Monday 4th March 2019
Last week saw the launch of the fifth generation of ERNIE (Electronic Random Number Indicator Equipment), the computer that chooses the winning numbers of premium bonds, launched in 1956 under Harold Macmillan’s chancellorship. Macmillan himself once said: “To be alive at all involves some risk” – when it comes to premium bonds, which have now spanned over six decades, it appears he might have taken the adage too far. As things stand, with an ‘investment’ of £1, you have a 1 in 10,457,501 chance of winning £500…
Recovery in China
But the risk-reward relationship need not be so unequal – a fact that the first two months of 2019 have thankfully proved. No major equity market has enjoyed a stronger new year recovery than China. Despite slowing growth and a disappointing round of official purchasing managers’ indices data hitting energy and mining stocks, mainland trading was boosted at either end of the week. On Monday, by Donald Trump’s decision to postpone the next round of US trade tariffs indefinitely, and, on Friday, by signs of stabilisation in the mining sector.
The former date proved to be the bigger news. Chinese stocks rose almost 6% in response to Trump’s postponement of tariffs – their best single-day gain in three years. Indeed, US-China trade talks have become a strong driver for investor sentiment on global markets; Japan’s TOPIX index was among the week’s beneficiaries.
With regard to the outlook for trade talks, the rise in the yuan is likely to have helped China’s case in Washington, but investors should also remember that China’s reliance on trade is not what it was. Henry H. McVey of KKR, which manages the St. James’s Place Diversified Assets Fund, said: “To be sure, the current trade tariffs are creating some notable headwinds in China, but they pale in comparison to what the effect could have been a decade ago. Exports as a percentage of the Chinese economy have already shrunk from 36% in 2008 to just 18% today, a nearly 50% decline in only a decade.”
There was technical support for Chinese equities, too. The MSCI Emerging Markets index is the benchmark for around $1.9 trillion of global funds; last week, MSCI announced it would quadruple the weighting of Chinese shares within the index. That could draw some $100 billion of investor inflows to China in 2019. Yet the Shanghai Composite is already up more than 20% this year alone.
US growth comes in strong
US GDP growth for 2018 came in at around 3%, in line with what the President had pledged, and consumer confidence rebounded in February from its contraction the previous month. Even the oil price appeared ready to bow to the President. Its price rose; he tweeted his disapproval to OPEC; it duly fell. Wage growth came in positive, if not quite as robust as it has been, and business investment rose as a proportion of GDP in the final quarter.
Despite this, the S&P 500 had a mediocre week, struggling to find positive news to hang its hat on. One sour point was Kraft Heinz, which fell 27% after the food company booked a $14.5 billion write-down and said it was subject to an investigation by the US financial regulator.
March marks Brexit countdown
Brexit continued to headline the dialogue in the UK this week. Politics underwent some significant shifts, with both the Labour Party and the government changing their position on Brexit. The former, having seen its own Brexit proposal defeated in parliament, formally backed a second referendum; it will only agree not to oppose the Prime Minister’s deal if she then holds a national vote on it. Meanwhile, the PM acquiesced to allowing MPs to vote for an extension to the Brexit deadline, should her deal be rejected on 12 March. Both events led to sterling striking a four-week high that, in turn, pushed down the FTSE 100, which is reliant on international earnings (see In The Picture).
The European Research Group is now in a tricky position: vote against Theresa May’s deal and risk a delay – perhaps even no Brexit at all, or vote for it and swallow the elements it has long opposed, notably the Irish backstop. Whatever the outcome, history is likely to feel starkly present later this year, when Ireland celebrates the hundredth anniversary of the founding of the Irish Free State.
Turbulence in other areas
Despite the easing of trade tensions between the US and China, global politics were not entirely benign across the board. Talks between the US and North Korea ended in failure, and Pakistan shot down an Indian plane in Kashmir – unsurprisingly, both weighed on markets.
But the China news was more important for stocks, perhaps particularly in Europe, where Germany and other Northern European countries are especially reliant on Chinese demand. Carmakers and luxury goods companies were among the most significant risers. The Euro Stoxx 50 ended up for the week. Sentiment was also buoyed by improved manufacturing figures in Germany. There were also signs that the worst of the French president’s political crisis may have passed – polls show a majority of French people now want the ‘gilets jaunes’ to end their protests.