Market Bulletin (19/12/2017)

Bull’s eye

The Old English word bula means ‘steer’ as well as bull. As a verb, however, ‘to bull’ means to tell untruths or polish to a high shine. Bears might nod knowingly at the double-meaning, but the truth is that it has not been their year.

The cyclical bull market that began in 2009 refused to abate last week, as the S&P 500 and Dow Jones Industrial Average both struck record highs. Although the S&P 500 rose just 0.86% across the five trading days, it has now made up some 17% since 1 January, while the NASDAQ is up more than 14% for the year. The Dow Jones Industrial Average has apparently found sixth gear, gaining more than 23%.

Bears – even a few bulls – worry that the current bull market is already mature. That is perhaps true of the cyclical bull market, which began in 2009 when it started to rise from its mid-crisis lows. Yet by that point, the S&P 500 had fallen to half the level reached at its 2007 peak. For many, the more meaningful measure is the secular bull market. For the S&P 500, that run only began in 2013, which is when it finally surpassed its 2000 and 2007 peaks. As for the NASDAQ, its secular bull run is barely adolescent, having only begun in 2016. A two-decade low can make for a misleading starting point. But if the bears are right, it is worth remembering that maturity does wonders for differentiating the best stock-pickers.

One of the year’s most meteoric performers has been Nintendo, the Japanese gaming multinational that continues to focus heavily on making all its own hardware. Japanese companies have been enjoying a strong year on markets as it is. The Nikkei 225 has risen more than 16% (although it slipped just over 1% last week). Yet over the same time period, Nintendo, which is listed on the NASDAQ, has risen by around 80%.

“Nintendo traditionally has limited access to its games to its proprietary platforms, while smartphone-enabled gaming has taken massive share over the last several years,” says Dan O’Keefe of Artisan Partners. “We first purchased Nintendo in April 2015 in the wake of its announced plans to monetize its tremendous IP [intellectual property] library via a partnership with Japanese mobile-gaming company DeNA – a compelling strategic shift. Since the new CEO arrived in 2015, the transition to mobile and smartphone platforms, the successful launch of Pokémon Go in 2016, the mobile platform treatment of Nintendo’s popular Mario Brothers characters, and the launch of its Switch platform in 2017 have made for a promising start.”

Given that US growth currently exceeds 3%, the real economy hasn’t exactly parted company with markets. Last week, a leading US small business confidence index showed the second-highest reading in its 47-year history. Janet Yellen expressed confidence in her own way, raising US interest rates for the third time this year, and signalling three rises to come in 2018. “The economy is performing well,” she said. “There’s less to lose sleep about now than has been true for quite some time.” Her tenure, which is due to end in a few weeks, has been marked by stability and clear market telegraphing. “She successfully brought asset purchases to an end and implemented the first rate hike,” said Mark Holman, CEO of TwentyFour Asset Management. “Good for her; a job exceedingly well done.”

Meanwhile, Capitol Hill still looked set to deliver its own fillip to markets in the form of Donald Trump’s tax-cuts package. Congressional Republicans settled on cutting the corporate tax rate to 21% and the US Treasury said it thought the growth acceleration sparked by the cuts would deliver around $1.8 trillion in revenue over ten years. Passage of the tax cuts was made more urgent last week when the Democrats unexpectedly won a Senate seat vote in Alabama – as of 2018, the Republican majority in the Senate will be halved, giving them a lead of 51–49.

Despite worries at home, the Trump administration continued to make its presence felt abroad. Rex Tillerson said that he was open to holding unconditional talks with North Korea – until the White House slapped down the idea. Meanwhile, the US was also joined by the EU and Japan in criticising “unfair” Chinese trade practices at the World Trade Organization. Not that it was all one-way traffic; last week, the finance ministers of the EU’s five largest economies – Philip Hammond included – wrote to warn the US government that its tax-cut plans would flout international agreements and undermine trade, risking a transatlantic trade dispute. The letter hinted at retaliatory measures over pro-US policies.

The US, meanwhile, warned Saudi Arabia not to sell a major stake in Saudi Aramco (soon to be the largest listed company worldwide) to China. Other companies were seeking growth through M&A, however. Disney agreed to buy 21st Century Fox for $66 billion, as the Murdoch succession saga rolled on. In France, Unibail-Rodamco, Europe’s largest commercial property company, secured the $24.7 billion purchase of Westfield, the Australian shopping centre major.

“Westfield shareholders were offered a 17.8% premium to the previous day’s share price,” says Mark Beveridge of AXA Investment Managers. “The merged entity will own €61 billion in its real estate portfolio, of which 87% will be shopping centres – 71% of the assets will be in Europe and 22% in the US. This creates truly a global leader in the sector, strategically positioned in many of the world’s most affluent cities and well-equipped to adapt to the rise of e-commerce. It should enhance its drive towards differentiation and innovation to enhance the shopping experience at its malls.”

To-and-fro

Theresa May last week experienced a familiar sensation in Brexit negotiations – as soon as she hits what looks like a winner, she finds the ball careering straight back at her. The prime minister was buoyed by her first major success – a breakthrough in EU exit negotiations that saw the European Council agree to move to the second phase of talks in 2018.

Yet her glory was somewhat soured when a later vote saw her suffer her first Commons defeat – this time over whether MPs would have a vote on the terms of the eventual deal prior to the UK’s exit from the union. Given that Tory rebels lay behind the move, it was a reminder that she has many audiences to please – at home as well as abroad.

Stocks in the UK enjoyed a strong week – the FTSE 100 rose 1.31% – while the Eurofirst 300 ended the week essentially flat. News came in the UK that inflation had risen to 3.1% – the level at which Mark Carney has to write an explanatory letter to the chancellor. Since markets are not pricing in a rate rise from the Bank of England this Thursday, this means that savings accounts are now offering even less versus inflation than they already were.

“There is little to suggest the Monetary Policy Committee needs to raise interest rates again quickly to stamp out inflationary pressures,” said Capital Economics in a recent report. “Indeed, we think that consumer price inflation has probably now peaked.”

Of more positive news to retirement savers was the government’s plan to extend its automatic enrolment scheme to younger workers aged 18 or over, from the present age of 22. Ministers hope to introduce the measure in the mid-2020s, expected to cost the government an extra £600 million a year in tax relief, and employers a further £1.4 billion a year in contributions.

The next edition of the Market Bulletin will be sent out on 8 January. In the meantime, we would like to take this opportunity to wish you all a very happy Christmas and New Year.

Artisan Partners, AXA Investment Managers, and TwentyFour Asset Management are fund managers for St. James’s Place.

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