Produced by St. James's Place Wealth Management


Waves not tides

Posted on Monday 19th February 2018

Markets quickly shrugged off the previous week’s bout of volatility, but inflation proved to be more persistent.

Just 17 days ago investors were finally reminded, after an extended hiatus, that stocks can in fact go down as well as up. Yet if you’d been away for those few days, you might have wondered what all the fuss was about. In the five trading days of last week, the S&P 500 rose by 3.6%, thereby nullifying more than half the losses it suffered in the days following 1 February. On Valentine’s Day, volatility dipped to just below its historical average, and has since remained controlled.

The S&P 500 is now up for the year once more, having risen by 19% in 2017. The FTSE 100 has had a rougher year but it, too, tracked back upwards last week, rising 2.9%. The MSCI Europe ex-UK rose 2.6%, as French unemployment struck a nine-year low and investors’ recent affection for Italian stocks showed no sign of abating, despite the imminent election.

At the risk of dampening spirits, it would be unwise to assume that we’ve seen the back of volatility in 2018. Last week’s recovery served as a lesson that volatility is an inherent feature of stock market behaviour. Those investors who sell out during periods of volatility end up crystallising short-term losses, and missing out on any recovery. Of course, they also end up missing out on dividends; and figures released last week showed that global dividends reached record levels in 2017, and rose at their fastest pace in three years.

Yet if stocks have returned to their previous form for the moment, the recent shift in inflation is proving to be more sustained. Last week, US inflation came in unexpectedly high at 2.1% while, in the UK, forecasts of a dip once again proved premature, as January inflation showed at 3%. For savers, this is simply more bad news – for spenders, too. Sam Ewing, the Chicago White Sox baseball veteran, probably put it best: “Inflation is when you pay $15 for the $10 haircut you used to get for $5 when you had hair.” In short, cash doesn’t age well, and Moneyfacts data continues to show that all savings accounts in the UK offer a rate of return that is comfortably below inflation.

The spectre of inflation continued to loom on bond markets last week, where the yield on the 10-year US Treasury struck a four-year high, ending the trading period close to 2.9%. Moreover, underlying inflation data showed that pretty much everything in the US saw price rises, while a separate report suggested that US house prices were no different. Into this heady mix comes the much-touted Trump tax-cuts package and, of course, its budgetary impact. Last week, the White House announced plans to delay balancing the budget by a decade – 2039, not 2029, is now the due date. (Even then, it might be injudicious to set too much stall by a 21-year political pledge.)

Yet there were also plenty of reminders to be had last week that, behind inflation and rising stocks, lies a humming US economy. One specific tail wind to show itself strongly this year has been the resurgence of the country’s shale oil industry, which is creating many a policy headache in the corridors of OPEC and the Kremlin. The price of a barrel of Brent crude was pretty much $70 at the start of the month, but ended last week at $64. According to the International Energy Agency, US oil production has returned to exceptional growth levels, as oil supply globally moves back towards a surplus. Last year, the world’s five largest oil companies doubled their profits (versus 2016), and the sector has been perhaps the lead contributor to rising inflation. It remains to be seen whether the shale-fuelled price decline has yet run its course.

Exit vision

While inflation remained elevated in the UK, retail sales figures for January came in much lower than expected, continuing December’s poor form. One exception was sports clothing, and the Office for National Statistics suggested that New Year resolutions could be behind it, not least because there was a concomitant fall in food sales.

The foreign secretary, meanwhile, delivered the first in a series of ministerial speeches on the government's Brexit plans, and the prime minister delivered the second over the weekend. Boris Johnson sought to conjure a vision of free-trading post-Brexit, while also looking to win over persistent Remainers. He limited his policy references, however, to saying he would like to achieve regulatory divergence with the EU on medical research, financial services and environmental impact assessments. Later in the week, reports emerged that the UK will seek “mutual recognition” of financial services to maintain the City’s access to the EU. The chief executive of TheCityUK, which lobbies for the Square Mile, said the group had been banking on this plan for the past 12 months.

While the British talked, the Irish acted, as Dublin began preparing its port customs checks for the “inevitable” border controls to come. The Irish government said it is assuming that a hard Brexit is the inevitable outcome and that a transition period is not assured – and that it is therefore keen to be prepared. “We’re not working on the basis of there being any magical political solution,” said the Dublin Port Company’s chief executive. “Once Brexit happens, 200,000 containers [needing customs checks annually] increases to 1 million.”

Handover politics

The UK has already seen a hollowing out of the political centre over the past two years, and there were increasing signs that German politics, which has been marked in recent years by studied non-theatricality, is feeling the full force of a similar shift. Leaders of both the main political parties in the new coalition looked increasingly feeble last week, and senior members of the centre-right CDU started to make more public calls for Merkel’s eventual handover plans to receive greater attention. The German chancellor received widespread criticism for agreeing to cede the finance ministry to the centre-left SPD in coalition negotiations.

A similarly drawn-out process was under way in South Africa last week, as its president sought to cling to power, only to be eased out by his own party and his successor, Cyril Ramaphosa. The new incumbent is a hero of the anti-apartheid movement and was once Mandela’s right-hand man. It is widely hoped that he can set the country on a new economic path, while also cracking down on political corruption. South Africa’s leading index has rallied significantly over the past two months in anticipation of his appointment. In December, Polina Kurdyavko of BlueBay Asset Management sensed that the change in mood could even become contagious.

“Local elections in South Africa also show that the nation’s tolerance for corruption and economic decline has an end,” said Kurdyavko. “These are encouraging signs. They give us optimism that other countries in emerging markets can follow, sooner rather than later.”

28-year high

While some countries were making plans, Japan could perhaps afford to reflect on past successes last week, as the country posted its eighth consecutive quarter of growth – a 28-year record. Both consumption and business investment were strong, and net annualised profits at companies across the Topix were up 39%. The Nikkei 225 finished the week up 1%, as several markets in Asia shut up shop for the Chinese New Year. At the weekend, the yen received an extra fillip as Haruhiko Kuroda, governor of the Bank of Japan, was nominated for a second term.

 

BlueBay Asset 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 2018. “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 2018; 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.


Groundhog Day

Posted on Monday 5th February 2018

Corporate earnings, the US jobs report and eurozone growth offered major encouragements, yet stocks suffered a bad week.

Last Friday, the US celebrated Groundhog Day, in which the North American marmot is consulted for the seasonal outlook. Punxsutawney Phil – Pennsylvania’s (and America’s) lead marmot – warned of six more weeks of cold ahead. Other indicators released the same day told a happier tale, although they contributed to expectations of rising inflation, unnerving some investors.

Friday’s jobs report showed that the US had added 200,000 new jobs in December, far exceeding expectations, while wage growth struck an eight-year high. Meanwhile, it was Janet Yellen’s final day as governor of the Federal Reserve. By almost any of the leading measures, she departs her role as one of the most successful Fed governors in history. Employment sits at an extended high, the economy is growing at 2.6% a year, inflation has been hovering close to the Fed’s target, stocks have been on the rise – and the Fed has successfully introduced five rate rises under her tenure. Donald Trump also linked himself to a few of these numbers in his State of the Union address, which he delivered to a joint session of the US Congress on Tuesday.

The hike in wage growth stoked fears of rising inflation and an uptick in the speed of interest rate rises, worries already evident in the 10-year Treasury yield, the world’s most important bond yield. By close of business on Friday, the 10-year yield was around 2.84%, its highest close since 2013. Stocks in the US had a bad week: the S&P 500 began the week with its worst two days since May 2017 and dropped 2.9% over the five-day period; its biggest weekly fall since February 2016. Last Monday’s slip capped a 99-day streak without a single-day fall of 0.6% or more, marking a postwar record.

Amazon reported the largest profit in its history, with its North America revenue up 42% last quarter, helped by a strong holiday season. It was, however, just one among many earnings highlights. Reuters made a midweek forecast that S&P companies’ earnings would see an average annualised increase of 13.7%. Apple reported record revenues, despite a 1% dip in sales of its latest iPhone. Nintendo, one of the world’s largest video games companies, reported a big jump in operating profits.

While Chevron suffered on refining weakness, other oil majors posted strong numbers, among them ConocoPhillips and Shell. The price of a barrel of Brent crude has been rising in recent months, and last week it even crested above $70, its highest since November 2014, before falling back to around $68. Buoyed by the recent price recovery, production of shale oil in the US last week reached a record high, 47 years after the last Texas oil boom.

Despite its high energy weighting, the FTSE 100 suffered its biggest weekly loss in nine months, falling 2.9%. Although in post-referendum terms, the pound remains strong against the dollar, it ended last week much where it began. The bigger issue came in the form of corporate challenges. Carillion’s slide had already hit the FTSE hard, but last week it was the turn of Capita to set pulses racing (for the wrong reasons). The outsourcing business, which has received numerous government commissions, delivered a profit warning and suspended its dividend. The CEO, who has only been in the job a few weeks, said that the company had spread its net far too widely, and promised an overhaul. The share price quickly fell 47% and has not recovered.

“Capita has been undergoing a complete reset,” said Neil Woodford of Woodford Investment Management. “The new chief executive, Jonathan Lewis, has mapped out a clear new direction of travel for the business and it is one with which I completely agree. More focus, better leadership, better cost control, and a stronger balance sheet – through a combination of disposals, dividend cuts and a future capital raise – will lead to more investment in the business, an enhanced competitive position and a brighter future for its shareholders and customers.”

Stocks in the eurozone had a similarly disappointing week, as the Eurofirst 300 fell 3.2%, pushed down by both negative news (such as poor results from Deutsche Bank) and a strong euro. Growth in the eurozone was reported at 2.5% in 2017, a ten-year high. The euro remained strong against the dollar (which often hurts stock prices in the short term). It has risen by 7% against the greenback in the last three months.

“The European economy is booming and, notably, the December eurozone manufacturing PMI reached its highest level since the survey began over 20 years ago,” said Stuart Mitchell of S. W. Mitchell Capital. “Our company visiting programme tells of corporate sector recovery that continues to significantly outpace more cautious market expectations. After a number of years of austerity, a highly competitive eurozone is gaining market share in export markets, experiencing a recovery in consumer spending and seeing investment spending beginning to pick up. The election of President Macron in France, furthermore, has given a boost to the European project but, more importantly, heralded controversial economy-boosting labour market reforms. These ‘revolutionary’ changes… will especially benefit businesses with fewer than 50 employees [95% of all French businesses].”

Faced with buoyant trends, the eyes of investors are increasingly trained on the ECB. Last week, it warned that markets were unprepared for inflation (although single-currency area inflation fell to 1.3% last month). Meanwhile, some 42% of the €7 trillion of eurozone government bonds still carries yields below zero – in other words, lending to the central bank actually costs you money. Policy normalisation still lies some way off. There are other worries too – a member of the bank’s rate-setting committee warned last week that the ECB would fight back if the US started a currency war.

Commons exchange

In Brussels, the EU appeared to play hardball over Brexit. First it ruled out a special trade deal for financial services (insisting instead on equivalence) and then it published a paper warning that it would impose sanctions if needs be to prevent the UK trying to undercut its major trading partner in such areas as tax, regulation and state support.

Yet the liveliest Brexit disagreements were in Westminster and Whitehall. A leaked Treasury analysis forecast a major hit to UK GDP in all mainstream ‘hard Brexit’ scenarios. Falling back on WTO rules would, it said, cost the UK 8 percentage points of growth; higher than the Remain campaign’s 7.5% estimate. A free trade agreement would reduce that figure to 6.2 points, and a Norway-style single market deal would cut it to 3.8. In short, going by the leaked report, the Treasury is more negative on the economic impact of a hard Brexit now than it was prior to the referendum. A second leak warned that the cost of a strict immigration policy would far overshadow the economic benefits of a new trade deal with the US.

In response to a question in the House of Commons, Steve Baker, the Brexit minister, warned that Treasury officials were allowing their anti-Brexit views to colour their judgements. Theresa May chose not to reprimand him publicly, let alone push for his resignation. Moreover, on the weekend, she quashed rumours she was softening on customs union membership, by once again ruling it out. Meanwhile, the Labour MP Chuka Umunna launched a new coalition of groups opposed to a hard Brexit, adding new definition to the existing Brexit divisions in Westminster.

While Theresa May was visiting Beijing, and her ministers were bickering over Brexit, the UK chancellor was writing to the Office of Tax Simplification to request a review of Inheritance Tax in order to simplify the regime. The announcement coincided with news that around 400 estates inherited last year could be liable for unexpected IHT bills of hundreds of thousands of pounds after relatives made gifts which they continued to benefit from before they died. The complications of Inheritance Tax rules mean taking advice is crucial to navigating the nuances. If Phil Hammond thinks it’s hard to understand, that surely says something.

 

S. W. Mitchell Capital and Woodford Investment Management are fund managers 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 2018. “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 2018; 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.


Bottom dollar

Posted on Tuesday 30th January 2018

The dollar struck a three-year low and sterling a post-Brexit high, as the US imposed new trade tariffs and Donald Trump struck a softer note at Davos.

Joachimsthal (or Jáchymvok, as it has been known since 1945) in Bohemia doesn’t feature much in financial news these days, but its linguistic progeny certainly does. The ‘thaler’ (from the word ‘Joachimsthal’) was launched as the currency of Bohemia exactly 500 years ago, providing the etymological root of the word ‘dollar’. After winning their independence, the American Revolutionaries were hardly going to stick with ‘pound’.

Investors in 2018, on the other hand, seem to prefer sterling, which on Thursday even broke through $1.43. The continuing dollar sell-off last week pushed the greenback down to its lowest level (against the usual six-currency basket) in three years. There was much debate over why the dollar should be falling in value just when both Treasury yields and US interest rates are rising, but the proximate cause appeared to be political.

The World Economic Forum is supposed to provide an opportunity for leaders in politics and business to hobnob expensively and reaffirm a vague commitment to liberal internationalism – the economic kind. Last year Xi Jinping, the Chinese president, fulfilled the globalisation brief in his speech; as this year did Narendra Modi, India’s prime minister. Yet at Davos, the one sure-fire way of stealing the show is to buck the globalist trend.

The US certainly began by leaning that way. Steve Mnuchin, the trade secretary, came out in favour of a weaker dollar, before defending a much tougher policy stance in trade relations. “This is not about protectionism,” said Mnuchin. “This is about free and fair reciprocal trade.” His speech came hard on the heels of an announcement by the White House that the US was imposing tariffs on imported washing machines and solar cells, with more expected to follow.

“What we’re seeing is not only India but also China being expansionist and trying to broaden their dealings with the rest of the world,” said Chris Ralph, Chief Investment Officer at St. James’s Place. “Meanwhile, the Trump administration is putting up tariffs against industries outside their country and that’s resulting in a more closed society. But obviously the US as an economy is big enough to trade with itself and so doesn’t need such big links with the external world.”

On Friday, it was the turn of the president himself to address the Alpine gathering. Expectations were not high, which made the assembled crowd all the more delighted to hear Donald Trump talk about a US that was “open for business” and ready to trade with the world, albeit on “fair” terms. He even contradicted Mnuchin by speaking in favour of a strong dollar.

The US growth rate remained strong (if marginally less so) in the fourth quarter, while the IMF raised its 2018 global growth forecast to 3.9%. (It was notable that 57% of the 1,300 CEOs polled in Davos last week expect global growth to rise this year.) Corporate earnings rose in the US, as energy, industrials, technology and consumer discretionary companies all overshot expectations: Sky, Netflix and Caterpillar were highlights. Retail figures came out strong.  Amazon’s own US sales accounted for 4% of those figures, and last week the online giant opened its first checkout-free physical store.

Apple, the world’s largest listing, has had less to celebrate in 2018. Ireland’s slowness to recover €13 billion in unpaid taxes from the company is costing Apple a further $1.7 billion (due to new US rules on foreign earnings), adding to the $38 billion it must pay for combined foreign earnings. Yet analysts are still forecasting that Apple will report its best quarterly earnings ever for the fourth quarter. The S&P 500 ended up 0.28% at another record close. At 399 days and counting, the index has now clocked its longest period without a 5% one-day drop since records began in 1928.

Putting on the pounds

As the greenback swooned, so sterling soared to its highest level against the dollar since the referendum, helped by a surprise dip in unemployment, as well as by rising gilt yields. The rally in sentiment towards the UK was, conversely, felt in a fall in the FTSE 100, where non-UK companies suffered in sterling terms. The index ended the week down 0.36%. Consumer staples companies suffered particularly hard, among them BAT and Reckitt Benckiser, as retail data revealed a December sales dip, and only a mildly positive January. Only the miners, such as Anglo American, gained ground, thanks in part to rising commodity prices; the same trend helped UK dividends in 2017 towards their fastest growth rate in five years. Meanwhile, the UK economy grew 0.5% in the fourth quarter – not a bad rate, although 2017 as a whole was the economy’s worst year for growth since 2012. The IMF downgraded the UK’s 2019 growth prospects.

In the Commons, Theresa May faced the possible prospect of a Eurosceptic rebellion over her plan for a two-year EU exit transition period. Jacob Rees-Mogg, a leading Conservative Eurosceptic, warned that a transition period would involve the UK being a “vassal state”, and advised instead extending membership by two years. On Thursday, Philip Hammond was reprimanded by the prime minister’s office after he called for the UK to diverge only “very modestly” from the EU after Brexit. The next day, David Davis published details of the government’s plan for the transition period, and said the UK wanted to retain a say over EU law-making during transition. Meanwhile, a survey published by the Confederation of British Industry showed that most companies are preparing for a no-deal Brexit, and Mark Carney, Governor of the Bank of England, told Davos that UK rate decisions would depend on Brexit negotiations.

The government is facing pressure in other areas too – not least in funding. The current NHS winter crisis has already attracted plenty of calls for extra money. Last week, the foreign secretary, who famously promised an extra £350 million a week for a post-Brexit NHS, called publicly for the prime minister to increase funding for the service. Asked about the request, the chancellor’s opening statement was suitably territorial: “Boris Johnson is the foreign secretary.”

Chancellors are, of course, forever on the hunt to increase revenue and cut costs. Last week’s news that savers withdrew £5.4 billion using pension freedoms in 2017 can therefore hardly have passed Hammond’s attention, as the figure was £1 billion more than in the previous year. Whether all those taking advantage of the opportunity have the expertise to protect their financial futures – and avoid the usual tax and planning pitfalls – is another question.

It also emerged last week that the current cost to government of pensions tax relief for employers was £950 million higher in 2016/17 than originally estimated. There is no immediate political agenda to chip away at pension tax relief but, when economic conditions worsen or budgets start to deteriorate, chancellors are capable of moving quickly.

Draghi(ng) his feet

One of the regions to have effected the most impressive recovery in recent months has been the eurozone. Yet growth brings its own pressures, and those were plainly apparent in the minutes (published last week) of the December meeting of the ECB. While Mario Draghi is reluctant to increase the pace of the Bank’s withdrawal from quantitative easing, it seems many of his fellow board members have a strong sense of urgency. Some even want him to name an end date for the programme – a risk he is unlikely to take. A rising euro helped push the Eurofirst 300 down 0.36% for the week.

Meanwhile, in Berlin the SPD voted to approve coalition talks with Angela Merkel’s centre-right party, but only by a relatively narrow margin. The SPD members will still have a final vote on the coalition agreement in the coming weeks.

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 2018. “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 2018; 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.


Frozen air

Posted on Monday 22nd January 2018

Stocks meandered ahead of a US government shutdown and Donald Trump’s speech in Davos, while earnings season and Chinese growth buoyed confidence.

In some ways, Donald Trump ended his first year in office with much to celebrate, although Saturday’s government shutdown certainly put a dampener on celebrations. Growth in the US is rising, joblessness remains relatively minimal and stocks have performed strongly. Moreover, predictions of further falls for unemployment and rises for earnings and inflation, are not hard to find. The S&P 500 ended the week up by another 0.54%, buoyed by technology and healthcare stocks, not to mention positive corporate earnings.

On the other hand, a one-year President has never achieved such low popularity ratings in the polls, meaning that midterm elections could yet prove a challenge. Last week, Donald Trump was supposed to be crossing the Atlantic to visit Theresa May. Having pulled out, he will now travel to Alpine Davos for the World Economic Forum. His speech this Friday should provide clues on his willingness to cooperate internationally, not least on trade. If he sticks to campaign rhetoric, he is unlikely to enjoy a warm reception.

As the transatlantic air chilled, so it appeared to warm across the Channel, aiding Emmanuel Macron’s visit to the UK. (Relations were so warm that Boris Johnson suggested building a bridge across the Channel.) But it was Macron who started the public rapprochement, saying that the EU doors would remain open and announcing that he wanted the Bayeux Tapestry to travel to the UK for the first time in more than 900 years.

The warming did not extend to financial services. Pressed on whether the City could have free access to EU financial services, the French president said it could not do so without accepting continental judicial oversight and paying into the budget – and London has already ruled out both options. If it looked like one in the eye for the UK, a senior eurozone official offered a different perspective later in the week, warning that a hard Brexit would cause a shock to the eurozone’s financial system. Moreover, Macron later said that a bespoke exit deal for the UK was possible.

Small businesses appear less concerned at the coming cleavage. A YouGov survey published last week showed that the majority of midsized UK businesses wants to leave both the single market and the customs union after Brexit, setting them against big business. Of those 315 companies surveyed, 51% said that Brexit would damage the economy over the next two years, whereas 38% said it wouldn’t. Once the timespan was extended to five years, however, numbers were about even. 19% favoured leaving the EU under WTO rules – the option beloved of the more hardline Brexit lobby.

Scotland, on the other hand, appeared to side with France on EU membership, publishing its own Brexit analysis which showed that leaving the EU without a trade deal would cost Scotland £9 billion a year, or more than 6% of GDP. The first minister used the document to press the case once more for single market membership but, as the pro-EU referendum campaign showed, warnings of economic pain do not always translate into polling success. The European Investment Bank, meanwhile, published data which showed that its new lending to the UK shrunk by two thirds in 2017, due in part to investor concerns over Brexit. The FTSE 100 dropped 0.62% as Carillion, the construction major, went into liquidation.

Yet such negativity can often translate into opportunities for prudent investors. Figures last week showed that a net 36% of global fund managers are underweight UK equities – a Bank of America Merrill Lynch report shows UK exposure at its lowest since 2001 – while eurozone allocations are at a 45% overweight. (The Eurofirst 300 rose 0.51% last week.) As ever, such binary behaviour should be questioned, rather than simply followed, especially as UK growth continues. Adrian Frost of Artemis Investment Management believes that UK stocks have suffered on the back of Brexit anxieties and political uncertainty, but that an improved mood could yet exert a significant impact on prices.

“The all-important global investor has never been so averse to the UK as now – you almost think they can’t get any more negative,” says Frost. “You only need some of these developments to come out more positively than the market currently thinks, and the impact of the global investor allocating money into the UK, because it’s a very important market to them, could have a very striking effect. It’s almost like dry tinder waiting for someone to put a match to it.”

Moreover, Capital Economics’ forecasts for 2018 predict that the UK “will continue to defy expectations of a sharp Brexit-related slowdown” and will benefit from continued business investment. It was not alone in its prognostications.

“I expect the UK to defy expectations of a slowdown and the valuation stretch between the popular and unpopular stocks to begin to reverse,” said Neil Woodford of Woodford Investment Management. “While there are risks, there are equally opportunities – that is always the case when markets get carried away. I believe the best opportunities lie in UK domestically-focused stocks, a healthcare sector that has endured a prolonged bear market and companies – of all sizes – that have disruptive technologies at their core.”

Indeed, for many in the UK the most pressing concern may be inflation. Although last week’s figure was down on last month, it was only a marginal fall. Inflation remains elevated at 3%, even though interest rates sit at just 0.5%. Despite this combination of headwinds for savers, banks are not stepping into the breach. All variable savings rates remain far below those offered before the rate cut of August 2016, suggesting banks have been better at passing on reductions to customers than rises. The average no-notice Cash ISA rate is still 0.22% below what it was when the base rate was last 0.5%. Saving up cash is currently an expensive habit.

Global shifts

Whatever Donald Trump chooses to say about trade during his speech in Switzerland on Friday, the usual ‘Davos set’ currently has plenty of numbers to help shore up its financial internationalism. At a global level, trade grew rapidly in 2016 and 2017 and – presumably not by coincidence – the world is enjoying a synchronised recovery, while capital flows continue to recover. Productivity growth is severely lagging (not least in the US), but such problems are always easier to address when growth is strong, as it is currently across the US, Europe and Asia.

Last week, Japanese stocks struck a 26-year high, and the Nikkei 225 ended the week up 0.65%. Chinese stocks struck two-year highs, after the country published its GDP figures, which showed growth through 2017 of 6.9%, up a mere 0.1% up from 2016. Nominal figures, which many economists are more inclined to trust, show the annual rate of growth actually rose by more than three percentage points. Rising commodity prices helped, not least for metals. Last week, however, it was oil that stole the show, breaking through $70 a barrel for the first time in three years.

Yet the ultimate petrol head gathering – the Detroit Auto show – was already looking beyond oil. While pure-electric vehicles were in limited supply, the conference provided an opportunity for major auto makers to announce new targets for electric investment and rollout. The chairman of Ford said the company would increase investment from $7.3 billion to $11 billion by 2022, by which time it pledged to have more than 40 hybrid and fully electric vehicles on offer. The announcement comes hard on the heels of a similar pledge by Mary Barra, CEO of General Motors. Volkswagen, one of the great corporate recovery stories of 2017, has a €20 billion plan of its own for electric cars.

 

Artemis Investment Management and Woodford Investment Management are fund managers 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 2018. “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 2018; 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.


Smooth running

Posted on Monday 15th January 2018

Equity and bond market volatility struck new lows, as sterling and the FTSE both surged, and earnings season got underway.

Volatility on equity markets last week struck a 60-year low while, in the US, Treasury market volatility slipped to a 50-year low, despite yields recently creeping upwards. The S&P 500 rose by 1.37%, while the FTSE 100 and Eurofirst 300 rose by 0.7% and 0.35% respectively. The US and UK indices posted record highs; the Eurofirst 300 struck a six-month peak.

One reason for the rises was buoyant corporate earnings. The first US bank earnings to come through did not offer quite the unalloyed good news some had hoped for, but were still broadly positive. Wells Fargo said profits were up $3.4 billion in the fourth quarter, thanks to a tax-cuts package that reduced its liabilities – although it also reported $3.3 billion in legal costs following a consumer deposit scandal. JPMorgan Chase suffered a 37% drop in annualised fourth-quarter earnings due to costs on deferred taxes and foreign earnings relating to the new tax-cuts package; but its CEO said the cuts would benefit the bank by around $3.5 billion in 2018. The dip in the tax take spurred Walmart, the world’s largest company by revenue, to raise its minimum wage by more than 20%, and Fiat Chrysler to pledge a $2,000 bonus to its 60,000 US staff.

Historic lows for stock volatility served to highlight the fact that Bitcoin was experiencing its most volatile period in three years. Between mid-November and mid-December, the price of the cryptocurrency trebled before losing 25% of its value in five days. The pricing zigzags did not end there, but at time of writing it is priced at around $13,700 – a year ago it was not much above $820. That’s a gain of more than 1,500%.

“Whilst the underlying blockchain technology is probably here to stay, it can’t be long before the global regulators intervene into this world of cryptocurrencies and prevent investors, who would ordinarily be more sanguine, from taking investment decisions which could harm their long-term wealth creation,” said Chris Ralph, Chief Investment Officer at St. James’s Place, in December. “When there is finite supply and seemingly infinite demand, even my long-buried economics training informs me that the price is likely to move up – until the rules are changed and the demand collapses.”

As if on cue, a number of Asian governments took (or countenanced) remedial action last week. China announced a crackdown on its extensive domestic Bitcoin ‘mining’ operations; it emerged that South Korea – currency Bitcoin hub – is planning a bill to ban cryptocurrency trading; and the central bank chief in Singapore – a centre for ‘fintech’ – expressed his own wariness about cryptocurrencies. Bitcoin is currently 18 times more volatile than the US dollar.

Bond bears

Just because Bitcoin shows that you can have too much volatility doesn’t mean volatility itself is a bad thing. For long-term investors, the market distortions that volatility generates provide opportunities: sometimes to buy, sometimes to sell. As the current equity bull market approaches its ninth birthday, an increasing number of investors are arguing that markets look expensive – and are forecasting a spike in volatility.

Yet the stock market is hardly alone in gaining altitude. Global growth is now more broadly based than it has been at any time since the financial crisis, and corporate earnings are on a tear. Retail sales figures in the US lifted consumer stocks last week and earnings for the fourth quarter in the US are expected to rise 10.9% (annualised), according to FactSet Research Systems. Wall Street analysts are forecasting that every one of the 11 major sectors of the economy will show an uptick. Donald Trump’s tax-cuts package certainly hasn’t hurt sentiment – nor have Fed rate rises.

For all the talk about equity valuations, it was bonds that drew much of the market’s attention last week. Bill Gross, the billionaire investor and PIMCO founder once dubbed the ‘Bond King’, warned that bonds had entered a bear market for the first time in almost three decades. (“Bonds, like men, are in a bear market,” was the high-risk analogy he actually employed.) The comments came amid a rise in the yield on the 10-year US Treasury – the world’s most important bond yield. (Yields move inversely to prices.) Last week it edged towards 2.6% for the first time since July 2016.

In part, the rise in the yield reflected concerns over the gradual withdrawal of quantitative easing and the raising of interest rates. The US Fed began to reduce its bond holdings in December, and has already signalled further interest rate rises to come in the year ahead, having made three hikes last year. The rise also reflects concerns over the cost of the new tax-cuts package. Steve Mnuchin, the treasury secretary, said that US taxpayers would see the tax cuts in their February pay cheques. A further cause for concern came in the form of a government report in China which concluded that Chinese purchases of US Treasuries should probably slow. The US’s deficit shortfall could be as large as $1 trillion this year, making a bond sell-off hurt all the more. It was unclear, however, whether China was merely using the report to warn the US against introducing protectionist measures on trade.

Investors still bought plenty of US debt last week, both 10-year and 30-year notes, and there were signs of other major central banks slowly shadowing the Fed too. Last Thursday, December minutes published by the European Central Bank were interpreted as hawkish, since they expressed confidence in economic growth, hinting at the possibility of gradual rate hikes in the not-too-distant future. The euro rose to its highest level against the dollar since 2015, although it was also aided by Angela Merkel’s success in agreeing a preliminary coalition deal with the Social Democratic Party of Germany.

Reshuffle, reshuffled

Prospects for increased US–UK trade after Brexit were not helped last week – at least on the surface – when Donald Trump cancelled his forthcoming visit to the UK. He blamed what he said had been a “bad deal” on the new US embassy under Obama (although the new embassy, which formally opens this week, was actually announced under George W. Bush). But the promise of extensive anti-Trump demonstrations may also have held him back.

Theresa May had rejections to worry about at home too. Not for the first time, an opportunity for the prime minister to show strength descended into quite the reverse. Her attempted New Year reshuffle received short shrift from several of those on the receiving end – and the prime minister quickly reversed many of her plans. Nevertheless, sterling surged to its highest level against the dollar since the EU exit referendum, courtesy of reports that Spain and the Netherlands were ready to back a soft Brexit deal.

But the chancellor returned home from a visit to Germany to find a mixed economic picture. While UK manufacturing rose for the seventh consecutive month in November, high-street spending during Christmas season had apparently been less liberal than usual. Visa said that retail expenditure had fallen for the fourth consecutive month in December, ending the weakest year for UK consumer spending since 2012. M&S shares fell 7% after it announced disappointing results. Tesco, Mothercare and House of Fraser all missed analyst expectations. John Lewis bucked the trend, but in part because it refrained from raising prices.

In Japan, the rapid stock surge that marked early January lost momentum and the Nikkei 225 ended down 0.25%. However, this may have reflected a rise in the yen against the dollar. The currency shift came in response to the Bank of Japan reducing its holdings in long-term bonds, which was interpreted as a move towards normalisation.

 

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