Market Bulletin (01/08/2016)
In 2010 Eric Schmidt, CEO of Alphabet (Google’s parent company) and unofficial evangelist-in-chief at Google, gave a sense of the data overload that characterises our digital age. Since 2003, Schmidt claimed, humans had recorded or created as much information every two days as they had in the whole of their pre-2003 history.
Admittedly, much of the purported increase is down to the number of people – more than three billion at last count – using the internet today; but this digital proliferation has transformed the more specialist areas of life too, not least finance and economics. As a result, it can often be difficult to sift through all the data that matters, let alone to evaluate it all.
Last week, amid a crescendo of evidence on the UK outlook, the problem was all the more apparent, not least because the data did not always provide a clear picture. The headline news was positive: UK GDP growth in the second quarter was 0.6%, a whole 50% above the first quarter’s rate and above expectations – manufacturing in particular enjoyed a bumper quarter.
A cheaper pound also appeared to have offered a boost to some domestic transport and tourist companies, such as National Express and Merlin Entertainments. Other companies, McDonald’s and Jaguar Land Rover among them, announced new investment or jobs in the UK. Earnings season was less good for financial stocks such as Schroders and HSBC, or for oil majors, notably Shell – a barrel of Brent crude ended the week relatively cheap at just over $43. ARM reported a strong rise in earnings ahead of the SoftBank takeover, and the FTSE 100, perhaps appropriately, finished broadly flat – down just 0.09% – having reached an 11-month high earlier in the week.
Moreover, the headline GDP figure concealed a more worrying trend – almost all the growth had come in April, when the referendum was still two months off, while the June figure showed a contraction. The British Retail Consortium said jobs had been cut in the months leading up to the vote. RICS, the surveyors’ representative body, said construction demand had decreased. A survey of members of the Society of Motor Manufacturers and Traders found growth, jobs and investment expectations were negative. The YouGov/CEBR Consumer Confidence Index suffered its biggest one-month drop in six years, and fell to a three-year low, while the GfK Consumer Confidence Barometer suffered its biggest drop since 1990. The Markit UK manufacturing purchasing managers’ index (PMI), which measures manufacturing output and sentiment, showed a sharp fall into negative territory for July, with new orders recording their largest monthly drop in 18 years. The equivalent eurozone PMI figure showed continued expansion.
If UK politics seemed quieter, it was surely only because participants had been so hyperactive in the previous weeks. There was an important appointment in Brussels in the form of Michel Barnier. The man now charged with overseeing Brexit negotiations for the European Commission was immediately described by Nick Clegg as “no friend of the City of London”. In EU-speak, Barnier is a federalist (as opposed to an adherent of intergovernmentalism, such as David Cameron) and has come close to blows with the UK over financial regulation in the past.
Meanwhile, Theresa May also faced pressure from the right in the form of Liam Fox, who wants Britain to leave the customs union (which is distinct from the single market) immediately, since it would allow London to negotiate trade deals elsewhere. May’s own political signals were somewhat different – on a state visit to Warsaw, the prime minister said that the 800,000 Poles in Britain remain “very welcome”. There are domestic financial pressures for her to worry about, too. Last week pension providers were reportedly lobbying the government to postpone introduction of the Lifetime ISA, and speculation continued over the fate of the ‘triple lock’ that keeps the state pension rising at a decent rate – but expensive to fund.
Nevertheless, it seemed the EU already had other matters to focus on, not least arguments over security following the recent spate of deadly attacks in France and Germany.
A European Commission survey suggested economic sentiment across the EU 28 turned positive, with the UK the most egregious exception. Nevertheless, Friday figures showed that eurozone growth dropped to 0.3% in the second quarter – just half the first quarter rate – while French growth turned stagnant. The FTSEurofirst 300 ended the week up 0.25%.
The most important European news was announced on Friday evening: the results of stress tests on European banks. Italy, the UK, Germany and Ireland appeared to provide the greatest concentration of stress-sensitive banks, but the broader conclusion of the tests was that “steady-state monitoring” was now the order of the day – as opposed to emergency recapitalisation. The tests have been criticised for, among other features, having no fail mark. European bank stocks suffered on the Monday morning following the announcement.
In better company
A mildly better-than-expected US earnings season coupled with a sufficiently optimistic Federal Reserve decision statement combined to offer a happier picture across the Atlantic – until Friday’s GDP figures showed that annualised GDP growth had fallen to just 1.2% in the second quarter, around half the forecast rate. The fault lay with a fall in the investment rate.
The day before, the Federal Reserve announced it had chosen to leave rates on hold, noting that the labour market, labour utilisation and household spending were all stronger, while fixed investment in business was soft. Inflation remained below the Bank’s target, although the Fed put this down in great part to energy price falls. The Bank’s Federal Open Market Committee expects “gradual increases in the federal fund rates” to provide the future trajectory, thereby offering markets reassurance that US growth remains on track.
If Google and Facebook rule over the two great digital empires of the age, last week saw a smaller challenger pursuing expansion, as Verizon agreed the acquisition of Yahoo. Having already bought AOL, the telecoms company now hopes it can use its scale and the breadth of its knowhow – Yahoo was a leading developer of the internet – to become the third player.
“Verizon has been strategically looking for new ways to generate revenue from its customer relationships and the enormous amount of data that flows over its network,” said Paul Boyne of Manulife Asset Management. “Yahoo brings scale which will allow Verizon to deliver not only advertising but also to collect and analyse online behaviour, which can create value. The Yahoo acquisition may allow Verizon to take the number three spot in the digital market, which we believe will add meaningfully to its revenue growth.”
Both Alphabet (Google’s holding company) and Facebook reported earnings for the quarter that came in far above expectation. While Apple reported slackening iPhone sales rates as expected, and Twitter’s quarterly report looked mixed at best, the two dominant digital players proved their continued edge by posting strong advertising revenue growth. After a week of much toing and froing, the S&P 500 ended up just 0.03%.
In Japan, the central bank left rates on hold and delivered stimulus plans whose scale disappointed the market. But some investors saw relief in the government’s pledge on Wednesday to offer its own $265 billion fiscal stimulus – central banks have had to shoulder a great deal of the responsibility for addressing growth shortfalls in recent years, and last week Deutsche Bank estimated that the Bank of Japan and ECB are between them buying some $180 billion of securities every month. The Nikkei 225 ended the week down 0.35%.
Manulife Asset Management is a fund manager for St. James’s Place.
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