Market Bulletin - Turning tides
As old political alliances variously waxed and waned, investors hinted that they might once again be interested in the world beyond the US’s borders.
“Nations have no permanent friends or allies, they only have permanent interests,” said Lord Palmerston, twice prime minister during the heyday of the British empire. Recent turns in the tides of diplomacy suggest the abrasive ‘Lord Pumicestone’ (as he was popularly known) might have been onto something.
Last week, the Vatican announced it had ended a 67-year hiatus in relations with China, as the two recognised one another’s authority and agreed to work more closely together. (Until now, Catholic bishops in China could only be appointed by atheist communist politicians.) Yet while Beijing may be keen to ingratiate itself to the world’s billion Catholics, relations with the US are surely a more pressing concern.
The American Chamber of Commerce, meanwhile, reported that half of its members in China – the US’s biggest trading partner (excluding the EU) – had reported a rise in non-tariff barriers; presumably this has been part of Beijing’s response to US tariffs. Meanwhile, a report published by the European Central Bank found that if the US imposed tariffs of 10% on its major trading partners – and faced the same in return – its economic activity would be knocked by 2% over the first year.
Yet the most immediate tariff effects appeared to be playing out in China, not the US. New forecasts showed China’s corporate earnings growth rate sliding downwards into 2019. All this came amid signs some smaller countries are facing rising pressure to choose between two trading and financial nexuses, one centred on the US, the other on China. After all, what many dismissed as US campaign rhetoric has since crystallised into a trade war, the like of which has not seen since the 1930s.
Despite these tensions, and ongoing political and economic problems in emerging markets (EMs) such as Turkey and much of Latin America (as well as, on a far weightier note, last week's devastating earthquake in Indonesia), there are growing signs that investors might be rethinking their 2018 pessimism on EMs. Defying trade tussles and a high oil price (around $80 a barrel) – China is a net oil importer – the Shanghai Composite index rose in September, and across last week. Meanwhile, the MSCI Emerging Markets index hinted at a possible mood change among investors; after a bleak first eight months of the year, it has been gradually climbing since 12 September – it rose last week, too.
Donald Trump continued to lay into opponents at the United Nations last week, pillorying Iran and accusing the Organisation of Petroleum Exporting Countries of “ripping off the rest of the world”. He also expressed his openness to Warsaw’s proposal to build a US military base (dubbed ‘Fort Trump’) in Poland, which would be an affront to Russia. (The latter may yet be subject to further sanctions, following fresh evidence over the two accused of the Salisbury poisoning.)
Whatever unnerving spectacles there are to be had in Washington, the US economy marched on. Earnings forecasts for US companies continued to rise, and second quarter growth came in at 4.2% (annualised). The third quarter might see a slight decline (forecasts coalesce around 3%) but the figure remains high all the same. Alert to the economy’s strengths, the Federal Reserve raised rates by a further 0.25%, and signalled one more in 2018 and three in 2019. Bond yields rose in response.
Despite last week’s fall, the S&P 500 is up some 8% for the year, boosted in particular by the performance of Apple, Microsoft, Netflix and Mastercard. Last week news broke that Facebook, one of the major detractors, had suffered a data breach affecting more than 50 million users; the EU watchdog may yet fine it $1.63 billion in response.
“This year, Facebook has already increased its cost base by more than $10 billion to address security – up from $20 to $30 billion,” said Stefan Marchionetti of Magellan Asset Management, managers of the St. James’s Place International Equity fund. “The company was very naïve two years ago and was caught out, but has moved on a long way. The likes of the FBI and CIA think Facebook is actually doing a really good job. Facebook’s very collaborative with the agencies now.”
Mergers and acquisitions by US companies have hit $3.2 billion globally this year. Last week, Comcast won a blind auction for Sky, finally ending Rupert Murdoch’s involvement with the company he founded in 1990. Yet in Japan business confidence – which had been buoyant – soured for the third quarter, despite a rising stock market. Since Shinzo Abe’s recent reelection, the Topix has been on the up, while the Nikkei 225 last week hit its highest intraday level since November 1991.
The FTSE 100 gained on sterling weakness and the high price of oil, reflecting its heavy weighting towards energy companies. But the more significant news in the UK was political. Fresh from her defeat in Salzburg, the prime minister returned home in time (should she have wished) to watch highlights of the Labour Party Conference. After Labour’s mixed messages on Brexit plans, Keir Starmer, Shadow Brexit Secretary, said that, short of a general election, Labour would reject any Chequers-style deal and support the call for a referendum – perhaps including ‘Remain’ on the ballot. The comment won a standing ovation.
John McDonnell had other priorities. The shadow chancellor laid out radical proposals, including one that would see companies obliged to gradually pass 10% of their equity to their staff – business groups expressed strong opposition. At least UK Plc isn’t flagging; a Link report showed a record £31 billion paid out in underlying dividends in the second quarter.
“It’s a good figure … but a big reason for the growth is coming from the mining sector, and … we know they cut their dividends and rebased them a few months ago when they were struggling from lower commodity prices,” said Blake Hutchins of Investec Asset Management, manager of the St. James’s Place Worldwide Income fund. “And now their policy is not one of progressive dividends but actually one of paying out a fixed amount of their profit after tax. This year they’re quite profitable – if commodity prices fall, those dividends can then fall in line with them. But in general, companies are growing their profits, cashflows and dividends, which represents quite a healthy outlook for UK companies in general.”
Nice little earner (for the Treasury)
Figures released on Friday by HMRC showed the number of individuals breaching the annual allowance for pension savings more than doubled to 18,930 in 2016-17 from 7,150 the year before. The data also showed that the total value of pension contributions exceeding the annual allowance reported through Self Assessment leapt to £517 million. This represents more than three-and-a-half times the previous year’s figure (£143 million in 2015/16).
The annual allowance is the maximum amount anyone can contribute to their pensions tax-free. Contributions eligible for tax relief are currently capped at £40,000 a year. However, an extra measure introduced by previous chancellor George Osborne in 2016 means that some top earners can see this limit reduced to as little as £10,000 a year.
“The taper for higher earners is far too complicated for most individuals to fully understand,” says Ian Price, Divisional Director at St. James’s Place. “It is especially tortuous for the self-employed, who typically don’t know their income until after the end of the tax year.”
This complexity means many more individuals may be caught out. Some experts are now calling for the taper to be revoked as part of the measures in the Budget; last week, the chancellor tweeted that he was bringing the Budget forward to 29 October.
Investec and Magellan are fund managers for St. James’s Place.
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