Market Bulletin (05/06/2018)
On Wednesday last week, newspapers around the world reported that Arkady Babchenko, a Russian journalist disdained by the Kremlin, had been found dead in Kiev, the victim of gunshot wounds. A few hours later, the man himself held a press conference, in which he explained that he had in fact faked his own murder, in cahoots with the Ukrainian Security Service, in a bid to uncover the details of a pre-existing plot against his life; a strange denouement in a week marked by turnarounds.
Rome underwent its own reversal over the five-day period. At the outset, the failure of coalition talks with the Europhile president made a technocratic government – and fresh elections – look inevitable, offering populist parties the opportunity to increase their share of the vote, potentially ensuring an even more Eurosceptic coalition. Investors responded by selling off Italian equities and bonds, pushing up the government’s borrowing costs – Italy’s debt-to-GDP ratio is more than 130%.
Yet the resulting volatility wasn’t confined to Italy. Global stocks fell sharply midweek and the euro sank to a ten-month low against the dollar. US government debt yields slipped as investors began to reduce their expectations for Fed rate rises through 2018. A common refrain heard among investors and economists was that Italy was too big to fail, and too big to bail out. However, a successful sale of €3.5 billion of Italian government bonds on Wednesday began to allay investor fears. The S&P rallied in response. Such ups and down were simply the latest example of volatility, which has made its return this year. Wednesday was the 34th day in 2018 that the S&P 500 moved by more than 1% – there were only eight such days across the whole of 2017. Volatility is normal; in this respect, 2017 was not.
Italy’s political resurrection came on the final day of a fraught month, as Northern League and Five Star agreed an 11th-hour deal that satisfied Italy’s octogenarian president, leading to the official formation of a government the following day. Cue a boost for Italian stocks and bonds alike, although both remain some way off pre-election levels. Giuseppe Conte, an academic with minimal political experience, was named as prime minister for the second time in as many weeks – except this time it was official.
As Conte was being sworn in, Spain’s Mariano Rajoy was being voted out due to corruption problems in his party. As a result, Pedro Sanchez, leader of the main opposition party, was sworn in as prime minister over the weekend, pushing up Spanish stocks. The MSCI Europe ex UK ended the week only slightly down.
As of last week, both Spain and Italy have new reasons to warm to the EU. Brussels announced that it was shifting €30 billion of its cohesion funding away from central and eastern Europe in favour of the south. Poland would lose 23% of its allocation, while 24% would be cut from the allocations to Hungary, the Czech Republic, Estonia and Latvia. Beneficiaries would include Greece, Spain and Italy.
Yet even as early as Thursday, the EU had other worries, as the US confirmed that there would be no exemptions on planned tariffs on steel and aluminium. The decision will affect the EU, Mexico and Canada. By the weekend, all three had announced countermeasures, and the EU had taken its case against the US measures to the World Trade Organization. The developments raised the spectre of a transatlantic trade war, a phenomenon largely unseen in the postwar era. They may also reflect a significant shift in power dynamics in a number of Western democracies.
“Two years ago, the most powerful people in the world were probably central bankers, whereas now I’d say the politicians are back in charge, and geopolitics is very much to the fore, especially with the new populist streak in politics,” said David Millar of Invesco Perpetual, co-manager of the St. James’s Place Multi Asset fund. “Who’d have thought that the left and right in Italy would carve out the middle and do something completely different? And then you have Brexit and Trump. These are important developments.”
Meanwhile, China chose last week to announce a relaxation on foreign investment limitations ahead of trade talks with the US, doubtless hoping to limit any protectionist action by Washington. Yet although Beijing appeared on the defensive, it notched up a significant breakthrough on markets last Friday, as some 230 A-shares (those listed on the mainland) passed into the MSCI World Index, with more additions to come. The shift brings mainland Chinese stocks into the investing mainstream, altering how the country’s companies are perceived – and traded. The Shanghai Composite slipped slightly over the course of the week all the same, hit in part by fears of a global trade war.
Those international companies affected by US tariffs may well rue the timing, should sanctions mean the US consumer becomes less easily accessible. On Friday last week, the latest figures on US consumer spending exceeded expectations – up 0.6% in April from the previous month (seasonally adjusted). Personal income rose by 0.3%, while the unemployment rate for May fell to an 18-year low of just 3.8%. US payrolls have now risen for 92 months in a row.
There were already ructions being felt within the UK’s steel industry last week, as well as increasing doubt that the UK could hope for a meaningful trade deal with Washington as it exits the EU. Stocks in the UK seesawed over the course of the week, ending only slightly below where they had begun, as political developments elsewhere helped to direct sentiment.
One company to suffer significantly over the period was FirstGroup. The transportation company witnessed its CEO resign following a full-year loss. The company, which operates trains and buses, was already under scrutiny from investors following its rejection of an acquisition approach made by Apollo Global Management.
“Operationally, results were broadly as expected although severe weather and driver shortages in the US weighed on profitability,” said James de Uphaugh of Majedie Asset Management. “This follows many years of the business struggling to restructure against a background of reversing underinvestment from previous management. The company, however, decided to make a provision for the TransPennine Express rail contract of £106 million – but it does not derail our strong belief that the business has considerable inherent value.”
Pen to paper
Meanwhile, a report published by Aegon last week gave a sense of the scale of the pension deficit faced by people both in the UK and around the world. The report found that workers worldwide believe they will need 68% of their current annual income in retirement – but just 25% think they will achieve it. A mere 13% of workers have a documented retirement plan, while 44% say they have a plan they haven’t written down. Just 32% say they have a Plan B for if they are unable to continue working. Amid talk of the need for a new social contract, the decline in State Pension provision makes it all the clearer that the burden rests four square on individuals to ensure their retirement needs can be met.
If only it were merely a question of planning for young people seeking to step onto the property ladder. In reality, of course, increasing numbers of young people rely on parental gifts in order to afford the deposit on their first property. Yet research published last week by Legal & General showed that the average parental contribution for home buyers this year will be £18,000 – a 17% reduction from last year’s level of £21,600. Nevertheless, more than one in four buyers will receive parental aid.
Invesco Perpetual and Majedie are fund managers for St. James’s Place.
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