December Market Commentary
Introduction
Well, for the second time this year the pollsters and the bookmakers had it spectacularly wrong.
First Brexit, now President-elect Donald J Trump. By 306 Electoral College votes to 232 the 70 year old billionaire overturned the predictions and beat Hillary Clinton. Yes, there is still the small matter of challenges to the result in three states, but we can expect to see Trump sworn in as the 45th President of the United States on 20th January.
What of the rest of the world? In the UK the new Chancellor, Philip Hammond, delivered his first Autumn Statement – and then promptly announced that it would also be his last. In France it now looks like next year’s Presidential race will be between the right wing candidate Francois Fillon and Marine le Pen of the Front National, whilst Italy is preparing for a referendum on 4th December that could heap more pressure on the embattled European Union.
In the US better than expected jobs figures put more pressure on the Federal Reserve to raise interest rates and the Dow Jones Index – hopeful of a pro-business agenda under the new President – soared to a record high. Meanwhile India was banning banknotes to try and curb the black economy and the Bank of England was coming under pressure over the new £5 note. Let’s see what the world’s stock markets made of all the excitement…
UK
November’s big event in the UK was the Autumn Statement, delivered by new Chancellor, Philip Hammond. Prior to the Statement, there had been much discussion over the size of the ‘gaping’ or ‘black’ hole in the Chancellor’s finances as a result of the decision to leave the EU. The simple fact is that no-one knows and, as Hammond conceded, forecasting over the next five years is going to be even more difficult than normal.
Hammond – or ‘Spreadsheet Phil’ as he’s apparently known to his colleagues – announced a largely cautious set of measures. Gone was George Osborne’s flamboyance and many of his policies: in its place was a heavy reliance on investment in the UK’s national infrastructure as Hammond outlined his determination to “build a country that works for all.”
Whatever the forecasts, there has been some good news for the UK economy since the decision to leave the EU. Hot on the heels of Nissan’s commitment to its Sunderland plant came news of a £1bn investment – creating 3,000 jobs – from Google, and Jaguar Land-Rover’s ambitious plans for 10,000 new jobs in the West Midlands.
UK unemployment fell by 37,000 to 1.6m in the three months to September, hitting an eleven year low, while the number of people in work rose by 49,000. Retail sales also did well, growing by their fastest rate for fourteen years in October. The Office for National Statistics said that sales volumes for October were 7.4% higher than in October 2015, and the increase of 1% from September was much stronger than economists had forecast. November on the High Street ended with a ‘Black Friday bonanza’: we’ll report on how much the tills were ringing next month…
The economy as a whole grew by a better than expected 0.5% in the three months to September, helped by export growth and that stronger consumer spending.
Against this, the construction sector had its weakest quarter for four years, and early indications were that the pace of growth in manufacturing had also slowed. House price growth also slowed in October according to Nationwide, with the year-on-year increase dropping to 4.6%.
We won’t weary you with the continuing debate over Brexit: the Government remains committed to triggering Article 50 by the end of March 2017 and for now the arguments and counter-arguments rumble on.
The FT-SE100 index of leading shares had a disappointing month in November, falling by 2% to 6,783. With eleven months gone, the FTSE is up by 9% for the year as a whole.
Europe
Italy hit the headlines with its referendum on 4th December. Prime Minister Mario Renzi banked his political future on a question of constitutional reform … and lost. He was beaten in decisive fashion by the No camp, a medley of populist parties headed by the Five Star Movement.This leaves Italy facing political and economic uncertainty, meaning there could well be a run on Italy’s banks: a fine problem for the European Central Bank to face in the run-up to Christmas…
Meanwhile, Angela Merkel has announced that she will run for a fourth term as German Chancellor and, as outlined in the introduction, the French Presidential contest looks like it will be between the right wing Francois Fillon and the even-further-right wing Marine le Pen.
Away from the debating chamber and on the shop floor VW was announcing plans to shed 30,000 jobs worldwide as it continued to struggle with the fallout from the emissions crisis. At least the wider German economy can be relied on, as figures for September confirmed a trade surplus for the month of €24.4bn.
Not that the German stock market was impressed. It ended November more or less unchanged at 10,640 and remains down just 1% for the year as a whole. November was a better month in France, where the stock market rose by 2% to close at 4,578.
US
November started calmly in the United States. There was good news on the jobs front, with 161,000 jobs created in October and the figures for August and September revised upwards. This increased the pressure for a rise in interest rates, but the Federal Reserve decided to keep rates on hold ahead of the Presidential election.
This is not the place to analyse the reasons why Donald Trump won: suffice it say that a great many forecasts were re-written very, very quickly. So far, American business has reacted favourably to the President-elect, clearly anticipating a much more pro-business agenda in Washington. Shortly after the election the Dow closed at a record high and, as we’ll see below, has now broken through the 19,000 barrier.
As yet, it’s difficult to say what America’s trade position will be under President Trump. Will we see ‘the wall’ along the border with Mexico? The threat of tariffs on Mexican goods? Ford certainly don’t seem to think, saying that they are going ahead with moving production of their smaller cars from Michigan to Mexico.
Donald Trump has stated that the US will quit the Trans-Pacific Partnership – a trade agreement with countries around the Pacific Rim but excluding China – on his “first day in office.” For now though, it is best to wait and see whether the rhetoric of the campaign trail gives way to the harsh realities of the Oval Office.
In company news Snapchat announced plans to float on the stock market with an expected valuation of between $20bn and $25bn, and Wall Street was certainly buoyed by the election, with the Dow Jones index closing the month at 19,124 – up 5% in the month and 10% for the year as a whole.
Far East
November was a good month for Japan as figures released for the third quarter showed that the economy had expanded more than expected, due to higher exports. GDP grew at an annualised rate of 2.2% in Q3, the third consecutive quarter of expansion – although there are fears that a Trump Presidency could hurt the economy if the anti-free trade rhetoric becomes a reality.
China may be taking a different view on President-elect Trump, however. The Trans-Pacific Partnership was a key part of the Obama administration’s ‘pivot to Asia’ and was seen as a way of bolstering US leadership in the area, at the expense of China. If the US does quit the TPP then China can only benefit as it assumes de facto economic leadership in the Asia Pacific region.
We’ve written previously about Samsung’s problems with the exploding Galaxy Note 7, and this has now led to pressure for the firm to divide into two – a holding company and an operating division – as a way of boosting shareholder value and drawing a line under the Note 7 fiasco.
On the region’s stock markets both the Chinese and Japanese markets were up by 5% in the month, closing at 3,250 and 18,308 respectively. There was less cheerful news in Hong Kong and South Korea, with both markets falling by 1% in November. Hong Kong was down to 22,790 and the South Korean market to 1,983.
Emerging Markets
There were widespread changes in India, as the country began November by streamlining its tax system in the biggest reform since independence. The new Goods and Services Tax is an attempt to introduce a simplified, countrywide system, to replace the previously fragmented state to state system.
A week later there was an even bigger upheaval as the 1,000 and 500 rupee notes (roughly equivalent to £11 and £5.50) were scrapped, in a move described as a “surgical strike” on tax evaders. “Honest people have nothing to fear” said Finance Minister Arun Jatley: sadly, both honest people and tourists were left queuing hopefully at cash dispensers as the surprise move caused widespread chaos.
A company that could have done with a few banknotes was Brazil’s oil producer Petrobras, which racked up massive losses for the third quarter of its financial year. Analysts had been expecting a profit: instead the company reported losses of 16 billion reals, equal to £3.86bn.
Unsurprisingly, both the Indian and Brazilian stock markets were down in the month. The Indian market fell by 5% to 26,653 and the Brazilian index was down by a similar amount to 61,906. There were no such problems in Russia, the other major emerging market we cover, where the market was up 6% to close November at 2,105.
And finally
Problems with the banknotes in India – there weren’t any – and now there are problems with the new £5 notes in the UK, which have been found to contain traces of animal fat. It certainly gives a new meaning to the phrase “having a fat wallet…” However, vegans and vegetarians were not amused and the Bank of England looks like to phase the new notes out as quickly as they phased them in.
Also being phased out – even more quickly – was an advert for Heinz Beans (or should that be ‘beanz?’) The company’s new ad showed people using empty and full cans of beans to beat out the rhythm of a song – obviously a splendid way to start your day. Sadly, the miseries at the Advertising Standards Authority banned the ad on the grounds that we might all cut our fingers.
