Market Bulletin (12/11/2018)
Terminal moments
“Why speak they not of comrades that went under?” ends Wilfred Owen’s 1918 poem, ‘Spring Offensive’. Last weekend, after the pizzazz of the US midterms, presidents and prime ministers gathered in France to do just that, marking a hundred years since the war was ended on a railway carriage in Compiègne, some 50 miles north-east of Paris.
While the machinations of markets pale next to such moments, stocks are hardly immune. Restrictions introduced in 1915 ensured that securities in London could only be bought and sold in cash. But any dampening effect paled next to that of the conflict itself; UK-listed companies declined sharply over the course of the war, hitting a floor in 1918.
Last week’s US midterms offered a more benign political driver for markets. The pollsters were right, and the US Congress is now split between a Democrat House of Representatives and a Republican Senate. It is also divided between land and people: most of the US landmass is Republican red, while most of Wednesday’s votes went to the Democrats. Indeed, even in the Senate elections, Democrats won 12 million more votes than Republicans.
Constitutional quirks aside, markets have historically liked to see America’s political house divided, and this time was no different. US equities rallied in response to the outcome, after disappointing results from Apple had set a dampener on early-week trading; in fact, the S&P 500 and Dow Jones each clocked their largest post-midterm gains since 1992.
Both the dollar and US Treasury yields initially jumped on indications the Republicans might hold both houses, but both likewise fell back as the actual result hove into view. US stock futures rose in response, as radical economic measures looked less likely. The president put a positive spin on events, anticipating “a beautiful bipartisan type of situation”.
The ensuing rally petered out on Friday, as investors digested the latest Federal Reserve guidance. While it left interest rates on hold, the Fed pointed to “further gradual increases” ahead. All the same, the S&P 500 ended up 2%. Meanwhile, workers in the US received a dose of good news. March this year was the first time – in 17 years of monthly records – that there had been more unfilled US jobs than unemployed Americans. Last week, that happy gap stretched to more than a million.
Some worry this is simply the latest piece of data showing the US expansion rate hitting its limits, among them Capital Economics: “We expect the US economy to cool as monetary tightening starts to bite and the boost from the fiscal stimulus fades.” For the moment, however, the US credit market is holding up well, which is often seen as auguring more growth and stock rises to come. Moreover, recent jitters on markets mean that new opportunities are materialising.
“For many investors, the perception of negatives is much more dramatic than the reality,” said Tye Bousada of EdgePoint, co-manager of the St. James’s Place Global Growth fund. “Content that can tap into your fears gets your attention – and that’s the goal of many content creators. An overly dramatic worldview, combined with investors’ tendency to think things are worse than they actually are, can be described as the gift that keeps on giving. Finding good investment ideas would be much harder in a world where investors tended to believe things were better than the reality.”
QE deceleration?
One concern for investors last week came in the form of a hint by Haruhiko Kuroda, governor of the Bank of Japan, that it would begin to unwind its programme of quantitative easing (QE), through which it bought trillions of dollars’ worth of bonds to offer support to the market. A gradual reversal may now be in the works. However, Kuroda also said he didn’t expect to raise interest rates soon, softening the blow for investors. The Nikkei 225 had a good week, aided by the US midterms and perhaps by oil entering a technical bear market – Japan is one of the world’s largest net oil importers.
Stocks on the Chinese mainland enjoyed no such US lift, and the Shanghai Composite ended the week down after five straight sessions of losses. The bear market continued despite figures showing that Chinese exports to the US have surged, even under today’s trickier tariff regime. Indeed, China’s trade surplus with the US extended in October, driven by both a fall in imports to China and a rise in exports to the US; the US accounts for a fifth of Chinese exports.
News was more mixed for China plc, however. Tencent, dubbed ‘China’s Facebook’, has suffered especially dramatic losses this year and its first quarterly profit decline for 13 years – gaming was a particular detractor. Nevertheless, last week it began a major hiring push in California for its launch into self-driving cars. Meanwhile Sina Weibo, China’s largest microblogging company, has agreed to greater regulatory and screening controls, in a nod to government censorship.
Johnson & Johnson
The FTSE 100 was another beneficiary of US voters last week; but was also boosted by good results for both AstraZeneca and Coca-Cola HBC, the iconic drink’s second-largest bottler worldwide. Perhaps more importantly, the UK’s fiscal picture is expected to improve significantly over the next decade, according to the latest figures from Fitch Solutions.
Furthermore, UK growth for the third quarter (Q3) was confirmed at 0.6% – quite a hike from the sluggish first two quarters of 2018. Exports and household expenditure helped, while business investment dragged. But the UK economy has been heavily directed by events this year: the Beast from the East; the heatwave that followed; and the retail boost from the royal wedding and World Cup. Growth in Q3 came early – there was none in September.
Hopes initially rose last week that a Brexit deal might finally be struck. Over the weekend, the prime minister even achieved the unthinkable and united some arch Remainers and arch Brexiteers. Unfortunately, they united against her – and her Brexit deal. Jo Johnson, a Remainer, resigned from the Cabinet, saying the deal meant now choosing between “vassalage and chaos”; his Brexiteer brother Boris was swift to agree. On Monday this week, the CEO of ThyssenKrupp in the UK – a major UK employer – called the plan “a complete shambles” and said the Tories “have failed business”, before warning of job losses. Even if the prime minister can satisfy her Cabinet and the EU, the parliamentary arithmetic looks challenging.
Working terminus?
Many women might envy Jo Johnson’s capacity to quit his position. As of Tuesday this week, the State Pension age for women shifts to 65, the same as for men. Age equalisation does not mean equalisation elsewhere, however, since women still receive lower pay than men at all career stages. This restricts their ability not only to generate a full State Pension entitlement, but to pay into a private pension. Whatever the demographic rationale behind Tuesday’s changes, women in their 50s and 60s may now be focused on the extra years they must wait.
Campaign groups, such as Women Against State Pension Inequality, do not oppose equality; their issue is how it has been reached. The changes, it argues, have been imposed with a lack of appropriate notification and much faster than was originally promised. “The short notice changes have caused significant hardship to many women, especially as many did not know about the original plans to increase their pension age from 60,” said Ros Altmann, former pensions minister.
Nevertheless, further increases are planned, starting with a rise in 2019-20 to 66 for men and women. Ultimately, anyone now aged 30 or below is unlikely to receive their State Pension until the age of 70. Altmann may be right that the system needs “urgent measures”, but individuals can hardly rely on progress on that score. The rise in the minimum age provides just one more reminder of the need to take personal responsibility for retirement finances and to seek advice.
EdgePoint is a fund manager for St. James’s Place.
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