Market Bulletin - Shared faith
As trading resumed in the New Year, stocks showed no sign of losing their momentum.
“Go into the London Stock Exchange… and you will see representatives from all nations gathered together for the utility of men. Here Jew, Mohammedan and Christian deal with each other as though they were all of the same faith, and only apply the word ‘infidel’ to people who go bankrupt… and everybody is happy.”
So wrote Voltaire, the French Enlightenment philosopher and Anglophile, after a visit to the City in the 1720s. He might have encountered a similar mood on the four trading days of last week, as the rally of 2017 showed no signs of losing steam. On Thursday, the FTSE 100 struck a new record high, before ending the week up 0.47% – last year it rose 7.6%.
Sentiment in the UK was buoyed in the New Year by positive readings from the country’s services sector, as well as by indictors suggesting that fourth-quarter growth would come in slightly higher than the previous quarter, thereby ensuring annual growth of 1.8% across the year as a whole. Moreover, productivity growth, long the stuff of bad news in Britain, struck its highest level for six years. The only headline disappointment came in the form of car sales, which struck their lowest level since 2009.
Indeed, it was the retail sector that formed much of the focus for UK traders over the course of the week, and the major stock stories pointed in opposing directions. Shares in Debenhams ended the week down 15% after the company announced that it would miss full-year profit forecasts due to a decline in post-Christmas footfall. The news follows a profits warning back in June.
Next, on the other hand, reported a 1.5% increase in full-price sales in the eight weeks running up to Christmas, and enjoyed an ensuing share price rise of 7%.
“In addition to the results, Next slightly raised guidance for the forthcoming year to 1% sales growth, suggesting that the business is not experiencing the decline that the fall in the share price [last autumn] implied,” said Nick Purves of RWC Partners. “The company continues to generate huge amounts of cash, routinely throwing off over £500 million a year after £150 million of capital expenditure. In the year ahead this will be used to pay a dividend which represents 4% of the share price as well as buying back £300 million of the company’s shares. It remains a very well-run business that is being offered at an attractive valuation.”
Amid all the financial focus, politics was notably subdued, and Theresa May began the New Year looking more secure than she had appeared for much of 2017. As things stand, she also faces the first year in five that the UK has not had either a referendum or general election, raising the prospect that the dog work of Brexit negotiations may receive more wholehearted attention. On this same topic, Michel Barnier delivered his own New Year message to the UK prime minister, commenting that any Brexit transition phase must end by 31 December 2020, and confirming that there could be no privileged access for financial services.
If UK stocks enjoyed a positive week, their performance paled in comparison to Continental Europe and the US. The Eurofirst 300 rose by 2.1%, boosted by strong economic performance in eurozone economies and positive business surveys. The banking sector offered a strong tailwind: BNP Paribas, Santander and ING were among the highest risers.
Yet in reality, the US continues to form the core of the stock surge. Last year, the S&P 500 rose in every month of the year for the first time in its history. It has now risen for 14 months straight – another record – as it continues the second-longest bull run in its history. In 2017, the index surged by 19.4%, but last week it shot up faster still, gaining 2.3%. Much of the 2017 gains came from the big IT companies – a quarter of the year’s gains were accounted for by Apple, Microsoft, Facebook, and Alphabet (Google’s parent company).
Last week’s surge owed perhaps a little to the US president. On 22 December, Trump signed into law the Tax Cuts and Jobs Act of 2017, thereby delivering a historic simplification of the tax code, reductions to income tax liabilities, and a huge drop in the rate of corporate tax – from 35% to 21%.
The package was among the reasons that markets enjoyed such a sugar rush at the start of the year, one that took the Dow Jones Industrial Average above 25,000 for the first time in its history – the index only broke 20,000 last year. As it happened, sector growth for US jobs and services failed to meet expectations; although, judging by his tweets and legal threats, the president appeared at least as concerned about the publication of Fire and Fury, an unsparing exposé of the Trump White House.
The president also found time to tweet about the Korean peninsula, following news that North and South had agreed to hold talks about the Winter Olympics, which will take place in Pyeongchang in South Korea. The news emerged the day after the US and South Korea decided to postpone their annual springtime joint military exercises, which North Korea has traditionally viewed as provocative. The fact that the North Korean leader had already announced the completion of the country’s nuclear programme in November may also have smoothed the way for talks.
Among those relieved at the unexpected turn of events was Japan, which suffered the spectre of North Korean missiles flying directly over its territory in some of the tests conducted last year. As it happened, Japan’s Nikkei 225 rose 4.2% last week to strike a 26-year high; although the rise seemingly had more to do with positive global economic sentiment, banking stocks and the rise of the dollar against the yen. Toyota and Sony were among the most notable outperformers. Stocks in China, South Korea and Australia also recorded a strong week, as sentiment rallied strongly around the Asia Pacific region.
The UK government will doubtless have been watching closely. Last week, it emerged that the UK government was entering talks about the possibility of joining the erstwhile Trans-Pacific Partnership (TPP), the trade association formed in 2016 (and since renamed the ‘Comprehensive and Progressive Agreement for Trans-Pacific Partnership’). The trading association excludes China – and some view it as more of a political exercise. It remains to be seen whether the UK, despite its limited Pacific presence, can take that 12th spot left vacant by the US.
RWC Partners is a fund manager for St. James’s Place.
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