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Market Bulletin (23/05/2017)

Market Bulletin (23/05/2017)

Shifting allegiances


“These are my principles,” Groucho Marx once said, “and if you don’t like them… well, I have others.” Last week, after four decades operating in Thatcher’s shadow, the Conservative Party published an election manifesto that very much appeared to preach other principles – or at least to shift the party’s emphasis. Theresa May left no doubt over those principles in her manifesto launch speech last Thursday, which she delivered in the Labour heartlands of West Yorkshire.


“We do not believe in untrammelled free markets. We reject the cult of selfish individualism. We abhor social division, injustice, unfairness and inequality… True Conservatism means… a belief not just in society but in the good government can do… Our responsibility to one another is greater than the rights we hold as individuals,” said the prime minister.


Everyone expects some pre-election bids to win the centre ground yet few pundits or business groups interpreted the Conservative manifesto as a mere tweaking of emphasis. May, it seems, has far greater ambitions than that, as several policy pledges made clear. One commentator called it the birth of Third Way Conservatism.


Manifesto measures included replacing the cap on care fees for the wealthy with a guarantee that each family can keep £100,000 in assets; a doubling of the immigration skills levy from £1,000 to £2,000 for non-EU workers; a restated pledge to reduce annual immigrant numbers to the tens of thousands; new rules to ensure that listed companies publish pay ratios versus broader UK averages; the imposition of strict annual pay package shareholder votes (and some form of worker representation on boards); the introduction of a ‘safeguard tariff cap’ for energy prices; replacement of the pensions ‘triple lock’ with a less generous ‘double lock’; and the removal of pledges to freeze rates of Income Tax, National Insurance and VAT.


Signal change


The response from business groups was swift. Approving noises were made over certain elements of the manifesto, such as the party’s continued commitment to cut Corporation Tax and cull the deficit (albeit on an extended timeline) and its greater commitment to invest in innovation and skills. Yet the criticisms outweighed them.


“The Conservative manifesto has an Achilles heel – in a global race for talent and innovation, UK firms risk being left in the starting blocks because of a blunt approach to immigration,” said Carolyn Fairbairn, Director-General of the Confederation of British Industry (CBI). “Charges for visas for non-EU skilled worked have risen hugely in the past decade, and further increases will harm inward investment. Damaging our global reputation at a time when we’re looking for global trade deals can only be self-defeating.”


Others pointed to the potential impact of regulatory creep, to a decrease in labour market flexibility, and to the prime minister’s intention to leave the single market and customs union, an intention reaffirmed in the manifesto. Adam Marshall, Director General of the British Chambers of Commerce (BCC), expressed satisfaction over policy pledges on business rates, and digital and mobile connectivity. Yet his broader tone was more concerned than celebratory.


“[Certain] proposals would increase upfront costs, regulatory obligations and uncertainty for business,” said Marshall. “The Conservatives’ proposed approach to immigration… will worry companies of every size, sector, region and nation. Some… proposals for additional market intervention and new employment regulation will be questioned, even by firms that are not directly affected themselves, because of the signals they send.”


The Labour Party manifesto received a still cooler reception, although it too had measures to placate economic liberals. Carolyn Fairbairn of the CBI praised its commitment to skills, infrastructure and an interim deal for EU citizens’ rights, while the BCC’s Marshall lauded the aim to balance the budget. Tax and regulation were a different matter.


“Labour’s priorities taken as a whole prioritise state intervention over enterprise, and fail to offer the pro-growth and competitiveness agenda the country so badly needs,” said Fairbairn. “While employers welcome new commitments on skills and infrastructure, living standards will only rise if open markets remain the mainstay of the UK economy, rather than stifling new rules, regulations and burdens on firms.”


Meanwhile, economic figures for the UK offered a mixed picture last week. Retail sales beat expectations. But inflation reached 2.7%, highlighting the ongoing challenge for savers; none of the 753 savings accounts currently available offer a rate to match – in fact, the average Cash ISA return over the past year has been just 0.97%, according to the latest Moneyfacts data.


While UK jobs market and manufacturing numbers came in strongly, figures also showed that wages had dropped in real terms for the first time in almost three years. Longer-term figures were more worrying, showing that the current decade is set to be the worst in 200 years for UK pay packets. Yet investors’ economic optimism limited last week’s FTSE 100 losses to 0.48%.


Trump trails


British manifestoes and jobs figures might loom large in the domestic consciousness, but there was no doubting the most high-profile global news of the week: a claim that the US president had pressured James Comey, outgoing director of the FBI, to end an investigation into links between Russia and Trump’s former national security director. The disclosure presented the Trump administration with a potentially existential political threat. John McCain, a senior Republican senator, spoke out in concern. “We’ve seen this movie before,” said McCain. “It’s reaching Watergate size and scale… This is not good for the country.” The simple mention of Watergate added fuel to the fire.


Stocks took a short-term hit, and the S&P 500 ended the week down 0.17%, after a Friday recovery – the dollar fared much worse, losing the gains it had made since Trump took office. The Eurofirst 300 followed US indices downwards, slipping 1% despite French President Emmanuel Macron’s new party gaining momentum in the polls ahead of legislative elections in June. The Nikkei 225 fell 1.5%. Sentiment was also knocked by news that US household debt surpassed its pre-financial crisis peak during the first quarter, and by retail data showing falling sales figures and stiffening online competition. Yet while other retailers lagged, results for Walmart, the world’s largest company by revenue, showed the US retail giant had made huge initial strides in its recent bid to compete online with the likes of Amazon – sales flew up 69% in the first quarter.


In emerging markets, an election in Iran returned the internationalist incumbent as president, but there were political ructions in Brazil as a newspaper published allegations that President Michel Temer had endorsed bribe payments. The real dipped dramatically in response, and Brazilian stocks took a slide.


“Brazil is still dealing with the effects of a corruption scandal that brought down the previous government – recent news has had an impact on the valuation of companies owned in our strategy; however, none suffer any existential threat,” said Glen Finegan of Henderson Global Investors, manager of the St. James’s Place Global Emerging Markets fund. “The devaluation of the currency has exacerbated this weakness. In Brazil, we invest exclusively in private sector businesses whose operations are not reliant on government contracts. Most of these also have some export or overseas revenues in addition to their domestic business. Short-term it’s not nice to see positive reform momentum potentially derailed but in the long term the fact corrupt politicians can be held to account can only be good news for perception of rule of law in Brazil – so different from most emerging markets – and hence [is] likely a positive.”


Henderson Global Investors is a fund manager for St. James’s Place.



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