Market Bulletin (31/07/2018)
“I believe in the horse,” said Wilhelm II, German Emperor, more than a century ago. “The car is a temporary phenomenon.” He might have smiled last week, as the impact of trade tariffs began to show themselves in the share prices of a few major car manufacturers (and not in a good way).
GM and Chrysler both cut their profit forecasts and their shares fell dramatically; in GM’s case, the company suffered its largest market plunge in seven years. Both manufacturers said that import tariffs – introduced by China in response to US tariffs – had hit demand. GM had been on track for another record year until tariffs pushed up the price of both steel and aluminium.
European automotive manufacturers had been set for a disappointing week on markets themselves, but their fortunes turned following Jean-Claude Juncker’s visit to the White House. The Trump administration had been considering a 25% tax on automotive imports despite protestations that the measures would hit US consumers. However, the European Commission president cut a deal whereby the EU buys more gas and soya beans from the US and holds off on retaliatory measures against the US. Both sides, the US leader said, would “work together towards zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods”.
Whether the outcome represents the start of a softer approach by the White House remains to be seen, but at least some of the impact of tariffs is already being felt. Thus the US government felt obliged last week to provide $12 billion in support for US farmers.
Another casualty of tariffs was Qualcomm, a major US telecoms and semiconductor company that had been looking to close a $44 billion takeover bid for NXP, a Dutch chipmaker. The plan eventually stalled on China’s refusal to approve the deal. The Qualcomm CEO left investors in no doubt as to the reasons for the failure: “We got caught up in a trade war.” Meanwhile, shareholders approved the Disney–Fox tie-up; it now looks all but assured.
Yet all these tales paled by comparison with the major investment news of the week: Facebook’s precipitous fall from grace on markets – a dip of 19%; and one from which it had not recovered by the end of the week. In terms of its market capitalisation, the social media network, co-founded and chaired by Mark Zuckerberg, forfeited $120 billion as soon as it opened on Thursday morning. That is equivalent to the entire GDP of Kuwait or the full market cap of General Electric.
The slump followed results showing a fall in subscriber growth. Given the remarkable gains made by technology majors this year, investors must now consider whether the fallreflects long-term issues. An alternative reading is that it simply represents the end of an overextended run of gains – after all, the stock is pretty much where it began the year.
“We continue to believe that Facebook has a highly advantaged business model and enormous opportunities ahead of it,” said Hamish Douglass of Magellan Asset Management in Sydney, manager of the St. James’s Place International Equity fund and co-manager of the Global Growth fund. “It still has multiple large platforms that are under-monetised, including Instagram, Messenger, WhatsApp and video across [various] platforms. The results were actually very strong, with revenues up 42%. Moreover, the share price reaction has to be put into perspective – it unwinds extraordinary gains over the last two months.”
Twitter, meanwhile, reported lower subscriber numbers, causing its own stock to slip. Other technology majors, however, had a good week. Amazon announced $2.5 billion of second-quarter profits, up from $197 million just a year earlier, and marking its third successive quarter with profits above $1 billion. Moreover, at the start of the week Alphabet – Google’s parent – reported quarterly results that beat analyst expectations, pushing up its share price 5% to a record high.
Belying the big stories of the week, the S&P 500 enjoyed a fairly even upward run over the five-day period. It was buoyed not only by some reasonable corporate earnings, but also by a report showing that US growth is currently cantering along at a rate of 4.1% a year, its fastest pace in four years. When Donald Trump promised just such a rate of growth back at his inauguration, few economists believed it was credible.
Around Europe, stock markets enjoyed a strong week. The strongest of them all this year has been France’s CAC 40. It has been boosted by political tailwinds, good economic data and, more recently, by its luxury brands, which are popular with Chinese consumers. Last week, however, French GDP growth showed up as a mere 0.2% for the second quarter, as trade growth dropped and household consumption slipped; the latter due in part to strikes.
The FTSE 100 ended the week up, aided by corporate earnings (such as for Reckitt Benckiser) but constrained by trade tensions. Despite recently appointing a new Brexit minister, Theresa May last week stepped in to take charge of the process. Michel Barnier, however, said the customs plan contained in her White Paper was a non-starter – odds have risen on a no-deal outcome. Meanwhile, another class action lawsuit was being prepared against Facebook – this time in the UK – over data misuse during the referendum campaign.
Last week also saw a rise in global bond yields. (Yields move inversely to prices.) At the root of the shift lay Japanese government bonds, which dipped in value on speculation that the Bank of Japan is planning to exit quantitative easing and begin to raise interest rates. The Bank injected more cash into the market than the Federal Reserve following the global financial crisis; its own retreat from markets should have a sizeable impact, with the Fed having already begun its exit.
One country to feel the chill wind of slowing money flows and trade tariffs in recent months has been China; data showed that the long-buoyant Chinese housing market may in fact reach a peak this year, and then begin to decline, hitting both Chinese growth and global commodity demand. However, last week Beijing also announced a package of tax cuts and infrastructure spending, just one day after the central bank injected $74 billion into the financial system.
From Hammond to Hood?
Back in Westminster, a committee of MPs urged the government to rein in the available rates of pension tax relief for higher earners, and make savings incentives appeal to low-income households.
In a report published on Thursday, the Treasury Committee suggests that “tax relief is not an effective or well-targeted way of incentivising saving into pensions”, and that government bonuses – such as in Help to Buy: ISAs – are more attractive to low earners. The committee advocates replacing the current tiered system of tax relief with a flat rate for all incomes, and promoting this as a ‘bonus’ or ‘additional contribution’.
The committee is also calling on the chancellor to abolish the £1.03 million lifetime allowance – an effective cap on the total that can be held in a pension fund and still obtain tax relief. It suggests tax relief should be controlled through a simpler, reduced annual allowance. This is despite the annual allowance being cut by more than 80% over the last decade – and by even more for high earners.
Pension and National Insurance tax relief cost the Exchequer more than £41 billion in 2016/17, according to HMRC estimates. At a time when the Treasury is looking for possible ways to raise an extra £20 billion for the NHS, ditching the higher rates of pension tax relief and introducing a lower annual allowance would likely garner widespread political support. Nevertheless, the chancellor will be keen to avoid knee-jerk tax changes that could alienate core voters. Either way, savers would be wise to consider making the most of the current allowances while they still exist.
Magellan is a fund manager for St. James’s Place.
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