WeeklyWatch – Turbulent conditions send investors running for cover

Monday 12th August 2019

Stock Take

Eight days ago, there were celebrations galore in Dover, as inventor of the Flyboard Franky Zapata hoverboarded his way across the English Channel, completing the 22-mile journey from Sangatte on the northern coast of France to St Margaret’s Bay in just 22 minutes. It was, sadly, not a sign of a closing gap between the UK and Continental Europe. Nor was the temperate weather an augur of the future conditions in global politics, which darkened last week – sending investors diving for cover.

Combustible moments cast a cloud over Pakistan, with an outcry following India’s decision to end Kashmiri autonomy, and also Hong Kong, where ongoing anti-Beijing protests spurred China’s leadership on the mainland to warn that the territory was ‘playing with fire’ and was coming ‘to the verge of a very dangerous situation’.

The Trade War and now a Currency War?

The city’s Hang Seng index dropped in response, but not dangerously so – having already been weakened (along with the Shanghai Composite) courtesy of President Trump’s decision to impose further tariffs on Chinese imports to the US. Last week, the US Treasury Department went one better (worse), and labelled China a currency manipulator, as the renminbi dipped below seven to the dollar. Beijing dismissed the allegation, pointedly blaming shifts in market dynamics and ‘escalating trade frictions’.

This has raised fears of a currency war, whereby the US could create a legal justification for raising tariffs on Chinese goods to the US to offset the weaker renminbi plus a number of other Asian currencies. The major exception was Japan’s yen, which has strengthened against the dollar since late August, in turn pushing down the TOPIX, but the latest figures did at least show Japanese growth coming in at 0.4% for the second quarter, four times the expected rate.

Amid all these disputes across East Asia, there was a bigger surprise to come: China’s exports actually rose 3.3% in July, following a fall in June, thanks to strong orders from Europe and Southeast Asia. That said, analysts expect the bounce to quickly lose momentum.

Growth worries weighed on markets

The FTSE 100 and EURO STOXX 50 both had poor weeks. Just as worries about trade wars weighed on markets, so too did concerns about growth. Central bankers had, until recently, been looked to for dovish policies to support growth, but the extent of their recent dovishness has now begun to unnerve investors, who fear the oracles who sit on monetary policy committees must have spied too many storm clouds ahead.

As a result, investors have been heading for the perceived safety of US Treasuries, the dollar, gold, the yen and the Swiss franc. Signs of growth in the eurozone are hardly encouraging: German car production has dipped by around a sixth this year, German industrial production more broadly has also taken a dive; and eurozone growth slid to 0.2% in the second quarter. The ECB is now thought likely to be geeing itself up for further monetary stimulus in the autumn.

Brexit uncertainty weighs on UK investment

In the UK, growth clocked in negative for the second quarter, coming in at -0.2%, suggesting that a UK recession (usually defined as at least two consecutive quarters of negative growth) is at least plausible.

Moreover, while the new Prime Minister is certainly upfront in his determination to leave the EU without any Irish backstop on 31 October, there are growing signs that MPs are going to make that outcome as difficult to achieve as possible. Boris Johnson has already alienated much of the Scottish Conservative Party, and polls have also suggested his policy is alienating voters there and in Wales –52% of Scots now wish to leave the UK (up from below half previously), an ominous echo of the percentage who voted for the UK to leave the EU.

That said, the PM is likely to be more focused on the prospect of a possible no-confidence vote in the Commons – only possible (pre-Brexit) during a five-day window in September, and on the prospect of a general election campaign, which he has indicated could happen as the UK is leaving the EU. The suggestion has only added to his opponents’ determination to sink his Brexit plans. The MPs may be on holiday now but, come the autumn, there will likely be more turbulent times ahead…

Wealth Check

Last week, ministers announced they would relax pension contribution rules for NHS doctors. Chancellor Sajid Javid also set out plans for a wider review of pension tax rules that could result in caps being lifted for all workers, including private sector employees. Retirement expert Tony Clark takes a closer look.

In The Picture

No matter how detailed your investment plan, it can all come to nothing if you don’t allow for the human who has to make the decisions. And this problem of emotions in investing continues to provide fuel for plenty of debate. Managed badly, emotions can even hamper your retirement planning. But, for those well-trained in managing their own, the emotions that drive markets in the short-term can provide plenty of opportunities…

The Last Word

“The function of freedom is to free someone else.”

Toni Morrison, Nobel laureate, who died last week at the age of 88.

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 or Wellesley Wealth Advisory.

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