Market Bulletin - Parting course
Trade uncertainties depressed markets across the world; but data showed the US economy forging ahead.
The tale of global markets this year has been one of growing divergence, and last week offered plenty of reminders of the trend. The S&P 500 might have suffered a gentle decline over the five-day period, but it has enjoyed a strong year thus far, rising almost 8%.
Yet that rise has been far from even across all stocks, with much of it driven by the technology sector, which now accounts for more than a quarter of the index’s market share. Last week, Amazon became the second company in history to top a market valuation of a trillion dollars; it was a mere month behind Apple.
In fact, Apple – hardly a slow riser itself – can’t compete with Amazon’s pace of growth. The online retailer has gained $520 billion in value in just a year; equivalent to the GDP of Poland. Five years ago, it was worth ‘just’ $134 billion. It now controls almost 50% of US retail e-commerce sales.
Facebook and Twitter, on the other hand, have both struggled this year, at least relative to their trillion-dollar peers. Senior representatives from both companies – Sheryl Sandberg and Jack Dorsey – last week appeared before the intelligence committee of the US Senate to give testimony on, primarily, Russian meddling in the US elections via social media.
Despite these travails, Twitter’s share price is up for the year. Facebook’s share price is down more than 10% this year (although that should be set in the context of its rapid rise in recent years). Although many tech stocks slipped during last week’s hearing, it remains the best-performing sector on the S&P this year.
Domestic indicators in the US continued to come in strongly last week. A US manufacturing index clocked its second strongest rise since 1984; productivity among US workers showed its best increase in three years; and, on Friday, the closely-watched US jobs report showed August wage growth of 2.9% (annualised) and jobs growth (‘nonfarm payrolls’) of 201,000.
The Trump administration has been credited with fuelling at least some of the rise in the numbers, thanks to the tax cuts signed into law last year. Yet while many companies have been grateful, it is becoming harder for them to keep politics at arm’s length. Some have therefore grasped the nettle.
Last week Nike’s share price dropped almost 3% as soon as trading started last Tuesday, following its decision to run an ad featuring Colin Kaepernick, a leading American football quarterback. Kaepernick has drawn attention over his decision to kneel during the national anthem before matches in protest at police brutality – President Trump has been among those to publicly criticise his actions. Nike’s decision divided opinion and garnered the company plenty of publicity.
“Nike’s controversial marketing campaign will create a tailwind for the business in both the short and long term,” said David Levanson of Sands Capital, co-manager of the St. James’s Place Global Growth and Global Equity funds. “The campaign’s divisiveness elevates its visibility and effectiveness. It fits well with Nike’s corporate strategy, which is increasingly focused on urban millennial consumers – this consumer segment values virtue-signaling products and brands.
“Nike’s campaign complements its other initiatives, including increased product innovation and sales channel optimization – it continues to be the leader in an industry positioned at the sweet spot of some of the most powerful consumer trends: ecommerce, health, and the rising global middle class. If Nike can increase its brand affinity with core customers, we expect it will grow its revenues and earnings over time.”
Other companies are feeling the effects of White House policies, most notably in the form of new trade tariffs (or tariff threats). The chill wind of US protectionism was felt last week by both Canada and China, neither of which looks likely to come to a deal with the US at the end of current talks. Canada is currently seeking to agree terms for a successor deal to NAFTA with the US and Mexico, who have struck an initial agreement already. Meanwhile China is seeking to prevent the US imposing a further $200 billion in tariffs on imports from China – it said it will retaliate should the Trump administration press ahead.
Yet while trade tensions provide a major headwind for emerging markets, they may not be the most immediate or significant. Turkey’s woes on bond, equity and currency markets continue, but attention is increasingly turning to Latin America; the MSCI Emerging Markets Latin America Index has dropped almost 15% in just a month. For one thing, the US-Mexico deal may be meaningless without Canada. But investors are also increasingly concerned by developments in both Brazil and Argentina. The B3, Brazil’s leading stock index, has fallen significantly this year, while the currency is down around 20%.
“We feel that there is room for more volatility as fiscal constraints weigh heavily on the country’s growth prospects,” said Polina Kurdyavko, portfolio manager at BlueBay Asset Management and manager of the emerging market debt element of the St. James’s Place Strategic Income fund. “For us to turn more positive on Brazil, we would need to see a deeper change in the government.”
As for Argentina, even the vigorous attempts of its reformist leader, Mauricio Macri, have not been enough to prevent a currency and debt crisis. Last week, he imposed new austerity measures in a bid to save costs, centralise power and persuade the IMF to grant accelerated debt relief.
“The government recognises that fiscal adjustment is not ideal policy, but [the taxes involved] are easy to collect and claw back some of the windfall gain that commodity producers in particular have accrued from the peso depreciation,” said a BlueBay report. “The government’s external funding requirement is manageable if IMF disbursements are brought forward.”
Stuck in the middle
As emerging markets recoil and the US rockets ahead, Europe appears to be finding its own, unhappy medium. Last week came news that the eurozone economy slowed slightly in the second quarter, rising just 1.5% (annualised), versus a 4.2% rise for the US.
In the UK, second-quarter growth rose to 0.6%, aided by services figures, while manufacturing numbers disappointed. Meanwhile, a Treasury leak of no-deal Brexit contingency reports warned of air and rail disruption, risks to the private sector and budget changes. The prime minister was buoyed by reports that EU leaders had instructed Michel Barnier to ensure that a deal is struck. Back at home, however, there were reports that 80 Conservative MPs planned to vote against the Chequers deal, meaning she would have to rely on Labour votes to get it through Parliament.
The FTSE 100 dropped over the week, especially on Thursday and Friday, when it hit a six-month low on a rally for sterling; the rally followed news that Michel Barnier was now willing to discuss Brexit backstops. Mining companies, housebuilders and banks performed particularly poorly.
“There’s an awful lot of noise, which means there’s likely to be currency volatility as we approach the end of the year,” Chris Ralph, Chief Investment Officer at St. James’s Place, told Radio 5 last week. “It’s hard to see sterling appreciating much while there’s so much uncertainty.”
There was also news that millions of workers are “sleepwalking” into retirement with pensions that will pay out less than the minimum wage. The report, which was published by the Office for National Statistics, reported that the number of active occupational pensions rose from 13.5 million just two years ago to 15.1 million in 2017, as a result of auto enrolment. However, the same report showed the average private sector contribution rate in defined contribution schemes had fallen from 4.2% in 2016 to just 3.4% in 2017 – a worryingly sharp drop.
For younger generations, however, the financial focus is currently on the beginning of the new university year. A survey released last week by YouGov showed that 62% of English and Welsh students believe tuition fees are justified. Yet either way, the fees are still eye-watering to an 18-year-old without an income – and well worth planning for long in advance.
BlueBay and Sands Capital are fund managers for St. James’s Place.
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