Market Bulletin – Soldiering On – Monday 5th November 2018

In this week’s Market Bulletin, we look back at a week defined by investor optimism, and also explore the main features of the UK Budget, announced last Monday.

Following a difficult October, strong corporate earnings encouraged a significant mood change in investors last week. As Shakespeare’s beloved comic character Falstaff once said, “Money is a good soldier, sir, and will on”. Provided the money is in the right place, his words certainly ring true. Notably, Falstaff made his maiden appearance just before the opening of the first stock market; the Dutch East India Company went on to pay out dividends worth 1,600% of its value over the subsequent two centuries.

Red October

However, looking in the short term, October was undeniably a very difficult month. Dubbed ‘Red October’, it saw the FTSE All-World suffer its worst trading month for six years. This instability was felt globally: the Bank of Japan was prompted to provide further support to the struggling TOPIX. In the US, volatility on the index jumped to its highest level since March, the S&P 500 dipped into negative territory for the year twice in the past fortnight, and US stocks recorded their greatest number of negative days in a month since the depths of the financial crisis.

Increased investor optimism

As we moved into November at the end of last week, it was clear that there had been a sea change in investor moods, as corporate earnings reminded us that companies are still making money. This was the case across the world: the S&P 500, FTSE 100 and Japan’s TOPIX has all risen by the end of the week.

Jim Henderson of Aristotle, manager of the St. James’s Place North American fund, commented: “Since 1980, we have had 36 market corrections – defined as a decline of 10% or more – averaging a decline of 15.6% and lasting three to four months, but only ten such corrections resulted in bear markets. Since the financial crisis of 2008, the market has been remarkably devoid of volatility and we are only now getting back to normal. But trying to time the market is futile; markets are generally driven by corporate earnings, which at this stage of the cycle appear healthy.”

This was supported by second quarter US growth coming in at 3.5% last week, making it the US’s fastest-growing half-year since 2014.

Political moves

Last week Donald Trump tweeted positively about a “long and very good” chat with Chinese President Xi Jinping, and stressed the potential for trade deals at the forthcoming G20 summit in Argentina. This prompted an S&P 500 rise (ending up 1.5%), led by semiconductor and industrial stocks, which are hyper-sensitive to US and China trade relations. Even if the tweet was related to this week’s midterm elections, investors took confidence from other positives: the S&P 500 companies are set to report 26% annualised profit growth for the third quarter – the best since 2010, and Friday’s US payrolls report showed 250,000 new jobs and 3.1% wage growth – the highest since 2009.

However, these gains were outshone by Brazil’s B3 index rises last week, following the election of Jair Bolsonaro as President. His economic liberalism appeals to investors and took Brazil’s main index to a new high. Polina Kurdyavko of BlueBay, the emerging markets debt manager within the St. James’s Place Strategic Income fund, said: “His party gained more presence in the National Congress, but we are yet to see if it translates into better policy-making. Overall, we like Brazilian corporate credit, especially distressed assets and merger and acquisition candidates.” Trump was quick to congratulate the new President, seeing the new leader of South America’s largest economy as a crucial ally.

Uncertainty in Europe

On the back of stinging federal elections, German Chancellor Angela Merkel said she would not seek re-election as party leader in 2021. Although some companies, notably Volkswagen and ING, reported strong results, the eurozone is now growing at its slowest rate in four years – third-quarter growth was a mere 0.2%. Furthermore, relations between Rome and Brussels were still tense last week. On Tuesday, the European Commission rejected Italy’s draft 2019 budget and gave Rome a three-week deadline to submit a new fiscal plan – or face an ‘Excessive Deficit Procedure’, which could lead to sanctions.

Budget bliss in the UK?

Attention in the UK last week was firmly on the ramifications of the 2018 Budget, delivered by Chancellor Philip Hammond in the House of Commons last Monday. It may not have been a show-stopper, but Hammond did pledge that the “era of austerity is finally coming to an end”, and also announced Income Tax cuts a year early.

“This was an astute political Budget and one which underlined the significant economic improvement that is unfolding here in the UK but which markets, politicians and commentators have, thus far, refused to acknowledge,” said Neil Woodford, manager of the St. James’s Place UK Equity fund. “It confirms many of the economic assumptions that I have embedded in the portfolio strategy.”

Fortunately for higher earners, pensions tax relief was left well alone, and there was further positive news for the UK’s retirement savers who will benefit from an additional rise in the lifetime allowance from next April, meaning that many individuals will be able to withdraw a little more from their pots before being hit with the 55% tax penalty.

“It was a relatively bland affair – there was something of a relief bounce for gambling stocks on news that the gambling levy increase would be less than expected, and housebuilders benefited from the ‘Help to Buy’ scheme being extended to 2023,” said Nick Purves of RWC Partners, manager of the St. James’s Place Equity Income fund.

One significant measure was a tax on major technology platforms, such as Google, Amazon and Facebook. Yet while being popular with voters, the business impact of this may prove marginal. “Our long-term valuations already incorporate these companies ultimately paying tax broadly in line with the typical rates in geographies where these new measures are being introduced – and the announcement itself came as no surprise,” said Hamish Douglass of Magellan Asset Management, manager of the St. James’s Place International Equity fund. “Given the low percentage of these taxes, the impact is low.”

The Chancellor spent a £68 billion windfall he received from improved tax receipts to deliver the largest discretionary fiscal giveaway since 2010. The Office for Budget Responsibility’s fiscal outlook, published last week, revealed that the Treasury will net an extra £400 million as a result of people paying tax on their pension withdrawals, bringing the total take to £1.3 billion in 2018/19.

Aristotle, BlueBay, RWC, Magellan and Woodford 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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