Back in 2004, Blockbuster Video boasted 9,000 stores worldwide. Today, a single franchise in Bend, Oregon is all that remains. As the company’s longstanding advertising jingle had it … what a difference.
Among the reasons for its demise, the rise of Netflix must surely rankle the most with Blockbuster’s former top brass. In 2000, Blockbuster turned down the chance to buy the fledgling video streamer, then just three years old, for $50 million. But Netflix has everyone’s attention now. It has a market capitalisation of $124 billion and its customers watch, in aggregate, 165 million hours of Netflix content a day.
If you can’t join ’em, beat ’em. Last week saw a new streaming service go live: Disney+; Disney’s share price rose following the announcement. (In response, Netflix announced a new partnership with Nickelodeon.) Disney was just one of the reasons that the S&P 500 struck another all-time high last week, clocking its sixth consecutive week of gains – the longest run of weekly gains since 2017.
Across the Pacific, Chinese stocks had a less good week, suffering the effects of reports that a first-phase trade deal with the US was becoming less likely, even as Alibaba all but confirmed it would be launching a second listing in Hong Kong (its first was in New York). Protests continued to derail everyday life in Hong Kong, where the economy is in recession, and the situation deteriorated over the weekend. On Saturday, Beijing dispatched locally stationed troops to “clean up” the streets and remove roadblocks.
“A lot of the companies in Hong Kong are still up for the year,” said Alistair Thompson of First State Stewart Asia, manager of the St. James’s Place Asia Pacific fund. “We haven’t seen a huge impact on stock markets, although there has been a little more in the last few days. Companies in the retail sector have not been performing well, as shopping centres have closed. It’s also a worry for some companies like Cathay Pacific – airline travel has slowed sharply.”
Chinese stocks have been performing exceptionally strongly in 2019, making it the best-performing major stock market worldwide, but Thompson argues the rise may say more about decisions by MSCI, which is responsible for many of the world’s leading indices, among them the MSCI Emerging Markets Index and MSCI AC Asia Pacific Index, than about fundamentals.
“The main reason for the market performing so well has been that MSCI increased China weighting, which meant that a lot of passive money went into the equity market,” said Thompson. “At a macro level in Asia Pacific, things could actually look quite bearish in the sense that there are excessive levels of debt, interest rates are unsustainably low and we don’t have inflation. But at the company level, we are very excited about the next five years.”
Asia Pacific is not the only region facing macroeconomic headwinds at the moment. Last week, GDP figures came in for both Germany and Japan, showing 0.1% in each country for the third quarter – the news meant Germany has narrowly avoided entering a technical recession. German figures flattered the UK, which delivered 0.3% quarterly growth, courtesy of the construction and services sectors.
Others were less eager to flatter. The EU opened proceedings against the UK after the government failed to nominate a new commissioner as per its mandate; and a coalition of 15 UK trade partners (including the US, India and Australia) made a case at the World Trade Organization for compensation from the UK due to the trade uncertainty caused by the Brexit referendum and its aftermath.
The UK prime minister and leader of the opposition, however, were focused on spending, and on arguments about spending. Under their election pledges, the Conservatives would raise public spending from 2% to 3% of GDP, while Labour would raise it to 4%. Neither level of public spending has been seen since the 1970s, but the plans did not rattle investors, and bond yields remained low.
“The bond market is offering a once-in-a-generation opportunity for a big fiscal expansion,” said Mark Dowding, chief investment officer at BlueBay Asset Management.
Yet where there is a will, there may not, on this occasion, be a way. Indeed, many economists are arguing that achieving even the more modest government spending targets of recent years has failed – and that low unemployment makes it all the more difficult to begin major new infrastructure projects, since the latter require significant numbers of workers.
Yet for all the focus on spending plans, Brexit may yet swing this election, and is already pushing the Tories to focus on the North of England and Labour on much of the South. Furthermore, last week Nigel Farage confirmed he would not stand Brexit Party candidates against Tory incumbents, but he will run candidates against Labour.
BlueBay, EdgePoint and FSSA are fund managers for St. James’s Place.
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