February Market Commentary
Introduction
Despite the claims of Brexit and the debate on triggering Article 50, it is impossible to start this commentary anywhere other than in Washington where, on January 20th, Donald Trump was inaugurated as the 45th President of the United States.
It is remarkably difficult to find a news outlet that has a neutral view of ‘the Donald:’ however, we’ll do our best in this commentary to stick to the facts and let you form your own opinions…
So far the new President is looking to make good on his pledge of “only America first:” he’s pulled out of the Trans-Pacific Partnership and indicated that he’ll be building a wall along the US/Mexico border – but he has graciously accepted Theresa May’s invitation to visit the UK.
The pro-business agenda of the new administration briefly saw the Dow Jones index break through the 20,000 barrier in January, before it slipped back later in the month. Most of the stock markets we cover in this commentary moved very little in January, but there were strong performances from both Brazil, last year’s star performer and up 7% in the month, and Hong Kong, which rose by 6%. There were perhaps intimations of a difficult year ahead for our old friend, Greece, with the Athens market down by 5% in the opening month of 2017.
Away from stock markets, the World Bank offered some good(ish) news to start the year, forecasting a modest recovery in global economic growth. It is expecting growth of 2.7% this year (compared to last year’s 2.3%) driven mainly by improvements in emerging markets and developing economies.
UK
The year got off to a good start for the UK manufacturing sector, with figures for December confirming that activity in the sector had reached a 2½ year high. The Purchasing Managers’ Index was up to 56.1 from 53.6 in the previous month, with any figure higher than 50 indicating expansion.
There was also strong growth in the service sector, which grew at its strongest pace for 17 months, and the Society of Motor Manufacturers and Traders reported that 2016 had seen UK car sales hit an all-time high, with 2.69m vehicles sold thanks to “very strong” consumer demand.
There was also good news for the housing market, with the number of first time buyers at a ten year high despite the average price of a house in the UK going through £200,000 for the first time – the Halifax recoding the figure as £205,170.
Last in the ‘good news’ column was the IMF upgrading its forecast for UK growth to 1.5% for the coming year (up from 1.1% in October) as it said the economy had “held up better than expected” after Brexit. Growth in GDP for the fourth quarter of 2016 was confirmed at 0.6% and unemployment also fell by 52,000 to 1.6m.
Less welcome was the news that household debt on loans and credit cards has returned to pre-crash levels, with the average UK household now owing £13,000. UK fuel prices also reached an 18 month high as inflation jumped to 1.6% in December from 1.2% in November.
There was mixed news from the UK’s retailers regarding the busy Christmas period. Next warned of disappointing sales, but several food retailers – notably Morrisons and Sainsbury’s – reported better than expected figures over the holiday period. As always though, the irreversible trend away from the high street and towards the internet continued.
What did the FTSE 100 index of leading shares make of all the news? In the event, ‘not much’ was the answer. Despite going through 7,200 at one point and breaking the record for the number of consecutive days where it rose, the index ended the month down slightly. It finished December 2016 at 7,143 and closed January down 44 points – or 0.6% – at 7,099.
Europe
Most of January’s news in Europe seemed to concern the car industry. BMW bravely announced its $1bn commitment to a new plant in Mexico, despite warnings from the new administration in the US. As we’ll see below, many firms are planning to invest in the US and/or move production back.
So potential problems for BMW and real problems for VW as it entered a guilty plea in the US over ‘deiselgate’ and agreed a $4.3bn settlement with the authorities over the emissions scandal. Despite these woes, VW has now become the world’s largest car manufacturer, overtaking Toyota which sold 10.175m vehicles in 2016, compared to VW’s 10.31m.
There was a grim prediction for the Euro, as Professor Ted Malloch, tipped to be Donald Trump’s ambassador to the EU, said the single currency “could collapse” in the next 18 months. Not surprisingly, Angela Merkel has taken exactly the opposite view – but with elections due in Holland, France and Germany, 2017 promises to be a turbulent year for Europe.
There was no such turbulence on the major European stock markets. The German DAX index was virtually unchanged in January, closing at 11,535, while the French index drifted back 2% to end the month at 4,754.
US
One of Donald Trump’s key pledges on the campaign trail was his commitment to pull the US out of the Trans-Pacific Trade Partnership, the 12 nation trade deal that was a key part of his predecessor’s Asia policy. Although this was largely symbolic (as the deal had not been ratified by the US Congress) it was a clear indication of his determination to push through election promises.
Executives at Ford were clearly aware of which way the wind was blowing as they cancelled plans to move to Mexico and instead announced a $700m expansion of their plant at Flat Rock in Michigan. And having been threatened with an import tax early in the month, Toyota ended January by announcing plans to invest $10bn in the US over the next five years.
Clearly major investments like this will not make an immediate difference to the US economy, and in January the news was not good. Jobs growth had slowed to 156,000 in December, against 204,000 in November and general estimates of 175,000, whilst growth in the fourth quarter was 1.9%, lower than the 2.2% which economists had been predicting.
Meanwhile, the new President was announcing his fabled wall along the US/Mexico border and a crackdown on immigration, as well as continuing to promise much lower taxes for both the middle classes and business. Wall Street has generally liked what it’s heard from Trump and his team: the Dow Jones index closed October 2016 (just before the election) at 18,142 and has risen by 9.5% since then, finishing January at 19,864. The index did briefly go through the 20,000 barrier at one point, but then fell back to settle for just a 1% rise in the month.
Far East
January saw Xi Jinping become the first Chinese leader to attend the World Economic Forum in Davos. This time last year his government was setting a target of 6.7% for GDP growth in 2016 – and what do you know? Official figures released in January showed that the economy grew by 6.7% in 2016, slightly down on the official figure of 6.9% recorded a year earlier and marking the slowest annual growth since 1990.
I say ‘official figures’ because there has been increasing scepticism over China’s growth figures and in January Chen Qiufa, the governor of Liaoning, said that his province had been “involved in large-scale financial deception” between 2011 and 2014 and that economic data had been doctored.
As Mr Chen may find out, that may not have been the greatest career move in the world. Unsurprisingly, the director of China’s National Bureau of Statistics declared the national data was “truthful and reliable.”
‘Reliable’ was certainly not a word that could be applied to Samsung’s Note 7: the phone’s habit of suddenly exploding and/or bursting into a flames gave a lot of YouTube viewers a lot of entertainment in 2016. Despite having to recall 2.5m handsets, however, Samsung still recorded a 50% rise in profits in the final quarter of 2016, up to 9.2 trillion won (around £5.8bn).
Meanwhile, Ant Financial, the digital payments arm of Chinese e-commerce giant Alibaba, was spending $800m to buy the US based MoneyGram. The deal will need regulatory approval from the US Committee on Foreign Investment, so it will be interesting to see what approach the new administration takes.
On the stock markets the Chinese Shanghai Composite had a steady start to the year, rising 2% in January to 3,159. As mentioned above, the Hong Kong market had an excellent month, rising 6% to 23,361. The South Korean market was also up, rising 2% to end January at 2,068, while Japan’s Nikkei Dow index was virtually unchanged, closing the month at 19,041.
Emerging Markets
As we’ve noted above, Brazil took the prize for ‘best performance in 2016’ among the markets we cover in this commentary with a rise of 39%. It made a storming start to 2017 as well, with the stock market rising a further 7% to 64,671. But despite the good performance of the stock market, we spent much of last year chronicling the ever-increasing losses at Petrobras, the state oil producer.
Petrobras is at the centre of a massive corruption probe in Brazil, with dozens of politicians having been arrested for taking bribes to grant lucrative contracts to private companies who then massively overcharged Petrobras. In January, Teori Zavascki, the judge overseeing the corruption probe was killed in a light aircraft crash – and the inevitable conspiracy theories were quick to surface. It’s another problem for President Michel Temer to wrestle with as he tries to keep the economy on track and eradicate the seemingly endemic corruption.
India – now the world’s fastest growing major economy – also enjoyed a good start to the year with the stock market rising 4% to 27,656. January was more subdued in Russia, however, where the market slipped back 1% close at 2,217.
And finally
January always brings us the World Economic Forum: the annual gathering of the great and the good at Davos in Switzerland. This meeting of politicians, business leaders and economists – sprinkled with a dash of celebrity – is supposed to chart a course for the world economy. Last year you may remember that delegates listened to Leonardo di Caprio rail against the excesses of corporate greed and then went off to reflect on the speech over £290 bottles of Cheval Blanc.
No such greed was reported this year – although one US TV reporter did complain that the price of a Davos hot dog had now reached $40. Clearly, he isn’t among the world’s super-rich who will have been cheered by news that sales of that ‘must have,’ the super-yacht, are back to pre-financial crisis levels. Just to give you something to aim at for the year, a super-yacht that is 100 metres long with a top speed of 25 knots and 50 crew will cost $275m – plus a $1m a year on maintenance and $1.4m on crew salaries.
If you can’t quite manage that, maybe the answer is to take advantage of McDonald’s all day breakfast. Launched with a fanfare as part of the grand plan to revitalise the business, the all-day breakfast has turned out to be a fine example of the Law of Unintended Consequences. Rather than draw new people in, existing customers have simply switched from burgers to breakfast, meaning that fourth quarter revenue for McDonald’s actually fell by 1.3%.
So no ticket to Davos and no super-yacht for the bright spark in charge of that initiative…
