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Tranquil times

Posted on Monday 20th November 2017

Politicking over Brexit and the Budget gained pace, German coalition talks failed – and US stocks retained their historic calm.

A report last week showed that half of the world’s wealth is owned by 1% of its people. In an interview in the UK on Thursday, Joseph Stiglitz, the Nobel prize-winning economist who advised Bill Clinton and Jeremy Corbyn, said that the election of Donald Trump had been a direct result of rising inequality.

Prince Muhammad bin Salman has adopted a more direct approach to the problem. Last week, hundreds of Saudi Arabia’s wealthiest royals, politicians and business leaders were being held under ‘house arrest’ – in Riyadh’s Ritz Hotel – where they were offered their freedom in exchange for a proportion of their wealth – in one reported case, 70% was demanded. Prince Muhammad’s initiative aims both to punish graft and to shore up the state coffers.

Yet when it comes to political hijinks and rising inequality, investor insouciance apparently knows no bounds – at least in stock markets. Since the shock election of Donald Trump, US stocks have enjoyed their least volatile 12-month period in 50 years. Curiously enough, the last time a 12-month stretch was so calm, John F Kennedy was not long dead, there was a presidential election, and a new resolution was passed to enable a US escalation in Vietnam – hardly politics as usual.

As it happened, the Saudi turn of events did have one notable market outcome: the price of oil went up. Since that initial spike, oil has lost some ground but remains buoyed all the same. Last week, Opec also raised its demand forecasts for 2018. A barrel of Brent crude ended last week above $62; until this month, oil was last at $62 in mid-2015. The fuel is arguably not quite as dominant on markets as once it was – at the start of 2017, total oil consumption accounted for 2.05% of global GDP, against 7.5% in the early 1980s, or 5% just five years ago.

Energy stocks have not enjoyed a particularly strong year, despite the price rise.  Last week, the Norwegian sovereign wealth fund, a significant force on markets (with more than $1 trillion in assets), announced it would be selling off its energy holdings, which account for 6% of the fund, and a few other investors quickly followed suit. The S&P 500 Energy index is down by more than 10% this year, which is a far cry from the hi-octane performance of the broader S&P 500. The latter was flat last week (down just 0.02%), held back by some disappointing corporate announcements, not least GE announcing restructuring plans and a hefty reduction to its dividend. Conversely, WalMart’s share price rose after it announced its strongest US sales in eight years, stoking speculation over the capacity of Amazon to dominate the sector. Despite the mix of results, investors are hardly suffering – the third quarter saw global dividends growing at the fastest rate in three years.

Earnings were varied in Europe too. EDF was a particular low point, as the power company saw profits fall due to delays in its nuclear projects. There was better news for Airbus, which agreed its biggest ever deal to sell 430 aircraft to low-cost airlines for $50 billion. The FTSE 100 was down 0.7%, while the Eurofirst 300 slipped 1.3%, although growth in central Europe struck a nine-year high, boosted by Germany. Coalition talks in Berlin, however, failed on Sunday night, casting doubt over Angela Merkel’s future. The euro slipped against the dollar in response but only temporarily.

Meanwhile, Japan clocked its seventh consecutive quarter of economic growth, marking its longest run since 2001. The Nikkei 225 enjoyed a strong session on Friday, helped by gains across most sectors, but ended down 1.3% for the five-day period after a nine-week winning streak. Household incomes in Japan continue to rise and recent momentum may yet finally return inflation to healthy levels – inflation’s long absence in Japan has turned it into a holy grail for policymakers.

Deflated expectations

Inflation in the UK, on the other hand, persisted at 3%, meaning it remains significantly above target. The most important contributor was food inflation, which rose at its fastest level in four years. The UK imports around half of its food, mostly from the EU. The continued high for inflation arguably validates the Bank of England’s recent interest rate rise, but that will come as cold comfort for savers, since at the start of last week just 17 of the 150 providers in the market place had passed on the rise to savers. Even for those that did, there remain no UK savings accounts offering a rate that matches inflation. It is an expensive time to be holding cash.

Both Theresa May and David Davis showed increasing signs of acquiescence over the nature of the UK’s EU exit. The prime minister agreed to let parliament hold a vote on the EU divorce deal, while David Davis promised City firms a bespoke travel deal for the two-year transition period. At the end of the week, however, he took a more pointed turn, claiming that France and Germany were blocking the UK from making progress on a deal, whereas other a number of countries were more flexible – among others, he listed Italy, Spain and the Netherlands.

Members of the Dutch parliament apparently saw matters somewhat differently. The parliament’s European Affairs Committee last week said it was time to start preparing for a no-deal Brexit and blamed the UK’s “unrealistic expectations” and “inconsistency”. Its report concluded: “What was long considered impossible is suddenly thinkable: a chaos scenario in which the UK abruptly leaves the EU on 29 March 2019 without an exit agreement, a transition period or a framework for future relations.”

Yet by the end of the week, it appeared that the greatest stumbling block to the UK progressing to phase two of negotiations in December might in fact be the Irish border question. The disintegration of the Northern Irish government meant that UK ministers imposed a £10.6 billion budget, bringing the province a step closer to rule from Westminster. In more ordinary times, this would win plenty of attention but, instead, it was the words of the Irish Taoiseach that caught the headlines. Shortly before a meeting with Theresa May, Leo Varadkar warned that he would block UK-EU negotiations progressing to phase two, unless the UK was willing to sign up to ruling out a hard land border between Ireland and Northern Ireland. On Friday evening, Donald Tusk stepped in to say that the UK needed to make a meaningful offer on both the exit bill and the Irish border question before negotiations could move onto the second phase.

There was pressure in the other direction over this week’s Budget, however. Jacob Rees-Mogg MP said that Philip Hammond should be willing to announce an increase in spending, as part of taking a more “optimistic” line on Brexit, echoing the recent comments of John Redwood, a fellow Conservative MP. The chancellor has made clear on several occasions that his priority is deficit reduction. Reports on Friday evening said he was planning to take advantage of a change in the accounting status of housing associations to offer him £5 billion more in slack. Moreover, the continued lows for gilt yields suggest investors might themselves cut the chancellor some slack for fiscal stimulus. Two-year gilts ended the working week trading just below 0.48%, which is below the Bank of England rate of 0.5%. The UK’s debt-to-GDP ratio reduction plans are also slightly ahead of budget.

There was speculation that the chancellor might cut stamp duty for first time buyers, toughen tax rules for non-doms and extend a crackdown on illegitimate self-employment. However, he is also known for his caution and will be eager to avoid a repeat of the post-Budget U-turn forced on him last time round – not to mention adding another gaffe to his comment on weekend television that there are “no unemployed” in the UK. Hammond warned Cabinet colleagues last week that he would stick to his own fiscal rules. Given the track record of chancellors past, it would certainly be a radical approach.

 

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

© S&P Dow Jones LLC 2017; all rights reserved

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.


Halfway house

Posted on Monday 13th November 2017

Markets pulled in different directions, as the UK government was further weakened by events.

To lose one cabinet minister may be regarded as unfortunate; to lose two looks like carelessness – as Oscar Wilde (almost) said.

Last week the prime minister lost her second cabinet minister in just eight days, this time for a solo and unapproved diplomatic mission to Israel. Meanwhile, Boris Johnson briefed a public meeting that a British citizen in detention in Iran had been teaching journalists (which he has since reneged on, but not apologised for), raising the possibility that her sentence may be doubled. Michael Heseltine, the former deputy prime minister, said previously that in normal times the current foreign secretary would have been sacked some time ago; last week he added that he might vote for Jeremy Corbyn at the next election in order to prevent Brexit. As the harassment scandal convulsed Westminster, and a tax avoidance story filled the front pages, there were signs the government may be struggling merely to keep up with events.

All the same, it has plenty to do. Michel Barnier warned that the UK now has two weeks to set out how much it is ready to pay in the divorce settlement, or risk running out of time to prepare for the transition deal the UK government has requested. (He also advised EU governments and businesses to start contingency planning for a no-deal scenario.) British officials said they want more certainty that the EU will then reciprocate and agree the outlines of a transition deal at the summit on 14–15 December. Nevertheless, reports last week said that Theresa May and pro-Brexit Cabinet ministers had already accepted that they would need to offer a much higher figure than the €20 billion initially proposed.

Meanwhile, a study published last week by the think tank IPPR North estimated that Brexit would exert double the impact on the North of England that it would on the South. It found that 10.2% of the region’s GDP is dependent on the EU, against 7.2% for inner London. Cumbria, the most severely affected county, would suffer a 13.2% hit to GDP, followed by North Lincolnshire at 12.8%.

500 mark

Last week, two new landmarks were reached: 500 days since the referendum result was announced, and 500 days until the UK’s exit deadline. Moreover, two of the UK’s closest allies began to talk tough. Irish negotiators reportedly blindsided UK officials at negotiations in Brussels by reopening the question of the Irish border and adopting a more forthright approach. The Irish foreign minister then told the press that achieving an EU–UK trade deal in 2018 was “not realistic”.

In London, Wilbur Ross, the US secretary of commerce, warned the UK to avoid agreeing to “hindrances” to trade in its Brexit negotiations. On his visit, Mr Ross was also briefed by the heads of the largest banks on Wall Street, who complained of the UK government’s failure to offer clarity on either transition or a final deal – and of its instability. The banks warned that they were fast approaching the “point of no return”, after which they would need to trigger contingency plans and start to move jobs, capital and infrastructure overseas. They have, of course, made similar warnings before.

Nevertheless, a Capital Economics report, commissioned by Woodford Investment Management and published last week, anticipated improvements in the negotiations.

“We expect a deal to be struck with the EU in the coming months,” Woodford said in its summary. “[The] report suggests that neither side can be entirely comfortable about the prospect of walking away from the table without an agreement, as do the Bank of England Financial Policy Committee notes released last month. These highlighted that £20 trillion of uncleared derivatives contracts, impacting tens of thousands of counterparties, were potentially at risk of disrupting the functioning of financial markets in the event of no deal. Nevertheless… even in the event of no deal, the long-term prospects for the UK economy are nowhere near as bleak as many have predicted.”

Another view is that the UK will have one of the lowest growth rates of all EU countries in 2018, or so said a report published by… the EU. All the same, it still predicted reasonable growth, and the IMF and Bank of England (BoE) have both offered more positive forecasts of 1.7% growth – hardly the stuff of downturns. Moreover, a BoE company survey published last week offered encouraging news on wages, which have long remained stagnant, forecasting a 2–3% rise in 2018.

Investors were more circumspect. The yield on the two-year gilt was below 0.5% last week, indicating that investors think borrowing costs are likely to go up much more slowly than suggested by the BoE’s interest rate ‘dot plot’. The FTSE 100 slid 1.7% last week but, like the Eurofirst 300, which forfeited 1.9%, corporate results may have been the true cause. AstraZeneca reported a further fall in sales in the third quarter, although the pace of decline had at least slowed, and the CEO was able to point to successful recent clinical trials. M&S, meanwhile, announced a fall in like-for-like food sales, and Archie Norman, the CEO, warned of major challenges faced by the company. Beyond the stock market, it was also a significant week for the UK’s ‘gig economy’, as Uber lost its appeal against a court decision to oblige it to treat its drivers as employees.

Last week also saw MPs launch a formal inquiry into the state of household finances, since personal debt has reached a level not seen since the financial crisis. The Treasury Select Committee will consider whether the £200 billion borrowed by households and consumers via credit cards, personal loans and car deals is excessive – and consider the potential impact of the recent interest rate rise.

Amid the political ruckus, it was easy to miss the fact that the chancellor will next week announce his Budget. There are plenty of reasons for Philip Hammond to play the Grinch. Among them are his lack of fiscal slack and the need to focus on political firefighting – and Brexit negotiations – rather than launching new spending initiatives. Conversely, there has been speculation that businesses may face a VAT hit and that pension savers may be in line for a less generous deal. Could pensions tax relief be targeted?

“There is no doubt Hammond faces pressures on both sides of his balance sheet,” said Steve Webb, former pensions minister. “We can assume pension tax relief will be in his sights. Latest figures show the cost of pension tax relief rose by around £3 billion in the last year, while the cost of not levying National Insurance on pension contributions rose by a further £2 billion. The complex and messy ‘tapered’ annual allowance could also be in the government’s sights.”

Given the chancellor’s concern to see both a balanced budget and an increase in what the government calls ‘intergenerational fairness’, savers would be well-advised to make the most of their available allowances while they still can.

Trump tour

Meanwhile, stocks rose dramatically early in the week on both sides of the Pacific. On Monday, the S&P 500, NASDAQ and Dow Jones Industrial Average all struck record highs. The following day, Japan’s Nikkei struck a 26-year high and ended the week up 0.63%, while the TOPIX reached a 10-year high. The S&P 500 dipped 0.36% over the week, but is having a great year nevertheless. Whatever the demerits of Trump’s presidency, they certainly haven’t hurt stock prices.

Last week the “great huge global brand”, as Boris Johnson recently described him, took a five-nation tour of Asia in which he displayed a somewhat different persona to that presented on the campaign trail. Although he spoke out on unequal trade, Trump has already developed close relations with both Shinzo Abe and Xi Jinping. He even won over his South Korean hosts, who had feared he might seek to stoke the North Korea stand-off, rather than resolve it.

There was less sign of momentum back in Washington, as the tax-plan package faced extended Republican efforts to minimise the harm it could do to the budget deficit. It is not clear that investors are expecting much – a recent study by Goldman Sachs showed that the 50 most tax-sensitive stocks on the S&P 500 have underperformed the broader index in recent months.

 

Woodford Investment Management is a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

© S&P Dow Jones LLC 2017; all rights reserved

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

 

 


Easing off

Posted on Monday 6th November 2017

The Bank of England raised interest rates marginally, as strong global corporate earnings buoyed stocks on leading indices.

The last time the Bank of England raised interest rates, it was quickly overtaken by events. On 5 July 2007, the Monetary Policy Committee raised rates by a quarter of a percentage point to 5.75%, and employed restrained language in its assessment of the economic forces at large.

Such heights are unthinkable today. Since 2009, the base rate has sat below 2%. Perhaps more importantly, the Bank launched an unprecedented era of quantitative easing to stimulate the economy.

Last week, it technically turned the monetary corner, raising interest rates for the first time in a decade. “The time has come to ease our foot off the accelerator,” said Mark Carney, the Bank’s governor. “That will help to bring inflation back to its 2% target while still supporting jobs and growth.”

In reality, however, the UK is in strange economic territory. As Mark Carney remarked, unemployment sits at a 42-year low. Yet while the US and eurozone are growing at a strong clip, economic growth in the UK economy has been sluggish, wage growth is far below inflation and productivity growth has been essentially flat for a decade. GDP has risen only 10.9% in that time and the FTSE 100 is just 12.9% higher, but 10-year gilt yields are 4.1 % lower. No wonder the governor said these are “exceptional” times.

Unfortunately for savers, the “exceptional” environment means the latest rise in interest rates won’t offer them much solace – and not just because plenty of banks aren’t passing it on. Even if they were, inflation of 3% and interest rates of 0.5% is a costly combination for cash holdings. Carney said that he only expects rates to rise very gradually; a mere two rate rises over the next two years.

Moreover, investors responded as though rates had been cut, not raised, pushing down sterling and pushing up stocks – the FTSE 100 ended the week on a closing high, up 0.74%. In reality, markets were responding not to the rate rise itself, which had been well-telegraphed, but to the BoE’s relatively gloomy economic outlook.

“Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly,” the Bank reported. “And Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.”

All the same, there were several positive economic indicators published over the course of the week. Manufacturing output rose significantly, thanks to new orders, while job growth in the sector struck a three-year high. Foreign investment in the UK struck a new high in 2016, according to Office for National Statistics figures published midweek, as the country attracted £119.6 billion of new investment – although more than 80% of the figure was generated by foreign acquisitions of two major UK-listed companies, Arm Holdings and SABMiller. UK services also showed signs of healthy momentum, as a leading indicator pushed still higher, although job creation in the sector struck a seven-month low.

Corporate groundswell

There were several strong sets of corporate results, among them those of HSBC. Pre-tax profits at the UK-listed bank shot up by a stunning 448% in the third quarter on a boom in Asia trade and cost-cutting measures. Banks had been among the laggards on markets during the recovery after the financial crisis, but have enjoyed strong results in recent quarters – and their share prices have risen in response. BT, on the other hand, was a significant disappointment, as its Global Services unit suffered a 39% fall in earnings due in part to alleged fraud in Italy.

There were corporate tailwinds on both sides of the Atlantic. The Eurofirst 300 ended up 0.74% as a number of major sectors enjoyed positive earnings seasons – Société Générale and Air France-KLM were among the best performers. In the US, Facebook enjoyed (another) heady set of earnings results, posting a revenue increase of 47% – its shares have risen 60% this year alone. Google and Apple also performed strongly, but it was not merely technology that buoyed markets – Kellogg and Mondelez were among the major names to post strong results. US stocks were hit by a disappointing non-farms payroll report, which showed just 261,000 jobs added in October – around 50,000 below expectations – although the jobless rate fell slightly. The S&P 500 ended the week up just 0.13%.

Markets were also sensitive to the Republicans’ announcement of agreement over the new tax-cuts package. Under the proposals, corporate tax would be cut from 35% to 20% and income tax would drop. Although the U.S. Chamber of Commerce warned that “a lot of work remains to be done” for the package to work well, there was some relief that the likely impact on the deficit was smaller than expected. Thus, it would increase by $1.5 trillion over ten years, still well within the limits that would enable Republicans to pass it through Congress without Democrat support. Part of the budgetary balancing act resulted in less favourable tax rules for certain individuals – local tax will no longer be deductible against state taxes, and neither (for futurehomebuyers) will mortgage interest.

If the Bank of England’s rate decision looked somewhat unexciting by historical standards, the Fed’s was still less so. The Federal Open Market Committee (FOMC) chose to leave rates unchanged, but reported that solid economic growth and an improving labour market meant a further rise was on track for December. Although inflation has risen to 2.2% in the US, questions remain over the longer-term outlook for inflation across several Western economies, given structural trends, implying that interest rates may not rise rapidly any time soon.

“The central banks do not actually know whether lagging inflation is [due to] something structural,” said Hamish Douglass of Magellan Asset Management. “My view is that [lagging inflation] is driven by ageing demographics in the Western world and, even more important, by the impact of technology on wages inflation into the future. On a ten-year view, those will become even more important. We are going into a higher rates environment, but it won’t be as high as in the past – unless inflation returns.”

Despite the lack of movement, the Fed won plenty of attention as Donald Trump finally announced his choice to chair the central bank for its next term. Janet Yellen’s replacement will be Jay Powell, the first non-academic to hold the post since 1978. Powell was appointed to the FOMC by President Obama and is not expected to rock the boat – he has voted with Yellen in the past, despite the growing tendency of FOMC members to vote as individuals under the last two chairs. His two predecessors have had to deal with the global financial crisis and its immediate aftermath. With equities much higher and bond yields subdued, he will face a somewhat different environment.

Meanwhile, investor interest in Japan continued to grow last week, as Japanese stocks enjoyed their biggest inflows in seven weeks, according to Bank of America Merrill Lynch figures. The Nikkei 225 finished the week up 2.4%.

 

Magellan is a fund manager for St. James’s Place

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

© S&P Dow Jones LLC 2017; all rights reserved

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.


Writing on the wall?

Posted on Tuesday 10th October 2017

The pound slipped on political worries, but globally stocks broke new ground as investors focused on larger issues.

The prime minister could surely be forgiven a little self-pity after the ordeal that was her Conservative Party Conference speech last week. She might have got over the prankster handing her a P45 (‘from Boris’) and perhaps even the persistent cough that interrupted her delivery. But when the letters of the party motto started dropping down behind her, it felt like the writing was (mostly) on the wall. Even some Tory MPs believed that little of her credibility remained at the end of the day – one former minister went on record to say so.

Traders apparently shared their concerns. The pound quickly fell more than 2% after the speech and refused to arrest its descent over the remainder of the week. However, the weaker pound did at least help stocks, as Tesco posted encouraging results – the FTSE 100 ended up 2%, close to an all-time high. The yield on 10-year gilts rose over the five-day period. Beneath the headlines, the prime minister promised £10 billion for homebuyers and pledged a tuition fee freeze.

Yet there was much for markets to worry about beyond the prime minister’s speech. Ahead of the release of a report by the Office for Budget Responsibility (OBR), it emerged that the chancellor is due to lose around two thirds of his budgetary slack (which currently amounts to £24 billion). The OBR report will say that it has overestimated UK productivity gains for seven consecutive years and is therefore dialling down its forecast this time around – even though in August the UK posted its lowest budget deficit since before the global financial crisis. The institute has already estimated that Brexit will cut the public finances by £15 billion a year to 2021.

Meanwhile, the Bank of England warned that lending to businesses could dry up after Brexit because not enough preparations are being made by companies in the EU to continue operating in the UK after March 2019, given the reauthorisations required post-exit. The London Mayor added his own warnings.

Indicators in the UK did not help the wider mood. Construction indicators suffered their first dip in 13 months – a construction recession could be imminent, according to the latest estimates. There was also a slowdown in UK manufacturing. Services, however, expanded modestly, although new business growth struck a 13-month low. In a report published last week, Capital Economics calculated that the current figures point to headline growth remaining sluggish in the third quarter: “Nonetheless, household spending may have regained some momentum, with retail sales volumes posting a solid rise in August… with survey indicators pointing to export and business investment growth picking up pace, the economy could see a slight acceleration over the coming quarters.”

Big picture

Yet if politics obstructed the view in the UK, investors globally were largely focused on other issues. September was the 11th consecutive month (i.e. since Trump’s election victory) in which the S&P 500 avoided posting a negative return – since 1928 some 38% of months have seen a decline. One more month of gains and it will be the longest run in almost 90 years.

Last week the index rose a further 1%, striking a new record high. While some onlookers believe markets have entered the hubris stage, it is hard to argue with corporate earnings, especially in the US – last week PepsiCo added its own good news to the roster. In the first quarter of 2017, US earnings growth was 13.9% (annualised), while last quarter it was 10.3%. Even indications of a tougher season in the current quarter may be linked to short-term factors – the energy price flattening out and the impact on insurers (discomfiting as it is to think in this way) of the destructive hurricanes to hit the Americas. Yet the most immediate market impact of the hurricane came last week when Donald Trump tweeted that “you can say goodbye” to Puerto Rican debt in the wake of Hurricane Maria – the value of the nation’s government bonds instantly halved in value. The hurricanes may also lie behind Friday’s payrolls data, which showed that US employment had fallen (albeit by just 33,000 jobs) for the first time in seven years.

Japan’s stock market continued its own rise last week too, striking a new two-year high on Tuesday. The Nikkei 225 rose by an impressive 1.6% last week, despite ongoing uncertainty around the forthcoming Japanese election. The rise took almost all Japanese sectors with it, although utilities and healthcare led the charge. Meanwhile, stocks in mainland China hit a two-year high, helped by a central bank decision to ease regulation on domestic banks and by strong domestic manufacturing levels. Of course, investors do not have to worry about elections in China, but many are focused on the five-yearly meeting of the Communist Party of China starting on 18 October, when the ruling party will enunciate the strategic and economic priorities for the world’s second-largest economy in the coming years.

Growth momentum

While corporate earnings offer their own reasons for the relatively strong performance of markets in recent months, there has been a good deal more to it. It has been a strong year for global growth, as emerging markets and Europe have both picked up. Figures released last week showed that Europe’s economic recovery strengthened further in September, while the Markit survey of companies across the eurozone showed corporate sentiment striking still higher and rising at its fastest rate in four months. Job creation, meanwhile, came close to its highest level in a decade.

Investment in the eurozone was €563 billion in the second quarter, new figures showed – the first time it has surpassed the level it reached in the first quarter of 2008, just as the crisis was about to unfold. Investment across the eurozone rose 3.5% (annualised) in the quarter, according to the ECB. Germany’s DAX index struck a new all-time high last week, while the Eurofirst 300 rose 0.37%.

Even the possibility of a constitutional crisis in Spain failed to dent confidence. Early last week the Spanish king took to national television to push for calm and denounce the Catalan referendum. The local government held back from declaring independence within 48 hours of the ‘Yes’ vote, as agreed by its parliament prior to the vote, but pledged to make a declaration in the near future. The IBEX 35, Spain’s main index, dipped 2% after the referendum – hardly disastrous, although the index has limited exposure to Catalonia.

Meanwhile, the European Parliament voted to recommend that the European Council does not permit Brexit negotiations to move to phase two – as scheduled – due to failure to conclude all the business that forms part of phase one. The Council will meet on Saturday but, as things stand, talks look unlikely to progress quickly to trade, as formerly hoped. The next Council meeting will take place in December.

 

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

© S&P Dow Jones LLC 2017; all rights reserved


Political Punts

Posted on Monday 2nd October 2017

Shinzo Abe called an election in Japan and Donald Trump finally laid out his tax cut plans, while violence marred Catalonia’s independence poll.

“You’ve got to know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run.” So sang Kenny Rogers in ‘The Gambler’, back in 1978.

These days, politicians appear to have lost the knack. In late 2015, when EU leaders were anxious about the UK’s forthcoming referendum, David Cameron told them: “Don’t worry – I’m a winner”. Hillary Clinton assumed she was a shoo-in against Donald Trump. Theresa May went back on her initial decision as leader not to call a snap general election – only to forfeit her majority at the ballot box.

After last week’s rush of events in Japan, the question is whether Shinzo Abe has made a similar miscalculation. At first, his decision to close parliament and call an election for 22 October looked bold, but the honeymoon was quickly over. Yuriko Koike, the popular, conservative mayor of Tokyo, announced that she was forming a new political party, Party of Hope. (Koike herself will not stand). It soon got worse for the incumbent, however, as the main opposition party, the Democratic Party (DP), said it would not even be fielding its own candidates, thereby allowing them to stand for Koike’s new party instead.

While Japan struggled for decades under the weight of persistent deflation, growth in 2017 has been impressive, reaching 0.6% in the second quarter, while inflation jumped to 0.7% – an unusually healthy level, given Japan’s demographic dynamics. The Nikkei 225 may not be rising as fast as last year (when it surged by more than 16%), but its return in 2017 is still very respectable. Despite jitters midweek, the index rose 0.29% last week as Friday brought better news for the incumbent prime minister in the form of rising factory output, increased household spending and an unemployment rate sitting at a two-decade low. Industrial product is growing at a rate of 2.1%. One poll released at the weekend showed Abe’s Liberal Democrat Party winning 29% of the popular vote, against 18% for Koike’s party.

Power shuffles

As Angela Merkel licks her wounds after a less-than-decisive victory in Germany’s federal elections, there was little doubt last week where the greatest momentum in European politics has been gathering. Emmanuel Macron conjured his vision for France and for the EU in a 90-minute speech at the Sorbonne in Paris. The French president called on EU leaders to be “bold” against the threat of populism as he preached a message of European integration. The euro continued a short-term decline, pushing the Eurofirst 300 up 1.3%. The index was buoyed by exporters, despite a fall in the value of Volkswagen, after the carmaker said it was increasing its provisions for North American settlements over emissions fixing. Eurozone inflation, meanwhile, dipped to 1.5%, adding to the ECB’s challenges as it plans its exit from QE.

Yet all developments in the EU were quickly overshadowed by Sunday’s contested independence poll in Catalonia. The vote, which contravened the Spanish constitution, went ahead despite repeated attempts by Madrid to shut it down. Preliminary results suggested 90% had voted in favour of independence, which is unsurprising, since those Catalonians opposed to independence mostly boycotted the vote. But perhaps the greatest legacy of the vote was the violence which accompanied it, as the police force sent in by Madrid was filmed attacking protestors – 840 people were injured, according to Catalonia’s government. Having voiced support for Madrid in advance, most EU leaders were conspicuously silent about the weekend’s events.

Following her own EU speech in Florence, Theresa May’s star appeared to have risen in EU circles, even if things remained complicated back at home. Donald Tusk visited 10, Downing Street and praised the prime minister’s new tone on Brexit, saying that the UK had now abandoned its ‘have cake and eat it’ policy, although he lamented that “there is not sufficient progress yet”. However, May was largely upstaged by Jeremy Corbyn last week, who displayed fresh swagger in his speech at the Labour Party Conference.

Despite the gathering momentum, Corbyn was less radical than many expected. He ruled out a repeat referendum, committed to the single market as part of a ‘jobs first’ Brexit, called for rent controls, criticised the US president’s recent UN speech, confirmed plans to nationalise utilities, and pledged to tax the largest companies at a higher rate. He also spoke of developing “a new model of economic management to replace the failed dogmas of liberalism.” The prime minister picked up the point in a speech at the Bank of England, saying that free markets were “the greatest agent of collective human progress ever created”.

After the talk, came the numbers. Statistics released on Friday marked down the UK’s second-quarter GDP rate to its lowest rate since 2013 – it is now the slowest-growing G7 economy. The pound fell in response. The current account deficit rose to 5.9% of GDP. Another possible bellwether moment came in the form of London house prices, which, according to Nationwide, have fallen for the first time since 2009. Stocks in the UK remained flat over the course of the week, but the FTSE 100 ended up 0.85% due to sterling weakness following the GDP news. One corporate disappointment, however, was Card Factory.

“Card Factory guided its profit margins down today in response to higher costs due to wages, investment, FX and product mix,” said Chris Field of Majedie Asset Management. “In addition, the company has indicated that the board plans to review the amount and timing of the special dividends which has knocked investor confidence.  We had recently reduced the position.  The company’s business model remains very strong and compelling and we expect the company to continue to increase its market share over time.”

Meanwhile, new figures showed that pension contributions hit record levels last year, raising fears that the chancellor may yet seek to cut pension tax relief in his Autumn Budget. Nine million people contributed £24.3 billion in 2015-16, according to HMRC – higher than before the financial crisis. The rising level of contributions creates a headache for the Treasury. The government was eager to improve savings habits and, largely through auto enrolment, it appears to have succeeded in doing so. Yet it will surely be loath to pay ever more for its success, given the chancellor’s determination to balance the books. Pension savers should be wary, and prepared to take advice, while still making use of the reliefs and allowances currently available.

Tax cuts, revisited

In the US, Donald Trump returned to the fore as he finally laid out his tax cut plans in a speech in Indiana. Calling the current system a “relic”, the president announced significant cuts for corporations and individuals alike. The plan would reduce the number of income tax brackets from seven to three (at 12%, 25% and 35%), with a possible surcharge for the super-rich. Estate tax (which currently affects just 0.2% of the population) would end. Companies would benefit from a cut in the corporate tax rate from 35% to 20%.

Majedie Asset Management is a fund manager for St. James’s Place.

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Since coming to power, Trump has yet to score a major legislative victory, but on tax cuts he may yet have an issue that many Republicans can rally around, if fiscal conservatives believe government revenues will not overly suffer. The S&P 500 rose 0.57% over the course of the week. If the president can get his tax cuts through Congress, markets may yet reward him for it.