Market Bulletin - Russian bear
Russian stocks felt the brunt of trade sanctions and a rise in tensions over Syria, as US corporate earnings season entered its stride.
When Macbeth compared himself to “the rugged Russian bear”, he was steeling himself to speak to a ghost. Last Monday, investors in Russia needed some of that same ursine resolve, as the Russian market opened the week down more than 11% from its previous close. That made it a technical correction (defined as 10% below its previous peak) and left it in danger of entering technical bear market territory (defined as 20% below).
In the weeks running up to the correction, foreign investors had been loading up on Russian stocks, as sentiment was buoyed by coordinated global growth and a rising oil price. Indeed, they had never been so overweight to Russia since it first entered the MSCI Emerging Markets Index 19 years ago. Russian stocks did not recover their losses last week, potentially leaving investors to wonder whether some of the cheap valuations on offer had been cheap for good reasons. The rouble dipped by 7.2%, its most dramatic weekly fall in 18 years.
Behind the rapid shift in sentiment lay politics, and its capacity to impact on profitability. A US decision to introduce a new round of sanctions, this time against leading Russian business people and political officials, was far-reaching in its implications. One particularly targeted measure was to introduce generic sanctions against the business interests of Oleg Deripaska, a major commodities player and friend of Vladimir Putin. Energy company EN+ and aluminium producer Rusal both suffered as a result.
Several energy and industrial majors were also hit, as was Mechel, a mining company. Copper prices fell 8% in a matter of days, adding to the pain. Later in the week, it emerged that the Kremlin was planning to prop up some of the companies hit by the measures. Nevertheless, it was notable that the US sanctions also targeted non-Russian banks that trade with the relevant companies and individuals.
The US said that the sanctions were connected to Russia’s behaviour in Crimea, Ukraine and Syria, as well as to its cyber campaigns conducted against the West. Reports that Bashar al-Assad’s army had used chemical weapons against the Syrian people provoked swift condemnation from several Western military powers, most notably the US, UK and France; and culminated in a coordinated military strike on Friday evening on three of Syria’s alleged chemical weapons facilities.
There was some positive news for Moscow, however, as reports came back that the $9.7 billion Sino–Russia gas pipeline was nearing completion. Moreover, Brent crude finished the week above $70 a barrel, its highest level since 2014. The rise was linked to tensions in the Middle East, but also to hopes that the trade dispute between the US and China may be resolved without greater damage to the global economy.
There were better times on leading indices further west, however; the FTSE 100 gained 1.1% over the week, while the S&P 500 and MSCI Europe ex UK ended the week largely flat – up 0.1% and 0.6% respectively. Companies in the US were set to report earnings growth of around 17% for the first quarter (annualised), a rate last beaten back in 2011. Some of the major US banks reported late in the week, and were buoyed by rising interest rates and Donald Trump’s corporate tax changes. J.P. Morgan’s profits rose 35% to an all-time high; Wells Fargo and Citigroup both reported higher earnings too.
On Monday, technology, energy and finance stocks all recovered from a tough end to the previous week – the three sectors account for a large portion of the S&P 500. Among technology stocks, Facebook was also helped by Mark Zuckerberg’s extended testimony to Congress in Washington, from which he emerged relatively unscathed. However, Wall Street was unpredictable, and by the end of the week, financial stocks stalled, while energy stocks continued to rise in value.
Meanwhile, US inflation came in below the Federal Reserve’s 2% target, potentially raising questions over the outlook for interest rates. The Congressional Budget Office warned that the US was heading for an annual budget deficit of more than $1 trillion by 2020, and added that the cumulative deficit would hit $28 trillion, or about 96% of GDP, by 2028; a situation which would have “serious negative consequences for the budget and the nation”. Yet, whilst he backed up his angry words on Syria with action, an apparent softening in the Sino–US tariff tit-for-tat – initiated by China – helped to mollify Donald Trump, who tweeted warmly about a Chinese decision to step back from imposing a set of threatened sanctions. His comments would doubtless have been well received by Christine Lagarde, chair of the IMF. Earlier in the week, she had delivered a stinging critique of US economic policy, damning tariffs and protectionism and warning that “the system of rules and shared responsibility” which underpins the multilateral global trade system was “in danger of being torn apart”.
In the UK, Tesco reported a big jump in annual profits, as it continued its recovery from the accounting scandal of three years back – its share price rose some 7% in response. The supermarket said it had attracted 260,000 new customers over the past year, and announced pre-tax profits of £1.3 billion.
Meanwhile, a survey by HSBC forecast that the value of UK exports will expand this year at its fastest rate since 2011, boosted by the weaker pound. The survey also found that 62% of companies feel that Brexit will be positive, or at least neutral, for their business. However, ONS figures released on Wednesday showed that UK manufacturing declined by 0.2% in February, the first time monthly output has fallen since March last year. The National Institute of Economic and Social Research estimated that the bad weather in late February and early March is likely to have reduced economic growth to 0.2% in the first quarter.
As the dust settles on another last-minute rush to beat the tax year-end deadline, it’s worth remembering that financial planning should be a year-round activity, and that taking action sooner rather than later can have benefits. Investing your annual ISA allowance early in the tax year can get your money working harder for longer and provides the peace of mind that you have avoided any end-of-year panic.
Furthermore, new data from the Financial Conduct Authority underlined the need for individuals to more frequently review their financial plans for retirement. The research revealed that, among those contributing to a pension, 53% have not reviewed how much their pension pots are worth in the past 12 months. Over a quarter of people aged 55 and over and not retired do not know the size of their pension savings. Nearly half admitted that they do not give their pension much thought until they are two years from retirement; while eight in ten people with a defined contribution pension said they had not considered how much they should be paying into it to maintain a reasonable standard of living in retirement.
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