Market Bulletin (12/06/2018)
“To err is human; to forgive, divine,” wrote Alexander Pope some three hundred years ago. If only it were so simple.
Faced with the ongoing probe into rogue Russian involvement in the US election, the US president opened the working week with a tweet about his constitutional rights: “As has been stated by numerous legal scholars, I have the absolute right to PARDON myself, but why would I do that when I have done nothing wrong?”
He was no less keen to break with tradition at the end of the week. Recent US trade sanctions have aggravated all the US’s traditional allies and the anger was such that the G7 had already been dubbed “G6+1” by the media. Rather than cool tensions, Trump added fuel to the fire by suggesting that Russia should be allowed back into the fold, four years after its expulsion for occupying Crimea. As a result, the US President arrived as something of a lone rider, already at loggerheads with the leaders of Canada, France, the UK and Japan. Only the new Italian prime minister took Trump’s side on Moscow. Some of the trade spat played out on Twitter, as Donald Trump laid into traditional allies. Remarkably, he later refused to even put his name to the official G7 communiqué.
Do investors care? Judging by last week’s equity market moves, they care selectively. One company believed to have benefited from Trump’s concise public broadsides has been Twitter; last week, the social media outlet officially entered the S&P 500. Indeed, technology stocks, reckoned to be quite protectionism-insensitive, have benefited by disassociation. The FAANG stocks have outperformed the S&P 500 by some 30% this year; last week the tech-heavy NASDAQ index hit an all-time high.
Others have been less lucky. Industrial companies are reckoned to be particularly sensitive to trade tussles, and the S&P 500 Industrials index has slipped slightly over the course of 2018 – although it has hardly plummeted. Nevertheless, a J. P. Morgan trader last week estimated that Trump’s trade rhetoric and policies have cost the stock market $1.25 trillion since March.
The S&P 500 actually enjoyed a strong week, helped in part by a buoyant US economy and, more specifically, by improving sentiment towards US banks, as interest rate expectations rise. (Trump’s meeting with Kim in Singapore this week may yet show itself on the index too.) Last week, a Wall Street Journal survey of economists found that expectations centre on four Fed rate rises across 2018 – an indicator of economic confidence, but also a boost for banks’ profitability.
The other six
The G7 economies account for just under half of (nominal) global GDP, although the US dominates. Nevertheless, the remaining six united last week to criticise new US tariffs and launch their retaliatory measures. Some members have already felt the weight of US tariffs, not least Japan, which has a trade surplus with the US. The Topix rose last week, but struggled in May.
“Major Japanese equity markets declined in May due to increased uncertainty over geopolitical situations, such as a worsening political situation in Italy and trade frictions with the US,” said Yoshi Ito of Nippon Value Investors, manager of the St. James’s Place Japan fund. “The yen’s appreciation also weighed on the market. While domestic stocks in the portfolio performed relatively well, export-oriented stocks performed poorly, especially auto and cyclical stocks.”
Last week’s rise in the Topix came despite disappointing labour earnings data, marking the end of a good run. Real earnings in Japan are officially at zero; real earnings may in fact be going down. Yet Japan’s challenge is too few workers, not too many. Only the week before last, the government announced it would be welcoming more than 500,000 foreign workers to help plug its labour gap. Adding to the challenges for investors is the fact that the Bank of Japan continues to slow its purchase of assets. Yet it may be helped by the fact that Japanese companies have almost zero debt, and market valuations of Japanese companies are close to record lows versus the rest of the world.
Luna di miele
If the G7’s second-largest economy faces its challenges, investor attention is more focused on the minnow of the club: Italy.
Last week’s new government delivered Italian government bonds a brief political honeymoon (‘luna di miele’ in Italian) but it didn’t last long, and the yield on 10-year debt ended the week back above 3%, although is down again this week. (Prices move inversely to yields.)
Part of the challenge comes in the form of ECB policy. The eurozone’s central bank has recently slowed its purchase of Italian bonds, riling the new government and, of course, reducing overall demand. Moreover, comments made last week by members of the bank’s rate-setting council were interpreted as hawkish, implying growing determination to taper central bank holdings of government debt across the currency area. As Italy’s new government flirts with major increases to its budget, other eurozone members are liable to be affected. Among foreign holders of Italian bonds, France accounts for 48% and Germany for 14%, according to Goldman Sachs research.
Even without recent US announcements, trade remained a concern in the UK, where Cabinet tussles over the scope of an Ireland ‘backstop’ arrangement narrowly avoided triggering resignations. But a key element of the plan submitted to Brussels was summarily rejected by Michel Barnier. This week, the prime minister aims to have 15 amendments to Brexit legislation thrown out of the Commons.
Meanwhile, HMRC warned that a no-deal Brexit would cost UK businesses around £20 billion (in customs needs) a year; port operators in the UK warned last week that it was now “too late” for a no-deal Brexit to avoid disrupting the traffic of goods; and a survey by Pantheon Macroeconomics found that, since summer 2017, most people in the UK no longer back Brexit.
Amid such concerns, it was heartening to see that the UK services sector showed its sharpest growth for three months in May. It will come as little comfort to House of Fraser or Poundworld. The former announced the closure of more than half its shops, while the latter faces going into administration. The government’s coffers, however, are due a boost from the sale of a 7.7% stake (£2.6 billion) in RBS – although taxpayers have lost money on the sale. “The fact that there was such demand for the placing in RBS reflects the fact that the bank is in much better shape today than it was ten years ago, with a much stronger balance sheet and profitability starting to recover,” said Nick Purves of RWC, manager of the St. James’s Place Equity Income fund.
A return to financial health for the headline casualties of the financial crisis is not necessarily reflected at a personal level, however. Research published by Prudential last week showed that a lack of consumer awareness and understanding of pension freedoms are the biggest concerns for advisers, even three years on from the launch of the new rules. Added to that is the finding, highlighted in a Scottish Widows report published last week, that just two out of five under-30s are saving adequately for retirement, and 21% of young people are still saving nothing for later life.
As for those now entering retirement, economic and demographic trends may not be in their favour. The London Institute of Banking & Finance last week co-published a report, which pointed to “longevity and a decade of historically low interest rates” as a “dangerous cocktail” for the current generation of baby boomers entering retirement. In this financial area, as in so many others, it makes little sense to set young and old at loggerheads; the reality is that they face many of the same challenges.
Nippon Value Investors and RWC Partners are fund managers for St. James’s Place.
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