Monday 11th February 2019
Growth continues to slow in China
Last Tuesday heralded the Chinese Year of the Pig, an animal traditionally associated with luck and wealth. That said, the pigs themselves would tend to disagree – more than half the pigs eaten worldwide this year will be consumed in China, while nearly half the world’s feed crops will end up in the troughs of China’s pig population of 433 million.
Concerning news arrived last week that most analysts believe the official China’s headline growth numbers are inflated, perhaps owing to China’s ambitious pledge to double GDP between 2010 and 2020. According to state-run paper Economic Information Daily, China’s economic growth could slow to just 6% in Q, which would be the slowest pace of growth since quarterly readings began.
Moreover, last week’s Chinese factory production figures pointed to declining demand for Western imports. All the same, global reliance on China continues to rise; Japan now exports more to China than to the US (see In the Picture section). Nissan’s announcement that it would not build the new X-Trail at its UK plant was probably more to do with the Japanese carmaker’s long-term geographical priorities than it was about Brexit.
Meanwhile, Toyota announced a fourth quarter profits slide of 81%, annualised. The company spoke out against a no-deal Brexit; however, the shocking results were arguably less to do with sales than with Toyota getting burned by dabbling in stock markets. In its core business, Japan’s biggest carmaker saw a 15% rise in Asia sales, even as US sales slipped. Yoshihiko Ito of Nippon Value Investors, Manager of the St. James’s Place Japan fund, said: “Toyota’s recent strong business results in the Chinese market were partly attributed to the sales increase in its hybrid vehicles, of which the company has expanded the product line. The company forecasts an 8% increase in sales in the Chinese market to 1.6 million units in 2019, reflecting strong sales of hybrid vehicles. Toyota is expected to maintain its strong sales in the Chinese market by increasing local production.”
USA-China trade fears persist
The TOPIX index fell through the week, however, reflecting ongoing fears over the future of US-China trade. Donald Trump’s comment that he would not be meeting with the Chinese President ahead of the next sanctions deadline did nothing to compound traders’ worries. The S&P 500 ended the week essentially flat, as a corporate earnings-driven run finally petered out. That said, if the current US expansion continues past 120 months later this year, it will be the longest on record.
Brexit rumbles on
In the UK, the Brexit saga continued last week, with some minor events for bemused onlookers. Donald Tusk controversially warned there was “a special place in hell” for those who’d argued for Brexit “without any hint of a plan”; Jeremy Corbyn offered up Labour’s Brexit deal conditions – and Theresa May rejected them; the UK and EU agreed to reopen negotiations; the Department for International Trade admitted to a paucity of trade deals in the can; details emerged of ‘Project After’, a government initiative to plan for a no-deal Brexit; and there was news of a fresh amendment that could see Theresa May’s deal through parliament, if she then holds a referendum on the deal.
Poor UK growth forecasts
The Bank of England cut its 2019 UK growth forecasts from 1.7% to 1.2%, the worst since 2009. The FTSE 100, meanwhile, enjoyed a strong week, buoyed by BP announcing a doubling of annual profits on oil and gas output; new figures showed that the US had become the UK’s top oil supplier for the first time since the Suez Crisis.
Nick Purves of RWC Partners, Manager of the St. James’s Place Equity Income fund, said: “If you look at the operating expenditure per barrel of oil produced, it’s gone down by 50%. The market is still cynical about these kinds of turnarounds. You can still buy BP and Shell at dividend yields over 6% at a time when the free cashflow to pay those dividends is close to 10%, so they are well-covered dividends.”
Across Europe, there were weak services data for Italy and France, and poor manufacturing data in Germany, raising fears of a eurozone-wide slowdown. Italian government bond yields jumped sharply after the European Commission cut Italy’s growth forecast from 1.2% to just 0.2%. The threat of African swine fever is coming to the fore in Europe; Denmark is currently building a wall on its German border to keep out wild boar, which might otherwise pass the disease to its pigs.