Market Bulletin – Turning Tides – Monday 1st October 2018

For this week’s news bulletin at Wellesley, we are looking at the global climate, and the countries in which investors are most interested. Current indications are that investors are being attracted to opportunities outside the United States, despite tensions in emerging markets.

Wellesley Waves

The rise of emerging markets

After a bleak start to the year, the MSCI Emerging Markets index have hinted at a possible sea-change among investors. The index has been gradually climbing since 12 September, signifying that investors might be becoming more interested in the world beyond the US’s borders.

Despite ongoing political and economic problems in emerging markets (EMs) such as Turkey and much of Latin America, there are growing signs that investors are looking at these markets with optimism. And defying the tensions with the US over rising tariffs, China is a net oil importer – the Shanghai Composite index rose in September. Last week, the Vatican announced it had reconnected with China after a 67-year hiatus; the two recognised one another’s authority and agreed to work more closely together.

All of the above developments give credence to the comments by 19th century Prime Minister, Lord Palmerston, that “Nations have no permanent friends or allies, they only have permanent interests.”

The USA economy marches on

Despite the fresh interest in EMs, the USA’s economy remains strong. Mergers and acquisitions by US companies have hit $3.2 billion globally this year – notably, last week, Comcast won a blind auction for Sky. Earnings forecasts for US companies continued to rise, and second quarter growth came in at 4.2% (annualised). This week, the S&P 500 is up 8% for the year, bolstered by the performance of Apple, Microsoft, Netflix and Mastercard. However, Facebook might be facing a significant fine of $1.63 billion from the EU watchdog, following the recent data breach affecting more than 50 million users.

The Brexit effect

The FTSE 100 gained on sterling weakness and the high price of oil, reflecting its heavy weighting towards energy companies. But the more significant news in the UK was the annual Labour Party Conference.

After Labour’s mixed messages on Brexit plans, Shadow Brexit Secretary, Keir Starmer, said that, short of a general election, Labour would reject any Chequers-style deal and support the call for a referendum – a comment which won a standing ovation. However, Shadow Chancellor John McDonnell had other priorities. He laid out radical proposals, including one that would see companies obliged to gradually pass 10% of their equity to their staff – with business groups expressing strong opposition to this.

In positive news, UK Plc is going strong; a Link report showed a record £31 billion paid out in underlying dividends in the second quarter. Blake Hutchins of Investec Asset Management, manager of the St. James’s Place Worldwide Income fund said: “It’s a good figure … but a big reason for the growth is coming from the mining sector, and … we know they cut their dividends and rebased them a few months ago when they were struggling from lower commodity prices… And now their policy is not one of progressive dividends but actually one of paying out a fixed amount of their profit after tax. This year they’re quite profitable – if commodity prices fall, those dividends can then fall in line with them. But in general, companies are growing their profits, cashflows and dividends, which represents quite a healthy outlook for UK companies in general.”

Closer to home

Figures released on Friday by HMRC showed the number of individuals breaching the annual allowance for pension savings more than doubled to 18,930 in 2016-17. The data also showed that the total value of pension contributions exceeding the annual allowance reported through Self Assessment leapt to £517 million. This represents more than three-and-a-half times the previous year’s figure.

The annual allowance is the maximum amount anyone can contribute to their pensions tax-free.  Contributions eligible for tax relief are currently capped at £40,000 a year. However, an extra measure introduced by previous Chancellor George Osborne in 2016 means that some top earners can see this limit reduced to as little as £10,000 a year.

“The taper for higher earners is far too complicated for most individuals to fully understand,” says Ian Price, Divisional Director at St. James’s Place. “It is especially tortuous for the self-employed, who typically don’t know their income until after the end of the tax year.”

This complexity means many more individuals may be caught out. Some experts are now calling for the taper to be revoked as part of the measures in the Budget. Last week, the Chancellor announced that he was bringing the Budget forward to 29 October. Look out for updates in our weekly Wellesley bulletin!

Investec and Magellan 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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