Market Bulletin – Downfall – Monday 17th September 2018

For this week’s market bulletin at Wellesley, we look at how growth, reform and stocks have fared 10 years on from the signature moment of the financial crisis.

Ten years on…

It has been a decade since one of the most shocking moments of the global financial crisis, when 158-year-old US bank, Lehman Brothers, filed for bankruptcy. Lehman’s bankruptcy filing was (by more than $300 billion) the largest in US history. The following trading week was particularly tumultuous: the S&P 500 Index dropped 28%: from 1,255 points on 15 September 2008 to below 900 on 6 October 2008. The effects were still being felt in 2009 – in March it hit an intraday low of 666.

Lehman’s demise also offered a timely reminder that politics still mattered in markets. Hank Paulson, US Secretary of the Treasury at the time, faced pressure from the financial sector to step in and help the troubled lender, and pressure from elsewhere to refrain from intervening (Paulson chose the latter).

Crisis creates opportunity

The crisis led to many investors selling up, leading to paper losses becoming all too real. However, this was not the case across the board. On the day of the Lehman bankruptcy, 15 September 2008, Nick Purves of RWC Partners, who still manages the St. James’s Place Equity Income fund, commented: “One thing is certain; when we are through the current problems, a powerful rally will ensue… Crisis creates opportunity because, when the market is ruled by fear, investors’ decisions are driven by emotions, not fundamentals and this enables me to pick up good assets at low prices. It happened in 1998 and 2002 – I believe we have the same opportunity today.”

He was not wrong. Last Friday, the S&P 500 closed at 2,907 points, 2.3 times higher than its close on 15 September 2008, and more than 4.3 times higher than its mid-crisis intra-day low in March 2009. The FTSE 100 ended last week up at 7,304 points, more than double its mid-crisis low of 3,530 in March 2009.

Purves himself took the opportunity to buy stocks when the market crashed. He said: “We have been surprised by the extent and the duration of the rally, which has been driven by a continuation of the ultra-aggressive actions of the world’s central banks. Stock markets have enjoyed a long ‘Goldilocks’ period of healthy profit growth and low interest rates. The most spectacular returns in the portfolio over the period have come from consumer cyclicals such as Next, and from financials, which were priced for financial distress.”

How the US stands up globally

Looking back, the US appears to have responded to the crisis more decisively that Europe, shown in the respective dominance of its major banks. The US also enjoyed a far stronger recovery. Last week, private sector wage growth struck is at its highest level since 2009, and unemployment benefits were at their lowest level since 1973. The S&P 500 is up almost 8% for the year, while many emerging markets are in bear territory and the FTSE 100 is down a few points.

Yet this doesn’t necessarily translate into positive news for international relations. Last week, China’s trade surplus with the US hit a record high, spiking above £30 billion a month and making another round of US tariffs more likely, despite reports of Beijing showing greater flexibility in talks. inflation rose more slowly than expected in August, but is still a concern – should it rise more sharply, the Federal Reserve is likely to feel still more pressure to act.

The spectre of midterm elections is looming, offering the possibility of the Democrats winning the House or the Senate, or both. An analysis by Bank of America Merrill Lynch (released last week) shows that market outcomes are more positive if the House and Senate remain Republican. Beijing is evidently concerned by developments in Washington, perhaps especially in light of economic indicators in China. Last week came news that investment in factories, rail and other infrastructure projects in China has grown at its slowest pace in more than 25 years.

Chequers challenge

This week, market attention was firmly focussed on Theresa May – specifically whether she could successfully cut a withdrawal deal with the EU. The Prime Minister was bolstered by the failure of the influential pro-Brexit European Research Group, headed by Jacob Rees-Mogg, to deliver its own plan for Brexit. Meanwhile, a YouGov poll published last week showed an ever-larger proportion of Brexit voters regretting their choice, while Mark Carney said the Chequers deal would deliver a £16 billion boost to the economy; both developments should help Mrs May win support for her Brexit solution. However, a new challenge emerged over the weekend as Emily Thornberry, Shadow Foreign Secretary, warned that Labour MPs planned to vote against the Chequers deal.

Indicators across Europe offered little in way of a confidence boost; industrial production fell and eurozone GDP slipped to 2.1% (annualised), having reached above 3% just a few months ago. The latest comments and reports from the European Central Bank, which left rates unchanged last week, suggest it will keep rates on hold through 2019 and only raise them in 2020. Greek bank shares dropped to a two-year low, but European shares more broadly ended the week up.

Signals in the UK were mixed, as long-awaited pay growth increased to its equal-highest pace since 2008. The Bank of England voted unanimously to leave interest rates on hold, however, on disappointing growth and business optimism trends. Deutsche Bank also stepped up plans to move hundreds of billions of assets out of London to Frankfurt.

The Budget looms

Attention in the UK is increasingly turning to the forthcoming Budget, and to what may yet be targeted by the Chancellor to pay for his pledge to provide funding for the NHS. An area which might be on the cuts hit list is tax relief on pension contributions. It was perhaps significant, then, that influential former government minister, David Willetts, said last week that it would be unfair to ask working people to fund pensioner benefits, especially now the median pensioner income is greater than the median working-age income.

Concerned that the forthcoming increase in the minimum contribution for automatic enrolment to 5% will encourage opt-outs, Willetts proposed incentivising automatic enrolment by using National Insurance contributions from pensioners’ income. This should only affect wealthier pensioners, he suggested, but any such move would have significant implications for retirement planning. Here at Wellesley we will be keeping a close eye on any developments and how it might affect our clients.

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 or Wellesley.

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