Market Bulletin – Pinball Pound – Monday 17th December 2018
Sterling was sent hurtling by Brexit turbulence and a no-confidence motion on Theresa May this week, while fears over China and banks weighed heavily on global markets.
Welcome to the final Market Bulletin of 2018. Next year will bring a new-look bulletin, named WeekWatch. We would also like to take this opportunity to wish all our clients a very Happy Christmas and New Year!
The pound feels the Brexit effect
Sterling has been particularly twitchy in recent weeks, mirroring the turbulent politics of Brexit. When Theresa May postponed the scheduled vote on her withdrawal deal last week, the currency hit an 18-month low. This set in motion a leadership challenge and a pledge by the Prime Minister not to stand as leader in the 2022 General Election (she won by 83 votes, but more than half of Tory backbenchers voted against her). After her triumph she went straight to Brussels to continue negotiating her deal terms, only to be told that meaningful amendments to the deal are not possible.
Worryingly for investors, it must be remembered that the UK’s break with the EU is bound to be a drawn-out process, given the 45 years of harmonisation and deepening ties that need to be rewired. Even the most patient and far-seeing investors struggle with such time horizons. However, there were more tangible indicators this week. UK economic growth slowed in the three months to the end of October, and car sales contracted. Mike Ashley, owner of Sports Direct, warned that November was “unbelievably bad” for UK retail. Debenhams, M&S, Next, Dunelm and Card Factory all suffered stock price falls, although the FTSE 100 rose over the week.
Philip Gadsden of Orchard Street, Manager of the St. James’s Place Property fund, commented: “Retail has two extremes that are both doing well. At one end, experiential, premium brands such as John Lewis and Cineworld are performing well. At the other end, cheap, convenient brands like Lidl, B&M and Tesco are doing well too. The problem is the companies in the middle that are neither one nor the other, like New Look and Carpetright. The other key differential for commercial property is in-town retail versus out-of-town – the former is really struggling.”
Residential property market suffers
Meanwhile, the latest Royal Institution of Chartered Surveyors (RICS) monthly survey showed the weakest period for UK residential property since 2012. But not all buildings are getting cheaper. The price of UK warehouse space has risen in recent months, as companies and public entities begin to stockpile imports. Civil servants across Whitehall have now been instructed to increase emergency no-deal planning. Last week, the Department for Environment, Food and Rural Affairs (DEFRA) advertised 90 new posts for civil servants who would staff a crisis centre in “the reasonable scenario of no deal”. Meanwhile, a new study by the U.K. Trade Policy forecast that 750,000 jobs could be lost across Britain in the event of a no-deal exit.
“The political crisis that is already imposing a meaningful economic cost on the UK will intensify over the coming weeks and continue to weigh on the value of the British pound and sterling assets,” said David Riley, Chief Investment Strategist at BlueBay Asset Management, which co-manages the St. James’s Place Strategic Income fund. “The UK is far from cutting the Gordian Knot of Brexit.”
No confidence win #2
The political crisis continued to erupt on the streets of France over the weekend, forcing the President to call a vote of no confidence just a day after Theresa May had won hers. He won far more decisively. To appease the protestors, Macron offered a partial climb-down in the form of €10 billion of handouts and extended tax breaks (not least on diesel) – however, these may push France over the budgetary limits set by the EU.
Ceasefire in Yemen
There was a surprising glint of hope for Yemen at the UN last week, where a ceasefire deal was struck for the port of Hodeidah, potentially enabling humanitarian aid to get through to those most in need. It is still early days, but it is a hopeful start.
Trade ties between the US and China are becoming increasingly tangled. Following Canada’s controversial arrest of Huawei’s chief financial officer the previous week, China upped the ante by arresting two Canadian businessmen over national security. This came in the context of the FBI warning that Beijing is stealing US technology. “I believe this is the most severe counterintelligence threat facing our country today,” said Bill Priestap, the agency’s top counterintelligence official. “Every rock we turn over, every time we’ve looked for it, it’s not only there, it’s worse than we anticipated.”
Some US indicators made for happy reading, not least news that US job openings crested above seven million again in November. Consumer confidence in the US is close to multi-decade highs. In financial circles, Sino–US interaction continued to grow, as Tencent – a Chinese technology giant – listed on the New York Stock Exchange; the market values the company at $21.3 billion, and the listing is one of the largest on the index since that of Alibaba in 2014.
Yet the week on markets ended on a sour note. Financial stocks in the US struggled last week and are now some 20% below where they began the year, on concerns over growth and central bank policies. Concerns are also growing over non-financial corporate debt in the US, which is at an all-time high of nearly $10 trillion – or 50% of US GDP. Moreover, sluggish Chinese retail and industrial data released on Friday only added to investor nerves. The S&P 500 ended the week down, as did Japan’s TOPIX and the Shanghai Composite index.
BlueBay and Orchard Street are fund managers for St. James’s Place.
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