Market Bulletin (24/10/2017)
Extended speeches have long been a signal of authority in Communist administrations. Last week, the Chinese president made his own supremacy abundantly clear, delivering the key five-yearly address for no less than three hours and 23 minutes. In economic terms, his emphasis was on regulation and planning, rather than any further prioritisation of market forces. Yet the world’s second-largest economy rolls on inexorably; third-quarter growth was reported last week at 6.8% (annualised), led by the services sector.
“Announcements are likely to emphasise economic reforms already in place, such as supply-side reforms, sector consolidation and mixed-ownership initiatives,” said Alistair Thompson of First State Stewart Asia. “This approach – bringing market-oriented practices to the bloated state-owned sector – has helped China manage its slowing economy and – so far – avoid a painful ‘hard landing’ amid a global contraction.”
It was the country’s chief central banker, Zhou Xiaochuan, who stole the show. Unless China dealt with its mounting debt issues, he warned, the country faced a ‘Minsky moment’ – a sudden major collapse of asset values caused by speculation following a long period of prosperity.
Perhaps Zhou had an eye on history. His admonition came just three days after the 30th anniversary of Black Monday, the biggest one-day fall in stock market history, when leading indices dipped up to 23% over a 24-hour period. There were no such jitters last week. Indeed, it is now 329 days since the S&P 500 last fell 5% in a single trading day – the fourth-longest such run in its history. One of the results of this ongoing momentum is that finding cheap value opportunities has become harder – discrimination has become indispensable.
“Valuations are much more elevated than during the recovery that followed the financial crisis, so it is harder to find good new investment opportunities,” says Dan O’Keefe of Artisan Partners. “But there are always some opportunities. Our financials weighting became large over the last couple of years. Because they were at the epicentre of the financial crisis, many investors were unwilling to look at those businesses. That created a valuation opportunity. As for now, I wouldn’t [focus on] a particular industry or geography – just one-off opportunities here and there.”
Not that earnings are bad. Among the major companies to announce results relatively early was Goldman Sachs, which posted an increase in third-quarter earnings beyond what markets had expected. The S&P 500 might have risen just 0.74% over the five-day period, but it also struck a record close every single day, a feat last achieved in 1998. Moreover, the Senate passed a budget resolution that should pave the way to introduce Donald Trump’s tax-cutting legislation without Democrat support.
“Trump becomes a threat to one’s sensibilities from time to time, but if you look at the stock market as a leading indicator of economic ability…it is up 25%,” said Jim Henderson of Aristotle Capital Management. “Moreover, corporate America is doing quite well right now.”
Abe & abdication
Indeed, perhaps the most significant political news of the week came in Japan, where Shinzo Abe scored one of the most decisive victories in his party’s history – and the emperor announced his plan to abdicate in 2019. Abe’s Liberal Democratic Party and coalition partner Komeito won a two-thirds ‘supermajority’ in Japan’s parliament.
Abe can now pursue ‘Abenomics’ in earnest, increasing economic stimulus and reappointing his favourite Keynesian central banker. The supermajority may also enable him to alter the wording of Japan’s pacifist 1945 constitution, imposed in the wake of Japan’s wartime defeat, in order to legitimise a more conventional national army. His tough talk on defence, not least on North Korea, has boosted defence stocks in recent weeks, among them Mitsubishi Heavy Industries. The Nikkei 225 closed on Friday up 1.42% for the week, at the end of its longest winning streak in 50 years. Japanese stocks appeared buoyant on Monday too.
“The Japanese market has responded well to news of a convincing win for Prime Minister Abe in the snap election, with exporters rising on a weaker yen and indices hitting highs not seen in the previous two decades,” said Alistair Thompson of First State Stewart Asia. “Abe’s handling of constitutional reform and the continuation of fiscal and monetary stimulus will be of more importance to markets in the medium term. Nevertheless, Abe’s victory should be positive for Japan’s equity market.”
Corporate scandals have been plentiful in Japan of late, involving Takata, Toshiba, Kobe Steel, Nissan, Mitsubishi, Olympus and others. Yet according to a 2017 ‘Country Brands’ report, Japan ranks 8th among 49 leading manufacturing countries, due to the quality of its manufactured products. Moreover, the fact it currently lags in e-commerce means there is extra slack for growth.
“We recently took a position in Yahoo! Japan, an e-commerce business,” said Dan O’Keefe of Artisan Partners. “It is very profitable, and has secular growth opportunities because the penetration of e-commerce in Japan is still well below where it should be, given the level of technology adoption going on. We think that will create a growth tailwind for that business and we were able to buy at what we think is a very attractive price.”
While headline events passed off smoothly in China and Japan, politics appeared far more fraught in Continental Europe last week. Madrid moved to exert direct rule over Catalonia, an autonomous region, after the recent referendum. Meanwhile, in Austria, Sebastian Kurz, the newly elected 31-year-old prime minister, looked likely to form a coalition with the far-right Freedom Party, which was founded by, amongst others, ex-Nazis.
Visiting Brussels, Theresa May put on a brave face when discussing EU exit negotiations with the press; but last week the EU rejected the UK’s call to move on to the second stage of negotiations – the next chance won’t come until December. Mark Carney, Governor of the Bank of England, also spoke on the negotiations, arguing that a no-deal outcome would be very bad for both sides. “The entire economic impacts are greater for the UK but… from a financial stability perspective they are greater for the EU than for the UK,” he said. “It is absolutely in the interests of the EU27 to have a transition agreement.” Carney has his own worries, however. Last week, inflation struck 3% – a five-year high – but if he is to raise rates as he has indicated, he must also account for the countervailing impact of negative real wage growth.
The FTSE 100 ended the week down 0.16%, as Unilever and Reckitt Benckiser delivered disappointing results, while the Eurofirst 300 slipped by 0.19%. There was encouraging corporate news, however, as Airbus secured a majority stake in Bombardier’s C-Series regional jet early in the week. The move rescues the C-Series from a parlous future, gives Bombardier a shot in the arm in the process and enables the survival of its Belfast wing factory, which employs 4,000 people.
“We hold Bombardier bonds in the portfolio,” said Paul Read of Invesco Perpetual. “The partnership with Airbus over the C-Series will open up a wider market for the jet. It will also allow for these planes to be produced in a US plant and so could provide a solution for the US market. Right now, we are happy to hold.”
Yet when it comes to investing in stocks and bonds, the latest Financial Conduct Authority report shows that too many people never even start. The study found that 87% have some form of cash savings but only 29% had an investment that wasn’t a pension or in property, wine, art and jewellery. Even in the 65–74 age bracket, just 44% invested in anything other than cash.
Aristotle Capital Management, Artisan Partners, First State Stewart Asia and Invesco Perpetual are fund managers for St. James’s Place.
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