November was a lacklustre month in terms of stock market returns. Japan and the US led the way with rises of 1.14% and 1.06% respectively, which resulted in the FTSE World index managing a rise of just 0.7%. Closer to home the FTSE All Share fell by 1.66%, as did Europe and Emerging markets which fell by 1.50% and 1.68%. However, although returns were small, there were lots of interesting developments as highlighted below.
November saw President Trump deliver one of his election promises; tax cuts! Approximately 1.4 trillion of cuts will be made over the 10 years. Corporation tax will be reduced from 35% to 20% hopefully encouraging companies to repatriate cash holdings from overseas. What the effect of such largesse is disagreed. The Republicans state that the tax cuts will unleash growth that will pay for itself. Companies will invest more, growth goes up which will compensate for the loss of tax revenue. Others argue that the growth the US is experiencing at the money should be used to pay down debt (US debt has tripled over the past 10 years).
Meanwhile the outgoing Chair of the Federal Reserve, Janet Yellen was able to pronounce that 3rd quarter growth in the US was a robust 3.3%. The recovery from the financial crisis in 2008 has been the third longest expansion in history. Many are not forecasting a slowdown just yet but with rising interest rates and low unemployment, will wage rises lead to more inflation than expected.
News outlets have had no problem filling copy given the ups and downs of the Brexit talks. At the time of writing it is close as to whether a deal on the Irish border can be agreed and talks can move on to discuss future trade agreements. Politics is never far from the surface and the turbulence this may cause. Watch sterling as this is probably the first market that will react to progress or otherwise. This can have an effect on the competitiveness of exports and translation of overseas earnings, a significant part of the FTSE100.
Of note during the month was the first interest rate in 10 years from the extremely low level of 0.25%. Any other rises are likely to be glacial with a forecast rise of 2 more rises over the next 3 years. The budget during the month appears to have passed with no controversies. Consumer spending (a mainstay of the economy) has slowed as inflation (via a lower exchange rate) squeezes incomes. It is hoped that the rise in exports will offset the consumer.
Japan grew for the seventh consecutive quarter (the longest run in 20 years). The economy benefitted from rising global demand and a weak yen helps exports (think cars and electrical goods) as well as continued financial stimulus from the government, affectionately known as Abenomics. Ending deflation is the goal of the latter, a debilitating condition where consumers hold off purchases as they know goods will be cheaper in the future. Although inflation is now at 0.7%, this still remains below the target of 2%.
Post the German election in September it was assumed politics had returned to normal. However talks failed in trying to form a coalition government, suddenly the long-term future of Angela Merkel looks in doubt after 12 years in power. And in Spain, the euros area 4th largest economy, the Catalan crisis is less in the headlines but still rumbles on with leaders of the region facing prosecution. Overall political leadership to tackle some of the deep-seated problems of the region may be delayed.
However in spite of the above, economically the region itself continues to set a good pace. Activity indicators in France, Germany the Eurozone are above forecast and are increasing, with both manufacturing and services both expanding. Unemployment dropped to 8.8%, a 9 year low but inflation remains low at 1.5%.
Russia and OPEC agreed to extend their oil production cuts to the end of 2018. The oil price is now nearing $60 per barrel, up from a low of $30 in early 2016.
It used to be the case that low prices were bad for emerging economies and vice versa, but that relationship is perhaps not as strong as it was. A decade ago energy companies accounted for 15% of emerging market indices, that is now approximately 7%. The IT and electronics companies are now 25% of the indices, think Alibaba, the Chinese technology company. Although many emerging markets are still resource and manufacturing heavy, that is changing as their economies begin to resemble their developing market counterparts i.e. the service sector is growing.
The above article was first published by Parmenion on 8th December 2017