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WeekWatch (14/10/2019)

WeekWatch (14/10/2019)

You wait years for a new marathon milestone; then two come along at once. On the same weekend that Eliud Kipchoge broke two hours at marathon distance in Vienna, Brigid Kosgei set a new women’s marathon best in Chicago, finally breaking Paula Radcliffe’s record, which had stood since 2003.

For economists, Vienna and Chicago are perhaps appropriate cities for the new to overturn the old. Joseph Schumpeter, who grew up in Vienna from the age of ten, would popularise the term ‘creative destruction’, the process by which capitalism destroys the old to make way for the new. The Chicago School argues for minimal intervention in markets so as to allow that creative destruction to continue relatively unchecked. Such processes were in evidence last week far beyond the world of running.

Figures released by JPMorgan Chase show that the number of Chinese companies listed on public markets has now surpassed the number of listed US companies: around 4,800 Chinese companies against some 4,400 US enterprises. While listings have increased in China, they have gone the other way in the US: back in 1996, there were more than 8,000 publicly listed US companies. Investors, it seems, are divided on whether public or private work best, but that need not be a bad thing.

“There are advantages to both markets – public markets provide scrutiny and access,” said Rob Gardner, Director of Investments at St. James’s Place. “Private markets, on the other hand, can enable companies to think longer term without some of the short-term pressures that come with quarterly reporting and market overreaction. But even then, private markets are set to become more accessible to retail investors, too. So, there are benefits to both, and investors may find both useful in achieving their long-term goals.”

In the short term, markets are prone to oversensitivity, and they were no different last week. Leading indices rose in the US, China, Japan, EU and UK last week, often in response to rumours of changes in political momentum – rather than to actual political events. Some investors may have wondered why – after all, quarterly earnings growth among S&P 500 companies is in negative territory; while sentix data published last week showed that global investor sentiment is at its lowest level since the eurozone crisis.

The short-term developments driving markets were, as so often these days, related to trade. Above all else, US–China trade negotiations continued to concentrate investor attention. Perhaps that should come as no surprise – after all, the US consumer accounted for 17% of global GDP last year, and its biggest import partner is China. Figures show that several territories and countries have benefited from the sanctions imposed on China, chief among them Taiwan and Vietnam.

Last week, the US added more Chinese companies to its trade blacklist ahead of a negotiating delegation visiting Washington. Its focus was eight Chinese technology companies, which it blacklisted for, among other practices, providing facial recognition technology to the Chinese government for use in

Xinjiang. Report say that Beijing has incarcerated some million Uighurs in ‘re-education camps’ in the northwestern province.

Even if the blacklisting was to encourage Beijing to accommodate US demands in talks, Washington is also pushing hard for trade progress elsewhere, and last week signed a trade deal with Japan, although the agreement is very far from comprehensive. All the same, in the World Economic Forum’s global competitiveness rankings, the US last week gave up top spot to Singapore.

While the US pull out from Turkey may have the greatest reverberations in the long term, markets were more sensitive to signs of hope for trade talks with China. The US’s Median Consumer Price Index, meanwhile, struck 3% for the first time since the great recession. Other indicators, however, are pointing to a US slowdown.

Indeed, meeting minutes released last week by the Fed show that the bank’s Federal Open Market Committee has turned both more dovish and more divided. Minutes from the European Central Bank showed a similarly dovish tilt; the latest data on German industrial orders, which shows a larger-than-expected dip and has raised expectations of recession, will only add to the ECB’s desire to prop up – even if doing so incurs further wrath from northern European countries.

Continued disputes over trade will not make it any easier to propel growth and, among those, the dispute about taxing multinationals took a new turn last week; the OECD announced its plan to provide a new blueprint for international tax rules, so that countries can more effectively tax companies that do “significant business” within their borders. Highly-globalised industries would be most affected, not least the technology sector. Such arrangements remain little changed since the 1920s.

The UK’s own trade debate, the Brexit negotiations, continued apace. The week opened with disillusion, and expectations that Brexit would probably be delayed again. But the mood changed later in the week when a very different tone emerged in joint statements made by Boris Johnson and Leo Varadkar, following the former’s visit to Dublin. Sterling enjoyed its biggest rise against the dollar since March, gilt yields fell as investors sought out risk, and UK-focused companies saw share prices rise.

Over the weekend, however, it became clear that the two sides remained too far apart to find a meeting point, meaning the UK has very little time to cut a deal ahead of the meeting of the European Council later this week. Amid these tensions, it was perhaps cruelly symbolic that Northern Ireland last week passed 1,000 days without a government.

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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