WeeklyWatch – Stocks propelled forward by trade hopes

14 October 2019

Stock Take

A duo of record runs

Last weekend saw new marathon records imitating the proverbial bus, with two major milestones coming along at once. On 12th October, Eliud Kipchoge broke two hours at marathon distance in Vienna. Fellow Kenyan Brigid Kosgei was hot on his heels – setting a new women’s marathon best the following day in Chicago, breaking Paula Radcliffe’s long-standing record from 2003.

Vienna and Chicago are perhaps fitting cities for the new to overturn the old – particularly when it comes to economics. Vienna-dwelling political economist Joseph Schumpeter popularised the term ‘creative destruction’, the process by which capitalism destroys the old to make way for the new – a process later supported by The Chicago School.

‘Creative destruction’ in action?

Such processes were evident last week far beyond the world of running. Figures released by JPMorgan Chase show that the number of Chinese companies listed on public markets has now surpassed the number of listed US companies: around 4,800 Chinese companies against some 4,400 in the US (a number that has decreased from more than 8,000 in 1996).

Investors, it seems, are divided on whether public or private works best, but that need not be a bad thing, as Director of Investments at St. James’s Place, Rob Gardner, discusses:

“There are advantages to both markets – public markets provide scrutiny and access. Private markets, on the other hand, can enable companies to think longer term without some of the short-term pressures that come with quarterly reporting and market overreaction. But even then, private markets are set to become more accessible to retail investors, too. So, there are benefits to both, and investors may find both useful in achieving their long-term goals.”

Short-term reaction to trade rumours

In the short term, markets are prone to oversensitivity, and last week far from bucked the trend. Leading indices rose in the US, China, Japan, EU and UK last week, mostly in response to rumours of changes in political momentum, rather than to actual events. These drivers were related to trade – above all else, US-China trade negotiations continued to hold investor attention. After all, the US consumer accounted for 17% of global GDP last year, and its biggest import partner is China.

Last week, the US added more Chinese companies to its trade blacklist ahead of a negotiating delegation visiting Washington. The US took aim at eight technology companies for, among other practices, providing facial recognition technology to the Chinese government for use in Xinjiang. Even if the blacklisting was to encourage Beijing to accommodate US demands in talks, Washington is also pushing hard for trade progress elsewhere, and last week signed a trade deal with Japan. All the same, in the World Economic Forum’s global competitiveness rankings, the US last week lost its top spot to Singapore.

While the US pull out from Turkey may have the greatest aftershocks in the long term, markets were more sensitive to signs of hope for trade talks with China. The US’s Median Consumer Price Index, meanwhile, struck 3% for the first time since the great recession. Other indicators, however, are pointing to a US slowdown.

The Fed and ECB turn dovish

Meeting minutes released last week by the Fed show that the bank’s Federal Open Market Committee has turned both more dovish and more divided, with the European Central Bank showing a similarly dovish tilt. The latest data on German industrial orders, which shows a larger-than-expected dip and has raised expectations of recession, will only add to the ECB’s desire to prop up – even if doing so incurs further wrath from northern European countries.

Continued disputes over trade will not make it any easier to drive growth and, among those, the dispute about taxing multinationals took a new turn last week. The OECD announced its plan to provide a new blueprint for international tax rules, so that countries can more effectively tax companies that do “significant business” within their borders. Highly-globalised industries would be most affected, not least the technology sector – with such arrangements remain little changed since the 1920s.

Brexit deadline approaches

The UK’s own trade debate, Brexit, continued swiftly – with sterling reacting accordingly. The week opened with disillusion, but later in the week the currency enjoyed its biggest rise against the dollar since March, plus gilt yields fell as investors sought out risk and UK-focused companies saw share prices rise – all thanks to joint statements made by Boris Johnson and Leo Varadkar, following the former’s visit to Dublin.

It soon became clear, however, that the two sides remained too far apart to find a meeting point, meaning the UK has very little time to cut a deal ahead of the meeting of the European Council later this week. It was perhaps cruelly symbolic that, over the weekend, Northern Ireland passed 1,000 days without a government.

Wealth Check

People could see their weekly State Pension payments increase 4% from April next week – marking its biggest increase in eight years under the ‘triple lock’ system. Those on the full, new, single-tier State Pension will see their incomes rise from £168.60 a week to £175.35 a week, and those on the old basic pension will go from £129.20 a week to £134.35.1

The triple lock ensures the State Pension grows by either: a minimum of 2.5%, the rate of inflation, or average earnings growth – whichever is highest. We already know stands at 4%, as it is calculated from the year to July. 2 The Consumer Prices Index report, used to measure inflation, is due this week – however, it currently stands at 1.7%, meaning it is more likely that earnings growth will be used for the second year running.

But despite the increase, it is clear that saving for retirement has never been so important. The government has committed to the triple lock until 2022 – yet, in light of the challenge posed by the UK’s ageing population, the sustainability of the system is being called into question.3 It’s possible that changes – such as a ‘double lock’ – could be brought forward to make the system more manageable, resulting in the State Pension growing at a slower rate.

“The rise is something pensioners can look forward to,” says Tony Clark, Head of Retirement Marketing at St. James’s Place. “But with Brexit and an early general election on the cards, it will be interesting to see parties’ commitment to the triple-lock.”

1 Pensions Age, State pension to increase by 4%, September 2019
2 Office for National Statistics, Average weekly earnings in Great Britain, September 2019
3 Pensions Policy Institute, Pension Facts Demographics, 2019

In the Picture

As St. James Place celebrates the first anniversary of the launch of their Diversified Assets (FAIF) fund, Matthew Woodbridge, Head of Division – Alternatives, gives an insight into some of the key benefits for clients.

This fund provides exposure to a range of private market assets which could play a key role in your portfolio of investments.

The Last Word

Nothing is stronger than a peaceful mind.

Eliud Kipchoge, who set a sub-two-hour marathon record this week.

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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