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WeekWatch (05/12/2019)

WeekWatch (05/12/2019)

“Well, I don’t know how it gets better than this.” Taylor Swift wasn’t singing about the stock market at the time but, last week, she could have been. She certainly wouldn’t have been singing about herself; the singer now finds herself in the curious position of trying to persuade Carlyle Group to use its position to enable her to perform her own back catalogue: not the kind of politics the US financial group might have imagined getting embroiled in when it helped sell Swift’s former record label to manager Scooter Braun.

If last week was anything to go by, there are plenty of deals to be had just now. The Abu Dhabi government (aka royal family) agreed the sale of a 10% stake in Manchester City Football Club to Silver Lake, in a deal that values the premiership title holders at $4.8 billion, making City the most expensive sports club in the world. Meanwhile, on Monday last week, LVMH secured the purchase of Tiffany & Co.; yet that was just one among a spate of deals that day, deals that added up to $70 billion.

Moreover, consumers are certainly buying, not least in the US. As volatility across US stocks stooped to a one-year low and the S&P 500 clocked a new record high, American shoppers showed every sign of delivering the usual pre-Christmas boost to sales. New figures indicated that household spending picked up in October, and that consumer spending has been driving US GDP growth far more than in the previous few quarters. All the same, factory orders in the US were down. A key barometer will be the data for Cyber Monday, when US consumers are forecast to spend $9.4 billion – and when the US consumer duly delivers, the financial world breathes a collective sigh of relief.

Tensions, as so often these days, were largely political last week. After the Hong Kong Human Rights and Democracy Act easily passed through both houses of the US Congress, Donald Trump was left with little choice but to sign off on a shift in the US’s treatment of Hong Kong. The bill obliges the White House to verify annually that the legal and administrative systems in Hong Kong are still distinct enough from those of mainland China to ensure separate treatment in both customs and economic arrangements. If not, there is a stick in the form of sanctions, although it is highly doubtful that Donald Trump would ever wave it. Still, the move is hardly likely to please Beijing at a sensitive point in trade negotiations.

“China might play a longer-term game than Trump wants, which might provide an unpleasant surprise for markets in the coming months,” said George Luckraft of AXA Investment Managers, manager of the St. James’s Place Diversified Income fund. “That said, it might be dangerous as investors get more optimistic that a deal is going to be done. But legacy is Trump’s priority and he is likely to ultimately want a deal.”

Stock indices worldwide were somewhat unsure what direction to take, as hopes of continued economic growth were weighed against ongoing US–China trade tensions. Two of the world’s most trade-sensitive major economies were certainly feeling the heat, albeit for a range of reasons. Japan’s recent tax rise and super-typhoon sparked the largest monthly drop in retail sales the country has suffered in recent years while, in the eurozone, business climate and sentiment indicators ticked increasingly negative. (Fitch warned that the eurozone is now at risk of Japan-style stagnation.) Such feeble indicators raise alarm bells for some investors.

“Weak data gives me one real cause for concern,” said AXA’s Luckraft. “2020 earnings predictions are too optimistic and there will be a period of resetting earnings estimates… a lot of businesses have already reset expectations.”

In the UK, while stocks were influenced by global developments – the FTSE 100 ended the five-day period only marginally higher but posted a four-month high midweek – the focus was on election season and Brexit. It was not just polls that suggested momentum is with the Conservatives; they were also helped by some of the economic statistics. The European Commission’s Economic Sentiment Indictor (ESI) pointed to stabilisation, while a mild improvement in consumer confidence should surely help the Tory cause.

“Despite the growing likelihood of a Conservative majority, sterling has only edged higher in recent weeks,” said Capital Economics last week. “We think that the pound could rise further if the party wins a majority, but that its stance on Brexit limits the upside for now.”

In UK corporate news, De La Rue, the banknote manufacturer, halted its dividend, and the impact was quickly felt on the share price; Uber lost its London licence; and Npower announced it would be cutting 4,500 jobs. But amid the negative headlines, some see opportunities.

“The UK market looks cheap internationally, which is unsurprising given recent events,” said AXA’s Luckraft. “We are in a situation where you can see some of this reversing quickly if we get a Conservative majority.”

AXA is a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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