WeeklyWatch – China’s GDP: as believable as the Easter Bunny?

Tuesday 23rd April 2019

Stock Take

Positive news in China?

This week saw China defy expectations, with 6.4% annualised GDP growth seen in the first quarter achieved against a backdrop of trade tensions. This was reinforced by manufacturing production, which surged 8.5%, as well as better-than-expected employment figures and consumer spending. However, it is worth noting that many experts have reacted with caution, suggesting the GDP figures are about as believable as the existence of the Easter Bunny. Despite these encouraging signs, it might still be too early to announce a recovery, after all.

Indeed, Capital Economics indicated that the improved economic conditions may be fleeting due to “the increasing headwinds from weak credit growth”. The announcements bolstered the Shanghai Stock Exchange Composite Index, which finished the week strongly on Friday (one of the few major global markets trading during the long Easter weekend).

Not-so-rich pickings

If you’re feeling slightly guilty about your Easter indulgence this weekend, you’re not the only one. The chocolate egg market is worth more than £220 million – and, on average, every UK household will have enjoyed eight Easter eggs over the festive weekend.

Despite this, a recent UN report has indicated that the classic rich treat is not as fruitful for cocoa producers. In the last five years, the price per tonne of cocoa has fallen by 46% – slumping 5% this year alone.

Other commodities are also feeling the pinch. Coffee prices have fallen to a 13-year low, driving many despairing farmers in Central and South America to turn to producing coca – the main constituent of cocaine. The decline in coffee prices has been attributed to the weakness of the Brazilian real, which has meant other local markets cannot keep up with the country’s cheap exports. This volatility has done little to help the popularity of Jair Bolsonaro, who now has the lowest approval rating recorded by a first-time Brazilian President in their first 100 days in power.

US earnings season in full swing

The majority (60 of 77) of S&P 500 companies to have announced earnings by Thursday had exceeded analyst expectations. A strong finish to the week meant the Dow and Nasdaq posted small weekly gains, while the S&P 500 index continued to flirt with its record close achieved last September. Azad Zangana, Senior Economist at Schroders, observed: “US corporate profits are at their highest level since the 1960s and elevated cash levels suggest investment can continue. Cash levels are at about 1% of GDP and the US has never had a recession when that number has been above zero.” Zangana believes that this period of surplus cash should mean that there won’t be a recession “this year or next”.

There were some warning signs, however. A decline in industrial production for March completed a weak first quarter in which manufacturing output also contracted. Yet wider sentiment appears to be broadly positive; US retail sales rose at their fastest monthly pace for over a year while unemployment continued to slump. “We’re now in a position where job openings exceed the number of people unemployed. Some firms have begun relaxing drug-testing standards and restrictions on hiring felons to alleviate labour shortages”, added Zangana.

UK economy shows signs of resilience

Meanwhile, in the UK, inflation remained unchanged and unemployment fell to its lowest level since 1975. The FTSE 100 also touched a six-month high on Wednesday and better-than-expected retail figures suggested that shoppers were shaking off Brexit uncertainty…for now!

BlackRock Chief Executive, Larry Fink, appeared to share this upbeat outlook, suggesting that signs of solid growth in major economies could lead to a “melt-up” in equity markets, as more money flows in from big investors who have largely kept their powder dry during this year’s recovery. The FTSE All-World Index has had its best start to the year since 1998 – and Fink was quoted as saying that there was “too much global pessimism” and widespread “underinvestment”. Equity markets have suffered outflows worth $90 billion this year, with many blaming market uncertainty on the Sino–US trade war and Brexit.

The booming bond market

In contrast to the plight of equity markets, the burgeoning bond market has attracted $112 billion of inflows this year. The decision by the US Federal Reserve to leave interest rates unchanged last month has led to unprecedented growth in corporate debt markets. Global corporate bond issuance of almost $750 billion so far this year has outstripped the previous record set in 2017. However, the IMF has urged caution about the level of indebtedness being built up in major economies, such as Italy, and warned it could “amplify” an economic downturn.

Wealth Check

It’s not just the weather that’s getting better (although this point itself is debatable according to climate change activist Greta Thunberg – see The Last Word). The retirement prospects of workers across the nation are also improving: the minimum contribution rate for anyone auto-enrolled into a workplace pension rises from 5% to 8% this month. Employees now pay in a minimum 5% of their earnings, while employers must contribute at least 3%.

Here at Wellesley, we welcome this news as we passionately believe that retirement is unquestionably a time of life that we should be able to fully enjoy – whether you want to travel the world, or live comfortably while being able to treat the grandchildren.

More than 10 million people have been automatically enrolled into a workplace pension since the regulations were introduced in 2012. But there is now a concern that people could start to opt out as they see more of their pay packet going towards their pension. But remember that those who remain opted in stand to benefit greatly due to free top-ups from employers and tax relief, plus the compound effect of investing over long periods.

However, the overall minimum contribution rate of 8% is still well below the required level for a decent retirement. Indeed, experts suggest that a contribution rate of 15% is a good starting point for anyone in their 20s who is starting to save into a pension. There are also segments of the population, such as the self-employed, who are locked out of auto-enrolment. Early and ongoing financial planning and advice is even more important for these workers.

A good rule of thumb is to have a fund worth about 10 times your annual salary as you head into retirement. But much depends on how and when you want to retire. Once you’ve decided that, you can work backwards to calculate a saving target – and determine how much you need to put away each month to reach it.

If you have a question about retirement planning or would like more information about our services, please contact Wellesley Wealth Advisory on 01444 848508 or via email at info@wellesleywa.co.uk.

In The Picture

Fancy a flutter? How about betting on Brexit?

Bookies still favour the second half of this year for the infamous B-word to happen but reckon there’s a 30% chance it won’t happen before 2022 (…or ever).

The Last Word

“I want you to panic. I want you to act as if the house was on fire.”

Greta Thunberg, 16-year-old climate change activist, in a speech to the European Parliament, Strasbourg, on 16th April 2019.

Thunberg met political leaders and made a speech to the House of Commons today, telling MPs that the UK government’s active support for fossil fuels and airport expansion is “beyond absurd”. She also stated: “This ongoing irresponsible behaviour will no doubt be remembered in history as one of the greatest failures of humankind.”

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

Schroders 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 or Wellesley Wealth Advisory.

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