Market Bulletin (02/10/2017)
“You’ve got to know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run.” So sang Kenny Rogers in ‘The Gambler’, back in 1978.
These days, politicians appear to have lost the knack. In late 2015, when EU leaders were anxious about the UK’s forthcoming referendum, David Cameron told them: “Don’t worry. I’m a winner”. Hillary Clinton assumed she was a shoo-in against Donald Trump. Theresa May went back on her initial decision as leader not to call a snap general election – only to forfeit her majority at the ballot box.
After last week’s rush of events in Japan, the question is whether Shinzo Abe has made a similar miscalculation. At first, his decision to close parliament and call an election for 22 October looked bold, but the honeymoon was quickly over. Yuriko Koike, the popular, conservative mayor of Tokyo, announced that she was forming a new political party, Party of Hope. (Koike herself will not stand). It soon got worse for the incumbent, however, as the main opposition party, the Democratic Party (DP), said it would not even be fielding its own candidates, thereby allowing them to stand for Koike’s new party instead.
While Japan struggled for decades under the weight of persistent deflation, growth in 2017 has been impressive, reaching 0.6% in the second quarter, while inflation jumped to 0.7% – an unusually healthy level, given Japan’s demographic dynamics. The Nikkei 225 may not be rising as fast as last year (when it surged by more than 16%), but its return in 2017 is still very respectable. Despite jitters midweek, the index rose 0.29% last week as Friday brought better news for the incumbent prime minister in the form of rising factory output, increased household spending and an unemployment rate sitting at a two-decade low. Industrial product is growing at a rate of 2.1%. One poll released at the weekend showed Abe’s Liberal Democrat Party winning 29% of the popular vote, against 18% for Koike’s party.
As Angela Merkel licks her wounds after a less-than-decisive victory in Germany’s federal elections, there was little doubt last week where the greatest momentum in European politics has been gathering. Emmanuel Macron conjured his vision for France and for the EU in a 90-minute speech at the Sorbonne in Paris. The French president called on EU leaders to be “bold” against the threat of populism as he preached a message of European integration. The euro continued a short-term decline, pushing the Eurofirst 300 up 1.3%. The index was buoyed by exporters, despite a fall in the value of Volkswagen, after the carmaker said it was increasing its provisions for North American settlements over emissions fixing. Eurozone inflation, meanwhile, dipped to 1.5%, adding to the ECB’s challenges as it plans its exit from QE.
Yet all developments in the EU were quickly overshadowed by Sunday’s contested independence poll in Catalonia. The vote, which contravened the Spanish constitution, went ahead despite repeated attempts by Madrid to shut it down. Preliminary results suggested 90% had voted in favour of independence, which is unsurprising, since those Catalonians opposed to independence mostly boycotted the vote. But perhaps the greatest legacy of the vote was the violence which accompanied it, as the police force sent in by Madrid was filmed attacking protestors – 840 people were injured, according to Catalonia’s government. Having voiced support for Madrid in advance, most EU leaders were conspicuously silent about the weekend’s events.
Following her own EU speech in Florence, Theresa May’s star appeared to have risen in EU circles, even if things remained complicated back at home. Donald Tusk visited 10, Downing Street and praised the prime minister’s new tone on Brexit, saying that the UK had now abandoned its ‘have cake and eat it’ policy, although he lamented that “there is not sufficient progress yet”. However, May was largely upstaged by Jeremy Corbyn last week, who displayed fresh swagger in his speech at the Labour Party Conference.
Despite the gathering momentum, Corbyn was less radical than many expected. He ruled out a repeat referendum, committed to the single market as part of a ‘jobs first’ Brexit, called for rent controls, criticised the US president’s recent UN speech, confirmed plans to nationalise utilities, and pledged to tax the largest companies at a higher rate. He also spoke of developing “a new model of economic management to replace the failed dogmas of liberalism.” The prime minister picked up the point in a speech at the Bank of England, saying that free markets were “the greatest agent of collective human progress ever created”.
After the talk, came the numbers. Statistics released on Friday marked down the UK’s second-quarter GDP rate to its lowest rate since 2013 – it is now the slowest-growing G7 economy. The pound fell in response. The current account deficit rose to 5.9% of GDP. Another possible bellwether moment came in the form of London house prices, which, according to Nationwide, have fallen for the first time since 2009. Stocks in the UK remained flat over the course of the week, but the FTSE 100 ended up 0.85% due to sterling weakness following the GDP news. One corporate disappointment, however, was Card Factory.
“Card Factory guided its profit margins down today in response to higher costs due to wages, investment, FX and product mix,” said Chris Field of Majedie Asset Management. “In addition, the company has indicated that the board plans to review the amount and timing of the special dividends which has knocked investor confidence. We had recently reduced the position. The company’s business model remains very strong and compelling and we expect the company to continue to increase its market share over time.”
Meanwhile, new figures showed that pension contributions hit record levels last year, raising fears that the chancellor may yet seek to cut pension tax relief in his Autumn Budget. Nine million people contributed £24.3 billion in 2015-16, according to HMRC – higher than before the financial crisis. The rising level of contributions creates a headache for the Treasury. The government was eager to improve savings habits and, largely through auto enrolment, it appears to have succeeded in doing so. Yet it will surely be loath to pay ever more for its success, given the chancellor’s determination to balance the books. Pension savers should be wary, and prepared to take advice, while still making use of the reliefs and allowances currently available.
Tax cuts, revisited
In the US, Donald Trump returned to the fore as he finally laid out his tax cut plans in a speech in Indiana. Calling the current system a “relic”, the president announced significant cuts for corporations and individuals alike. The plan would reduce the number of income tax brackets from seven to three (at 12%, 25% and 35%), with a possible surcharge for the super-rich. Estate tax (which currently affects just 0.2% of the population) would end. Companies would benefit from a cut in the corporate tax rate from 35% to 20%.
Since coming to power, Trump has yet to score a major legislative victory, but on tax cuts he may yet have an issue that many Republicans can rally around, if fiscal conservatives believe government revenues will not overly suffer. The S&P 500 rose 0.57% over the course of the week. If the president can get his tax cuts through Congress, markets may yet reward him for it.
Majedie Asset Management is a fund manager for St. James’s Place.
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