Market Bulletin - Capital concerns
The UK chancellor delivered a cautious Budget, as markets turned their attention to this week’s unprecedented Dutch election.
If anywhere can claim to be capitalism’s birthplace, it is probably the Netherlands. Karl Marx called it the “model capitalist nation of the seventeenth century”, the Amsterdam Stock Exchange became home to the first tradable shares in its founding year of 1602, and the country suffered the world’s first recorded investment bubble, in tulips, in 1636–37. The Netherlands’ history of global trade and exchange has often been cited as one reason behind its reputation for open-mindedness. This Wednesday, as the country goes to the polls, that reputation – and much else besides – faces a threat.
The focus of EU and market fears is Geert Wilders, the firebrand Eurosceptic whose Party for Freedom is currently leading in the polls. Yet the refusal of other major parties to form a coalition with Wilders, together with recent polls, suggests a Wilders premiership is highly unlikely. The Amsterdam Stock Exchange, now 415 years old, enjoyed a rally of more than 1.5% last week. Besides, extreme candidates are not necessarily bad for markets - the S&P 500, despite a 0.53% dip last week, has rallied significantly since Donald Trump’s victory.
The recent successes of political outsiders such as Nigel Farage and Donald Trump have raised concerns, not least in cosmopolitan Amsterdam, where one Dutch MP made the unlikely prediction that the capital city might go independent if Wilders became prime minister. Wilders wants the Dutch to leave the EU, and a domino effect is feared, with French and possibly Italian elections later in 2017.
“For those who believe in the European project, there is a genuine fear that far-right Wilders may do much better than the polls suggest and end up with by far the largest party in parliament,” said Stuart Mitchell of S. W. Mitchell Capital. “Brexit and Trump, some commentators opine, may just be the start of a worldwide and inescapable far right and nationalistic political movement – ultimately wrecking the post-war European project. I am not so sure. Wilders’ labelling of Moroccan immigrants as ‘scum’ is arguably just too hateful for even his sympathisers. His brother Paul [recently] described him as ‘a horrible pest, egocentric and aggressive’, and the numerous death threats have made his public appearances less frequent than expected. Polling data suggests that his campaign may have lost momentum – current prime minister Mark Rutte should be able to comfortably form a new coalition government.”
Despite pressure on the euro, leading economic indicators point to an improving eurozone economy, and inflation has risen above the ECB target. This may explain why Mario Draghi, the Bank’s governor, offered mildly hawkish comments last week, albeit while emphasising that rates were not about to rise nor QE about to be tapered. He certainly lags the Fed which, after positive US jobs figures on Friday, is widely expected to raise rates on Wednesday. The Eurofirst 300 slipped 0.71% last week.
One European economy that is comfortably outdoing its forecasts is that of the UK. On Wednesday, Philip Hammond reported upbeat growth, jobs and debt figures; while separate analyses showed a slight economic rebalancing towards exports post-referendum. The FTSE 100 slipped 0.42% last week.
“The Office for Budget Responsibility has upgraded its growth forecast for the current year from 1.4% to 2.0%, which suggests it is coming around to our more benign view of the UK’s economic situation,” said Neil Woodford of Woodford Investment Managers. “We are more upbeat on the outlook for the UK economy than many commentators – the market consensus has become too bearish in the aftermath of the Brexit vote. We are more positive on the outlook for the UK and, naturally, more positive about the outlook for some domestic stocks.”
Having sketched the outlook, the chancellor then proceeded to highlight his own fiscal prudence, delivering one of the most content-free Budgets in living history. This came as something of a relief after the showmanship of the Osborne Budgets. Indeed, the tendency of chancellors to tinker ad infinitum with caps and tax rates on all sorts of different savings and investment vehicles has often served merely to dissuade people from using them. Thus Hammond’s decision to leave both ISAs and pensions well alone was refreshingly self-controlled – and makes planning for the future that much easier. A rise in the Income Tax Personal Allowance from April 2017, meanwhile, was welcome in light of rising inflation. Cautious savers would also have been glad to see the announcement of a new NS&I bond; although, given inflation forecasts for later this year, the 2.2% rate of return means savers will be losing money in real terms.
“The rise in the personal income tax allowance to £11,500 from April 2017 will be helpful to try and offset the impact of inflation on real incomes, but it is unlikely it will prove enough to counter the falling savings ratio experienced in the UK,” said Richard Colwell of Columbia Threadneedle Investments.
With the other hand, however, he took away, lowering the Dividend Allowance from £5,000 to £2,000 as of April 2018 – not an inconsiderable cut, and one that highlights the value of opportunities to invest tax-efficiently; new figures released by Moneyfacts highlight just how far Cash ISAs fail in that objective. Based on the current average Cash ISA rate (which has hit a new low), depositing the full £15,240 allowance would earn interest of just £124.97 in the first year. Ten years ago, when the average rate stood at 5.06%, you could have earned more on an investment of just £3,000.
Most importantly of all, Hammond chose to raise the rate of self-employed Level 4 National Insurance contributions, a move that may (depending on interpretations) have broken a campaign pledge, but which certainly angered plenty of backbenchers, and led Theresa May to announce a legislative delay for the change.
The spectre of a business rates revaluation looms large over the corporate tax outlook, with significant implications for small businesses in property hotspots such as London. The chancellor offered a few sops to soften the blow and delay the damage. “Business had been lobbying for some relief from the impact of the business rates change and this will help small and medium-sized enterprises – especially pubs,” said Columbia Threadneedle’s Richard Colwell.
In a light-touch Budget, perhaps his most significant step was the simple fact of not spending his short-term tax gains, which were partially delivered by calendar quirks and timetabling changes, rather than by improving fundamentals. Indeed, other policies may well have been subordinated to that overriding priority.
“Despite the fact that growth estimates were edged up and borrowing forecasts nudged down, the chancellor is keen to build up his £27 billion Brexit ‘insurance fund’ that he has pencilled in for 2019,” said Nick Purves of RWC Partners. “Hence giveaways were followed by takeaways.”
Should the Brexit bill gain passage through parliament on Monday this week, it would release Theresa May to trigger Article 50 of the Treaty on European Union. On Monday, May was thrown a potential curve ball, when Nicola Sturgeon announced that the Scottish parliament would hold a vote on whether to run a second Scottish independence referendum between autumn 2018 and spring 2019. Yet there is even speculation that the UK prime minister could use her Tuesday slot at the despatch box to announce the triggering of Article 50, the day before the election in the Netherlands. Investors have already priced in a Fed rate rise – it may yet be an Anglo-Dutch tale that guides markets in the week ahead.
Columbia Threadneedle, RWC Partners and S. W. Mitchell Capital are fund managers for St. James’s Place.
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