WeekWatch (23/04/2019)

Have you over-indulged? You wouldn’t be alone. On average, every UK household will have consumed eight Easter eggs over the festive weekend; the chocolate egg market is worth more than £220 million.

Yet a recent UN report has indicated that cocoa producers in emerging markets are not becoming as rich as the chocolate they help provide. In the last five years, the price per tonne of cocoa has fallen by 46%, and has dropped 5% this year.

Cocoa is not the only food commodity to suffer. Coffee prices have slumped to a 13-year low, driving many despairing farmers in Central and South America to turn their farms over to the production of coca – the main constituent of cocaine. The decline in coffee prices has been attributed to the weakness of the Brazilian real, which has meant other local markets cannot compete with the country’s cheap exports. The volatility in the currency has also done little to help the popularity of Jair Bolsonaro, who now has the lowest approval rating recorded by a first-time Brazilian president in their first 100 days in power.

There was better news in other emerging markets. China’s economy outperformed forecasts. The 6.4% annualised growth seen in the first quarter has been achieved against a backdrop of trade tensions. This was backed up by manufacturing production which surged 8.5%, as well as better-than-expected employment figures and spending by Chinese consumers.

But many experts reacted with caution, suggesting the GDP figures are about as believable as the existence of the Easter Bunny. Indeed, Capital Economics indicated that the improved economic conditions may be short-lived due to “the increasing headwinds from weak credit growth”. The announcements bolstered the Shanghai Stock Exchange Composite Index, which finished the week strongly on Friday (one of the few major global markets trading due to the long Easter weekend). However, Chinese markets fell back from a 13-month high yesterday amidst fears policymakers may ease up on their stimulus packages due to recent signs of stabilisation.

In the US, earnings season was in full swing; 60 of the 77 S&P 500 companies to have announced results by Thursday had exceeded analyst expectations. A strong finish to the week meant the Dow and Nasdaq posted small weekly gains, whilst the S&P 500 index continued to flirt with its record close achieved last September.

“US corporate profits are at their highest level since the 1960s and elevated cash levels suggest investment can continue,” observed Azad Zangana, senior economist at Schroders. “Cash levels are at about 1% of GDP and the US has never had a recession when that number has been above zero.” Zangana believes that this period of surplus cash should mean that there won’t be a recession “this year or next”.

There were some warning signs. A decline in industrial production for March completed a weak first quarter in which manufacturing output also contracted. Yet wider sentiment appears to be broadly positive; US retail sales rose at their fastest monthly pace for over a year whilst unemployment continued to fall. “We’re now in a position where job openings exceed the number of people unemployed,” added Zangana. “Some firms have begun relaxing drug-testing standards and restrictions on hiring felons to alleviate labour shortages.”

The UK economy also provided some signs of resilience. Inflation remained unchanged and unemployment fell to its lowest level since 1975. The FTSE 100 also touched a six-month high on Wednesday and better-than-expected retail figures suggested that shoppers were shaking off Brexit uncertainty, for now.

BlackRock Chief Executive, Larry Fink, appeared to share this upbeat outlook, suggesting that signs of solid growth in major economies could lead to a “melt-up” in equity markets, as more money flows in from big investors who have largely kept their powder dry during this year’s recovery. The FTSE All-World Index has had its best start to the year since 1998 – and Fink was quoted as saying that there was “too much global pessimism” and widespread “underinvestment”. Equity markets have suffered outflows worth $90 billion this year, with many blaming market uncertainty on the Sino–US trade war and Brexit.

In contrast, the burgeoning bond market has attracted $112 billion of inflows this year. The decision by the US Federal Reserve to leave interest rates unchanged last month has led to unprecedented growth in corporate debt markets. Global corporate bond issuance of almost $750 billion so far this year has outstripped the previous record set in 2017. However, the IMF has urged caution about the level of indebtedness being built up in major economies, such as Italy, and warned it could “amplify” an economic downturn.
Schroders is a fund manager for St. James’s Place.

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