WeeklyWatch – Trade and monetary tailwinds boost markets

Monday 18th February 2019

Stock Take

Italy continues to struggle

With a turbulent financial future ahead of Italy, it would appear that financial advice from the 15th century is in hot demand. This Thursday, a Venetian edition of Summa de arithmetica, geometria, proportioni et proportionalita, a work by Luca Pacioli, friend of Leonardo da Vinci, will go on sale at Christie’s. First published in 1494, the work introduced the principles of modern accounting and double-entry bookkeeping – this copy may go for as much as £1 million.

Perhaps the Italian Deputy Prime Minister should enter the bidding; last week, Matteo Salvini debated dismissing the central bank’s managers and raiding the country’s 2,500 tonnes of central bank gold to fund the budget. But terminating the central bank’s independence is unlikely to turn things around; government debt is above 130% of GDP, the country is in its third recession in a decade, living standards are lower than when Italy adopted the euro 20 years ago.

Last week, Salvini’s Northern League soared ahead of di Maio’s Five Star Movement in a regional election in Abruzzo – the latest poll shows Italians see Salvini as their real leader. The Abruzzo vote was viewed as a litmus test for European Parliament elections this May, when populists are expected to make gains.

Politics buffet Europe

Europe economic growth is far from being helped by politics. In France, the President’s political crisis is far from over; and, last week, Spain’s parliament voted down Madrid’s budget, forcing the Prime Minister to announce an early election for 28 March. Eurozone growth more broadly is slowing – its reliance on exports a particular sore point just now. Meanwhile, fourth-quarter growth in Germany came in at 0.0% – the country avoided a technical recession by a mere €150 million.

Despite the negatives, earnings season hasn’t been bad. Last week, Michelin was one of the bright spots, while Gucci owner Kering reported luxury goods demand in China remains strong – Burberry’s stock also rose in response. The EURO STOXX 50 struck a three-month high and is up more than 6% for 2019.

Ken Hsia of Investec Asset Management, Lead Manager of the St. James’s Place Continental European fund, said: “The bounce in markets this year supports our view that dynamics have improved across European equities. While valuations reflect a reasonable scepticism about current earnings expectations, aggregate corporate earnings should continue to recover. All the while, corporate balance sheets continue to strengthen, so there exists reasonable scope for M&A and share buybacks. We expect incidences of both to lift, which could spur further returns.”

Brexit pulls down GDP

In the UK, sterling fell on Monday on the back of negative growth news. As Capital Economics said: “There are no prizes for guessing what pulled down GDP growth by more than most expected. The impact of Brexit and weaker global growth was clear in the figures. Between them, net trade and business investment knocked one percentage point off the annual GDP growth rate.” The Resolution Foundation reported last week that higher inflation and lower growth since the vote had left the average household income down by £1,500.

The UK’s loss may be the Netherlands’ gain

The Netherlands has gained some 2,000 jobs and €300 million in new investment by migrating businesses from the UK to Amsterdam due to Brexit. Last week, the Dutch Prime Minister Mark Rutte confirmed the continued shifting of resources, with a further 250 companies ready to move. Bank of America last week said it had spent €400 million moving $50 billion of banking assets to Dublin from London. “There is no return there,” said the CEO.

The FTSE 100 rose all the same, as did leading stock markets in Asia – Japan’s TOPIX and China’s Shanghai Composite both rose. Investors were buoyed by US jobs data, although signs of flagging Chinese inflation and disappointing US retail sales data combined to pare gains somewhat on Friday.

US-China trade talks are extended

The S&P 500 enjoyed a strong week, boosted in great part by a suggestion the Fed may arrest quantitative tightening and by news that US-China trade talks had been extended. Last week, the US national debt passed $22 trillion for the first time. A second government shutdown appears likely to be dodged, but only because Donald Trump reportedly plans to announce a national emergency, enabling him to use federal funds to build the southern border wall. Should that fail, there are always the gold reserves.

Wealth Check

The UK’s tax relief bill has risen to a staggering £164 billion annually – more than the entire NHS budget and the equivalent of £6,000 per household in the country. [1] The record figures, published by HMRC, show that the biggest single tax reliefs are zero or reduced VAT rates on food and energy purchases, at a cost of about £53 billion, followed by an exemption for Capital Gains Tax (CGT) on main properties, worth £27 billion.

The Resolution Foundation, in response to the latest annual HMRC tax statistics said the figures underlined the need for greater scrutiny of these reliefs, noting that Entrepreneurs’ Relief has cost over £20 billion over the last decade, despite having no obvious impact. And with the looming pressure on public finances, the foundation also called for a full review of tax reliefs to be an integral part of Spending Review process later this year.

Income Tax relief on pension contributions now costs the Treasury £26 billion a year. However, when you include National Insurance relief on employer contributions, which costs around £18 billion a year, the total cost of subsidising pensions is closer to £44 billion. The HMRC figures also show that taxpayers are saving around £3 billion a year investing in ISAs – but that’s just Income Tax. Stocks & Shares ISAs are also helping investors avoid any future Capital Gains Tax liability. For more information on the various types of ISAs, contact your Wellesley adviser.

The approach of the tax year-end is arguably a clarion call for investors to make full use of their tax-saving opportunities while they still remain; while the Chancellor has so far resisted making any dramatic changes, it is clear that these expensive reliefs are coming under increasing scrutiny.

[1] Resolution Foundation, 31 January 2019

In The Picture

The troubling outlook for Europe became more of a concern this week. Growth forecasts for the eurozone in 2019 may have remained positive at 1.3%, but this represents a significant downgrade from November’s estimate. This chart below shows the size of those downgrades in the European Commission’s latest round of adjustments.

The Last Word

“Europe was created by history, America by philosophy.”

– ​Margaret Thatcher

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

Investec Asset Management is a fund manager for St. James’s Place.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

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 Wealth Advisory.

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