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Fragile China

Market Bulletin - Fragile China?

27 July 2015

Equity and commodity markets retreat as weak Chinese data fuels concerns over global growth prospects.

Equity markets in the UK and US again found themselves under pressure as the week drew to a close, put on the back foot by disappointing company earnings and falling commodity prices. Excellent results from the likes of Google and Amazon (and this morning, UBS) were not enough to arrest the slide in sentiment caused by Apple’s figures earlier in the week. According to Thomson Reuters, of the US companies in the S&P 500 that have so far reported quarterly results, 74% have beaten analysts’ profit expectations. In Europe, the equivalent figure stands at 45% for companies in the STOXX Europe 600 Index.

The UK earnings season starts in earnest this week, with results due from major players such as BP, Shell, Centrica, Barclays and BAE Systems. On Tuesday, the Office for National Statistics is expected to reveal a return to strong growth for the UK economy – second-quarter figures are anticipated to show GDP growth of 0.7%, following expansion of 0.4% in the first quarter. Such figures will undoubtedly fuel speculation over interest rate rises, despite comments on Friday from the Monetary Policy Committee suggesting it was far too early to make swift rate changes. Andy Haldane, an MPC member considered to be a firm advocate of low rates, told the BBC that he saw no need to increase rates, as the economy is still recovering from previous damage and the problems of Greece and China still posed a threat to the UK economy.

With the Greek deal agreed, investors’ attention has turned increasingly to China, where the equity market rose for a third consecutive week, despite manufacturing data coming in significantly below forecasts for the fifth successive month. The Shanghai Stock Exchange Composite Index gained 2.9% for the week, however, increasing concerns over growth in the region triggered a fall of 8.5% in Monday’s trading – the biggest fall in the Shanghai index for more than eight years. Julian Evans-Pritchard of Capital Economics commented, “We think that recent policy easing has yet to fully feed through into stronger economic activity and expect policymakers to respond to signs of weakness by stepping up support.”

Copper-bottomed

Weak manufacturing data from both China and the eurozone fuelled concerns over prospects for the global economy. Copper prices, often held as the bellwether for industrial demand, dropped to their lowest level since July 2009, and the negative sentiment put downward pressure on commodities generally – the Bloomberg Commodity Index of 22 raw materials also stands at a six-year low. Oil prices now stand at more than 20% below the high reached in May, down 4.5% for the week at $54.52 per barrel, while gold continued to see weakness, standing at a five-year low of $1,084 per ounce. The impact of commodity price falls has seen billions of dollars wiped off market capitalisations in the resource sector, amid a level of negative sentiment rarely seen in the last 20 years.

Commodity prices have risen hugely over the last 10 years on the back of huge demand in China and emerging markets. China has almost single-handedly transformed the mining industry. However, prices have fallen as Chinese growth has slowed and, in particular, as its construction boom has stalled. Miners had responded to several years of high prices by increasing supply, which has more than met growth in demand from developing countries, but this is now putting pressure on everything from iron ore to gold.

In response to the recent market moves, Anglo American, one of the world’s largest mining groups, said last week that it would be cutting 6,000 jobs, while Lonmin also said it would cut a similar number of jobs in South Africa. Shares in Anglo American are now at the lowest point in a decade, unwinding all of the gains made during the boom years, while shares in Lonmin fell more than 17% late in the week to their lowest level ever, as the group said it would be looking to raise fresh capital and close down various operations. After enduring the most costly South African strike in history last year, the company announced it was closing several mineshafts after the price of platinum hit a six-year low of under $1,000 per ounce. UK mining stocks didn’t escape the falls: Glencore, Rio Tinto and BHP Billiton all dropped more than 3% on Friday.

Bad Apple?

Shares in Apple fell last week as investors were strangely disappointed by another set of record-breaking results and, perhaps more understandably, by a lack of fireworks over Apple Watch sales figures. The stock decreased by more than 7% immediately after the announcement, with many analysts suggesting that Apple shareholders had become too accustomed to significant earnings upgrades by the company. There was also concern over the company’s over-reliance on the success of the iPhone, as chief executive officer, Tim Cook, interestingly provided no solid sales figures for the Apple Watch.

The largest company in the world reported strong sales of its signature phone in its third-quarter financial report – 47.5 million iPhones, up more than a third year-on-year. Sales in China were particularly robust, doubling from last year. Apple Mac sales reached 4.8 million units, up 9%, and the company sold 10.9 million iPads, down 18%. However, sales of the Apple Watch – its newest product – were not reported separately, for the first time since its launch in April, but were instead placed in the ‘Other’ section, along with audio equipment maker Beats. Apple actually comfortably beat Wall Street’s expectations – its earnings were four cents better than predicted – but this wasn’t enough to stave off investor disappointment, giving credibility to the views of those analysts who suggest that the stock is priced to a point at which Apple must change people’s lives with every new product and software update.

To put this into context, Apple’s results came on the same day as Microsoft reported a $3.2 billion quarterly net loss, attributable largely to charges related to its Nokia phone business, job cuts, and weak demand for its Windows operating system.

Pensions plots

Following confirmation in the latest Budget of cuts in the tax relief on pension contributions available to those with income over £150,000 from next April, speculation is building that the Treasury is looking to extend the restrictions from additional rate to higher rate taxpayers. George Osborne has already announced a further consultation on pension tax relief, which costs the Treasury around £35 billion per year. At present, the relief allows higher rate taxpayers – those who earn more than £42,386 – to save £1 into their pension for every 60p that they contribute. Officially, the Chancellor is still considering all options, but some senior figures are reportedly pushing for a limit to the relief allowed for higher earners.

Ros Altmann, the pensions minister, is understood to support a single-rate system. A single rate of 30% tax relief has been mooted – a change which, according to the Pensions Policy Institute, would be broadly cost neutral. There are those who propose a further cut to 20% on every contribution, saving the Treasury a further £13 billion a year – money it sorely needs for other priorities. Osborne’s Budget speech also suggested an ISA-style pension arrangement, where money put into a pension pot comes from income already taxed but money taken out at retirement is tax-free.

“All the signs are he has not finished tinkering with pension legislation,” observed Ian Price, divisional director at St. James’s Place. “The message is simple: consider saving as much as you can as soon as you can into your retirement fund because the future is uncertain.”

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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