“Thou knowest, winter tames man, woman, and beast,” says Grumio in Shakespeare’s The Taming of the Shrew. Yet it cannot, apparently, tame stocks. As temperatures continued to slide last week, animal spirits persisted on leading indices, fed by glowing economic data. The MSCI World and S&P 500 broke all records to post a 13th consecutive month of positive total returns in November. The S&P 500 set a fresh record on Thursday, ending the week up 1.25%, and the Dow Jones broke through 2,400 for the first time. Forecasts on Friday showed US economic expansion at 2.5–3% in the fourth quarter.
Nevertheless, investors were not without their worries over the trading week. A severe sell-off in the Chinese bond market reflected concerns over political intervention and spilled over into equities. This shift was later mitigated by positive Chinese manufacturing data. Global manufacturing indices struck a multi-year high, after the best November in decades. The Eurozone Manufacturing Purchasing Managers’ Index came in at its second-highest rate on record; UK manufacturing struck its highest growth rate since 2013; and in Japan, the Nikkei Markit Manufacturing PMI clocked its best improvement since March 2014.
The Nikkei 225 rose 1.2%, while the Eurofirst 300 dropped 0.79%. Yet there was news that Siemens would part-float its highly profitable Healthineers division next year in Frankfurt. It will be the financial centre’s largest IPO in 20 years.
“Frankfurt won the battle of the listings, with London losing due to Brexit uncertainty and union discontent about New York,” said Stuart Mitchell of S. W. Mitchell Capital. “It has a potential valuation of €40 billion. In a world of increasing cost pressure on healthcare providers, as seen with the UK’s NHS and Trump’s policy intentions, the promise of better clinical outcomes at a lower cost should be popular. The increased focus and agility of a separation from a conglomerate, and the company’s strong market position, mean business should be able to accelerate. As ever with IPOs, it all comes down to valuation.”
In the UK, the FTSE 100 fell 1.5%, and losses would have been greater were it not for Friday’s manufacturing figures. Nevertheless, the FTSE 100 welcomed a high-performing newcomer to its ranks in the shape of Just Eat, the food delivery company founded in 2001 – the company is now worth more than M&S. Luke Chappell of BlackRock, who holds the stock, believes it is just one more proof of the UK’s thriving technology start-up scene.
“Some of the UK’s disruptors are incredibly young businesses – Just Eat was founded as a dotcom in Denmark and only arrived in the UK in 2006/07,” says Chappell. “It is now in 15 countries and in the FTSE 100. It provides convenience and added value to its customers, the restaurants, and also to consumers, [as it is] able to aggregate multiple takeaway restaurants on a single app, and the restaurants can get more orders and get them right first time. Its challenge is that it’s not the only company to spot that this is quite an attractive market; but one of the things you do see in disruption is that the prizes to the winners are extraordinary.”In fact, the broader decline in the FTSE 100 may have had more to do with politics than economics. As so often with developments around Brexit, a fall in stocks actually reflected improved sentiment over Brexit; thus, as sterling rose, so the FTSE 100 fell, due to its high concentration of companies earning revenues in other currencies.
Return of History
The tidings gladdening investor hearts were that the UK would foot a higher exit bill than previously countenanced (thereby ending a deadlock) – sterling then hit a two-month high against the dollar. The government prefers to calculate the figure net not gross (for political reasons) – reportedly €45 billion at minimum. Perhaps most surprising of all was the fact that almost no pro- Brexit MPs demurred – a change from Boris Johnson’s summer warning that, if the EU expected payment, it could “go whistle”.
Investors assumed the concession raised the odds that the EU will decide, at its meeting on 14–15 December, to agree to move to phase two of negotiations. One major issue is judicial sovereignty but, on Friday, the UK parliament’s Exiting the European Union Committee prioritised a different sticking point in its report: “The Committee does not see how it will be possible to reconcile there being no border between Northern Ireland and the Republic of Ireland with the Government’s policy of leaving the Single Market and the Customs Union.”
Last week it was increasingly clear that finding a solution will require deft – and rapid – manoeuvring by the UK government. The Irish foreign minister said Ireland would not accept a fudge, while the DUP warned it would not support Theresa May in parliament if Northern Ireland didn’t fully detach from the EU. As Theresa May arrived in Brussels, progress reports varied. Irish politics was often a fraught topic in Westminster in centuries past – in recent days, that history has felt a little less distant.
Meanwhile, pharmaceutical groups unveiled a £1 billion UK investment boost, amounting to 1,750 high-skilled jobs in life sciences, one of the UK’s fastest-growing sectors. Last week also saw the UK’s new industrial strategy launched. The plan focuses on productivity and aims to raise R&D investment to 2.4% of GDP. The CBI said it was a good first step.
Car sales in the UK have gone into reverse, falling for seven straight months since April, in a sign of waning consumer confidence – sales are down 4.6% this year against 2016. Consumer confidence is close to its lowest level since 2013, according to recent data. Richard Sharp, a senior official at the Bank of England, took what was (given his employer) a bold step, by speaking out after the Budget; he warned that the UK cannot afford to borrow more without jeopardising financial stability. The comments followed Hammond’s pledge of a £25 billion spending rise – small change compared to Jeremy Corbyn’s proposed £250 billion boost.
Sharp’s boss, Mark Carney, dangled the carrot of reduced banking regulations for the City after the UK’s exit, albeit in a limited number of areas – the banker bonus cap could be jettisoned, he suggested. The Bank also released its stress tests and the country’s seven largest lenders all passed for the first time since the tests were introduced in 2014, although Barclays and RBS only passed due to raising fresh capital in 2017. RBS, which announced thousands of job cuts, also formally shut its ‘bad bank’ with a £50 billion loss, opening the way for the government to sell its 71% stake in the coming months.
It was politics that held the headlines in much of the world last week. In Germany, the chances of a grand coalition between Merkel’s CDU and Schulz’s SPD remained very much in play, but the latter said that a commitment to strengthening the EU – in support of Macron’s reform agenda – would need to form part of the deal. In the US, Donald Trump retweeted a video posted by the far-right UK political party, Britain First, only to be slapped down by Theresa May. Janet Yellen offered an indirect reprimand of a different sort. The Fed governor, who is now in the final season of her tenure, warned that public debt, productivity and inequality were all worsening in the US. When questioned, she also commented that there was not sufficient evidence linking tax cuts to increased business investment. On Friday, the Senate approved the president’s tax package – it now remains for the Senate and House of Representatives to agree a compromise version.
Blackrock and S. W. Mitchell Capital are fund managers for St. James’s Place.
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