WeekWatch (29/04/2019)

Game of Thrones has entered is its eighth and final series. The franchise is worth around $1 billion and commands some 30 million viewers per episode in the US alone. If only Japan’s Chrysanthemum Throne were half so profitable.

This week, the latter will welcome a new occupant, when the current incumbent becomes the first Japanese emperor to abdicate in 200 years. Tellingly, the incoming occupant has just one child, emblematic of the enormous demographic challenge facing the world’s third-largest economy. At 59 years old, the new emperor is a mere 12 years older than Japan’s median age. There are now more registered dogs and cats in Japan than there are (human) under-15s.

Today’s Japan, however, may be as deeply influenced by its central bank than its royal family. The Bank of Japan is now the leading shareholder in more than 20 companies, and one of the ten major shareholders of half of all listed Japanese companies. This is more significant than either short-term index movements (the TOPIX ended last week only marginally up) or imperial handovers (the government has named the new imperial age Reiwa, meaning ‘beautiful harmony’). The economy certainly offers the bank justifications to lend a hand: Cabinet Office data shows growth set to moderate further; consumption patterns remain weak; industrial production is down almost 5% (annualised). All the same, new figures showed inflation may be finding sustainable momentum, while female employment figures rose once again – the latter is a major focus for the government and Japan certainly has plenty of slack to make up, relative to its G7 peers.

But rising growth and markets abroad are also helping matters. Last week, the S&P 500 passed its 2018 high, thereby making up for the downturn in the final quarter of 2018, losses which caused many investors to sell out in panic. The broad seesaw of the last seven months has provided an object lesson in the value of remaining invested through volatile times.

“The past few months have seen markets swinging in both directions, largely due to changing sentiment on the Fed’s interest rate policy,” said Tom Beal, Deputy CIO at St. James’s Place. “That needn’t be a problem for investors, unless they make the mistake of selling when markets fall. The best way to bank the recoveries is to remain invested for the long term.”

The tech majors helped the S&P to a good five days’ trading last week. Alphabet, Microsoft, Facebook and Amazon all performed strongly – Microsoft became only the third listed company in history to reach $1 trillion in value, albeit briefly. (Boeing, conversely, suffered after announcing a $1 billion hit to its revenues due to grounding all its 737 MAX aircraft.) Admittedly, the median price of a new US home is now down by its biggest margin in a decade, but figures from the US Department of Commerce showed US GDP growth at 3.2% (annualised) in the first quarter, far outpacing the fourth quarter of 2018. The S&P 500 is up sharply this year and the tech-heavy Nasdaq by even more. It’s been an expensive time to be out of the market.

Commodities are enjoying similar tailwinds. Brent crude appeared to peak at around $74.50 a barrel midweek but remains high in historical terms at above $72. Shell and BP pushed the FTSE 100 up early last week, before other concerns weighed in later in the week. Among the negatives was an announcement by the regulator that it would block the Asda–Sainsbury’s merger. Both share prices suffered a hit in the aftermath.

“Our initial investment in Sainsbury’s predated the Asda merger announcement and we believe that the core drivers of our investment case remain valid,” said Ken Hsia of Investec, co-manager of the St. James’s Place Greater European fund. “The supermarkets as a group have over the long term destroyed value by adding store space despite poor economics, and we have tended to avoid them. However, Sainsbury’s has reduced store expansion, cut costs and integrated the recently purchased Argos franchise into its stores, to better utilise its real estate whilst reducing capex and improving free cash flow. The shares trade on an attractive valuation and the merger failure does not change our view.”

Another commodity in hot demand is pork. China’s pig population is forecast to fall by around a third due to African swine fever – that’s 130 million hogs. Given the country’s voracious demand for pork, this is likely to have major repercussions; China may, reportedly, offer to import more US pork as part of its trade negotiations.

Concerns over Beijing’s aims concentrated minds at a Cabinet meeting in Downing Street last week, leading one person present to leak the story that the government will allow Huawei, the Chinese tech major, to play a non-core role in UK telecoms upgrades. The decision was met with a chorus of complaints, given recent signs of China circumventing Washington’s attempt to ringfence sensitive technology.

But then, the prime minister might muse, if she can’t trust her own ministers to keep sensitive information to themselves, why worry about Huawei?

Investec is a fund manager for St. James’s Place.

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