WeekWatch 17/02/2020
Tired of the roses, the ‘romantic menus’ and the pushy violinists? Blame Geoffrey Chaucer and Margery Brews. In 1382, Chaucer became the first to link the saint’s day with romantic love in his Parlement of Foules. In 1477, Margery Brews, a Norfolk woman, sent the earliest known Valentine’s missive. This year, global spending on Valentine’s Day should top $161 billion, according the US National Retail Foundation – Valentine’s today is a global retail phenomenon.
The retail boost wasn’t felt in China, although some concerned romantics chose to send ‘bouquets’ of face masks instead. Continued lockdowns, factory closures and consumer and tourist caution mean the country faces not only a dangerous virus that continues to spread, but an economic hit as well. Alibaba, usually a beneficiary of such festivals, reported strong earnings for the fourth quarter last week, but it was the CEO’s warning that the coronavirus would hit profits which directed the stock price.
Last Wednesday, Beijing changed how it computes fatalities and infections: confirmed cases in Hubei province thus increased almost ten-fold from the day before, with 14,840 new infections and new fatalities more than doubling to 242. The global death tally is at some 1,770, with more than 70,000 confirmed cases. Hours after the Hubei recount, two of the province’s senior Communist Party officials were ousted.
Beyond the sackings, Beijing is spending. The People’s Bank of China has already injected $174 billion of liquidity into markets since the virus appeared and cut interest rates (as have central banks in Sri Lanka, Malaysia, the Philippines and Thailand). Are investors reassured?
“I worry share prices in China are not fully reflecting the impact of the virus,” said Alistair Thompson of FSSA, manager of the St. James’s Place Asia Pacific fund. “Quality companies look fully valued although we are looking at China Resources Land which trades at a steep discount. We haven’t added to anything in China.”
However, just because most companies are hurt by the virus, doesn’t mean they all are.
“We own four companies that are actually beneficiaries of the current situation,” said Thompson. “CSL is one of the world’s largest flu vaccine manufacturers, while ResMed and Fisher & Paykel are two of the world’s leading masks and respiratory equipment companies – and Ramsay Health Care is a leading private hospital operator. All four companies have seen their share prices rise since news of the virus broke.”
What hits China economically these days hits the world. At the time of SARS in 2003, China accounted for 4% of the global economy; today it accounts for 17% and sits at the centre of global supply chains. A recent poll of US economists found they believed the virus will cut US growth by a little under 0.5% in the first quarter. Lower oil demand is another result; the International Energy Agency (IEA) expects the first quarterly
drop in global demand in a decade. “The consequences [of the virus] for oil demand will be significant,” the IEA said. “There is already a major slowdown in oil consumption and the wider economy in China.”
While the virus providing the major story on global markets just now, politics in the US and UK continued to intrude last week all the same. In the UK, a Cabinet reshuffle saw the chancellor resign his post just a few weeks before the current government’s first Budget. Sajid Javid said he had been unwilling to sack his own advisers and instead share a pool of advisers with Number 10.
“It was clearly a disappointing outcome for investors as, in the short term, gilts began selling off in response,” said Azad Zangana, Senior European Economist at Schroders. “To have a chancellor departing with less than a month before the first Budget since the election looks poor and highlights the splits within the government.”
The change of chancellor is thought to mark a shift in policy towards a looser fiscal arrangement that enables the government to fulfil its fiscal pledges.
“The surprise change [in chancellor] … bolsters our view that looser fiscal policy and tighter monetary policy are on the way,” said Capital Economics. “This supports our forecasts for a stronger pound, higher Gilt yields, and an outperforming UK stock market over the next couple of years. ”
Still, it’s hard to imagine the UK government spending the $97.5 trillion pledged by the rising star of the US Democratic primaries.
Bernie Sanders’ win in the New Hampshire primary has cemented his position as the front runner,” said Capital Economics. “Many observers believe that his policies, which could have a detrimental effect on the stock market, will ultimately prove too radical to appeal to mainstream voters [but] it would be unwise to dismiss his chances too quickly.”
Moreover, whatever promises he may make to US workers, he will face an incumbent very much at ease with protectionism. Last week, one of the greatest fans of US steel tariffs, JSW Steel, made a surprising call when it took the US Department of Commerce to court … because of US tariffs.
FSSA and Schroders are fund managers for St. James’s Place.
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