Market Bulletin (26/04/2016)
Heat and light
The Saxe-Coburg-Gotha family can lay claim to quite a few European thrones through its history, and members of the clan still occupy them in Britain and Belgium. Last week, one of their number welcomed the US president to Windsor Castle to celebrate her 90th birthday. So much for the scripted bit.
A controversial Treasury report published last week estimated the growth cost of an EU exit at 3–8% of GDP by 2030, and a pro-EU article by President Obama appeared in the Telegraph. Boris Johnson criticised the latter as “hypocrisy”, while Michael Gove dismissed the Treasury report as infantilising. Gove went on to argue that Britain’s post-exit relationship with the EU could echo that of Bosnia, Albania or Ukraine.
But for all the heat and light generated by British politics, the cost of insuring against a drop in sterling in the next three months actually fell last week, implying that EU exit worries have subsided, either because an exit is deemed less likely, or because its consequences are now less feared. Moreover, volatility in the FTSE 100, which dipped 0.53% last week, was a good deal more subdued, reflecting the international character of both the index itself and of London’s financial sector more broadly.
“We invest in large multinationals that have their headquarters in London and their performance is not driven necessarily by what happens to the UK economy but what happens to the global economy,” says John Wood of J O Hambro. “Given the scale of the US economy, the US presidential election is far more important than what happens in the Brexit vote.”
Both countries received some discouraging indicators last week. The UK government missed its budget deficit target (set just a month ago) by £1.8 billion, jobless numbers rose and wage growth slipped to its lowest since 2010. In the US, banks reported largely negative quarterly results; profits at Goldman Sachs fell by more than half and revenues at the six biggest banks suffered their biggest fall since 2011.
In the US, on the other hand, some of the potential challenges are the problems of success. Unemployment is now falling to levels where labour shortages may become a reality, according to a report published last week by The Conference Board, a leading business group. It expects an uptick in inflation as a result – inflation remains below target. The S&P 500 ended the week up 0.17%, having been driven to a 2016 high by commodities earlier in the week.
The corporate earnings season has hardly been encouraging in the US and Europe, but shareholders are not just upset about what the company itself earns. Last week, BP made clear it would not act on a recent non-binding shareholder vote against the 20% pay rise of Bob Dudley, its CEO. Meanwhile, investors and shareholder groups gathered to complain at the appointment of Michael Dobson as chair of Schroders and against his remuneration package. At a shareholder meeting for Anglo American, 42% of proxy votes opposed the company’s pay plans.
Meanwhile, Mitsubishi acknowledged fiddling fuel economy test results (cue an executive apology bow at the press conference) while French anti-fraud officers last week raided the offices of PSA, manufacturer of Peugeot and Citroën, over possible carbon emissions infractions.
While carmakers fiddled, China continued its shopping spree; Chinese corporate buyers have this year represented 15% of global deal activity in the first quarter of 2016. Alibaba had already bought a $1 billion controlling stake in Lazada, a Singapore-based shopping start-up, earlier this month; but last week a Chinese consortium inked a deal to acquire Lexmark, the US printing company, for $3.6 billion. Another consortium agreed last week to buy an Australian land company (with major pastoral leases) that owns more than 1% of Australia’s landmass – equivalent to almost a third of the UK landmass.
China’s overseas ambitions continued westwards too, as the newly formed Asian Infrastructure Investment Bank announced plans to extend highways and motorways across Pakistan, Tajikistan, Uzbekistan and Kazakhstan. Meanwhile, Chinese demand for iron ore could be just beginning to recover at last, as the price of steel’s chief ingredient rose to around $60 late last week.
Two emerging markets turning over a new financial leaf last week were Argentina and Saudi Arabia. Argentina successfully issued government debt for the first time in 15 years. Saudi Arabia agreed the loan of $10 billion from a number of major global banks – it may soon follow up with its first global bond deal since 1991, as well as with a listing of Saudi Aramco, the state oil company.
Negative rate zones
The standout performer of the week on stock markets was the Nikkei 225, which rose 4.3% as finance and shipbuilding stocks enjoyed a strong week, but also because the Bank of Japan reported on Friday that it was considering giving banks a hand by applying negative rates to its lending programme for financial institutions. The yen rallied on the news. Japan is already in negative-rate territory on its headline rate, but may yet venture further.
It was a more mixed week for its negative-rate counterpart, the European Central Bank (ECB). The FTSEurofirst 300 gained a respectable 1.6%, helped in part by an improving outlook for commodities, not least oil – Brent crude ended the week above $45 a barrel. But Europe was facing an array of other issues.
Italy’s banks remain a concern for politicians and investors alike; a deal last week to create ‘Atlas’, a backstop fund, was a start, but was thought unlikely to offer sufficient insurance. The European Commission sent a statement of objections to Google over the company making it hard to access rival search engines on its Android devices. Anti-trust charges may yet follow. France sent a tax bill (for a possible €300 million) to McDonald’s. On Friday, EU talks were being held over the programme for reforms and debt relief in Greece.
The greatest spat, however, was within the EU itself. In recent weeks, there has been a series of very public criticisms from economic conservatives in Germany. Most notably, the finance minister Wolfgang Schaüble complained earlier this month that accommodative ECB policy was 50% responsible for the rise of Alternative for Germany, the far-right political party that won so many votes at regional elections held in three German states in March.
That pitted him against the governor of the ECB, Mario Draghi. Last week, Mr Draghi finally spoke out, saying that central bank policy was supposed to be independent and that politicians should not interfere. Several politicians have since added their voices to Mr Draghi’s.
Monarchs and investors alike can take heart that, while the politicians bicker, stock markets continue to make steady progress.
J O Hambro is a fund manager for St. James’s Place.
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