WeeklyWatch – Markets buffeted by trade sanctions

Monday 20th May 2019

Stock Take

Back with Brexit

Following ongoing pressure from her party, the UK Prime Minister has finally agreed that, if she can’t get her proposed Brexit deal through parliament, she will be out before the summer recess, which commences on 20th July. After talks with the Labour Party broke down, it means that the week commencing 3rd June 2019 is when Theresa May must present the Commons with more or less the same Withdrawal Agreement that has already been rejected three times.

If being at the forefront of the Brexit debacle in the UK wasn’t enough, this Thursday she faces a potentially brutal round of European elections. Polls are currently suggesting that the Labour Party will also suffer as the pursuit of a middle ground isn’t the favourite ideal of voters. From this, they are expected to face tough competition at the hands of the Greens, Liberal Democrats and Change UK. The Conservatives are expected to lose seats to the Brexit Party.

Despite the continuing political debacle, the UK economy enjoyed a strong first quarter, where it grew by 0.5%. Part of this stockpiling was a large contributing factor to this figure, pointing towards pre-Brexit preparations rather than demand-driven growth. In addition to this, the UK’s jobless rate struck a 45-year low last week – however, employment figures only increased by 99,000 jobs against the predicted 140,000. These numbers also correspond to a rise in self-employment, as full-time employment actually dropped by 55,000.

Investors were also reminded in the benefits of the UK stock market’s global reach last week, as the falling sterling pushed up the value of UK-listed stocks, thanks to the importance of overseas earnings represented on the FTSE 100.

Where are the trade wars now?

Last week we discussed the growing trade war between China and the US. This week we can see that US stocks have suffered one of their biggest one-day losses since January. After Washington identified nearly $300 billion worth of new Chinese imports that would face 25% levies as early as this summer, Beijing retaliated with plans to increase levies on $60 billion of US imports.

In response, both the S&P 500 and the Dow Jones Industrial Average fell, at the same time as taking many other leading indices down with them, not least Japan’s TOPIX. The tariffs on China are expected to hit the automotive and parts sectors, not only in China but also in Japan, as this nation also faces prospects of US tariffs on its own automotive parts sector in six months.

US President Donald Trump signed an executive order enabling the US to ban telecoms equipment from ‘foreign adversaries’. An example of this is Huawei being added to a list of entities who are undertaking activities contrary to US interests. This will therefore limit sales or transfers of technology to Huawei – as a result, US semiconductor companies suffered drops in their share prices. Over the weekend, Google suspended access to some Huawei apps on its Android system, which is a hugely damming blow for the company if the policy should remain in place.

In other tech news, San Francisco is the first American city to ban facial recognition software, WhatsApp reported a security flaw that allows hackers to install surveillance software on smartphones, and the Supreme Court gave the okay for iPhone users to sue tech giant Apple over enjoying an unfair apps monopoly. Despite all of this, the tech-heavy NASDAQ index ended the week relatively flat.

The Shanghai Composite index also ended the week relatively flat, despite the US–China ructions. But when you dig a little bit deeper, this could be due to the fact that Beijing has chosen to allow the renminbi to drop in value faster in recent days.

The rest of the world

Although European Parliament elections loom, the upcoming elections in India could well be more impactful on the markets. Results, expected later this week, are set to rule in favour of the incumbent Narendra Modi, whose popularity sparked when he responded to cross-border terror attacks by sending planes across the Pakistan border.

Investors are also feeling more comfortable with India as of late, as during Modi’s tenure a net $25 billion has been invested into equities, and another $30 billion into bonds, even as emerging markets across the world have struggled.

Wealth Check

None of us like to discuss Inheritance Tax due to the nature of the topic, but it is something we certainly should be talking about!

In the 2018-19 tax year, Capital Gains Tax (CGT) receipts rose to a record level of £9.2 billion, which jumped by 18% from £7.8 billion. The total was 70% higher than receipts for Inheritance Tax (IHT), which also hit record highs last year of £5.4 billion.1

If we dig deeper into this, we can attribute this rise to changes in taxation of buy-to-let property in the last two years. By phasing out higher rate tax relief on mortgage interest and increasing the GT levy on the sale of buy-to-let properties, it has driven landlords to sell assets as the sector becomes less profitable. Rising equity markets have also impacted the rise in CGT receipts, as investors’ strong gains result in higher taxes.

Despite this, many people paying CGT could have significantly reduced or eliminated any tax bill by sharing the financial burden with their significant other, whether that be husband, wife or civil partner. Making effective use of available CGT allowances is considered sensible tax planning, which also doesn’t require you to wait until the end of the tax year.

Please also be aware that the levels and bases of taxation, as well as relief from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

In The Picture

This week, we’re taking a closer look at our love of screens. Although we’ve always had an affinity with TV screens, mobiles are now becoming a more influential part of the on-the-go consumer’s day-to-day life. Take a look at this chart to see the increase in time spent on these devices…

The Last Word

There is no way Huawei can resist any order from the [People’s Republic of China] government or the Chinese Communist Party to do its bidding in any context, commercial or otherwise.

Jerome Cohen, Professor at New York University School of Law, Adjunct Senior Fellow at the Council on Foreign Relations

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

1 Source: HMRC, Tax and NIC receipts, April 2019

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

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