WeekWatch – Westminster chaos deepens

Monday 21st January 2019

Stock Take

Confusion reigns over Brexit

“Would it not be easier…for the government to dissolve the people and elect another?” wrote Bertolt Brecht, the German playwright, in the 1950s.

Despite Brecht’s ironic suggestion, Theresa May might in fact wish to dissolve parliament itself, after facing the biggest ever Commons defeat for a UK government and another no-confidence vote last week. And given the amount of ‘unknowns’ when it comes to Brexit planning, no one can really be certain that she won’t dissolve parliament, and therefore trigger an election.

It appears that power is flowing inescapably from Prime Minister to parliament, which remains as divided on Brexit as the nation it represents. Theresa May has held talks with MPs since the Commons defeat, but offered no significant concessions – clearly pinning hopes on Brussels offering some kind of Irish backstop get-out clause. She has to propose her ‘new’ deal to the Commons today, and face yet another vote, which, Downing Street has today indicated, will likely be delayed until February.

Now that the government’s plan has been rejected in the Commons, the Labour party could yet play kingmaker to one of the various Brexit plans on offer. However, it appears to be staying firmly on the fence; last week there were only 71 Labour MPs willing to publicly back calls for a second referendum. Meanwhile, officials in Brussels are reportedly unanimous in assuming that the UK will choose not to leave the EU on 29 March (less than 10 weeks away).

Market resilience

Despite the confusion over Brexit, markets do not seem too troubled (yet). Sterling, which is usually the punch bag for Brexit uncertainties, is up 2% against the dollar over the past month, possibly buoyed by waning expectations of a hard Brexit. The FTSE 100 ended the week level, perhaps helped by UK inflation falling to a two-year low in December, which lowers the chances of interest rate rises.

“Sterling and UK equities, especially domestically orientated shares, have been shunned by overseas investors, providing scope for some good returns if a sensible deal eventually emerges,” commented George Luckraft of AXA Investment Managers.

Debt fears loom

If there is a major financial worry in the UK beyond the nature of Brexit, it should perhaps be debt. Since 2017, every part of the UK economy has spent more than it has earned – households, businesses and government alike. Not to mention the housing market, which has just shown the most negative outlook this century. This is perhaps a stark reminder that investors can never afford to ignore the balance sheets of the companies they invest in.

Speaking of debt, last week the Institute of International Finance published its quarterly Global Debt Monitor, which showed that global debt stands at 318% of GDP – a record $244 trillion. US government debt has become a pertinent concern on markets, due to Donald Trump’s tax cuts increasing the need for Treasury issuance. Yet even as the unprecedented government shutdown continued, the yield on US 10-year government debt stayed comfortably below 3%.

Moreover, US stocks enjoyed a strong week, thanks in part to some good earnings announcements by Goldman Sachs and Bank of America Merrill Lynch. Furthermore, defence stocks were boosted by the government’s announcement of a new missile defence initiative, and technology stocks also enjoyed some respite, after Netflix announced price rises.

US-China trade talks boost stocks

The most important tailwind came in the form of US-China trade talks. Stocks were especially buoyed by reports on Thursday that US Treasury Secretary Steve Mnuchin had proposed to lift tariffs on China. Despite officials quickly refuting the reports, the S&P 500 surged on Friday and ended the week up almost 3%. “Recent comments continue to suggest that a US-China trade deal is on the cards in the weeks ahead, and this impression was affirmed in our meetings with policymakers in Washington during the course of the past week,” said Mark Dowding of BlueBay Asset Management.

In China, market sentiment was also fired by The People’s Bank of China, which announced the injection of more than 500 billion renminbi ($75 billion) into China’s banking system. The move offered some relief to investors worried by news that car sales in China last year fell for the first time this century – down 4.8% on the previous year. Conversely, Huawei, the Chinese tech major, now faces a US criminal probe for allegedly stealing trade secrets and Germany decided, following wider European pressure, to block Huawei from 5G contracts.

Asian shares remain cheap relative to historical valuations and, already, there are signs this year of investors taking renewed interest in emerging markets. Another tailwind for emerging markets has been the promises of fiscal reform by the new president of Brazil, which boasts the best-performing currency of 2019.

Wealth Check

The start of the new year is a perfect opportunity to get our finances in order and to plan for the months ahead. With the end of the tax year coming up on 5th April, now is the ideal time to check that you are making the most of available exemptions and allowances – this can be instrumental in growing your wealth and ensuring a financially stable future.

One of the most obvious tax-saving opportunities is the ISA allowance. Individual Savings Accounts, also known as ISAs, are brilliant methods of tax-efficient saving, as, in short, you don’t pay tax on them. Despite this, according to HRMC, only one in five subscribers make full use of the ISA allowance. What’s more, nearly three-quarters of subscriptions are still deposited in cash, despite the near record-low returns on offer. The benefits of this type of ISA include there being no capital gains tax on profits, no tax on the interest earned and no tax on dividend income. Encouragingly though, there was a 28% increase in the amount invested into Stocks & Shares ISAs last tax year, which suggests that more savers are realising their ISA allowance could be working harder for them (source: HRMC, September 2018).

Moreover, your annual pension allowance also represents a significant tax-saving opportunity, given that personal contributions benefit from tax relief at your highest marginal rate. Unused allowances may be carried forward (unlike ISAs), but only up to three years – potentially allowing you to catch up. This is of particular importance for high earners with incomes over £150,000 who are affected by the tapered reduction in the annual allowance introduced in April 2016. This reduces the allowance to as little as £10,000 for those with an income of over £210,000. High earners have until 5 April to carry forward the £40,000 allowance from the 2015/16 tax year – the last year before the taper came into effect.

The forthcoming end of tax year is therefore the perfect opportunity for savers to make the most of their existing allowances and reliefs – particularly as speculation remains rife that the government may cut these tax breaks to fund future spending promises, such as the NHS.

In The Picture

With an OECD forecast that by 2030 Asia will represent 66% of the global middle-class population and 59% of global middle-class consumption, it is clear that long-term investors can’t afford to ignore this area of the world. Innovation looks set to trend in the same direction: even today, four of the world’s 10 largest information technology companies are headquartered in East Asia, according to Fortune.

The Last Word

“The ability to foretell what is going to happen tomorrow, next week, next month, and next year – and the ability afterwards to explain why it didn’t happen.”

– Winston Churchill, when asked what qualities a politician requires.

 

The information contained is correct as at the date of the article.

AXA Investment Managers and BlueBay are fund managers for St. James’s Place.

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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