Market Bulletin - Gaining ground
The world’s leading index ended at a new high despite a fresh missile test by North Korea, while the Bank of England suggested a rate rise was imminent.
It was a week of big numbers: 2,500 – the S&P 500’s record close on Friday; 3,700 – the flight distance (in kilometres) of the ballistic missile North Korea fired over Japan’s Hokkaido province into the ocean, also on Friday; and 1,512 – the diameter (in feet) of Apple’s new ring-shaped headquarters in California… longer than the Empire State Building is high.
The three were not unrelated. Premature relief came early in the week that North Korea had apparently not gone ahead with its plans to carry out another test, helping the world’s leading index to continue its upward trend. Apple’s launch of the iPhone 8 failed to move markets, because the company was also obliged to announce a delay to the revolutionary iPhone X (and there was even a technical failure at the launch event). A number of the company’s leading suppliers suffered sell-offs, among them the UK’s own Dialog Semiconductor.
Yet despite a mediocre week on the market, Apple’s performance this year has been exhilarating – the world’s largest listed company has risen almost 40%, to the point where it accounts for close to 4% of the S&P 500. (Facebook, Amazon, Apple, Netflix, and Alphabet (Google’s parent) – the FAANGs – now make up more than 12% of the index.) The FAANGs also account for a vastly outsized share of the index’s 2017 growth. Apple investors remain hopeful it won’t be long before the technology giant becomes the first trillion-dollar listed company.
At close last Friday, the S&P 500 completed 3,112 days since its last 20% decline – the technical definition of a bear market. It is currently enjoying the second-longest run in its 94-year history, a run which has seen it gain close to 270% – last week the index rose 1.5%.
On Friday, North Korea duly conducted its missile test, which added to nerves but failed to make a noticeable dent in US stock prices. Indeed, Japan’s own Nikkei 225 shot up 3.3%. Yet market insouciance should not simply be taken to mean that it is business as usual in global geopolitics. Earlier this month Dennis Rodman, the former basketball star, raised eyebrows when he told Good Morning Britain that he wanted to reconcile his friends Donald Trump and Kim Jong-un. Rodman, who once head-butted a referee and declared a few years ago that he was marrying himself, has since 2013 been a regular skiing and karaoke buddy of the North Korean leader – and recently gave him a copy of Donald Trump’s bestselling book, The Art of the Deal. Over the summer, a leading North Korea expert, speaking to Time magazine, said of Rodman: “He’s not the best ambassador… but it’s who we have.”
In such scenarios, market-pricing models only get you so far. As ever in investing, avoiding strong geographical biases helps to provide at least some protection, and all the more so when any of a number of markets might ultimately be impacted. According to Clyde Rossouw of Investec Asset Management, there are two main ways to avoid excessive exposure to country-specific risks: invest in local companies across several different jurisdictions, or invest in companies that themselves operate across several jurisdictions. He takes the second approach.
“Because the business is strong, you hope that the company’s geographical footprint allows them to make money,” says Rossouw. “It’s very rare that we’ve been willing to take on individual country exposures in terms of investing in companies that are solely dependent on one market for their profits. So we don’t have to worry as much about the geopolitical turmoil as we do about whether the businesses are strong and sustainable.”
The US, meanwhile, is benefiting from strong economic currents back at home. Figures released last week showed that US incomes rose by 3.2% in 2016; while the number living in poverty fell by 2.5 million, taking it almost down to pre-financial crisis levels. Separate data showed that new job openings reached a record high in July. The country’s economic recovery since the crisis is now the third-longest US recovery on record.
Employees in the UK are also enjoying a jobs boom, with figures showing employment at its highest level since 1975. Yet the improvement was overshadowed by the spectre of inflation, which last week struck a new high of 2.9%. By UK standards, that’s a high number – if it reaches 3%, the governor of the Bank of England has to send a letter to the chancellor of the exchequer explaining the Bank’s failure to hold it down. It is also bad news for wage-earners, since wage inflation remains far behind consumer price inflation.
The Bank of England’s Monetary Policy Committee still voted 7–2 to leave interest rates on hold, but the tenor of its report undoubtedly marked a shift in its outlook. “Some withdrawal of monetary stimulus is likely to be appropriate over the coming months,” it said. Expectations of a rise in November increased as a result, and the pound went up in value, reaching a one-year high against the dollar on Friday and a two-month high against the euro. The FTSE 100 fell 2.2% as a result, while the Eurofirst 300 rose 1.3%.
Aside from earners, the most immediate UK victims of the rise in inflation are those with large cash holdings. Data released by HMRC shows that an increasing number of UK savers are switching out of Cash ISAs, while contributions flowing into Stocks & Shares ISAs have been rising. Although the shift suggests growing awareness of the cost of inflation on cash holdings, Cash ISA subscriptions in the last tax year were still worth £39.2 billion – that’s a lot of money losing its purchasing power.
As wage pressures mounted, Theresa May last week agreed to end the public sector pay cap (of 1%) after its seven-year freeze. The announcement included a 2% annual pay rise for the police, but the Trades Union Congress is set to campaign for an increase of at least 5% for its five million workers. Yet the UK government had greater domestic concerns last week, as a terrorist attack on the London Underground left 29 people injured.
That £350 million
It was a significant week for the UK’s Brexit plans. The prime minister succeeded in getting her EU bill through the House of Commons at the first reading by a majority of 36 votes. The bill shifts 12,000 EU regulations onto the UK statute book; but MPs have proposed 59 pages of amendments, including a request for the UK’s membership of the single market and customs union to be extended.
Despite the initial boost, the prime minister faced some vocal opposition. Conservative MP Dominic Grieve, a former attorney general, described the bill as an “astonishing monstrosity”. Grieve was among the Conservative MPs supporting an amendment to require the final Brexit deal to be approved by parliamentary statute. Alex Norris MP compared that the government’s handling of the Brexit negotiation process to a “bad stag do”. The prime minister may have been more concerned, however, by an article by Boris Johnson published on Friday which argued that the UK should indeed get back its £350 million a week to spend on the NHS – as famously promised on the Vote Leave campaign buses. Sir David Norgrove, head of the UK Statistics Authority, said Johnson was guilty of “a clear misuse of official statistics”.
The government made what looked like a more mollifying gesture to the EU, by committing the UK to contribute to the European Defence Fund after Brexit. The pledge to support European security “unconditionally” marked a change in tone from earlier post-referendum declarations. Moreover, Downing Street announced that Theresa May will deliver a speech in Florence this week to update the EU on the UK’s exit plans. The prime minister’s spokesman said she would “underline the government’s wish for a deep and special partnership with the EU once the UK leaves”.
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