Last week further solidified the 2018 trend of growing divergence between global markets. The US rocketed ahead as emerging markets recoiled. Meanwhile, Europe appeared to be finding its own, unhappy medium.
The US economy surges ahead
Despite a gentle decline last week, the S&P 500 has enjoyed a strong year so far, rising almost 8% in total. Much of the increase can be attributed to the successful technology sector, the best-performing sector on the S&P this year, which now accounts for more than a quarter of the index’s market share.
Last week, Amazon became the second company in history to top a trillion dollar market valuation, only a month behind Apple. The former has gained $520 billion in value in just a year – equivalent to the GDP of Poland – and now controls almost 50% of US retail e-commerce sales. In comparison, Facebook and Twitter have both struggled this year, perhaps due to concerns over whether there was Russian interference via social media in the US elections. Despite this, Twitter’s share price is still up for the year.
US domestic indicators continued to perform strongly last week – a US manufacturing index registered its second strongest rise since the 1980s. Moreover, the US jobs report showed August wage growth of 2.9% and jobs growth of 201,000. Some of these positive signs have been attributed to the Trump administration, particularly the tax cuts signed into law last year.
Companies feel the effects of politics
It is becoming harder for companies to keep politics at arm’s length, evident in Nike’s decision to run an advert featuring Colin Kaepernick last week. The leading American football quarterback has drawn attention over his decision to kneel during the national anthem before matches in protest at police brutality – Trump has been among those to publicly criticise his actions. Nike’s decision divided opinion and garnered the company plenty of publicity; its share price dropped almost 3% as soon as trading started last Tuesday.
David Levanson of Sands Capital, co-manager of the St. James’s Place Global Growth and Global Equity funds commented: “Nike’s controversial marketing campaign will create a tailwind for the business in both the short and long term. The campaign’s divisiveness elevates its visibility and effectiveness. It fits well with Nike’s corporate strategy, which is increasingly focused on urban millennial consumers – this consumer segment values virtue-signaling products and brands…If Nike can increase its brand affinity with core customers, we expect it will grow its revenues and earnings over time.”
The effects of White House policies are also being felt by other companies, most notably due to new trade tariffs (or tariff threats). US protectionism hit both Canada and China last week – neither of which looks likely to come to a deal with the US at the end of current talks. China is seeking to prevent the US imposing a further $200 billion in tariffs on imports. Meanwhile Canada is currently seeking to agree terms for a successor deal to NAFTA with the US and Mexico, who have struck an initial agreement already.
Emerging markets recoil
In contrast to the US’s strong performance, last week proved turbulent for emerging markets, partly due to the aforementioned trade tensions, and partly due to ongoing internal issues. Attention is increasingly turning to Latin America; the MSCI Emerging Markets Latin America Index has dropped almost 15% in just a month. For one thing, the US-Mexico deal may be meaningless with Canada. But investors are also increasingly concerned by developments in both Brazil and Argentina. The B3, Brazil’s leading stock index, has fallen significantly this year, while the currency is down around 20%. “We feel that there is room for more volatility as fiscal constraints weigh heavily on the country’s growth prospects,” said Polina Kurdyavko, portfolio manager at BlueBay Asset Management and manager of the emerging market debt element of the St. James’s Place Strategic Income fund. “For us to turn more positive on Brazil, we would need to see a deeper change in the government.”
In Argentina, despite vigorous attempts of Mauricio Macri, they are in the midst of a currency and debt crisis. Last week, Macri imposed new austerity measures in a bid to save costs, centralise power and persuade the IMF to grant accelerated debt relief. “The government recognises that fiscal adjustment is not ideal policy, but [the taxes involved] are easy to collect and claw back some of the windfall gain that commodity producers in particular have accrued from the peso depreciation,” said a BlueBay report. “The government’s external funding requirement is manageable if IMF disbursements are brought forward.”
Europe is caught in the middle
With the gap between US and emerging markets widening, Europe appears to be finding an unhappy medium. Last week the eurozone economy had slowed slightly in the second quarter, rising just 1.5%, versus a 4.2% rise for the US. In the UK, second-quarter growth rose to 0.6%, aided by services figures, while manufacturing numbers disappointed. Meanwhile, a Treasury leak of no-deal Brexit contingency reports warned of air and rail disruption, risks to the private sector and budget changes.
The FTSE 100 dropped over the week, hitting a six-month low on a rally for sterling on Thursday and Friday; the rally followed news that Michel Barnier was now willing to discuss Brexit backstops. Mining companies, housebuilders and banks performed particularly poorly. “There’s an awful lot of noise, which means there’s likely to be currency volatility as we approach the end of the year,” Chris Ralph, Chief Investment Officer at St. James’s Place, told Radio 5 last week. “It’s hard to see sterling appreciating much while there’s so much uncertainty.”
UK pension woes
Last week also brought news that millions of workers are “sleepwalking” into retirement with pensions that will pay out less than the minimum wage. The report by the Office for National Statistics reported that the number of active occupational pensions rose from 13.5 million just two years ago to 15.1 million in 2017, as a result of auto enrolment. However, the same report showed a troublingly abrupt drop in the average private sector contribution rate in defined contribution schemes – which had fallen from 4.2% in 2016 to just 3.4% in 2017.
BlueBay and Sands Capital are fund managers for St. James’s Place.
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