WeekWatch (18/02/2019)

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It seems 15th-century financial advice doesn’t come cheap. This Thursday, a Venetian edition of Summa de arithmetica, geometria, proportioni et proportionalita, a work by Luca Pacioli (friend of Leonardo da Vinci) that was first published in 1494, will go on sale at Christie’s. The work introduced the principles of modern accounting, not least double-entry bookkeeping. This edition may fetch as much as £1 million.

Perhaps Matteo Salvini should have a read. Last week, the deputy prime minister toyed with raiding the nearly 2,500 tonnes of Italy’s central bank gold to fund the budget – and sacking the bank’s managers. But slaying the holy cow of central bank independence may not turn things around. Government debt is above 130% of GDP; the country is in its third recession in a decade; living standards are lower than when Italy adopted the euro 20 years ago; and government bond yields have risen to more than 3% over German bunds since Salvini and Luigi Di Maio formed Italy’s 65th postwar government last year.

Last week, Salvini’s Northern League swept aside di Maio’s Five Star Movement in a regional election in Abruzzo – the latest poll shows Italians see Salvini as their real leader. The Abruzzo vote was viewed as a litmus test for European Parliament elections this May, when populists should make gains.

Indeed, politics across Europe isn’t helping either economic growth or business confidence. In France, the president’s political crisis – which has chipped away at the growth rate and forced him to scale back reforms – is far from over; and, last week, Spain’s parliament voted down Madrid’s budget, forcing the prime minister to announce an early election for 28 March.
Fourth-quarter growth in Germany came in at 0.0%. Eurozone growth more broadly is slowing – its reliance on exports a particular sore point just now. The discontinuation of the landmark Airbus A380 – announced last week – felt like a badge of European failure.

All the same, earnings season hasn’t been bad; last week, Michelin was one of the bright spots, while Gucci owner Kering reported luxury goods demand in China remains strong – Burberry’s stock also rose in response. The EURO STOXX 50 struck a three-month high and is up more than 6% for 2019.

“The bounce in markets this year supports our view that dynamics have improved across European equities,” said Ken Hsia of Investec Asset Management, lead manager of the St. James’s Place Continental European fund. “While valuations reflect a reasonable scepticism about current earnings expectations, aggregate corporate earnings should continue to recover. All the while, corporate balance sheets continue to strengthen, so there exists reasonable scope for M&A and share buybacks.”

Then there’s the UK, where the news that seven Labour MPs were breaking away from their party felt less groundbreaking than it might in less fraught times. Sterling fell on Monday on the back of negative growth news. “There are no prizes for guessing what pulled down GDP growth by more than most expected,” said Capital Economics. “The impact of Brexit and weaker global growth was clear in the figures. Between them, net trade and business investment knocked one percentage point off the annual GDP growth rate.” The Resolution Foundation reported last week that higher inflation and lower growth since the vote had left the average household income down by £1,500.

The UK’s loss may yet be the Netherlands’ gain. Last week, the Dutch prime minister confirmed the continued migration of businesses from the UK to Amsterdam, with a further 250 poised to do so – the Netherlands has gained some 2,000 jobs and €300 million in new investment from companies shifting resources there due to Brexit. Bank of America last week said it had spent €400 million moving $50 billion of banking assets to Dublin from London. “There is no return there,” said the CEO.

The FTSE 100 rose all the same, as did leading stock markets in Asia – Japan’s TOPIX and China’s Shanghai Composite both rose. (Foreign investors have poured $9 billion into Chinese equities in January, the largest single monthly inflow on record.) Investors were buoyed by US jobs data, although signs of flagging Chinese inflation and disappointing US retail sales data combined to pare gains somewhat on Friday.

The S&P 500 enjoyed a strong week, boosted in great part by a suggestion the Fed may arrest quantitative tightening and by news that US–China trade talks had been extended. (The UK went the other way; imminent trade deals and talks with Japan and China were hit by apparent ministerial faux pas).
Last week, the US national debt passed $22 trillion for the first time. A second government shutdown appears likely to be dodged, but only because Donald Trump reportedly plans to announce a national emergency, enabling him to use federal funds to build the southern border wall.

Should that fail, there are always the gold reserves. 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.

Investec Asset Management 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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