Market Bulletin (03/04/2018)
Technology trouble
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. For retirees reliant solely on the State Pension, this means a retirement income 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.
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