City thinking, local knowledge

March Market Commentary

By Dina Patel


“The first month of 2018 was a good one for the major stock markets which we cover in this Bulletin. We report on 12 markets and 11 of them made gains in January – in some cases, spectacular gains, which many investors would regard as more than adequate for a full year.”

Sadly, February was the exact opposite: 10 of the 12 markets on which we report were down in the month, following a global sell-off at the start of February. But that is the nature of savings and investment: stock markets rise and fall. Saving and investing is a long term business: a marathon not a sprint.

The markets were ‘spooked’ in the first week of the month by signs of inflationary pressure in the US: the President has drastically cut corporation tax and many firms have passed the savings on to their employees in higher wages. Fears of inflation prompted worries that the Federal Reserve would tighten monetary policy in the US. As the Dow Jones index suffered its biggest one day points fall in history so – as always happens in today’s inter-connected world – the fears and falls travelled around the world. The Japanese stock market, for example, fell by 4.73% in one day – its biggest fall since 1990.

World stock markets recovered some of the ground through the rest of the month, but – as we will see from the figures – not all of it.

What of the crypto (or virtual) currency, Bitcoin? It finished January hovering around the $11,000 mark (£7,780), down from an all-time high of very nearly $20,000 and with plenty of experts predicting that it would ‘slide, crash or implode’ in 2018. At the beginning of the month it looked like the experts would be right, as the crypto-currency fell 30% in one day and went below $6,000.

This, though, was in the same week as the global stock market sell-off, and Bitcoin gradually recovered through the month. As we write, the price is $10,669 (£7,640) – so a roller-coaster month for Bitcoin but, at the end of it, very little change.

In politics, German Chancellor Angela Merkel finally found a way to stay in power for another four years and Donald Trump saw his popularity rating climb past 50% and announced he would be running for President again in 2020. At home, Brexit rumbled on: let’s plunge into the detail…

The month in the UK started and ended with bad news on the jobs front. At the beginning of February, supermarket group Morrisons announced that they would be making 1,500 middle managers redundant, and Sainsbury’s made similar gloomy noises. The month ended with both Toys-R-Us and Maplins as further victims of the move to online shopping: both chains called in the receivers, with around 5,000 job losses expected. In between these two events, British Gas owner, Centrica, announced that it would cut 4,000 jobs after a “weak year” – so a very poor month for jobs.

While our glass is half empty we should report that growth in the UK service sector for January was the slowest since September 2016. The Purchasing Managers’ Index was down to 53, well below the 54.2 recorded in December and also falling short of economists’ expectations.

Figures from the Office for National Statistics also showed the UK’s trade gap – the difference between what we import and export – had widened in the three months to December 2017 as exports to Europe slowed. The deficit for December was recorded at £4.89bn, up from £3.65bn in the previous month.

Perhaps the worst news, though, was reserved for Tesco’s director of human resources. We have written many times in this Bulletin about Tesco’s problems: the supermarket group seemed to be weathering the challenges, but it is now facing the largest ever claim for equal pay in UK employment history.

Claimants are seeking £4bn from the company, arguing that staff in (male-dominated) distribution are paid significantly more than staff in (female-dominated) retail. We are talking about an average wage of £11 per hour versus one of £8 per hour, which could add up to a disparity of around £5,000 per year.

UK unemployment also rose in the three months to December, inching up to 4.4%. But hand in hand with the rise in unemployment went a rise in wage growth, and there was certainly also plenty of good news for the UK economy in February. UK productivity growth was the strongest since the financial crisis of 2008; manufacturing grew by 0.3% in December and, again, is doing better than at any time since 2008. First time buyers were at their highest level for 11 years and ten years after being bailed out by the taxpayer, Royal Bank of Scotland finally recorded a profit, albeit what its boss called a “symbolic” one of £752m.

So what did the FTSE-100 index of leading shares make of it all? Like all the world’s leading stock markets, it was down in February. Having started the month at 7,534, it closed down 4%, at 7,232. The pound was also down against the dollar in February, falling by 3% to $1.3768.

The Brexit notes available for this month may not ultimately amount to much. Boris Johnson made a speech: Jeremy Corbyn made a speech: Theresa May is due to make a speech at the end of this week. Meanwhile, whatever the British politicians said, the European politicians said it wasn’t possible, while the pundits turned to semantics, arguing over whether we might leave ‘the’ customs union or ‘a’ customs union.

By the end of March, we will be a year away from leaving the EU: it is easy to believe that everything ‘agreed’ so far will be up for re-negotiation before then.

Perhaps the best clue as to what might happen came – ominously – from the Netherlands. The government there has triggered plans for a ‘hard Brexit,’ recruiting 1,000 extra customs officials in the event that no deal is reached and they need extra people power to administer trade barriers.

My apologies: I forgot. Brexit Secretary David Davis also made a speech, saying no one should fear a “Mad Max style dystopia” after Brexit. Well, that’s cleared everything up…

As we mentioned above, Angela Merkel finally stitched-up a coalition with Germany’s Social Democrats, allowing her to remain as Chancellor for another four years. This does, though, mean that the anti-immigration party, Alternative fur Deutschland, becomes the official opposition to the coalition. With anti-immigration sentiment already strong in EU member states like Poland, Slovakia, Hungary and the Czech Republic, there may well be increased tensions in the EU in the months ahead.

In Germany, the month started with thousands of metal and engineering workers in the south-west going on strike, essentially over their ‘work/life balance.’ The strikers wanted the right to reduce their working week from 35 to 28 hours (on full pay) to allow them to care for children or elderly relatives, before returning to full-time work after two years. The concession was duly agreed by the employers, and obviously could have implications for the whole of the German industrial sector. For now though, enough German workers remained on duty to see the country produce its customary trade surplus – €18.2bn in December.

Italy will have gone to the polls by the time you read this commentary, in an election which, at time of writing, is almost certain to produce no clear result. European Commission President Jean-Claude Juncker has already said that the EU is bracing itself for the ‘worst possible result’ – although whether that means months of trying to form a viable government or success for the far-right Northern League or the populist Five Star Movement, no one is quite sure. Some analysts believe that if either the Northern League or the Five Star movement come to power it will affect confidence in the Euro, but with a few days to go until polling, an unclear result and months of indecision looks the most likely outcome. We’ll update you on the outcome (if indeed there is one) in next month’s commentary.

At least Jean-Claude could console himself with the news that the European Union economy grew at its fastest pace for ten years in 2017, with figures from the EU statistics office Eurostat confirming that the 28 member bloc expanded by 2.5% in 2017. Growth in the final three months of the year was 0.6%, mirroring that of Germany and France.

There are, however, some warning signs for France: it did well in 2017, largely due to the labour reforms of Francois Hollande, but economists warn that the country is continuing to lose export share: it now accounts for less than 13% of the Eurozone’s total exports, compared to more than 17% in 2000.

Like all the world’s leading stock markets, both Germany and France were down in February. Germany fell 6% to close at 12,436 while the French market was down 3% to 5,320.

February began with three of America’s tech giants – Apple, Amazon and Alphabet (the parent company of Google) – in a race to become the world’s first trillion dollar company as they all revealed their latest impressive results. All the runners in the race have their supporters but, as the news from Toys R Us and Maplins showed, their success doesn’t come without a price.

In other company news, US cable TV company Comcast launched a $22bn takeover bid for Sky, rivalling the bid from Rupert Murdoch’s 21st Century Fox.

More generally, figures reported for January showed another good month for the US economy, with 200,000 new jobs created, unemployment holding steady at 4.1% and the average hourly wage for private sector workers up by 2.7% compared to January 2017. As mentioned in the introduction, though, that did add to inflationary worries and the consequent sharp falls in stock markets at the beginning of February.

The Federal Reserve Bank certainly seems to share this optimistic view of the US economy: minutes from its last meeting show that the Fed is preparing for “stronger-than-expected” economic growth this year as corporate America continues to benefit from the President’s decision to slash corporation tax. Legendary investor Warren Buffet said that the move had given his company a $29bn (£20bn) profit boost.

The month ended with good news for supporters of the President. Shortly after seeing his approval rating go above 50% for the first time in eight months, Donald Trump announced that he would be running for re-election in 2020. The news comes 980 days before Election Day – easily eclipsing the 582 days there were before polling when Barack Obama announced his intention to run again in 2012.

There was less good news on Wall Street where the Dow Jones index fell 4% in the month, finishing just above the 25,000 barrier at 25,029.

Far East
We have written several times about Chinese leader Xi Jinping consolidating his grip on power, especially with no obvious successor on view at the recent Communist Party Congress. Now it seems that Xi may well be on his way to a level of power that even Vladimir Putin would envy.

Following the death of Mao Zedong in 1976, the Chinese Communist Party introduced term limits (two consecutive five year terms) to ensure that future leaders could not ‘rule for life’ and enjoy the same cult of personality that had been bestowed upon Chairman Mao. Now all that seems set to change, with the Party last week proposing to remove the term limits, essentially giving Xi the authority to rule indefinitely, having originally been due to step down in 2022. With his ‘thought’ now enshrined in the constitution, Xi is moving towards absolute power in China.

…So crossing him may not be the best idea, which, it appears, the insurance and financial giant Anbang may have done. The ‘grey rhinos’ may sound like a rugby league team having a bad day: it is, in fact, the name given to China’s biggest conglomerates (supposedly because they trample everything in their path) who have been on an overseas buying spree which includes English football clubs.

It has long been rumoured that Beijing wanted to rein in the ‘grey rhinos’ – whether that is to curb excessive borrowing or simply to demonstrate state power is open to debate – and action was duly taken against Anbang as the state took control of the company and brought charges against CEO Wu Xiaohui for ‘economic crimes.’

Wu was supposedly one the best politically-connected bosses in China. Jack Ma, boss of e-commerce giant Alibaba will be hoping to stay on the right side of the authorities as his company saw revenues jump 56% to £9.2bn in the final quarter of 2017, thanks to a record-breaking Singles Day.

Away from China’s version of Game of Thrones, life was much more peaceful across the South China Sea: Japan responded to the problem of its ever-ageing population by raising the state pension age to 70. In company news, banking giant HSBC reported profits for 2017 of $17.2bn – an impressive figure but most analysts were expecting something closer to $20bn. As a result, HSBC’s shares slipped slightly, meaning that they were in step with all the major Far Eastern stock markets in February. All four of the markets on which we report fell, with the markets in China and Hong Kong both down by 6% to 3,259 and 30,845 respectively. The South Korean stock market fell 5% to 2,427 and Japan was down by 4% to finish February at 22,068.

Emerging Markets
HSBC’s profits may have disappointed: India’s second largest state run bank has rather bigger problems to contend with. The Punjabi National Bank has uncovered a $1.8bn (£1.3bn) scam linked to a single Mumbai branch and – apparently – relating to a handful of customers. The fraud amounts to nearly a third of PNB’s market value and is 50 times its profits for the final quarter of 2017. More pertinently, it raises questions about security and confidence for the whole of the Indian banking sector.

The Indian stock market followed the trend by dropping 5% in February to 34,184 but, finally, we come to the two stock markets which didn’t fall. The Russian index was up just 7 points to close the month at 2,297 while the Brazilian stock market rose 1% to 85,354.

And finally
Did anything happen to make the world smile in February? Absolutely – unless you were waiting in the queue at Kentucky Fried Chicken where, sadly, the bargain bucket was replaced by the empty bucket.

Early in February, KFC switched from specialist food distributor Bidvest to DHL for its deliveries but thanks to what were described as ‘operational issues’ (that is ‘we didn’t deliver the chicken’), more than half of KFC’s 900 outlets found themselves without any chicken. DHL’s managing director of retail said, “The reasons for this unforeseen interruption of this complex service are being worked on.” But the Great British Public was knocked sideways by ‘Chickengate’ – so much so that Tower Hamlets police were forced to take to Twitter to ask hungry, distressed diners to stop contacting them.

There were problems of an even more pressing kind for Iceland and its small population of just 340,000 people. The country has impressive green credentials, with virtually all of its energy coming from renewable sources: because of this, many firms have set up data centres there, keen to tick the ‘renewable sources’ box in their annual report. Now, it seems, many of these data centres have turned to mining Bitcoin to generate extra revenue. Unfortunately, mining Bitcoin – via computers solving complex mathematical problems – uses a lot of power. So much so that energy expert Johann Snorri Sigurbergsson is warning that Iceland simply will not have enough energy.

So the Law of Unintended Consequences strikes again: Iceland creates green energy for its citizens: the lure of green energy attracts data centres: the data centres use all the energy: ordinary Icelandic citizens wonder why the lights have gone out.

Let’s see what unintended consequences March brings us…

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