Market Bulletin (26/05/2015)
Global stocks rose broadly but modestly in a week of relatively calm trading. In the US, the S&P 500 index fell 0.2% on Friday – after Federal Reserve chairwoman Janet Yellen said that she still expected interest rates to rise sometime this year – but gained 0.2% in the week. US consumer prices rose a seasonally adjusted 0.1% in April, according to the Department of Labor. Energy prices slumped 1.3% last month while food prices were unchanged. The core Consumer Price Index, which excludes volatile food and energy costs, jumped 0.3%, driven by another increase in housing expenses and a gain in medical care costs.
US housing starts soared 20.2% in April to a seasonally adjusted annual rate of 1.4 million units – a seven-year high – whilst permits for home construction rose 10.1%. US jobless claims increased slightly but remained near a 15-year low.
The FTSE 100 Index ended the week up 1.02%, boosted on Friday by Vodafone which rallied strongly on takeover speculation. Meanwhile, Athens remained in the news as European leaders met for a second day to discuss Greece’s financial problems. On Friday a Greek government spokesperson expressed optimism that cash-for-reforms deal could be reached with creditors within 10 days.
In Germany, the Ifo Business Climate Index slipped to 108.5 from 108.6 in April, its first drop since October 2014, and figures showed that the country’s economic growth also slowed in May, for the second-straight month. The FTSEurofirst 300 Index was up 2.85% for the week, although it still remains below the high of April.
Japan reported a pick-up in first-quarter economic growth, leading the Nikkei 225 Stock Average to show gains for the sixth consecutive session, its longest run since December, to end the week up 2.69%. However, news in China was less positive. HSBC’s Flash Manufacturing PMI for China fell to 49.1 in May from 49.3 in April, the third-straight monthly contraction and the fifth in six months, reflecting continued weakness. Export orders also dropped to a 23-month low.
The week brought news that the UK has finally joined other advanced economies in experiencing deflation. Figures from the Office for National Statistics confirmed that the Consumer Price Index (CPI) fell to -0.1% in April, turning negative for the first time since records began in 1960.
“We should not mistake this for damaging deflation,” commented Chancellor George Osborne. “Instead, we should welcome the positive effects that lower food and energy prices bring for households at a time when wages are rising strongly, unemployment is falling and the economy is growing.”
Looking ahead, though, the UK’s deflation is likely to last for one month only. CPI inflation should return to positive territory in May, as the effect of the shifting timing of Easter ceases to depress it and as the negative contribution from energy and food prices starts to fade. Meanwhile, there are still few signs that very low inflation is having malign economic effects – consumers are undertaking, not delaying, purchases, and wage growth is picking up.
Last week Marks & Spencer reported its first increase in underlying pre-tax profits in four years, whilst pledging to buy back £150 million of shares in the current financial year. Underlying pre-tax profit rose by 6.1% to £661.2 million, modestly ahead of analysts’ predictions.
Richard Colwell of Columbia Threadneedle commented, “There were three key features of the M&S results in our view. Firstly, M&S has made good progress in gross profit margins in its general merchandise business. While the tabloids may choose to focus on suede skirts and Alexa Chung, margins in general merchandise were significantly better than expected and the company has flagged a further three years of rises in general merchandise gross margins. Crucially, we don’t think that M&S will have to sacrifice sales to achieve this outcome.”
Colwell is also encouraged by the fact that the company’s food proposition remains differentiated. “The M&S food business has delivered higher gross sales and higher gross margins despite a very tough industry backdrop. Growth prospects in Simply Food remain strong in our opinion, given the widening gap in range and quality of M&S’s food offer versus other food retailers.”
News that the company is undertaking a £150 million share buyback for the current year also underlines its commitment to shareholder returns, in Colwell’s view. “In coming years, we think that M&S could return more cash to shareholders, reflecting a decline in capital expenditure from peak levels and some ongoing profit recovery in the UK.”
Richard Staveley of Majedie Asset Management was similarly encouraged, although mindful that work is still to be done. “Gross margins are improving but are still only half the level of Next, its high street contemporary.” There are still question marks over the vital womenswear department, although sales rose in the final quarter. “M&S has a 25% share of the women’s underwear market,” adds Staveley. “What it needs to do is overcome the problem of women ignoring the rest of its range.”
Mind the gap
New research by Aegon has revealed that just 7% of UK workers are on track for the retirement they aspire to. Nearly two-thirds (62%) do not feel confident about being able to retire when they want to. Furthermore, 55% of people admitted to having never checked the value of their pension savings, whilst 20% of employees did not know how much they were contributing to their pension.
Half of the respondents had never done anything to review their retirement plans, making even more unrealistic the average desired retirement age of 63, and their expected income in retirement. Since last year’s survey, the average aspiration has risen from £35,000 to £42,000 per year; a sum that would require a savings pot of more than £1 million – thereby in excess of the lifetime allowance from April next year.
The deflation news provides those seeking a positive return from money on deposit with some temporary respite; but speculation mounts as to what measures affecting savers and investors will be confirmed or announced in the summer Budget on 8 July. What is more certain is that those saving for retirement will continue to need to take control for their own future financial security, whatever changes are announced to help the government balance the books over the course of the next parliament. With tax relief on pension contributions apparently on the Chancellor’s radar, it is doubly important that savers take action to boost retirement funds sooner rather than later.
Columbia Threadneedle and Majedie Asset Management manage funds for St. James’s Place.
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