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Market Bulletin - Pound in your pocket

27 March 2017

Financial developments were rightly overshadowed by the brutal attack in Westminster, and by the human losses suffered.

The sad events in Westminster held the headlines last week, as Londoners absorbed the impact of what had taken place. Markets offered a brief response, but are ultimately ill-equipped to do so. Some events are simply too far above their remit.

Nevertheless, the FTSE 100’s major shift came on Wednesday and it ended the trading week down 1.2%. A handful of significant corporate announcements played their part in the index’s performance over the week. On the positive side, Vodafone confirmed a merger of its Indian business with Idea Cellular, the largest local mobile operator, potentially putting a cap on a long-running price war and creating the country’s largest operator, with 400 million users on its books. Thus, while it sank alongside UK-listed peers on Wednesday, the effect of the merger news was enough for the stock to cancel out its losses out the following day.

Not all went well for UK plc, however. Royal Bank of Scotland, which is still 72% owned by the government, announced a reprioritisation of online banking and, with it, the closure of 150 branches and a cut in its full-time UK workforce by almost 500 employees.

An expensive strategic realignment tends to be an easier sell than a 3.8% fall in annual profits, which is what Next announced last week. The clothing retailer warned that the year ahead would see a further profits contraction, as it offered up bearish views on the economy and the retail sector, and warned about the risks of holding too many retail outlets. However, the company was able to reassure investors over the sustainability of its dividend programme, and many were just relieved that results hadn’t been worse – the share price rose significantly on Thursday.

“Following a series of earnings disappointments earlier in the year, investor sentiment towards Next appeared to have become too pessimistic,” said Nick Purves of RWC Partners. “Next remains a well-managed, good quality business and yet prior to the year-end results it was valued on only nine times earnings, which suggests some investors were expecting more bad news. Although the results were only in line with analysts’ forecasts, this caused a 7% jump in the share price from what was a very depressed level. Even following this rebound, the shares still appear to offer good value in our opinion.”

Taking a pounding

Retailers could also take heart at figures published last week which showed a 3.7% annualised rise for retail sales in February. Yet uncertainty continues to loom from several angles. For one, the new minimum wage comes into effect next month, and there are already signs of protective action – some 3,700 workers have been made redundant from major UK retail chains year-to-date. The wider economic context offers important perspective: wages are currently rising more slowly than prices.

Many of the pressures making themselves felt in the current economic environment stem from a single source: rising inflation. Figures published last week showed inflation at 2.3%, significantly above the last reading of 1.9%, and above the Bank of England target. It is now fifty years since prime minister Harold Wilson used a television address to reassure the public that, despite a sterling devaluation, the “pound in your pocket” had not lost its basic value. He was, of course, plain wrong.

Since June 23, sterling has lost around 16% of its value against the dollar. Ordinarily, such a shift is expected to create tailwinds for exporters and headwinds for consumers, and there is certainly evidence to make such a case. Figures last week showed that automobile output rose 8% last month – its best February in 17 years. Meanwhile, the Bank of England had forecast inflation reaching 2.05% by the end of March – it is already a quarter percentage point above that level. Fundamentally, inflation is no longer confined to food and fuel, but appears to be spreading itself more widely. Prices of goods were 2.8% higher in February (annualised), the steepest rise since March 2012, although petrol was up by more than 18%. Two reports published last week, one by IHS/Markit and the other by YouGov/CEBR, found that consumer confidence had slipped in March.

Rising inflation is creating a growing problem for savers, as well as for those struggling to get by. Data published by Moneyfacts last week showed that only one UK cash account, out of 793 available, now provides a rate of return that beats inflation. Not a single Cash ISA currently achieves that fundamental requirement. The average return on a Cash ISA so far this year (to 22 March) has been just 1.01%.

If governments can’t control inflation, they can at least control pensions policy – to a degree. Last week the Treasury reportedly ruled out plans to cut the rate of tax relief on pension contributions for higher earners. However, reports at the weekend suggested that chancellor Philip Hammond is instead leaning towards a further cut to the annual pension allowance, potentially to £30,000. Such a move would be seen as less of an attack on the middle classes, but would still help to cover some of the £2 billion revenue shortfall created by his climbdown on National Insurance contributions for the self-employed.

There were further reasons to think hard about retirement last week, as a paper published by the Department for Work and Pensions suggested that workers under the age of 30 might not receive their State Pension until the age of 70. Yet any change is likely to be introduced gradually, meaning that incremental rises could yet materialise far sooner. A separate report by John Cridland, also published last week, said that those under the age of 45 may have to work until 68. Attempting to forecast pension policy changes may well be a mug’s game, but the direction of travel is increasingly apparent. Individuals who want to be in control of their own retirement need to save harder and for longer. That starts by making the best use of ISA and pension allowances in the remainder of this tax year and beyond, while they are still available.

Losing momentum

Markets around the world continued to lose momentum over the week: the Nikkei 225 dropped by 1.3% and the Eurofirst 300 by 0.52%. Nevertheless, eurozone watchers could be heartened by IHS Markit figures released on Friday, which showed purchasing managers’ indices for manufacturing and services reaching six-year highs, suggesting the currency area’s recovery may be gathering pace.

Investor attention, however, remained largely trained on the US, as Donald Trump suffered his first defeat at Congress over his plan to amend the Affordable Healthcare Act (known as ‘Obamacare’), and as hopes for an imminent policy paradise for business began to fade a little. The S&P 500 fell 1.25% - its worst week since Trump’s election. There were also concerns last week over the FBI’s public announcement that it was investigating links between the Trump campaign and the Kremlin.

Nevertheless, the UK may succeed in wresting some attention in the coming week. On Tuesday, the postponed parliamentary vote over whether to recommend a second Scottish independence referendum will take place at Holyrood, just a day before the UK prime minister is due to trigger Article 50 of the Treaty on European Unity. Much is at stake in this run of events, but whether it changes the value of the pound in your pocket remains to be seen.

 

RWC Partners is a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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