Week Watch | 07 October 2019

Stock Take

The IAAF World Athletics Championships and Rugby World Cup might have been in full swing but, in terms of attendees at least, they looked like sideshows last week beside the 70th anniversary celebrations of the People’s Republic of China.

One hundred thousand civilians on floats processed past the Gate of Heavenly Peace in Tiananmen Square, as did a number of shiny-new intercontinental missiles. The choreography was less apparent in Hong Kong, where protests were marked by occasional outbreaks of violence. Hong Kong is equivalent to just 2.7% of the mainland economy today, compared to 18% back in 1997 at the handover. Yet for all its scale, Beijing is not expected to launch a 1989-style response. Instead, it moved last week to free up land to build more social housing, thereby targeting the city’s most immediate economic challenge.

Focusing on economics has, after all, kept the Chinese Communist Party in power. In 2007, the country was growing at 14.2% per year, and even today’s 6% rate is momentous; it creates well over half a trillion dollars of new wealth a year.

Globally, however, there came a series of signals last week which suggest that economic growth worldwide is declining: consumption and services data across the US, UK and eurozone are all struggling. More specifically, bleak manufacturing data suggest that the trade war is being sorely felt.

It is a war that shows little sign of abating. In a ruling last week, the World Trade Organization (WTO) found that Airbus – a consortium backed by Germany, the UK, France and Spain – had indeed received unlawful state aid. The ruling legitimises US sanctions, which will be imposed later this month, to the tune of a 25% tax on a range of imports from the EU. (Boeing, Airbus’s main competitor, awaits a WTO ruling on a parallel case, probably next year.)

“If applied on both sides, these tariffs will severely impact US and EU industries, putting high costs on the acquisition of new aircraft for US and EU airlines,” said Paul Boyne of Manulife, manager of the St. James’s Place Global Equity Income fund. “With regard to our Airbus holding, we expect to see increased volatility in the share price as these tariff battles work their way through. In fact, Airbus stock was up 4% on Thursday as the United States Trade Representative tariff announcement on Airbus was a lot less than expected.”

The US was also rocked by the continued saga of impeachment proceedings against the president, not least when a second whistleblower came forward on Sunday. Having already been accused of seeking Ukrainian government help to besmirch the name of the Biden family, Donald Trump last week openly called on China to investigate the Bidens instead – a rogue political move by any standards. Some speculate that the crisis makes a pre-election US-China trade deal all the more likely.

Fears over global growth and trade certainly weighed on investors’ minds last week: the S&P 500 slipped over the period. However, falling growth expectations also raised hopes that the Fed might yet take further supportive action. Friday’s US jobs numbers may help to make up the committee’s mind – the numbers fell short of expectations.

Anniversaries and rugby weren’t enough to prevent Asian stocks falling last week, and indices in Shanghai, Hong Kong and Tokyo all dipped, although losses were relatively contained. European stocks, meanwhile, were hit by the stream of negative economic data, as well as by the US tariffs decision; by Friday, however, hopes had emerged that the Fed might be softening further served to temper the week’s falls.

In the UK, Dave Lewis announced his forthcoming departure as CEO of Tesco after five years at the helm. “Dave Lewis has implemented a huge turnaround in the business over the past five years and, whilst it is disappointing to see him leave, his successor takes over a company in a very good state,” said Nick Purves of RWC Partners, manager of the St. James’s Place UK Equity fund.

However tough the new CEO’s job proves to be, it pales next to that of the prime minister. Last week Boris Johnson presented his new Brexit proposal to the EU. It includes customs checks, but not at the Northern Irish border, and it necessitates a regulatory border in the Irish Sea. Fearful of becoming a scapegoat, the EU was careful to get the mood music right, but the Johnson deal looks unlikely to fly in Brussels. The Irish Taoiseach said it failed to protect the “all-island economy” and that its proposals “do not fully meet the agreed objectives of the backstop”, while Donald Tusk said, “We remain open but still unconvinced.”

The prime minister needs EU approval at its Council meeting on 17–18 October. The passing of the Benn Act in parliament last month means he must request an extension on 19 October, should no deal be agreed before then.

  Wealth Check

Saving for children was once viewed as a nice extra – useful but hardly a top priority. These days, however, the cost of university or college fees, coupled with the cost of getting on the housing ladder, means parents are increasingly trying to plan ahead.

  In The Picture

The 70th anniversary of the People’s Republic of China passed last week. In that period, China’s national population has risen to be the largest in human history; the country has undergone what the Encyclopaedia of Global Migration said is “likely the largest migration in human history” (as rural dwellers move to the cities); and China has enjoyed what the World Bank, in its June 2019 report China’s Economic Rise, called “the fastest sustained expansion by a major economy in history”.

 

The Last Word

It doesn’t matter if the cat is black or white, so long as it catches mice.
Deng Xiaoping, who oversaw China’s modern opening up to the world, on choosing between different economic systems

The figures quoted in the video are examples only and they are not guaranteed. They are not minimum and maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

For Stock Take:

Manulife and RWC Partners are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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