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WeekWatch (17/06/2019)

WeekWatch (17/06/2019)

In the British Museum hangs a 17th century painting of Tao Gu, a tenth century Chinese scholar, clutching his latest poem. These days, however, Tao is better known for a brief reference to a “fake mutton” dish made of tofu – the earliest known mention of fake meat.

Last week Beyond Meat, a US fake meat producer, held its IPO and quickly saw its market value jump to $3 billion. A day later, an analyst warning prompted a share price fall of almost 30%. The stock has already begun to recover; the real price of fake meat clearly remains to be worked out.

If food is changing, so too is how it’s delivered. That might not have stopped Lidl announcing the establishment of 40 new stores in London last week; but the shift was undoubtedly reflected in the launch of “Morrisons at Amazon”, a new venture that will see one of the UK’s most established food retail chains offer a same-day online grocery service via Amazon. Food retail tends to involve heavy spending. But Morrisons will simply sell its food to Amazon without any major investment; which may explain why its share price rose last week.

In UK politics, meanwhile, Conservative leadership candidates began selling their various brands in TV interviews and debates. Boris Johnson, the frontrunner, pulled far ahead of the pack in the first round of voting, but there are several weeks to go yet. Last week offered yet another reminder that these are unusual political times in the UK: one candidate has talked of his willingness to prorogue parliament in order to force through a no-deal Brexit. Labour attempted to block that option last week; but lost the vote by 309 to 298.

Others lobbed in their various warnings: the chancellor told candidates to commit to continued reduction of the national debt, while a Cabinet note showed the UK would not be ready for a disorderly Brexit on 31 October. Most candidates were unmoved: tax and spend policies made plenty of appearances, and some of the leading candidates are still willing to go through with no deal if there are no new developments by the deadline – or at least say they are.

The FTSE 100 slipped, partly on disappointing Chinese industrial production. The broader picture across the UK is mixed, and investment levels remain subdued.
“The labour market remained relatively robust in April, despite the drop in activity in the rest of the economy,” said Capital Economics. “However, we still expect employment growth to slow over the rest of this year as the available pool of labour dries up.”

Eurozone industrial production is down on last year’s levels, although GDP growth is relatively strong (excluding inventory adjustments). European bonds have rallied this year, and last week Germany sold 10-year bunds at -0.24%, their lowest yield yet. The exception is Italy, where the government continues to flirt with leaving the eurozone – and has a lot of debt to refinance in the coming months. The EURO STOXX 50 rose last week, albeit only marginally.

“High-yielding stocks across Europe and the UK – a proxy for the “old economy” – have only been cheaper once during the past 30 years,” said Richard Colwell of Columbia Threadneedle, manager of the St. James’s Place Strategic Managed fund and co-manager of the UK High Income fund. “The weight of money that has exited the UK market, due to the political and economic uncertainty brought about by the Brexit maelstrom, has opened up a large price differential between those companies listed in the UK and their [non-UK] peers listed overseas.”

But the biggest show on markets continued to rage across the Pacific, with no imminent end in sight to the US-China trade dispute. China’s renminbi – long a bone of contention between Beijing and Washington – last week dropped to a six-month low against the dollar.

Economic growth forecasts for the US pointed to a continued deterioration on trade uncertainty – estimates aggregated by Bloomberg show that the forecast for the second quarter fell below 2% this month, having been above 2.5% just two months ago. The US Treasury market is not pricing in any resolution to the US-China trade war at the forthcoming G20. The S&P 500 ended the week up by only a whisker, amid positive jobs numbers.

China faces more immediate economic challenges, including a fall in consumer spending, not least on cars, and the weakest industrial output in 17 years. But Beijing’s focus last week was drawn to Hong Kong, where some two million protestors tried to stop the Hong Kong government from agreeing a new extradition law – their efforts were felt on the region’s stock markets. In the end, the protestors won a delay to the law’s passage, although, at time of writing, nothing more than that.

Columbia Threadneedle is a fund manager for St James’s Place.

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