WeeklyWatch – China’s impressive production rates tempt Trump into extending trade deadline

Monday 25th February 2019

Stock Take

Trump delays China trade deadline

China undeniably packs a punch when it comes to production, churning out 70% of the world’s mobile phones, half its cement, steel and aluminium and a third of its cars. It would appear that Donald Trump is well aware of this fact, as he has now formally delayed the 1st March deal deadline. This not only defers an increase in tariffs on $200bn of Chinese goods, but averted an escalation in tensions between the world’s two largest economies. Investors were cheered on both sides – the S&P 500 ended the week positive, while Chinese stocks entered a fresh bull market this morning; the last Chinese bull market peaked in January 2018.

US profits keep rolling in, despite some negatives

Profits in the US may have decelerated, but they continue all the same. Walmart, the world’s largest company by revenue, gave markets a boost when it published its quarterly earnings last week. Moreover, the Fed continues to act as bedrock for markets thanks to its New Year dovishness.

Compared with China’s impressive stats, it was a different story for manufacturing output and industrial production in the US, where indices showed negative readings for the start of 2019. There were also signs that hiring is beginning to slow; the Morgan Stanley Business Conditions Index showed that consumer inflation expectations are falling; meanwhile, import prices continue to fall. A study by Goldman Sachs showed that the pace of the US expansion has roughly halved since November. The latest earnings season shows more companies reporting compression of earnings than expansion.

Japan falls victim to China’s wilting demand growth…

The Shanghai Composite also rose last week, partly on hopes of a government stimulus. Aside from Chinese New Year, Chinese consumption growth has slowed – a fact keenly felt by its major trading partners. Japan’s exports took a dive, the latest Asian casualty of China’s sagging demand growth. Indeed, Japan’s exports fell 8.4% in January (annualised), but its exports to China fell a significant 17.4%.

…while Germany also feels the chill

Germany has felt a similar cold wind blowing from the East, but also faces the implications of Brexit and Donald Trump’s threat of 25% tariffs on European cars to boot. Last week came news that Europe’s trade surplus with the US rose to $160 billion last year – up around $40 billion; the White House is unlikely to celebrate. Europe’s trade deficit with China, meanwhile, was more than $200 billion.

Encouraging economic news for UK, despite Brexit uncertainty

In the UK, the Brexit story continued to rumble on, with three Conservative MPs ditching their party for the new Independent Group; there were also signs that the push to extend Article 50 was gaining new converts among MPs ahead of Wednesday’s ‘indicative’ vote. Talks in Brussels made little headway, and Theresa May postponed parliament’s next vote on her deal to 12th March, only 17 days before the proposed exit date.

Despite this, economic news was more encouraging. Last week, retail sales and wage growth came through stronger than expected, and the government reported the best January surplus on record – £14.9 billion – while borrowing was at its lowest for 17 years. Meanwhile, the European Securities and Markets Authority agreed to issue temporary licences allowing European traders to continue using UK clearing houses – Europe’s derivatives market was worth €660 trillion in 2017.

Johanna Kyrklund of Schroders, Manager of the St. James’s Place Managed Growth fund, said: “I don’t think Brexit is a systemic issue for global financial markets, although it might have implications for UK growth, with a bit of a knock-on effect on European growth depending on the deal. Sterling has weakened considerably, boosting companies with overseas earnings. As for the UK stock market, it suffered, particularly in the fourth quarter, because of Brexit uncertainty, but a lot of these companies are not going to be affected by Brexit. So, my bias is to actually rotate some money back into the UK.”

Wealth Check

January marked a record tax haul of £21.4 billion in the UK, including both self-assessment income tax and capital gains tax receipts. Admittedly, the start of the year is usually good for the Exchequer, but January 2019’s total was considerably larger than expected – 3.1 billion more than last year. The figures were undeniably a welcome boost for Chancellor Philip Hammond, who will be preparing his Spring Statement against a backdrop of Brexit economic uncertainty.

However, January’s record figures should serve to remind all UK taxpayers of how highly they are taxed. Over the last 20 years, HMRC’s total receipts from Income Tax is up a third, Inheritance Tax receipts are up three quarters, and Capital Gains Tax receipts have more than doubled. These tax revenues are expected to keep rising, and, therefore, we would advise our clients to carefully plan for the future, in order to shield as much of their hard-earned money from the taxman as possible – especially those who expect to receive a large tax bill in the future.

The end of the tax year is 5th April, which means there isn’t long left to take advantage of available tax-saving opportunities. Making full use of your ISA allowance is perhaps the most obvious way to reduce your tax bill, while diverting some of your salary or bonus into your pension is also a highly effective way of paying less tax. These actions will help you move a step closer to your retirement goals. For more information, contact your Wellesley adviser.

In The Picture

China’s government has long hoped that the country would get rich before it got old. However, if the graph below is anything to go by, the focus for policymakers and investors is set to shift.

The Last Word

“Demography is destiny.”

– Traditionally attributed to Auguste Comte (1798-1857)

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

Majedie and Schroders are fund managers for St. James’s Place.

The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent 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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