WeeklyWatch – Chinese stock rally comes to an end

20 July 2020

Stock Take

Chinese stock market falters

China’s stocks ended their remarkable recent rally last week, despite second-quarter data suggesting that the country’s economy is bouncing back from the effects of coronavirus. The CSI 300 Index dipped almost 5% on Thursday, in its biggest one-day fall since February. This slump suggests that investors have doubts about the recent news that Chinese GDP grew 3.2%, compared with the same period last year. Indeed, the picture is slightly uneven, with data suggesting the industry and construction sectors are faring well, but hospitality, retail and transport are lagging.

Julian Evans-Pritchard, Senior China Economist at Capital Economics, noted:

“The upshot is that while there are some reasons to think the GDP figures may be overstating growth slightly, there is little doubt that the recovery has been rapid”

Meanwhile, a renewal of tensions between China and the US is continuing to pull on markets. The situation worsened last week, as President Trump hit back at China’s imposition of a draconian security law in Hong Kong by signing the Hong Kong Autonomy Act, a piece of legislation that paves the way for sanctions on Chinese officials.

There has also been discord between the UK and China – last week, Boris Johnson’s cabinet decided to ban Chinese technology giant, Huawei, from supplying new 5G equipment to the UK, following intense debate about the security implications of Huawei’s involvement in critical infrastructure due to its close ties to China’s ruling party.

This morning, UK Foreign Secretary Dominic Raab accused China of “gross and egregious” human rights abuses against its Uighur population and said sanctions against those responsible cannot be ruled out. The move follows the appearance of drone footage that appears to show Uighurs being blindfolded and led towards trains. And in a further move against China, the UK has announced it will indefinitely suspend its extradition treaty with Hong Kong. Announcing the move, Raab said the UK “wants a positive relationship” with China, but he said the “imposition” of the new national security law in Hong Kong by Beijing was a “serious violation” of the country’s international obligations.

‘Tis the season

Earnings season is upon us once more. Companies have begun releasing their second-quarter results, detailing the true impact of COVID-19 and the global economic slowdown. Very few companies will escape unharmed by the crisis – according to FactSet, S&P 500 earnings in some sectors are expected to drop almost 45% year-on-year. Keen-eyed investors are now scouring results for clues about how companies have coped, and how they are positioned for the coming months.

George Curtis from TwentyFour Asset Management, Co-managers of the St. James’s Place Diversified Bond fund, argues:

“We expect headlines to be bad, but for the market reaction to be muted to positive on outperformance of exceedingly low expectations.”

Banks face loan losses

The major US banks fired the starting pistol on earnings season last week. Despite the fact they have largely benefitted from market volatility and central bank support, Wells Fargo, J.P. Morgan and Citigroup together set aside $28 billion to deal with expected loan losses due to COVID-19, in a sign of further fallout from the pandemic.

Wells Fargo also reported a $2.4 billion loss for the quarter. The bank is contending with operating costs that it can’t cut easily due to pressure from regulators, while unable to improve its margins by growing its balance sheet due to federal limitations, notes Dan O’Keefe of Artisan Partners, co-manager of the St. James’s Place Global Value fund. Artisan Partners exited its position in Wells Fargo earlier this year due to its view that the bank was being “squeezed on all fronts”.

Both Citigroup’s and JP Morgan’s results were positive, says O’Keefe, but they were interpreted differently by the market – with the former’s stock going down and the latter’s going up. In his view, the only explanation is that Citigroup’s statement was more pessimistic about the future than J.P. Morgan’s. That difference highlights how a tumultuous quarter has left investors especially keen to hear predictions about the future business environment.

But it’s more useful to scan results for clues about the present, says O’Keefe:

“Nobody knows what’s going to happen for the rest of the year, but the results reporting season gives you an insight as to how well the businesses are managing, how good those management teams are, and how resilient those businesses are.”

Eurozone stocks fall

Two big meetings took place in Europe last week. The first was at the European Central Bank, which, as expected, decided not to alter its level of stimulus. European stocks fell on the news.

Markets were more focused on the summit in Brussels, where European leaders gathered on Friday to thrash out the details of a €750 billion COVID-19 recovery fund. There were disagreements surrounding how much of the total ought to consist of grants rather than loans, and what sorts of conditions should be attached to funds when they are distributed. It appeared that the final sum, if agreed, might be smaller after the weekend.
At the time of publication, a weekend of talks had pushed the participants closer to a deal, with negotiations set to resume this afternoon. Markets seemed cautiously optimistic that an agreement was near. The euro strengthened against the dollar on signs that progress had been made, reaching its highest level since March.

Dutch Prime Minister Mark Rutte, one of the ‘frugal group’ of nations seeking to limit the number of grants that are disbursed, struck a note of optimism in the early hours of Monday morning, when he told reporters that the talks were “back on track” after clashes over the weekend.

Wealth Check

It appears that Chancellor Rishi Sunak has kicked off plans for tax rises to help pay for the support (£190 billion so far… and counting!) the government has given the economy to help it through lockdown and beyond. Sunak has ordered a review of Capital Gains Tax (CGT) last week – if tax does rise, tax-saving wrappers such as ISAs and pensions will take on even greater importance for those looking to grow and protect their wealth.

Sunak’s request to the Office of Tax Simplification made specific reference to “how gains are taxed compared to other types of income”. Currently, basic and higher rate taxpayers pay 10% and 20% respectively on capital gains (excluding those on residential property), and also receive a tax-free annual allowance of £12,300. Aligning CGT and Income Tax rates, or cutting the annual exemption, would both simplify the system and raise useful tax revenue. It is also significant that the review includes Private Residence Relief; which would open up a potentially vast pool of tax revenue, given how much of the population’s wealth is tied up in their homes.

Eddie Grant, Director and Chartered Financial Planner at St. James’s Place, says:

“Fewer than 300,000 taxpayers paid CGT in 2017/18, raising £8.8 billion. Against a deficit nearing £350 billion in 2020/21, doubling CGT revenue would make only a minor dent. But from a political viewpoint, CGT has similar advantages to a wealth tax, perceived as a tax on the rich which will not affect most people.”

The timescales for the consultation are short for any changes to be made in the Autumn Budget. However, there is a precedent for CGT rates to be changed mid-year, as George Osborne did it in 2010. The Treasury has downplayed the significance of the review, but individuals considering appropriate restructuring of their investments might be wise to take advantage of current rules.

While refusing to be drawn on whether he intended to break promises not to raise rates of Income Tax, National Insurance or VAT, at this stage it seems more likely that Sunak will target Capital Gains Tax.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

In the picture

Face masks (or face coverings) will become mandatory for shoppers this Friday, amid mounting evidence that masks are effective in hindering the transmission of coronavirus. According to new data from polling company YouGov, seven in ten adults support the move – so why is it that a large minority of Britons (37%) haven’t worn a mask in the past week?

The main reason, according to the poll, is that people don’t feel they have to, as it’s not mandatory yet. Perhaps politicians could do more – although some leaders have been spotted wearing masks in the past week, fewer than one in seven respondents had seen masks on the faces of Keir Starmer, Matt Hancock, Rishi Sunak or Priti Patel.

The Last Word

“To mock the truth, you have to know the truth.”

Actor Idris Elba argues that TV shows featuring offensive depictions should be signposted with a rating system rather than censored.

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

Artisan Partners and TwentyFour Asset Management are fund managers 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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