November Market Commentary
Posted by siteadmin on Thursday 9th of November 2017.
What’s the saying? ‘Close, but no cigar’. That’s how it was in October as all but two of the markets we cover rose in the month. Brazil’s market did manage to stagger up by just 14 points, meaning it was unchanged in percentage terms, but the Russian stock market let the side down, falling back by 1% in October.
While the stock markets were having a good month, the Brexit talks were having – another – stagnant month. Having been to Florence in late September, Mrs May then went and pressed the flesh in Brussels, but the warm words soon gave way to more bickering about the UK’s divorce bill. With the date for the UK’s departure from the EU another month closer, talks about a post-EU trade deal are nowhere near starting.
But Brussels was just a side-show: the real power was 5,000 miles away as Beijing hosted the 19th Congress of the Chinese Communist Party. Xi Jinping was confirmed in power for another five years and – while Britain and the EU bickered about when to begin talks about talks – Xi calmly set out his plans for China to become the dominant economic power in the world and then sent the delegates back to work.
In contrast to President Xi’s concrete plans, early October brought us the Conservative party conference and two speeches – from the Prime Minister and her Chancellor – which were roundly criticised. Theresa May at least had the excuse of a cold, but Philip Hammond delivered a lacklustre speech, labelled ‘thin, grey gruel’ by one commentator. At this stage you would not bet against his forthcoming Budget speech being his first and last Autumn Budget.
We will have to wait until 22nd November to see what rabbits the Chancellor pulls out of his hat. There have been suggestions of cutting back on tax breaks for older people to help the younger generation, but with the Conservatives still smarting from the ‘Dementia Tax’ debacle the last thing they need is to burden themselves with a ‘tax on getting old’.
Not that Monarch Airlines will be getting any older. The month started with the company which has whisked so many of us off to sunnier climes going bust, leaving 110,000 people needing to be brought back to the UK. Britain’s ‘biggest peacetime rescue mission’ duly cost the taxpayer £60m.
More worrying in the long term was the news that UK productivity was down for the second quarter in a row, and is now 15% below the average for the G7 group of the world’s largest economies, making us less productive than Germany, France, the USA and Italy. Expect this to loom large in the Budget speech: if the Chancellor can increase UK productivity it will provide a huge boost to the nation’s finances.
Staying with the bad news, new car sales were down for the 7th month in a row and Vauxhall responded by cutting 400 jobs at their Ellesmere Port plant. BAE Systems also announced plans to cut 2,000 jobs in their military, maritime and intelligence services.
Finally in the gloom section. With the latest figures showing inflation rising to 3% and growth for the third quarter confirmed at 0.4%, the Bank of England has announced a lift in base rates from 0.25% to 0.5%.
…And now the good news. Unemployment was down by a further 52,000 in the three months to August: this leaves the jobless rate unchanged at 4.3% with 1.4m people now unemployed.
Government borrowing in September was the lowest it has been for ten years, with the deficit between what the Government spends and what it takes in taxes down to £5.9bn. With the deficit for August also revised downwards, there is at least some good news for the Chancellor as he prepares his Budget speech but – as the Institute for Fiscal Studies pointed out – he faces “a spending dilemma”. Does he abandon his target for reducing the deficit in order to spend more on public services and thereby – hopefully – stimulate the economy? All will be revealed by the time of the next commentary…
Meanwhile, the FTSE 100 index of leading shares closed October up 2% at 7,493. It is now up by 5% for the year as a whole which – as we shall see – is significantly less than some of the other major markets around the world. The pound fell back slightly against the dollar, and was down 1% in the month at $1.3271.
Following her speech in Florence at the end of September, Theresa May went to Brussels to meet other European leaders. There were plenty of warm words with both Angela Merkel and Emmanuel Macron making conciliatory noises, but the message from the EU remains the same. The divorce bill must be resolved before any talks on trade can begin.
Both sides then went home and – whether they are publicly admitting it or not – continued to prepare for ‘no deal’ which would see the UK leave the EU and operate under World Trade Organisation rules.
Meanwhile the Bank of England warned that Brexit could cost 75,000 jobs in the finance sector, Goldman Sachs chief Lloyd Blankfein dropped a very heavy hint about moving a swathe of operations to Frankfurt.
Most of the attention focused on Spain and Catalonia’s declaration of independence, very swiftly followed by the imposition of direct rule from Madrid. So far precisely no governments have recognised Catalonia and it is hoped the situation can be managed without violence and with Catalan leader Carles Puigdemont not needing to seek asylum in Belgium.
Of much wider – and worrying – significance was a report that Europe was getting left behind the US and the Far East in the world’s digital economy, with too much investment still being done on narrow national grounds. UK investors put half their money into UK based companies, roughly the same proportion as in Germany. In France the comparable figure is 75% and there is a suggestion that Europe’s fledgling tech companies are missing out because there is not enough investment available to them.
Both of Europe’s major stock markets enjoyed good months and both were up by 3% – the German index to 13,230 and the French index to 5,503. On a year to date basis they are up by 15% and 13% respectively.
We start the US section with bad news for the President. Not only was a Donald Trump mask one of the year’s most popular Halloween costumes, figures for 2016 confirmed losses of £19m at his two Scottish golf courses.
There were no such worries for Jeff Bezos, boss of Amazon, who overtook Bill Gates to become the richest man in the world after Amazon shares surged 10% following impressive third-quarter earnings. Sales rose 34% to $43bn – roughly the size of the Slovenian economy. Google’s parent company Alphabet also posted impressive third quarter figures as the rise and rise of the tech giants continued.
Perhaps this helped the US economy to grow by 3% in the third quarter of the year, confounding the prediction of the ‘experts’ who had been expecting a slowdown following the battering several states received during the hurricane season.
Who will the President choose to steer the US economy in the future? Any day now he is expected to appoint the next Chairman of the Federal Reserve. He could stick with the status quo and keep Janet Yellen in the job, but the smart money seems to be favouring Jerome Powell, a Republican who supports low interest rates and is open to de-regulation of the financial sector.
It was another good month on Wall Street, with the Dow Jones index rising 4% to close October at 23,377 – up an impressive 18% for the year as a whole.
As we mentioned in the introduction, Xi Jinping used the Party Congress to set out his plans for China’s economic dominance of a large part of the world. He did this in a speech lasting 3 hours and 23 minutes: given that his audience was by no means in the first flush of youth and that popping out for a ‘comfort break’ was probably a treasonable offence, you do wonder how some of them coped. Hopefully, they all managed to concentrate on President Xi’s plans. China already has a domestic population approaching 1.4bn – nearly one-fifth of the world population of 7.5bn. The UN estimates that the population of the world will increase to 11bn by the end of this century, with most of that growth coming in areas China intends to reach and trade with through the massive infrastructure project known as ‘One Belt, One Road.’
The initiative was first mooted by Xi Jinping around 2013, and sees China’s push into global economic affairs extending through a land based Silk Road Economic Belt (SREB) and the Maritime Silk Road (MSR), with the focus being on infrastructure investment, construction, railways and highways, automobiles, power and iron and steel.
Speaking at the Congress, Xi told his attentive audience that China will “take centre stage in the world”. The Belt and Road is designed to do exactly that. The land based Belt runs across Asia and through Europe. The Maritime Road reaches South East Asia, Oceania and North Africa. More than 65 countries, 4.4bn people (63% of the world’s population) and 29% of the world’s GDP are in its path. Importantly, the countries it reaches are those countries poised for rapid growth – and many have been eager to accept China’s offer of help with infrastructure projects. What does China get in return? Not least, access to the vast mineral resources it will need for future growth.
Ratings agency, Fitch, estimates that $900bn of projects are planned or are already underway – but that this could eventually rise to as high as $4tn.
The first box in the ‘world domination’ column was certainly ticked, as figures confirmed that the Chinese economy had grown by 6.8% in the third quarter of the year, ahead of the official growth target for the year of 6.5%.
This saw the Chinese stock market rise 1% in October to 3,393 as all the Far Eastern markets moved upwards during the month. The Hong Kong index rose 3% to 28,246 and South Korea’s index rose 5% to 2,523 despite the CEO of Samsung resigning, citing an ‘unprecedented crisis’ at the firm. Pride of place though, went to the Japanese Nikkei Dow index, as the market hit a 21 year high, boosted by a comprehensive victory for Prime Minister Shinzo Abe in the parliamentary elections. The market closed October up 8% at 22,012.
It was a very quiet month for two of our three major emerging markets, with the Brazilian stock market up just 14 points to 74,308 and the Russian market slipping back by 1% to 2,064. However, in India it was an entirely different story, as the stock market rose 6% to 33,213 meaning that it is now up by 25% for the year as a whole.
This came despite a report suggesting that employment growth in India had slowed drastically over recent years. Prime Minister, Narendra Modi, famously promised that his BJP party would create 10m jobs if it came to power. That now looks significantly over-optimistic but, for now at least, worries about employment prospects are not being reflected on the Indian stock market.