February Market Commentary

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. But sitting alone on the naughty step was the UK: as we shall see below there was plenty of good news for the UK in the month but, dogged by uncertainties over Brexit, continuing doubts about Theresa May and the collapse of Carillion, the FTSE fell 2% in the month.

Why did global stock markets do so well? As we will see below, there was good news from China and, in addition, the World Bank issued a bullish forecast as it looked ahead to 2018. Reporting that global economic growth had been stronger than expected in 2017, the Bank forecast growth of 3.1% for the coming year. The Bank’s president, Jim Yong Kim said, “The broad-based recovery in global growth is encouraging”.

Add in the continued expansion in China, low interest rates and easy monetary policy around the world and it is no wonder that stock markets are doing well.

There was certainly plenty of self-congratulation at the World Economic Forum, the annual meeting of business and political leaders in the Swiss resort of Davos. Donald Trump flew in by helicopter – the first US President to attend since Bill Clinton in 2000 – and made a tub-thumping speech highlighting American growth and making no apologies for acting as his country’s “cheerleader.”

Theresa May made a somewhat lacklustre speech – which prompted both the Times and the Telegraph to question her continued leadership – and John McDonnell was also in attendance. The UK’s Shadow Chancellor railed against the evils of capitalism whilst staying in an €800 per night hotel.

UK
The big business story in the UK in the first month of the year was the collapse of the government’s ‘go-to’ contractor Carillion. The company went under with debts of £1.5bn, including a hole in the pension fund of almost £600m as Government ministers continued to dole out contracts even after three profit warnings. Up to 30,000 small businesses are owed money by Carillion and the receivers have told them to expect less than 1p in the pound on the money owed. There are bound to be redundancies and companies going out of business: equally worrying is the total lack of business acumen shown by Her Majesty’s Government.

Despite this, there was plenty of good news around in January. The month started with all the retailers reporting on their Christmas trading figures: Next, Aldi and Lidl did well but Debenhams reported disappointing figures and – having feasted on Carillion – the vultures are now circling the high street chain.

UK manufacturing, though, was at its highest for ten years and growth for the final quarter of 2017 was revised upwards to 0.5%. Ford picked the UK to build its new diesel engines, and there was also a welcome boost for the Chancellor. Both Philip Hammond and George Osborne before him have bemoaned the UK’s productivity, but figures from the Office for National Statistics showed that UK productivity had enjoyed its biggest increase since 2011, up by 0.9% in the third quarter of 2017.

Inflation also dipped slightly to 3%, but if you are looking for clouds on the horizon then the oil price hit a four year high of $70 a barrel – so petrol will not be coming down in price any time soon – and mortgage approvals slipped to their lowest level for five years.

…And inevitably, there was further bad news for the retail sector. We have already mentioned Debenhams and – once they had digested the Christmas trading figures – Marks & Spencer announced the closure of 14 stores. At the same time Sainsbury’s and Tesco were warning of job cuts: as we comment below, retail is changing inexorably and it will not result in more jobs.

This sombre mood was reflected on the stock market, with the FTSE 100 index of leading shares falling from December’s high and dropping 2% in January to 7,534. It was, however, a good month for the pound which strengthened appreciably against the dollar, rising by 5% to $1.4171.

Brexit
It is difficult to know where to start on Brexit. At the end of last year progress appeared to have been made with agreement reached over the UK’s ‘divorce bill.’ Attention has now shifted to the transition arrangements after the UK leaves, but whether that will be one year, two years or five years is anyone’s guess. Conservative MPs are once again at each other’s throats after Chancellor Philip Hammond made a speech in Davos saying he wanted only “very modest” changes to the status quo after Brexit – the so called BINO option (Brexit in Name Only).

US Treasury Secretary Steve Mnuchin has spoken of a ‘special’ free trade deal with the UK after Brexit, while International Trade Secretary Liam Fox has talked of up to 40 trade deals being in place by March 2019. Meanwhile, Theresa May has visited China, making trade deals but seemingly intimating that continuing membership of the EU customs union would still be a possibility.

With 14 months to go until the UK is supposed to leave the EU, many commentators are now making the point that the UK cannot go on trying to be ‘all things to all men’. Sooner or later it must declare a preferred position, as business increasingly calls for clarity.

Europe
Europe came back from its Christmas holidays to find Germany still without a government – although it appears that Angela Merkel is gradually drawing closer to a deal with the Social Democrats, which will allow her to remain as German Chancellor and de facto leader of Europe. With or without a government, the German economy ploughed on remorselessly, with the figures released for November confirming a trade surplus for the month of €23.7bn (£20.7bn).

However, it appears that Europe could be set for more problems, with the re-election of the anti-mass immigration, Eurosceptic Milos Zeman, to the Czech presidency, raising the prospect of a referendum on the country’s continued membership of the EU. Commentators will presumably have a hard time deciding between ‘Czechxit’ and ‘Czech out…’

But there is a solid block of countries in Central Europe – the Czech Republic, Hungary, Poland and Slovakia – who all appear to feel the same way. It may be that 2018 will present Angela Merkel with far greater problems than simply forming a coalition.

For now though, there seems to be little to worry about on Europe’s stock markets. The German DAX index rose by 2% in January, ending the month at 13,195. The French index did slightly better, rising by 3% to 5,482. But it was our old friend Greece that stole the show: with the country having survived for another year, the Athens stock market celebrated by rising 10% in January to reach 879.

US
It was a happy new year in the US as the Dow Jones index went through the 25,000 barrier in the first week of the year, despite figures showing that the US boom in job creation had run out of steam in December. ‘Non-farm payroll’, as it is known, added only 148,000 jobs in the month, largely due to job losses in the retail sector. Despite this, the US unemployment rate held steady at 4.1%, the lowest it has been since the year 2000.

The good news/bad news scenario in the US was neatly captured by retail giant Walmart, which announced that it would start paying its US staff at least $11 (£7.70) an hour, thanks to the US tax overhaul which has seen corporation tax fall to a flat rate of 21%. But then in the next breath it announced the closure of 63 of its 600 Sam’s Club stores and redundancies for thousands of workers. Amazon’s opening of the first ‘Amazon Go’ supermarket in Seattle only added to the perception that retail is changing rapidly and irreversibly, and there will be far more job losses to come.

There was equal confusion in Washington as the US Government ran out of money for a few days, with Congress failing to agree on the bill to fund the federal government until 16th February. This impasse is now a regular occurrence in the US, with the last government shutdown happening in 2013 and lasting for 16 days.

The month ended with a bullish President back from Davos and delivering his first State of the Union address. Whatever you think of Donald Trump, in the first year of his Presidency the US economy has grown, unemployment has fallen and the stock market has had a record run. The Dow Jones index eventually closed January at 26,149 – 6% up on the 24,719 at which it finished 2017.

Far East
There is one key question in the Far East and – despite South Korea seizing a second ship suspected of supplying oil to the North – it is not ‘has North Korea just launched another rocket?’

The question is simple: can China continue its remarkable growth rate and continue to be the economic powerhouse of the region? Figures for 2017 confirmed that the Chinese economy had grown by 6.9% – the first time in seven years that the pace of growth had picked up and ahead of the official target of 6.5%. Those who say, ‘yes, the growth can continue’ point to the fact that China only really became a key global economic power 15 years ago, to the ever-expanding middle class with ever-expanding consumer needs, and to initiatives like the One Belt, One Road project.

Those who say it must all end in tears argue that the growth is not real – several provincial governments have already admitted to faking figures to meet targets. They also argue that growth must slow down as China’s economy matures, and that it cannot be based on the current high levels of debt for ever. You pays your money and you takes your choice…

Away from China, South Korea’s Samsung – the world’s biggest memory chip maker – forecast record profits for the year of £10.4bn, although these were slightly below analysts’ expectations. Staying in South Korea, the government made trading in the crypto-currency Bitcoin illegal, amid fears it was increasingly being used by organised crime.

All four major Far Eastern stock markets were up during the first month of the year, with the Hong Kong market powering through the 30,000 barrier to close at 32,887 for a gain of 10% in the month. South Korea was up 4% to 2,566 and China up 5% to 3,481. Puffing along behind came the Japanese index, struggling up by just 1% to close January at 23,098.

Emerging Markets
For Emerging Markets, January’s big story was Canada’s decision to join the Trans-Pacific Partnership (TPP) which Donald Trump so spectacularly pulled out of last year. Canada had initially been reluctant to sign up because of concerns about the environment and labour protection, but will now join 10 other countries in Chile in March to sign the agreement. The TPP has been championed by Japan, which sees it as a way to counter China’s economic dominance in the region: Economy Minister Toshimitsu Motegi said the agreement would be an “engine to overcome protectionism”.

January was an excellent month for the three major stock markets we cover in this section. The Indian stock market rose 6% to finish the month at 35,965: Russia was up 9% to 2,290 and the Brazilian index shot up by 11% in January to close at 84,913.

And finally…
Football fans will know that January is the mid-season month when the ‘transfer window’ is open and Premiership leaders Manchester City continued their spending spree as they casually handed Athletic Bilbao £57m for defender Aymeric Laporte. Incredibly, this takes City’s spending on their defence since last summer to just under £150m – which is bigger than the more conventional defence budget of 52 countries.

Bottom of the list for defence spending are the Cape Verde Islands, who spend just $10m (£7.1m) last year. But City also outspent countries like Guatemala, Ghana and Afghanistan. Who said there was too much money in football?

No doubt Mr Laporte is well worth the £57m, but the real hero of January was Devon butcher Chris McCabe.

2017 was a fine year for the ‘And finally’ section of the Bulletin. 2018 will have to work hard to beat it – but Devon butcher Mr McCabe got the year off to the best possible start. The unlucky Mr McCabe found himself trapped in his own walk-in freezer after the door blew shut behind him. With the temperature as low as -20C, our hero feared the worst: he needed something to hammer the door release button, which (not surprisingly) had frozen shut. What could he do? The beef was too slippery and the lamb was too big. Fortunately, the shop had one giant black pudding left in the freezer – which saved Mr McCabe’s life. “I used it like a police battering ram,” he said. “I owe my life to a black pudding.”

Sadly, there are no reports of who subsequently bought the delicacy…