WeeklyWatch – Markets stable despite Italy’s government collapse and global tension

27 August 2019

Stock Take

Continued tension in Europe

In 1878, Russian author Leo Tolstoy published Anna Karenina, which opened with the line: “Happy families are all alike; every unhappy family is unhappy in its own way.” This line could all too easily be applied to the European family just now, which is dysfunctional to say the least.

Things failed to improve last week, with Europe’s attention preoccupied by events in Rome. Italy’s Prime Minister Giuseppe Conte resigned his position, and blamed the current deadlock on the far-right Northern League, Matteo Salvini. Whether a fresh coalition can be created quickly enough remains to be seen – if it cannot, then Italy faces an election, potentially in the middle of sensitive budget negotiations between Brussels and Rome.

Ken Hsia of Investec, Manager of the St. James’s Place Continental European fund, and Co-manager of the Greater European fund, commented:

“We don’t see the latest Italian political news as particularly significant, given the country’s rapid rotation of Prime Ministers in recent years, typically every one to two years – indeed, the spread between Italian and German sovereign yields suggests Italian country risk is broadly stable. Despite weakening data globally, we find attractive bottom-up investments in Europe, in sectors such as healthcare, technology and online gaming.”

Relations between the UK and the EU were still frosty last week. Boris Johnson wrote to Donald Tusk, asking for the Irish backstop to be removed from the Withdrawal Agreement. Tusk duly refused. Johnson visited the French and German leaders last week – the former said the backstop was a non-negotiable; the latter said it was up to the UK PM to find an alternative. All the same, the suggestion that the Withdrawal Agreement could yet be amended in time for 31st October delivered a small boost to sterling late in the week.

European economies rally despite sag in growth

Last week’s troubles arrived amid signs of wilting European growth, not least in Germany. Last week, eurozone inflation for July came in at its lowest level in two years: just 1%. Berlin did at least suggest that it might be willing to countenance a rise in German debt levels in a bid to stave off recession – the share prices of European banks rallied in response.

On the contrary, in the UK, the latest data showed retail sales 0.5% higher in the three months to July, which may be enough to keep the economy out of recession for the moment. Business investment is down, but has hardly dried up – last week, Hong Kong businessman Victor Li (son of Hong Kong’s richest man, Li Ka-Shing) paid £4.6 billion to purchase Greene King, the UK’s largest pubs and breweries group. Shares in the company soared 50% as a result.

Hong Kong’s unrest could spark a global recession

Li senior has suffered paper losses of $3 billion this year due to unrest in his home city. Hong Kong’s economy is plummeting on falling business investment and consumption rates; new business from mainland China is falling especially fast, according to Bloomberg. Last week, a leading authority on the global financial crisis, Carmen Reinhardt, told media that, given Hong Kong’s significance to East Asia’s economies, the current problems could ultimately lead to a global recession.

US-China trade war escalates

The trade war continues to make its presence felt on markets. On Friday, China announced $75 billion of tariffs on US imports. After a fairly stable week up to that point, the news sent markets tumbling. The US duly responded, saying it would begin the process of raising tariffs on $250 billion of Chinese imports from 25% to 30% from 1st October. Yet amid the escalating tension, President Trump claimed on Monday that the two countries would resume trade talks “very shortly”. Despite the more conciliatory comments, markets started the week in mixed moods. Investors remain nervous, and unconvinced.

Wealth Check

Do you feel compelled to work until your mid-70s? The Centre for Social Justice (CSJ) seems to think you should – last week it recommended that the State Pension age should be increased to 75 by 2035.

When the State Pension age was first introduced in the 1940s for anyone aged 65, life expectancy in the UK was 66. Today, it’s 81. But many people can expect to live even longer: the number of centenarians has almost doubled over the last 15 years.1 While this is cause for celebration (and more letters from the Queen), it raises questions as to how the government can afford to maintain the State Pension in its current form.

The pension age is already set to increase to 67 by 2028 and to 68 by 2046 – and the DWP has confirmed that there are no plans to increase the age to 75. But the CSJ wants to see a faster increase, suggesting it would support public services and boost the economy.

Critics argue that increasing the pension age exacerbates inequality and makes no allowance for ill-health. The poorest UK groups have nearly 20 years less healthy life expectancy than the most advantaged. Not only that – research has shown that the average worker needs to save an additional £84,000 for retirement in order to avoid working a decade longer than anticipated if the government raises the State Pension age to 75.2

1 Office for National Statistics, 2018
2 Royal London, Will we ever summit the pension mountain? 2018

In the Picture

The current generation of children faces exceptional financial challenges: high university fees, rising house prices and stagnant wages mean that preparing a child for their financial future requires ever more thought and planning.

Equipping a child for their financial future can therefore be daunting. What lessons do they need to learn about money? What is the role of parents? And schools? And can putting a small amount aside really make a meaningful difference to their lives when they leave home?

These are just some of the questions St. James’s Place will be answering in the coming weeks in their new series, Kids & Money. Watch the trailer here.

The Last Word

“You may have the universe if I may have Italy.”

– From Attila, an opera by Giuseppe Verdi.

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

Investec 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.

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