Market Bulletin - Revolutionary roads
While US corporate results were mixed, investors transferred their affections to Asia – and the ECB.
A hundred years ago trading ceased on the St. Petersburg stock exchange – and didn’t start again for 74 years.
Vladimir Putin chose not to mark last week’s centenary of the assault on the Winter Palace, signature moment of Russia’s October Revolution – despite some historians viewing the revolution as the most significant event of the 20th century. Putin has been either president or prime minister since 1999, a span that bears comparison with the reigns of imperial tsars and Soviet premiers alike. Under his watch, the country’s stock market has worked overtime, rising by more than 2,000%. By comparison, the S&P 500 looks like it’s been on a retirement cruise.
It wasn’t always so rosy. Between 1865 and 1914, the stock exchange of St. Petersburg generated more than double the capital return of the New York Stock Exchange. After closing at the start of the war, it reopened in January 1917. Over the next two months, investors proved that you can indeed make a quick killing – the index rose more than 20%. Yet the bigger lesson was about short-termism – when it shut in March, equity and bond investors alike lost everything.
Russia has long since made its peace with free markets, of course, and the country has grown a good deal richer as a result. Moreover, as of 2017, it has returned to growth after a two-year recession, and last month the IMF raised its 2018 growth projection for the country to 1.6%. The yield on the country’s ten-year government bond is now at half its 2014 peak.
“We have certainly seen some improvement in the overall macro picture in Russia over the past couple of years, with growth rebounding, inflation coming in lower than expectations, and corporate fundamentals generally on an improving trend, buoyed by stronger commodities and a more stable currency outlook,” said Polina Kurdyavko of BlueBay Asset Management, manager of the emerging markets debt element of the Strategic Income fund.
“When it comes to Russian credits, risks are a lot more balanced than they have been for some time. There are some fundamentally good companies that we like and hold in the portfolio, notably in the real estate and utilities sectors. But we have adopted a cautious stance and this has paid off, as we avoided problem credits like Otkritie Bank [which this year went into administration],” said Kurdyavko.
Not all emerging markets have thrown off the Communist legacy, of course – at least not in name. Last week, Xi Jinping wrote himself into the communist history books when he became only the third Chinese leader to gain his own place in the constitution of the Communist Party of China – the other two were Mao Zedong and Deng Xiaoping. He also made clear his ongoing priorities: economic reforms, the anti-corruption purge, and China’s rejuvenation as a major power.
As it happened, Hong Kong’s stock market trading floor was shut for good last week; but on this occasion the cause was digitisation, not Leninism. In fact, Chinese blue-chip stocks listed in Hong Kong finished the week with their highest close in two years – the Hang Seng China Enterprises Index was up 1.5%. The Shanghai Composite Index rose 1%, striking a 22-month high during Friday trading.
Japan, China’s second-largest trading partner, also enjoyed a strong week, continuing its momentum since Shinzo Abe’s election victory. The Nikkei 225 posted a 2.6% gain over the five-day period to close at a 21-year high. Nevertheless, core inflation for September was just 0.7%, and the Bank of Japan warned of problems in the country’s regional banking sector.
Unlike London, Tokyo, Singapore and, now, Hong Kong, the New York Stock Exchange has kept its trading floor open, albeit mostly for marketing purposes. Corporate results in the US last week suggested a growing divide in company performance. Wall Street suffered its worst day in seven weeks on Wednesday, as a string of underwhelming earnings results were published – the S&P 500 ended the week up 0.16%. Boeing was among the worst-hit – the aerospace giant reported an 18.7% drop in earnings. Oil majors also suffered, despite the recent oil price recovery.
Index losses were pared by exceptional results from the larger technology companies, however. Amazon gained most significantly, rising above $1,000 per share for the first time after the company reported a 34% jump in sales. Google reported a 24% rise in sales. Banks were another highlight – the KBW Nasdaq Bank Index ended the week on a new closing high.
Yet the continued rise in US stocks has for months sparked fears that the current bull run is unsustainable – and about to turn. In fact, there are reasons to question such fears. Citi’s ‘Bear Market Checklist’ comprises 18 risk factors that indicate investor excess, such as levels of global equity flows. In 2000, shortly before the tech bubble burst, 17 factors were flashing red. In 2007, 13 factors indicated it was time to sell. Today, only three factors point to excess.
Moreover, one of the biggest concerns for investors was how markets would react when the Fed stopped buying bonds – and then when it started selling them. The Fed stopped buying in 2014, since when the S&P 500 has risen more than 25%. This month, it began to sell. The late stages of a bull market are supposed to be marked by euphoria, whereas there are still plenty of Eeyores naysaying the continued gains – in the context of bull markets, grumpiness is often a good sign.
Caution was certainly the watchword in Frankfurt, as the ECB finally announced its tapering plans – and delighted markets with the tameness of its intentions. In January, the Bank will cut its monthly bond-buying from €60 billion to €30 billion, and then maintain the same rate of buying through to September 2018 – “or beyond, if necessary”, said Mario Draghi. Despite lagging inflation, investors were happy to buy – the Eurofirst 300 ended up 0.8% at a five-month high.
Meanwhile, Emmanuel Macron continued his market romance, as the French parliament voted through his cuts to France’s renowned wealth tax (although property was excluded) and to capital gains tax. Investors apparently liked it, and the CAC 40 enjoyed a strong week. Yet economic developments in the eurozone were marred in Spain, as the Catalan parliament declared independence, and Madrid swiftly announced the imposition of direct rule – much remains to be played out before the current constitutional crisis is over.
In the UK, growth figures for the third quarter rose marginally but remained subdued all the same, while yields on short-dated gilts rose to their highest level since the Brexit vote, reflecting high expectations that the Bank of England will raise rates this week. Retail sales figures provided the most dramatic economic news, however, as the CBI’s monthly survey showed a dip by 36% in the number of retailers reporting sales volumes up from a year before – the worst reading since March 2009. Earnings season provided little reason for cheer – EY counted 75 London-listed companies that issued profit warnings, well above the third-quarter average. Lloyd’s was a notable exception. The FTSE 100 fell 0.24%.
There was mixed news on pensions. The government acknowledged it might need to look into the high incidence of poor investment decisions made since pension freedoms. Meanwhile, a UBS report published last week said British workers have among the worst pensions in the developed world. Another report from Salisbury House Wealth showed that the gap between the number of men and women saving into a pension has widened significantly in recent years – 1.66 million fewer women are contributing to a personal pension than in 2015/16.
BlueBay Asset Management is a fund manager for St. James’s Place.
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