Market Bulletin (17/07/2018)
Deeds not words
According to the efficient market hypothesis, the prices of stocks reflect all the information available at any given time, meaning that only chance or higher risk can enable investors to win out over the market. Yet a quick glance at last week’s leading indices offers a reminder that investors often struggle to react appropriately to news – and overreact as a result. In the anniversary year of women winning the vote, they should perhaps have taken more heed of the favoured slogan of the British suffragette Emmeline Pankhurst: ‘Deeds not words’.
There were plenty of headline-grabbing words to digest last week, most of them uttered by the US president. And yet, having zigzagged their way through the trading week, the S&P 500 and FTSE 100 both ended the five-day stretch in the black. While the US president has begun to prove that he can indeed follow through on threats, investors can have a difficult time predicting which ones. Jerome Powell, chair of the Federal Reserve, said last week that he felt confident about the US’s economic outlook, but had little clue what direction trade policy was likely to take.
Unemployment in the US has continued its remarkable decline, but it is also notable that inflation has struck its highest rate in more than six years, chipping away at wage increases, which have been modest for US workers. In both May and June, the (annualised) pace of inflation neutralised the rate of wage growth, adding to concerns that the current run of growth is bringing only limited benefits to labour – thus far.
“Wage inflation in the US is still under control – millennials’ wage growth is rising 3.5% but baby boomers by just 1.5%, as they stay on later in the workforce,” said Schroders’ Johanna Kyrklund, lead manager of the St. James’s Place Managed Growth fund. “The Fed is in control, and not behind, on inflation.”
The impact of the US administration’s tax-cuts package, introduced late last year, showed itself strongly in first-quarter earnings, but many queried whether such a policy-fed sugar rush could persist. Initial signs for second-quarter earnings, which began to drip through late last week, delivered positive signals. PepsiCo reported stronger profits than expected, pushing up its share price, while JPMorgan Chase detailed a profits rise of 18%, adding to upbeat sentiment towards US banks. The tax-cuts package had other consequences, however. A report by Deutsche Bank last week showed the federal government’s corporate tax receipts dropping by more than quarter in the wake of the cuts, from around $400 billion to well below $300 billion.
Last week also saw Donald Trump formally begin the process of imposing tariffs on some $200 billion of Chinese imports. The bold move is large enough for China to be effectively unable to respond in kind – such is the size of the US–China trade imbalance – but Beijing is expected to use other means to place pressure on US companies in China. News that China’s trade surplus had expanded to a new record is likely to have added fuel to the protectionist fire.
“The big worries at the moment are Trump’s protectionism, Italy’s budget deficit, and Brexit; although, on the last one, weakening sterling acts as a shock absorber for the portfolio,” said Schroders’ Kyrklund.
By the end of the week, investors had decided that the positive momentum for US growth, jobs and earnings outweighed the potential negatives of Donald Trump’s escalating trade war, at least for the moment. Globally, stocks may also have been aided by last week’s slight decline in the dollar, which slipped against both the pound and the euro.
On a day-to-day basis, however, markets were highly sensitive to the words and actions of the US president, who last week attended a NATO meeting in Brussels and made a state visit to the UK. At the former, he berated allies for underspending on defence – surely a fair charge, given that 26 of the 29 member states are failing to meet commitments. Arriving in the UK, he told The Sun that Boris Johnson would make a good prime minister before warning that Theresa May’s Brexit plans would preclude a trade deal with the US. At the weekend he called the EU a “foe” of the US on trade.
Yet market reactions were short-lived and investors appeared to have initially concluded that the departure of David Davis and Boris Johnson from the UK Cabinet were not disastrous after all, and might even have benefits in terms of the balance of Brexit preferences in Cabinet. (Rightly or wrongly, markets tend to respond positively to signs of Brexit plans softening.) Nevertheless, the UK prime minister’s Brexit White Paper met with strong opposition from Eurosceptic MPs, but also from Europhile MPs, such that, by the end of the weekend, it was far from clear MPs would vote it through – or that she would escape a leadership challenge. Nine Ministers and ministerial aides have quit their positions since the meeting.
On the one hand, the White Paper showed the government had given up on ensuring a close financial services relationship with the EU after Brexit – the new approach was described as more like cohabitation than marriage. That pitted her against ‘soft Brexit’ MPs and voices from the City. One senior figure at the City of London Corporation complained it was “a real blow for the UK’s financial and related professional services sector”.
Yet the White Paper also received opprobrium from ‘hard Brexit’ advocates because it had replaced a more hardline alternative attributed to David Davis. An amendment has already been tabled by Eurosceptic MPs in response to prevent the UK having to collect tariffs for the EU – unless it’s a reciprocal arrangement. Jacob Rees-Mogg said the White Paper was “the greatest vassalage since King John paid homage to Philip II at Le Goulet in 1200”. Debatable.
The bidding war for Sky entered a new phase, as Rupert Murdoch’s 21st Century Fox offered £25 billion for the broadcaster, only for Comcast to step in with a £26 billion offer later that same day. Sky’s shareholders are certainly enjoying the ride, for the moment. Meanwhile, Japan’s Takeda won regulatory approval in the US to take over Ireland’s Shire, another pharmaceuticals group, pushing up the latter’s stock price. And M&S had a good week on markets; at its AGM held in Wembley Stadium, the tailor to the (now-disconsolate) English football team said it was willing to close stores as it continued to focus on profitability.
There was less good news for Xiaomi, Spotify and Unilever. The Chinese smartphone manufacturer conducted an underwhelming IPO, which saw its share price fall. Spotify continued to grow its subscriber base, but at nothing like the pace of Apple, which is now set to overtake it (in terms of music streaming subscriber numbers) in August. And Unilever struggled to persuade its major shareholders that a single headquarters in Amsterdam – and probably leaving the FTSE 100 – was a good idea; it will need 75% approval from UK investors to press ahead with the move.
Meanwhile, as the Trump visit filled the headlines, the government quietly announced last week that it would delay the ban on pension transfers cold-calling until the autumn. Figures show that a total of £51 million was lost to pension scammers in the UK since 1 April, up from £30 million in the first quarter, according to figures released last week by the City of London Police – the average age of the scammers’ victims is 57 years old. The statistics should serve as a reminder of the value of thinking carefully about how to plan for your retirement, and what advice to trust.
Schroders is a fund manager for St. James’s Place.
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