Market Bulletin (22/01/2018)
Frozen air
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.
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