Produced by St. James's Place Wealth Management


Signal worries

Posted on Monday 23rd April 2018

Investors contemplated the direction of inflation and interest rates, as stockmarkets rose on energy, trade and earnings tailwinds.

Equity investors largely enjoyed last week, as the correction of February felt increasingly distant. Even the VIX, leading measure of volatility on the world’s leading index, was back below its long-term average, having tracked gradually downhill over the course of the month. Moreover, as the current global economic expansion approaches its tenth year, even corporate earnings offered reasons for optimism.

Industry data showed that bank lending to US companies has picked up again in recent weeks, with an increase of more than 9% in March – its largest rise since Donald Trump took office. Bank of America Merrill Lynch, reporting better-than-expected first quarter results, can now point to double-digit shareholder returns for the first time in seven years. The bank also benefited from the US president’s tax reform package, introduced in November; although is yet to recover fully from reports of its $42 million settlement for “systematically” masking its trading practices, which emerged in mid-March.

It was largely a good week for technology stocks, which contributed significantly to rises on broader indices, given their large weighting within the investment universe. In part, this reflected a lack of major negative news stories. This marked a change from recent weeks, which saw Facebook suffer from failing to protect user data, a self-drive car involved in a fatality in the US, and Donald Trump attack Amazon over its tax arrangements.

Yet tech stocks suffered a small reversal later in the week, as a major bank issued a warning on Apple’s forthcoming earnings, and one of its major suppliers warned of poor demand for mobile handsets. Taiwan Semiconductor fell 5.5% in Taiwan following a disappointing earnings forecast for the second quarter. Netflix, meanwhile, announced exceptionally strong results last Monday, and announced plans to increase its content in Europe by doubling its investment in the region. Even Facebook, despite New York’s comptroller warning that Mark Zuckerberg should not be both CEO and chairman, enjoyed a positive week on markets. The NASDAQ had a particularly good week, while the S&P 500 ended the week up just over 1%, having forfeited some of its early gains. Stocks worldwide largely followed suit – the MSCI Europe ex UK ended up by around 1% and Japan’s TOPIX by a little more.

Another contributor to improving sentiment was the energy sector. Tensions in the Middle East, notably in Syria, the current geopolitical focus of US–Russia discord, contributed to supply worries for the sector. An unexpected dip in US inventories added to concerns over supply, pushing the price of a barrel of Brent up to $74.74, its highest since 2014. Speculation also coalesced around Saudi Arabia, which appears increasingly at ease with a higher oil price, perhaps in part due to its need to pay for the ambitious reform programme currently being introduced by Prince Mohammed bin Salman. At time of writing, the energy portion of the S&P 500 is up by some 9% in April alone. ConocoPhillips, BP and Shell were among the oil majors to benefit.

While oil benefited from global tensions last week, there were some signs of progress in the world of diplomacy, albeit only in the context of recent months. Perhaps most significantly, it emerged that Mike Pompeo, the director of the CIA, had met with Kim Jong-un to discuss the possibility of a formal nuclear deal; and South Korea indicated later in the week that North Korea had acquiesced to the idea of US troops remaining on South Korean soil – contrary to its former position. At the weekend, Kim said North Korea no longer needed to conduct any missile or nuclear tests.

Yet despite the lack of fresh sanctions last week, measures introduced earlier in the month against Rusal, Russia’s largest aluminium producer, were sorely felt. Rusal was effectively cut off from world markets and the price of alumina – the chief input for aluminium – has gained almost 50% in value since. The prices of aluminium, nickel and palladium also rose. Commodity majors elsewhere have had a better time of it, as could be seen in the stock prices of both Rio Tinto and BHP Billiton last week. Each of the mining majors is listed on the FTSE 100, which last week rose by almost 1.5%, reflecting the large weighting of energy and mining stocks within the index.

Bond markets, however, told a less happy tale. The yield on the 10-year US Treasury, the most important debt number in the world, climbed ever closer to the 3% mark. Reaching 3% is viewed as a signal that investors expect rising inflation to persuade the Federal Reserve to take more precipitate action in raising rates. Last week, Donald Trump also began to step into the fray – the president made no secret on the campaign trail of his preference for low rates.

Most notable, however, was the decline for major tobacco companies. Philip Morris lost around 15% over the course of the week, sparked in part by poor results – and its statement that take-up for alternative devices might not be as quick as some had hoped. The company suffered the worst trading day in its long history. BAT and Imperial Brands also had a bad week, suffering contagion from the worries over Philip Morris.

Unreliable boyfriend redux

Just as the rest of the world followed the US’s lead on equity markets, so concerns about inflation and interest rates were not confined to North America. In the UK, Mark Carney signalled that the Bank of England might not raise rates after all when it meets in May. The comments swung against the tone of his previous statements, prompting fresh accusations that he was an “unreliable boyfriend” to markets. However, the governor was responding to an unexpected dip in inflation in March. Despite the drop, the latest Moneyfacts figures confirmed that just four of the 399 Cash ISA accounts on offer pays a rate that beats it. However, that didn’t stop UK savers depositing a two-year high £1.2 billion into Cash ISAs in February, suggesting that caution is still winning over prudent long-term planning.

As inflation fell to 2.5% in March, so it emerged that wage growth in the three months to February was 2.8% – slightly above the average inflation rate across that longer period. That will come as good news for many further down the income spectrum, although it barely moves the dial on some of the affordability issues facing the younger generation, not least the challenge of home ownership. Figures published by the Resolution Foundation last week showed that 40% of millennials (which it defines as those born between 1980 and 1996) were living in rented accommodation at the age of 30 – double the rate in the years 1965–80. Up to a third of people, it found, face living in rented accommodation all their lives. With house prices up by 30% since 2013 (54% in London), it’s little wonder that families are increasingly turning to intergenerational planning to help children onto the housing ladder.

The prime minister, however, faced far greater domestic pressures, as London hosted the Commonwealth Heads of Government Meeting – and she came under attack for hardline immigration decisions. She also came under parliamentary pressure to explain why she hadn’t sought a Commons vote before agreeing to take part in military action against Syria. Trouble apparently does come in threes, as she also faced a vote in the Lords – and lost. The question of continued customs union membership may not be quite as fully resolved as she would want.

At least she still had a job by the weekend. Last week saw the resignation of one of the most successful business heads in the UK. Sir Martin Sorrell, the best-paid CEO in the FTSE 100, has built WPP, the advertising agency, into a £30 billion business, but resigned last week following the launch of a personal misconduct inquiry. WPP’s shares slid following the Sorrell announcement, but recovered later in the week.

 

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.


Russian bear

Posted on Monday 16th April 2018

Russian stocks felt the brunt of trade sanctions and a rise in tensions over Syria, as US corporate earnings season entered its stride.

When Macbeth compared himself to “the rugged Russian bear”, he was steeling himself to speak to a ghost. Last Monday, investors in Russia needed some of that same ursine resolve, as the Russian market opened the week down more than 11% from its previous close. That made it a technical correction (defined as 10% below its previous peak) and left it in danger of entering technical bear market territory (defined as 20% below).

In the weeks running up to the correction, foreign investors had been loading up on Russian stocks, as sentiment was buoyed by coordinated global growth and a rising oil price. Indeed, they had never been so overweight to Russia since it first entered the MSCI Emerging Markets Index 19 years ago. Russian stocks did not recover their losses last week, potentially leaving investors to wonder whether some of the cheap valuations on offer had been cheap for good reasons. The rouble dipped by 7.2%, its most dramatic weekly fall in 18 years.

Behind the rapid shift in sentiment lay politics, and its capacity to impact on profitability. A US decision to introduce a new round of sanctions, this time against leading Russian business people and political officials, was far-reaching in its implications. One particularly targeted measure was to introduce generic sanctions against the business interests of Oleg Deripaska, a major commodities player and friend of Vladimir Putin. Energy company EN+ and aluminium producer Rusal both suffered as a result.

Several energy and industrial majors were also hit, as was Mechel, a mining company. Copper prices fell 8% in a matter of days, adding to the pain. Later in the week, it emerged that the Kremlin was planning to prop up some of the companies hit by the measures. Nevertheless, it was notable that the US sanctions also targeted non-Russian banks that trade with the relevant companies and individuals.

The US said that the sanctions were connected to Russia’s behaviour in Crimea, Ukraine and Syria, as well as to its cyber campaigns conducted against the West. Reports that Bashar al-Assad’s army had used chemical weapons against the Syrian people provoked swift condemnation from several Western military powers, most notably the US, UK and France; and culminated in a coordinated military strike on Friday evening on three of Syria’s alleged chemical weapons facilities.

There was some positive news for Moscow, however, as reports came back that the $9.7 billion Sino–Russia gas pipeline was nearing completion. Moreover, Brent crude finished the week above $70 a barrel, its highest level since 2014. The rise was linked to tensions in the Middle East, but also to hopes that the trade dispute between the US and China may be resolved without greater damage to the global economy.

Rising stock

There were better times on leading indices further west, however; the FTSE 100 gained 1.1% over the week, while the S&P 500 and MSCI Europe ex UK ended the week largely flat – up 0.1% and 0.6% respectively. Companies in the US were set to report earnings growth of around 17% for the first quarter (annualised), a rate last beaten back in 2011. Some of the major US banks reported late in the week, and were buoyed by rising interest rates and Donald Trump’s corporate tax changes. J.P. Morgan’s profits rose 35% to an all-time high; Wells Fargo and Citigroup both reported higher earnings too.

On Monday, technology, energy and finance stocks all recovered from a tough end to the previous week – the three sectors account for a large portion of the S&P 500. Among technology stocks, Facebook was also helped by Mark Zuckerberg’s extended testimony to Congress in Washington, from which he emerged relatively unscathed. However, Wall Street was unpredictable, and by the end of the week, financial stocks stalled, while energy stocks continued to rise in value.

Meanwhile, US inflation came in below the Federal Reserve’s 2% target, potentially raising questions over the outlook for interest rates. The Congressional Budget Office warned that the US was heading for an annual budget deficit of more than $1 trillion by 2020, and added that the cumulative deficit would hit $28 trillion, or about 96% of GDP, by 2028; a situation which would have “serious negative consequences for the budget and the nation”. Yet, whilst he backed up his angry words on Syria with action, an apparent softening in the Sino–US tariff tit-for-tat – initiated by China – helped to mollify Donald Trump, who tweeted warmly about a Chinese decision to step back from imposing a set of threatened sanctions. His comments would doubtless have been well received by Christine Lagarde, chair of the IMF. Earlier in the week, she had delivered a stinging critique of US economic policy, damning tariffs and protectionism and warning that “the system of rules and shared responsibility” which underpins the multilateral global trade system was “in danger of being torn apart”.

In the UK, Tesco reported a big jump in annual profits, as it continued its recovery from the accounting scandal of three years back – its share price rose some 7% in response. The supermarket said it had attracted 260,000 new customers over the past year, and announced pre-tax profits of £1.3 billion.

Meanwhile, a survey by HSBC forecast that the value of UK exports will expand this year at its fastest rate since 2011, boosted by the weaker pound. The survey also found that 62% of companies feel that Brexit will be positive, or at least neutral, for their business. However, ONS figures released on Wednesday showed that UK manufacturing declined by 0.2% in February, the first time monthly output has fallen since March last year. The National Institute of Economic and Social Research estimated that the bad weather in late February and early March is likely to have reduced economic growth to 0.2% in the first quarter.

Spring clean?

As the dust settles on another last-minute rush to beat the tax year-end deadline, it’s worth remembering that financial planning should be a year-round activity, and that taking action sooner rather than later can have benefits. Investing your annual ISA allowance early in the tax year can get your money working harder for longer and provides the peace of mind that you have avoided any end-of-year panic.

Furthermore, new data from the Financial Conduct Authority underlined the need for individuals to more frequently review their financial plans for retirement. The research revealed that, among those contributing to a pension, 53% have not reviewed how much their pension pots are worth in the past 12 months. Over a quarter of people aged 55 and over and not retired do not know the size of their pension savings. Nearly half admitted that they do not give their pension much thought until they are two years from retirement; while eight in ten people with a defined contribution pension said they had not considered how much they should be paying into it to maintain a reasonable standard of living in retirement.

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.


Tubers and tariffs

Posted on Monday 9th April 2018

Figures revealed the impact of March’s cold snap on the UK economy, while the escalating trade battle between the US and China worried investors.

The Beast from the East has apparently contributed to the Jersey Royal potato season being at least three weeks behind schedule this year. But April’s crop wasn’t the only casualty of the recent cold snap.

A busy week of Markit/CIPS Purchasing Managers’ Index surveys revealed that the UK’s construction industry seized up in March due to snow-related disruption, with civil engineering suffering the sharpest drop in activity for five years. There were suggestions that the collapse of Carillion contributed to the slowdown, with economic, political and Brexit uncertainties also fuelling caution. However, the housing sector bucked the wider trend, while a solid rise in employment numbers in the construction industry and a rebound in business expectations raised hopes that March was a blip rather than the start of a longer-term slide.

The severe weather also afflicted the services sector, which registered its weakest performance since July 2016, the month after the EU referendum. The survey excludes the retail sector, so possibly understated the weakness, but – taken with the latest manufacturing and construction data – it points to GDP growth of about 0.3% in the first quarter; which is in line with the Bank of England’s forecast.

The storm cost supermarkets £22 million in lost sales in March as shoppers stayed wrapped up at home. However, shoppers’ stockpiling of groceries ahead of its arrival helped boost supermarket sales figures by 2.5% over the year. Unsurprisingly, warming foods were favourite – sales of tinned soup were up 27.5% and hot drinks up 8.4% over the month.

Yet soup and potatoes didn’t top the week’s food and beverage news. The soft drinks industry levy – or ‘sugar tax’ – came into force on Friday, amid much debate about its likely effectiveness. The introduction of the levy means the UK joins a small handful of nations, including Mexico, France and Norway, which have introduced similar taxes. Manufacturers’ responses have varied. Ribena’s new low-sugar recipe has been likened to drain cleaner by some angry fans.

Lovers of sugary, non-alcoholic beverages weren’t the only drinkers to receive bad news last week. Troubled drinks firm Conviviality, the wine and spirits supplier to J D Wetherspoon’s 900 pubs, officially went into administration after failing to raise £125 million from investors to resolve a cash crisis. On Friday, Bestway, one of the UK’s biggest wholesalers, agreed to buy the company’s shops, which include Bargain Booze and Wine Rack, saving 2,000 jobs.

There was also disappointing news for the UK car market, as new registrations shrank by 15.7% last month compared with March 2017. However, last March was a record month as customers bought new cars ahead of a change in vehicle excise duty. What is clear is that registrations have been falling steadily for a whole year, with diesel models suffering particularly badly.

Sky’s the limit

The week began with a further development in the long-running saga of the attempt by Rupert Murdoch’s 21st Century Fox to buy the 61% of Sky it doesn’t already own. An offer from Disney to buy Sky News eased some of the political objections to the deal.

“The regulator has taken the view that by having control of Sky News and a number of UK newspapers, Rupert Murdoch would have too great an influence on UK news outlets,” commented Nick Purves of RWC Partners. “The proposed move by Disney now makes it more likely therefore that the Fox offer can finally proceed.”

However, a surprise offer for Sky from Comcast, the US cable group, at a premium to the Fox offer has further complicated the picture. If Comcast is serious in its bid to derail Murdoch’s plans then Sky shareholders look set to benefit from a shoot-out between the two bidders. The Competition and Markets Authority needs to deliver its recommendation to the government by 1 May.

Fighting talk

Equity markets oscillated throughout the week in response to the fast-moving trade stand-off between the US and China. On Monday, China imposed $3 billion in retaliatory tariffs on US imports of 128 products, including soya beans, cars and orange juice. Markets reeled midweek in response to further threats from both sides to impose 25% duties on a range of exports worth $50 billion.

Markets rebounded sharply on Thursday in response to comments from President Trump’s top economic adviser, Larry Kudlow, who said the administration was involved in a “negotiation” with China – but not a trade war. The FTSE 100 jumped 2.3% as markets sensed an easing of tension, while German stocks recorded their biggest one-day gain in a year.

Thursday’s recovery came despite news that China had filed an official legal challenge with the World Trade Organization (WTO) over the US’s proposed $50 billion of tariffs on more than 1,300 Chinese products. China and the US now have 60 days to resolve their complaint, or they face litigation at the WTO from a neutral panel of arbitrators.

But further tit-for-tat actions followed on Friday as President Trump instructed officials to consider a further $100 billion of tariffs against China. In response, the country’s Ministry of Commerce spokesman Gao Feng said: “We do not want to fight, but we are not afraid to fight a trade war.”

Yet despite the escalating economic brinkmanship, behind the scenes US and Chinese officials are still talking and laying out all the options. As mid-term elections approach, President Trump is very aware of what a large-scale fall-out in US equity markets would do for his approval rating.

Failure to resolve the dispute poses an obvious risk to the continued health of the US and global economy. As it was, those fears were compounded by the release of lower-than-expected US jobs data on Friday. Non-farm payrolls increased by 103,000 last month; the fewest jobs created by the US economy in six months.

Consequently, global markets ended the week on a downbeat note. The S&P 500 was down 1.37% over the five-day period. However, the FTSE 100 missed Wall Street’s late fall and gained 1.80% over the shortened week. The MSCI Europe ex UK finished the week up 0.62%.

Tech trials

US technology companies with large operations in China could be threatened by an escalation in the trade dispute; which was just one reason why tech stocks continued to make the headlines and exert a big influence on markets. On Monday, Wall Street shares plunged to their lowest level in weeks in a wide sell-off led by technology firms. Intel was a big loser on reports that Apple planned to stop using its chips for its computers, while Amazon suffered after new attacks from President Trump.

Mark Zuckerberg, Facebook’s founder and chief executive, confirmed that he would testify to US Congress on Wednesday this week, to answer questions over user privacy, the Cambridge Analytica data breach and Russian meddling in the US presidential election.

Facebook admitted that 2.7 million people in the European Union may have had their data improperly shared with the political consultancy firm. Thirty organisations, including Facebook, are being investigated in the UK by the Information Commissioner’s Office as part of its probe into the use of personal data and analytics for political purposes, the body has said.

The last two weeks’ sell-off has wiped billions of dollars from the values of Amazon, Facebook and Twitter; yet Spotify, the music streaming group, bucked the bearish mood for technology stocks when it made its debut on the New York Stock Exchange on Wednesday. The stock jumped 26% from its starting point within the first few hours of trading, valuing the company at $29 billion.

RWC Partners 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.


Technology trouble

Posted on Tuesday 3rd April 2018

Tech stocks were the main exception as markets enjoyed a short-lived lull in trade and political tensions, while the UK entered its final year before Brexit.

On Monday last week, an unannounced diplomatic train pulled into a railway station in Beijing; reports soon surfaced that Kim Jong-un had come to town – the official photographs of Kim and the Chinese president followed two days later. The surprise trip was Kim’s first as leader outside North Korea, and raised hopes that he is serious about denuclearization, ahead of a meeting with Donald Trump in the next few weeks.

Shares of several foreign companies with business interests in the reclusive state enjoyed support as a result, and a further boost arrived for others in the form of reports of a fresh Washington–Seoul trade deal. Among the gainers were South Korean companies AmorePacific, a beauty and cosmetics company, and LG Chem – the latter is held in the St. James’s Place Asia Pacific fund.

There was, however, continuing trouble in the upper echelons of the technology food chain, as the reverberations of the Facebook–Cambridge Analytica story were felt on markets. The S&P 500 Information Technology Index ended the week marginally down; and remains far off its early-March highs. On Tuesday, technology stocks suffered the worst one-day drop in their history. Tech majors to suffer last week included Amazon and Alphabet, Google’s parent – the former suffered again late in the week (and then yet again on Monday this week) as Donald Trump accused it of paying “little or no taxes”. Meanwhile, some of Apple’s leading suppliers suffered on news that the iPhone manufacturer will henceforth make its own screens – South Korea’s Samsung Electronics was among those to suffer. Tesla, meanwhile, reported last Friday that its fatal car crash in March had involved its Autopilot system – the company’s share price suffered as a result.

Facebook, the primary focus of the negative sentiment, could not make a meaningful recovery from its previous fall, and ended the month down by more than 12%. Mark Zuckerberg, chair and founder, revoked an earlier decision and said he would now give testimony before Congress, but left unchanged his decision to send a junior to a select committee meeting in Westminster in his stead. The US Federal Trade Commission confirmed it had opened an investigation into the company’s privacy policies following the recent revelations. Technology companies are one of the reasons that, in recent weeks, volatility has returned to markets; and as yet, it shows few signs of abating. In broader historical terms, however, volatility should be expected – its absence is an exception, not a norm.

The broader S&P 500 enjoyed a stronger week, however, as the early part of the week saw trade tensions appear to subside, due perhaps in part to China beginning to offer trade concessions to the US, such as allowing foreign ownership of securities companies and diverting some semiconductor imports via the US. (At the start of this week, however, China announced tariffs of up to 25% on some 128 US imports, including wine and pork.) Monday last week was the best day for the S&P 500 since the Chinese currency devaluation three years ago, although the size of the rise reflected in part the scale of the previous week’s fall – the S&P 500 ended the week up almost 1%. Some Japanese stocks also benefited from improved trade sentiment, and the TOPIX, which tracks the share price fortunes of some 1,700 Japanese companies, ended the week up around 4%.

Takeover tussles

As the first quarter came to a close, data showed global takeover activity exceeding $1.2 trillion over the period, a record high. Shortly before the Easter break, shareholders in GKN, a 250-year-old UK engineering company, voted to accept the hostile takeover bid made by Melrose, a US company. There were reports, however, that the UK defence secretary might yet veto the deal on national security grounds. Speculation continued, meanwhile, over whether Takeda, Japan’s largest pharmaceutical company, would succeed in its bid to acquire Shire, a FTSE 100 company with most of its operations in the US. Questions remained over whether Takeda could really afford to make the acquisition. The FTSE 100 ended the week up almost 2%, while the MSCI Europe ex UK finished up 1.2%.

Mergers and acquisitions are up by 67% year-to-date compared to the same period in 2017, possibly reflecting the fact that global growth and US tax cuts have left some companies relatively flush with cash. An increase in the number of larger deals has been particularly notable. Moreover, these factors have led some investors to raise questions over some of the major technology companies; a number of senior executives at the tech majors have been selling their stock lately rather than buying it, among them Facebook’s Mark Zuckerberg.

Growing and exiting

The Facebook–Cambridge Analytica story rumbled on in the UK last week, amid accusations that the two leading leave campaigns (Vote Leave and Leave.EU) had broken campaign spending rules, and that Facebook data profiling may even have influenced voting intentions. At time of writing, these accusations – and many others made against SCL and its affiliates – remain unsubstantiated, pending investigation. Irrefutable political news came in the form of the expulsion of more than 100 Russian diplomats from NATO allies of the UK for the recent poisoning of Sergei Skripal and his daughter. All the UK’s major NATO allies took part in the move, which involved 23 countries. The US alone expelled 60 diplomats. Stocks in Russia slipped on the news, but the damage thus far has been relatively limited. Russia responded by expelling diplomats from those 23 countries.

The UK also passed a significant moment on Thursday: one year until it is due to exit the European Union. Although a transition deal has been agreed, the UK will formally leave the union on 29 March 2019. Reports surfaced last week that Brussels is already considering diverting the profits of some eurozone central banks in order to cover some of the shortfall created by the loss of the UK’s contributions. Keir Starmer, Labour’s Brexit minister, warned last week that the party was willing to vote down the Brexit bill in October if it failed to pass the party’s six tests.

The economic outlook appeared relatively positive, as the national accounts showed growth in 2017 broadly unchanged from 2016. Also included in the release were the credit figures, which showed both bank and consumer lending on the rise; in a report on the data, Capital Economics said that these “provide another reason to think that the economy has maintained its momentum in the first quarter”.

As the end of the tax year loomed, there were less happy tidings to be found regarding the nation’s savings habits, as the savings ratio hit a record low. The Office for National Statistics said that just 4.9% of earnings were set aside by UK citizens, below the previous historic low of 5.2% recorded in 1963 and 1971.

Even more worrying research published by Prudential showed that one in eight people retiring this year have made no provision for their retirement. This leaves them starting retirement with an income, courtesy of the State Pension, of just over £8,500 a year. Individuals concerned with achieving future financial security have just a few days left to take advantage of tax allowances and reliefs that will otherwise be lost after 5 April.

 

 

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.


Borderline

Posted on Monday 26th March 2018

Fresh import tariffs, Facebook woes and a rate rise loomed large on US markets, while the EU and UK agreed Brexit transition terms.

The ‘slings and arrows of outrageous fortune’ were much in evidence on markets last week, as Wall Street suffered its worst week of trading since early 2016. Three developments overshadowed the period: two political and one monetary.

The first was the White House’s decision to impose $60 billion of tariffs on Chinese imports; its second protectionist measure targeting the world’s second-largest economy. An import duty of 25% will be imposed on a range of products, among which drugs and robots feature heavily. In the same week, China announced tariffs of its own – on $3 billion of US exports to China – although these may well only be a response to the first round of Trump-era US actions (on aluminium and steel), with more to come in response to Washington’s latest protectionist salvo.

A number of stocks suffered in the wake of the announcements, among them Boeing and Caterpillar, and the broader S&P 500 ended the week down by a hefty 5.9%. Volatility has been particularly noticeable recently: on Thursday last week, the S&P 500 fell by 2.5% in a single day – the 17th time it’s suffered a single-day shift of at least 1% since the start of February. In the 13 months to January, there had been just ten such moves. Investors have become jumpy.

The second immediate cause of concern was the emerging story about personal data harvested by Facebook, data which the company then shared with Cambridge Analytica, a UK-based consultancy, but failed to ensure was subsequently deleted – or to inform the regulator of the developments. Cambridge Analytica, meanwhile, stands accused of then misusing that data to target voters with online ads in the US election on behalf of its client, the Trump campaign team. The social media company’s market value fell by more than $50 billion last week – and even its CEO, more accustomed to showing his face in the good times, emerged with something like an apology in the middle of the week.

As Facebook faced mounting pressure, the EU imposed a new digital tax on tech companies with more than €750 million in annual global revenues – crucially, the tax (of 3%) is based on revenues. The European Commission aims to raise €5 billion a year with the measure, although Berlin expressed some reservations later in the week. The share price of Alphabet, Google’s parent, suffered over the course of the week, as did a number of other technology majors; the S&P 500 Information Technology Index slipped almost 6% over the week. Market participants feared the business impact of privacy issues highlighted by the Facebook story for the wider sector – but for Facebook most of all.

“The biggest threat to Facebook’s long-term prospects would be a loss of users and engagement, which the #deletefacebook movement is trying to achieve,” said Hamish Douglass of Magellan Asset Management. “Based on Facebook’s user behaviour around privacy issues in the past and the centrality its platforms have in the lives of its users, we consider this to be a low risk. Therefore, outside the potential for a monetary fine, and higher legal and compliance costs, we do not believe that the Cambridge Analytica situation will materially affect Facebook moving forward.”

It was a happier week on markets for Dropbox, as the online file hosting service launched a successful IPO last week, significantly beating its target price. As with the recent Snapchat IPO, however, some investors expressed reservations about the multi-class share structure of Dropbox’s offering, whereby some shares receive more voting rights than others. Doubters fear such models leave the companies insufficiently answerable to shareholders.

The third major moment of the week was more scripted, but investors found it compelling all the same. The Federal Open Market Committee, the Fed’s rate-setting team, held its first meeting under its new chair, Jerome Powell. As expected, the committee raised rates by 0.25%, but said that US productivity levels needed to improve. Markets had expected a hawkish tone, and the yield on the one-year Treasury rose to its highest level since 2008 ahead of the meeting. In the event, policymakers were divided over whether 2018 held three or four rises in store – market reaction was muted.

Washington politics had still more in store for markets last week, however, as Congress agreed to a huge spending bill of $1.3 billion in order to help avert a government shutdown as the Federal budget approaches its latest deficit ceiling. Yet Donald Trump soon tweeted that the spending bill didn’t go far enough and said he might choose to veto it – one particular concern was the lack of budgetary allocation to build a wall along the Mexican border.

The president also maintained his revolving-door appointments policy, and last week named John Bolton as his third national security adviser. The veteran security hawk completes a cabinet almost entirely shorn of globalists and military soft-pedallers. Four weeks ago, the Wall Street Journal published a piece by Bolton entitled ‘The Legal Case for Striking North Korea First’.

A similarly robust direction of political travel was apparent in Beijing last week, as Xi Jinping largely completed the biggest Chinese government restructuring for a decade. Several ministries were discontinued, a new central bank governor was appointed, and the current premier was given a second term. More importantly, Wang Qishan was voted in as vice president with an enviable votes tally of 2,969 for and 1 against. (Not bad, although not quite as good as his boss, who went one vote better in the previous week’s decision to remove any tenure limit on China’s presidency.) Xi Jinping has said that the quality of growth and risk control must now trump the headline growth rate on the list of policy priorities.

Red lines

It was a significant week for Secretary of State for Exiting the European Union, David Davis, as he shook on a transition deal with Michel Barnier, his opposite number. Sterling rose on the announcement, and has remained up since, as it edges still nearer to its value it struck against the dollar the week before the referendum. A number of key areas received clarification in the release that followed: the transition period will end on 31 December 2020; the UK can negotiate its own trade deals during transition; in the absence of other solutions, Northern Ireland will effectively remain in parts of the single market and customs union; and the UK will remain de facto adherents to the Common Fisheries Policy, but without any say in policymaking. It was this last concession that particularly stuck in the craw of leading Brexit figures – given the industry’s decline in the years following the UK’s initial entry to the union.

Inflation in the UK, meanwhile, struck a seven-month low of 2.7%, raising questions over the Bank of England’s rate rise policy ahead. Sadly, the dip was nowhere near big enough to offer true respite to cash savers, who continue to lose money in real terms – whoever they bank with. Indeed, data from Moneyfacts revealed that the average no-notice rate actually fell last month; a response to savers spurning fixed-rate deals and opting for the flexibility of easy access in anticipation of an imminent interest rate rise. The news was more encouraging for earners, however, as wage growth rose to 2.8% in January, a whisker above inflation.

The FTSE 100 struggled over the course of the week, dropping 3.1%, although much of the fall was a result of the rise of sterling. (The MSCI Europe ex UK fell 3.2%.) There was bad news from the high street, as a series of retailers reported financial issues, among them Carpetright, Moss Bros and Kingfisher. Retailers in the UK have suffered their worst start to the year since 2013.

 

 

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