Market Bulletin (21/08/2018)
In hot water
At last month’s NATO summit, Donald Trump appeared to demonstrate his admiration of Turkish President Erdogan with a fist bump. Yet in a violent turn of events, Mr Erdogan last week declared that Washington’s imposition of sanctions was “a stab in the back against Turkey”. In truth, the injuries suffered by the Turkish leader are largely self-inflicted.
Turkey’s currency crisis dominated the trading week, and the ripple effects were felt across emerging markets. Mr Erdogan’s growth-at-any-cost political and economic agenda has been based on huge inflows of cheap foreign credit. Faced with double-digit inflation and a collapsing currency, the Turkish central bank’s refusal to formally raise interest rates triggered a sell-off in emerging market currencies and stocks. Mr Erdogan had previously claimed that interest rates were “the mother of all evil”, which is doubtless influencing the bank’s response. As the era of easy money comes to an end and access to the dollar tightens, there are growing fears for governments that have racked up debts in the US currency.
Erdogan’s belligerent and defiant response included a threat to impose sanctions on US electronics goods, but nothing heard from the president or his finance minister reassured markets that the country was willing to take all the necessary steps to address the crisis.
After recovering some ground midweek, the Turkish lira came under renewed pressure on Thursday when the US twisted the knife by threatening further sanctions if Turkey failed to release the American pastor, Andrew Brunson.
The middle of the week saw emerging markets register their biggest fall in six months, pushing stocks into bear market territory as prices slid by more than 20% since peaking in January. Worries about China’s slowing growth and trade tensions with the US contributed to investor nerves. The benchmark Chinese equity index is down 18% this year; last week’s slump was exacerbated by disappointing results from Tencent, one of China’s three technology giants alongside Baidu and Alibaba. The company has been hit by Beijing’s regulatory crackdown on online gaming, which has resulted in the suspension of game approvals. Since hitting a record high in January, the company has lost over $178 billion in value – equivalent to the market capitalisation of Netflix.
“Although it’s hard to know what the final intention of the Chinese government is, having patience while this issue is resolved seems a reasonable risk to take given the strength of the Tencent ecosystem, the high expected growth in paying users and gaming revenue, and the price-to-earnings multiple, which is the lowest it’s been in the last five years,” commented Ajay Krishnan of Wasatch Advisors, manager of the St. James’s Place Emerging Markets Equity fund.
Risk appetite seesawed throughout the week; confirmation from Beijing that it would restart stalled trade talks with the US next month lifted the mood, although many remained sceptical about the prospects for progress. At the end of a nervous week, the S&P 500 Index registered a modest rise, while UK and European markets were down; Italian stocks hit their lowest point since April 2017 as the Genoa bridge disaster highlighted the tensions in domestic politics.
The Office for National Statistics (ONS) confirmed a better-than-expected increase in retail sales in July, driven by strong internet and food sales, which added to hopes that an improvement in consumer spending is under way. There was also positive news on unemployment, which is now at its lowest level since 1975, falling to 4% in the three months to June. The ONS figures also revealed that the number of European Union nationals working in the UK fell by a record amount, continuing a trend seen since the referendum in 2016. The CBI expressed its concern that the size of the UK workforce was shrinking at the same time as vacancies for skills and labour are growing, and stated its belief that the government needs to guarantee that EU workers could continue to work even in the event of a no-deal Brexit scenario.
The ONS also confirmed a slowdown in wage growth in the last quarter to 2.4%. UK inflation ticked up for the first time since November, due largely to a spike in transport and fuel costs. CPI inflation rose to 2.5%, exceeding the pay growth figure and continuing to exert pressure on consumers. The rise in inflation will also have come as another blow to cash savers, already struggling through an apparent reluctance on the part of banks to pass on the full benefit of the interest rate rise earlier this month.
As Mike Ashley’s takeover of House of Fraser came under regulatory scrutiny over concerns about workers’ pension rights, Homebase was the latest UK retailer to announce drastic measures in an effort to stay afloat. The struggling DIY chain plans to close 42 stores and shed up to 1,500 jobs as part of a company voluntary arrangement (CVA).
“The Homebase CVA is an evolving process and we have been in discussion with Hilco [the new owners] for six weeks,” commented John Humberstone of Orchard Street, manager of the St. James’s Place Property fund. “None of the stores owned by St. James’s Place are on the closure list, and we are considering the new rental proposals for the stores that are in the portfolio.”
Exit stage right
As low-level Brexit talks resumed last week, European officials dashed hopes that Theresa May could use next month’s EU summit in Salzburg to break the deadlock and negotiate Brexit with other leaders. Diplomatic sources reportedly insisted that the EU’s negotiations would continue to be led by chief negotiator Michel Barnier, who has, perhaps optimistically, pencilled in another EU summit four weeks after the Salzburg gathering as the moment to strike a deal.
Meanwhile, a group of pro-Brexit Conservative MPs confirmed plans to publish a policy paper in favour of a no-deal exit ahead of the party’s annual conference at the end of September, in a direct challenge to Theresa May’s own white paper. The European Research Group, led by Jacob Rees-Mogg, argues that a no-deal scenario, in which all imported goods from the EU would be subject to WTO tariffs, would respect the referendum result. While insisting that a deal was “the most likely outcome”, the government announced at the weekend that it would publish guidance notes to help prepare people, businesses and public services for the possibility of a no-deal Brexit.
Uncertainty over Brexit is evidently also playing on the minds of retirement savers. Research by Aegon revealed that 42% of individuals believe that Brexit will have a negative impact on their pension savings, against just 5% who think their pension pots will grow as a result. The research also showed that, amongst 18–
34-year-olds, scepticism about Brexit’s impact has got noticeably worse over the last year.
For those with more immediate retirement income needs there was encouraging news that average annuity rates are now almost 15% higher than two years ago. Rates hit an all-time low in September 2016 as sales plunged after the introduction of pension freedoms scrapped the obligation to buy one in retirement. Annuity pay-outs should increase further given the recent rate rise by the Bank of England, prompting suggestions that they are becoming better value for money and could recover their lost popularity.
The security of an income guarantee to help cover essential outgoings is just one of the considerations in creating the right solution for generating income in retirement; something for which advice remains crucial.
Wasatch Advisors and Orchard Street Investment Management are fund managers for St. James’s Place.
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