Market Bulletin – Auf Wiedersehen – Monday 24th September 2018

For this week’s news bulletin at Wellesley, we cover the cool rebuke Theresa May’s Chequers plan received in Salzburg, as well as exploring why US stocks have struck a fresh record despite a further round of trade tariffs.

So long, farewell…

This week, Theresa May faced her own farewell moment in the very theatre where the von Trapp family famously sang “So long, farewell, auf Wiedersehen, good night” in the 1965 classic, The Sound of Music. The 27 other EU national leaders present at the Felsenreitschule theatre in Salzburg rejected her ‘Chequers plan’ for Brexit, with one EU official reportedly saying that May had been wrong to put all their eggs in that particular basket.

Overall, the gathering gave rise to more questions than answers, just weeks before the UK and EU need to agree a withdrawal deal, ahead of the formal withdrawal on 29th March next year. Donald Tusk commented that, unless the UK government presents an acceptable solution to the Irish border question by the mid-October summit, there will be no November gathering to finalise the deal. But the Prime Minister later told Leo Varadkar, the Irish taoiseach, that an Irish border plan wouldn’t be feasible before mid-October. It is perhaps no surprise, then, that there is talk of bringing the Budget forward a few weeks, in order to shield it from the politics of exit deals.


“We are at an impasse,” May later declared. Her comments pushed the pound to its biggest fall versus the dollar in 11 months. The bond market also recoiled, while the odds on a no-deal Brexit shortened to around 5/4. The Labour leadership’s decision to back its members, should they vote for a second referendum this week, only added to the mounting pressure, as several Cabinet members started to argue for ditching the Chequers plan in favour of a Canada-style deal (the removal of most tariffs but potentially no passporting for services).

News back at home didn’t offer the Prime Minister much relief. More than 80% of UK manufacturers said they were unprepared for a no-deal Brexit, according to a new survey published by EEF, an industry body. Employer federations for the haulage, housebuilding and hospitality sectors all complained at a new government immigration plan that favours high-skilled migrants at the expense of lower-skilled foreign workers. There were also reports that some multinationals have begun stockpiling products and parts in the UK.

“Fears of a no-deal Brexit are rising,” said a report published by Loomis Sayles, manager of the St. James’s Place Investment Grade Corporate Bond fund, early last week. “We believe an agreement will be needed by January 2019 at latest … [and] the UK’s economy would likely take a bigger hit from a no-deal Brexit than the EU.”

Outside the UK

The FTSE 100 enjoyed a stronger week, reflecting both the falling pound and exposure to energy companies and banks – the latter also buoyed European stock markets.

It was also a good week for Japanese stocks, which struck a four-month high on Friday, following on from Wall Street’s own successful run the day before. Banks and insurers led the rally, among them Sumitomo Mitsui Trust Holdings and Mizuho Financial Group. “The recent interest rate rise isn’t yet priced into the stock prices of Japanese banks,” said Yoshi Ito of Nippon Value Investors, manager of the St. James’s Place Japan fund. “In our own portfolio, the valuations of Sumitomo Mitsui Holdings and Mizuho Financial Group remain attractive in terms of price-to-book and earnings, while they still offer a good dividend yield of 3%.”

It could have been a tougher week in China, given the White House’s decision to impose a further $200 billion in tariffs on Chinese imports. Beijing retaliated by imposing its own tariffs on $60 billion of US imports and cancelled the next round of talks. The renminbi and Chinese stocks dipped on Thursday, but the Shanghai Composite index ended the week higher; and the currency even recovered most of its losses on Friday, in part because the US tariffs had been set at a lower level than initially feared.

Investors in the US clearly weren’t too bothered by developments last week, as the S&P 500 struck another all-time high, boosted by energy and technology companies. It’s also notable that investment by S&P 500 companies increased to $341 billion in the first half of the year; should that rate persist throughout 2018, it will mark the highest level of corporate capital expenditure in 25 years.

Nevertheless, ten years on from the last financial crisis, some are concerned that markets risk overheating and that indebtedness worldwide remains at elevated levels. The latter has all sorts of ramifications, not least in emerging markets, where companies have been encouraged for years to borrow in dollars – a much stronger dollar has since increased their debt burden in local currency terms.

Inflation fears loom

One of the major concerns for the market is inflation, which has only gradually begun to reappear since the financial crisis. Last week, data showed that inflation in the UK rose to 2.7% in August, above expectations. Prices of theatre tickets, ferry trips and new autumn clothing ranges were among the most heavily affected. While the rise makes the Bank of England’s August rate rise look prescient, it comes amid lacklustre growth and hits stricken cash savers still harder.

A report released by Moneyfacts last week showed that few providers have passed the full August rate rise onto savers – increases fell far short of the 0.25% increase introduced by the Bank of England. In fact, the average no-notice rate has risen by a mere 0.06% over the past month and now sits at 0.58%. The notice equivalent now sits at 0.94%, meaning a rise of 0.10%. It is a similar story for no-notice and notice Cash ISAs, up to 0.87% and 1.09%, respectively. “Despite there being two base rate rises in the last year, the market has barely recovered from the rate cut two years ago,” said the report. In this light, savers might want to consider their options.

Loomis Sayles and Nippon Value Investors are fund managers 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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