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Market Bulletin (05/08/2015)

Market Bulletin (05/08/2015)

Marching on

Despite it being a week when all major equity markets (and many bond markets) posted positive returns, the underlying sense was one of far greater caution as the focus, once again, turned to events at the Fed and the ongoing question of when – not if – US interest rates will finally increase. Chair of the US Federal Reserve, Janet Yellen, has been clear in her course of action, stating that an increase in interest rates will be dependent, amongst other factors, on continuing strength in US labour markets. Data released this week threw into doubt prospects for a September rate rise – as many commentators have been predicting – and gave equities a welcome bounce as the week drew to a close.

Data for the second quarter saw the Employment Cost Index (ECI), a closely watched gauge of wage growth in the US, rise over the period but at its slowest pace since records began in 1982. “Given that policymakers at the Fed reiterated last week that ‘lift off’ will depend on the incoming data, particularly from the labour market, the market clearly believes that these latest figures cast doubt on both a September rate hike and the pace of monetary tightening thereafter,” noted David Rees of Capital Economics.

Yet for all the twists and turns, equity markets continue to move upwards, and US and European indices largely ignored the threat of tighter policy to finish the week slightly ahead. The S&P 500, FTSE 100 Index and FTSEurofirst 300 Index gained 1.58, 1.77 and 0.53% respectively over the five-day trading period. In Japan, the Nikkei 225 also finished marginally up, thanks in part to some encouraging earnings reports.

In what was dubbed ‘super Thursday’ by some commentators, there was a raft of companies releasing half-year results. Amongst those names, Lloyds announced first-half profits of £1.2 billion, up almost 40% on the same time last year but still below analysts’ forecasts. The need to set aside a further £1.4 billion to compensate investors mis-sold PPI (described by chief executive António Horta-Osório as “disappointing” and taking the total amount paid out to £13 billion) dented what’s been a decent period for the part government-owned banking giant. Chris Reid of Majedie Asset Management, manager of the St. James’s Place UK Income fund, has been adding to Lloyds in recent months, “We’re feeling a bit happier with banks generally now that the UK general election is out of the way. We have some conviction that things at Lloyds may actually be on the turn and have seen some good operational improvements there in the past 12 months.”

Crude impact

The fortunes of Chinese equity markets added some familiarity to the week’s events: the SSE Composite Index dropped by over 1% in Friday trading, resulting in a loss of almost 15% for the month of July – its worst month since 2009 – as Beijing’s efforts to prop up the market met with limited success. Heightened volatility led to greater fears of a slowdown for the Chinese economy and, subsequently, a tough week for commodities – particularly for oil. This continued in early trading this morning as oil continued to fall.

The price for a barrel of Brent crude was down over 17% in July, the largest monthly drop since December 2014, and is currently trading at circa $52. It’s been six months since oil prices hit the bottom (the price of a barrel of oil fell almost 60% in the period from May 2014 to January 2015) and yet global production has gone up, rather than down. Some of the largest OPEC countries, such as Saudi Arabia and Iraq, continue pumping at record levels. Add to this the prospect of Iran joining the list of producers – after a lifting of sanctions by the US and EU – and fears are that not only will prices stay low for longer, but also that they could fall further once again.

Consequently, earnings have been hit hard at oil majors around the globe. Exxon Mobil’s second-quarter earnings were down 50% versus April–July 2014, whilst oil-producer Chevron saw figures for the same period down over 90%. UK-listed Royal Dutch Shell announced on Thursday that it has shed 6,500 jobs as part of cost-cutting plans to counter falling oil prices.

Drivers filling up at the petrol pumps will have felt the benefit in their wallets, but there are some other beneficiaries to the fall in the price of oil, as cruise operators on both sides of the Atlantic chimed in with strong results and positive outlook statements. In the US, Royal Caribbean raised full-year sales forecasts, confirming that bookings for 2016 are “running well ahead of last year, and at higher prices”.

In London, Carnival rose to a record high during Friday trading and, ironically, credited strength in bookings from China – offsetting weakness in Latin America – as a factor for recent improvements. Results for Carnival provided a boost for the UK equity team at Majedie, led by James de Uphaugh, vindicating their decision to buy the stock at the end of summer last year. Successfully identifying the double benefit of cheaper fuel costs and a consumer with greater disposable income, the share price has risen 23.1% year-to-date.

Final testimony?

A landmark case last week saw the Court of Appeal award over £160,000 to a daughter who had been left nothing in her mother’s will. Whilst this is a ground-breaking case, it has prompted fears of increasing legal challenges against the wishes of those who haven’t prepared a comprehensive and correctly drawn-up will.

Whilst many are aware that the intestacy rules are very complex and, for all but a small number of cases, they fail to ensure that the assets of the deceased are passed on as they would have wished, it is estimated that millions of families do not have wills in place. “Many people put off sorting out their wills, believing it to be a difficult or complicated process,” says Tony Müdd, divisional director at St. James’s Place. “Yet the unintended consequences should you die without adequate provision, can create a significant challenge for your loved ones, both financially and emotionally. Will disputes are expensive and, quite apart from the costs, they are likely to greatly increase family tensions,” he adds.

If your family circumstances are complex, you should ensure that the will is drafted by a solicitor. This makes it much easier to avoid challenges in the future. Data from Co-operative Funeralcare suggests that eight out of ten DIY wills suffer problems when going through probate. “It is our advice to always seek professional guidance to ensure that a will is properly drafted and executed by an individual with suitable levels of experience and qualification. Furthermore, you should regularly review it to ensure that it reflects your wishes as your personal and financial situation evolves,” added Mr Müdd.

Majedie Asset Management is a fund manager for St. James’s Place.



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