WeeklyWatch – Time heals markets’ wounds

Monday 11th March 2019

Stock Take

A decade on

Benjamin Franklin was right all along – time really is money. Saturday marked the 10th anniversary of markets striking their financial crisis low point. Since that fateful day, the S&P 500 has gained more than 300%, as central bankers, buybacks and improving sentiment have pushed markets ever upward. US-based companies have bought back nearly $8 trillion of stock since 2009 – enough to buy every listed company in the UK, France, Germany, Italy, Spain and Sweden. Indeed, for many investors around the world, the past decade has been a reminder of the potential of equities.

The Brexit clock is ticking

Despite the last 10 years showing just how far investors have come, it could be argued that politics have not enjoyed such a positive time. With less than 20 days until the UK is due to exit the EU, a deal is still proving elusive, with the issue of the Irish backstop plan continuing to divide opinion. Last week, the Attorney General Geoffrey Cox made his own (unsuccessful) bid to negotiate a deal in Brussels. Meanwhile, the Prime Minister is not expected to win this Tuesday’s meaningful vote on her deal – a survey of bank strategists published last week showed her deal has a 40% chance of passing by the end of March.

The Bank of England confirmed that UK banks will be able to borrow from it in euros as of this week, having activated a financial crisis-era ‘swap line’ – a temporary, reciprocal currency exchange agreement – with the ECB. It warned, however, of deep disruption for financial markets in the case of a no-deal Brexit. Andrew Shaw, Head of Investment Communications at St. James’s Place, commented: “We have seen recently just how much volatility Brexit is capable of generating in the UK, especially via sterling. While uncertainty remains, however, investors need to hold their nerve and remember that their investments are ultimately in companies – not politics.”

Concerns over UK growth

Last week anxieties centred on negative employment and growth trends for the UK, with BMW and Toyota warning that they could no longer commit to UK production in the event of a no-deal Brexit. Despite these growth concerns, the Markit/CIPS business activity survey came in strong, even as business investment remained lacklustre. The Chancellor has an undoubtedly difficult task on his hands this week – the decline in the deficit suggests a further dialling down of austerity, but political and economic uncertainty is likely to set a cap on any generosity.

The FTSE 100 ended the week down, but was not alone. Fears over trade and growth continue to stalk markets across the board, and the smallest developments can turn investor sentiment on a dime. More momentously, this year’s impressive rise for global equities owes some of its vitality to a more dovish tone from the Federal Reserve.

ECB gives reason for hope

Yet there was perhaps still greater focus on the European Central Bank (ECB) last week, as it confirmed that quantitative tightening was off the table and that new long-term refinancing operations were now in the mix. It painted an unenticing economic picture, pushing down the EURO STOXX 50. Not all indicators flashed negative, but 2018 growth was cut right down to 1.1%. However, while the ECB might feel short on tools to address any imminent downturn, there may be reasons for hope.

Mark Holman of TwentyFour Asset Management, which co-manages the St. James’s Place Diversified Bond fund, commented: “All three of the eurozone’s largest economies have had, and are still having, quite specific issues, but these may well be wearing off as drivers of sentiment. Holding European credit now, while it is priced so much cheaper than the US, does not actually feel so bad.”

S&P storms into 2019

After its worst December since 1931, the S&P 500 has registered its best start to a year since 1991. Bloomberg data shows that markets are now convinced that Fed rate rises are on hold for the duration of 2019. There was an energy boost for US markets too, as Exxon Mobil and Chevron lifted their output predictions for the Permian Basin, epicentre of the US shale oil industry. But if Donald Trump was pleased, the US trade deficit would have soured his mood – Wednesday figures showed the US trade deficit in goods at a new record in 2018, while Friday saw the weakest US jobs report in months.

TOPIX and Shanghai Composite suffer

The TOPIX in Japan, meanwhile, faced a meandering descent over the five-day period, despite fourth quarter growth coming in strong at 0.5%, and household spending outpacing expectations. The Shanghai Composite index suffered on the final day of the week – but still ended the week up some 19% for the year. Last week, at the annual National People’s Congress in Beijing, the premier set a lower growth target of 6-6.5% for the year ahead.

Wealth Check

Getting onto the property ladder is no mean feat. As things stand, it takes 18 years for the average first-time buyer to save for a deposit – in the mid-90s it took three years. It is little surprise, then, that young people are turning to their parents and/or grandparents for help. And a new study has revealed the extreme lengths to which some parents are going to help them achieve home ownership, with many sacrificing their own living standards or postponing retirement.

According to Aldermore’s First Time Buyer Index, half of families say they will use cash savings to help younger relatives get onto the housing ladder, while a fifth plan to move or downsize. A further 17% intend to remortgage, and a few over-55s are even planning to use cash from their pension pots.

But, as long as you plan ahead, you need not put your own financial security at risk. For instance, investing in a Junior ISA is an ideal way to pass money on, and it will give children an opportunity to build up capital for their future, and therefore support their dream of home ownership. Even if saving the maximum of £4,260 a year (as per 2018/19 tax year figures) for each child is a tall order, if you are able to save a small amount each day, the compound interest on that amount can accumulate quickly. Saving just £2.50 each day, from the day a child is born, may be enough to create a nest egg worth around £25,000 by the time they turn 18 (this assumes an average annual net return of 5.5%).

Of course, these returns are not guaranteed – much will depend on how your investment grows and on its tax treatment. But if your aspiration is to help a young relative save for a distant goal – such as buying her or his first home – then the earlier you start the better.

In The Picture

With fewer than 20 working days left of this tax year, there is still time to make use of your ISA allowance and maximise other tax-saving opportunities.

That said, the volatility seen at the end of last year may still be on the minds of many potential investors. But looking back to the Global Financial Crisis of 2007-2008 provides a useful illustration of the importance of time in, not timing – as seen in the graph below. Even if you had invested just before the market fell, you would still have made positive returns over five years. And regardless of when you invested, returns over the longer term would have been even stronger.

Source: Financial Express. Data for the FTSE All Share Index to 06/03/2019

The Last Word

“Forced to confront a reptile or an international financial crisis, I’ll take the reptile every time.”

– Alexandra Petri

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

TwentyFour is a fund manager 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.

FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

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