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Week Watch | 20 July 2020

Stock Take

Chinese stocks ended their remarkable recent rally last week, despite second-quarter data suggesting that the country’s economy is rebounding quickly.

The CSI 300 Index slumped almost 5% on Thursday in its worst one-day fall since February. The news suggests that investors have doubts surrounding the announcement that Chinese GDP grew 3.2%, compared with the same period last year. The picture is slightly uneven, with data suggesting that sectors such as industry and construction are faring well, but hospitality, retail and transport are lagging.

“The upshot is that while there are some reasons to think the GDP figures may be overstating growth slightly, there is little doubt that the recovery has been rapid,” noted Julian Evans-Pritchard, Senior China Economist at Capital Economics.

Meanwhile, a renewal of tensions between China and the US is continuing to weigh on markets. The situation worsened last week, as President Trump retaliated to China’s imposition of a draconian security law in Hong Kong by signing the Hong Kong Autonomy Act, a piece of legislation that paves the way for sanctions on Chinese officials.

Last week provided an example of the effects of that tension. Boris Johnson’s Cabinet decided to ban Huawei, the Chinese technology giant, from supplying new 5G equipment to the UK. The decision follows intense debate about the security implications of Huawei’s involvement in critical infrastructure due to its close ties to China’s ruling party.

“Tis the season

Earnings season began last week. Companies have begun releasing their second-quarter results, detailing the true impact of COVID-19 and the global economic slowdown. Very few companies will escape unscathed from the crisis – S&P 500 earnings in some sectors are expected to drop almost 45% year-on-year, according to FactSet. Investors are now scouring results for clues about how companies have coped, and how they are positioned for the coming months.

“We expect headlines to be bad, but for the market reaction to be muted to positive on outperformance of exceedingly low expectations”, argued George Curtis from TwentyFour Asset Management, co-managers of the St. James’s Place Diversified Bond fund.

Kicking off the season last week were the major US banks, which have largely benefitted from market volatility and central bank support. However, in a sign of further fallout from COVID-19, Wells Fargo, J.P. Morgan and Citigroup together set aside $28 billion to deal with expected loan losses due to COVID-19.

Wells Fargo also reported a $2.4 billion loss for the quarter. The bank is grappling with operating costs that it can’t cut easily due to pressure from regulators, while unable to improve its margins by growing its balance sheet due to federal limitations, notes Dan O’Keefe of Artisan Partners, co-manager of the St. James’s Place Global Value fund. Artisan Partners exited its position in Wells Fargo earlier this year due to its view that the bank was being “squeezed on all fronts”.

Both Citigroup’s and JP Morgan’s results were positive, says O’Keefe, but they were interpreted differently by the market – with the former’s stock going down and the latter’s going up. In his view, the only explanation is that Citigroup’s statement was more pessimistic about the future than J.P. Morgan’s. That difference highlights how a tumultuous quarter has left investors especially keen to hear predictions about the future business environment.

But it’s more useful to scan results for clues about the present, says O’Keefe: “Nobody knows what’s going to happen for the rest of the year, but the results reporting season gives you insight as to how well the businesses are managing, how good those management teams are, and how resilient those businesses are.”

In the eurozone

Two big meetings took place in Europe last week. The first was at the European Central Bank, which, as expected, decided not to alter its level of stimulus. European stocks fell on the news.

Markets were more focused on the summit in Brussels, where European leaders gathered on Friday to thrash out the details of a €750 billion COVID-19 recovery fund . There were disagreements surrounding how much of the total ought to consist of grants rather than loans, and what sorts of conditions should be attached to funds when they are distributed. It appeared that the final sum, if agreed, might be smaller after the weekend.

At the time of publication, a weekend of talks had pushed the participants closer to a deal, with negotiations set to resume this afternoon. Markets seemed cautiously optimistic that an agreement was near. The euro strengthened against the dollar on signs that progress had been made, reaching its highest level since March.

Dutch Prime Minister Mark Rutte, one of the ‘frugal group’ of nations seeking to limit the amount of grants that are disbursed, struck a note of optimism in the early hours of Monday morning, when he told reporters that the talks were “back on track” after clashes over the weekend.

In ordering a review of Capital Gains Tax (CGT) last week, it appears that Chancellor Rishi Sunak has fired the starting gun on plans for tax rises to help recover the costs of the coronavirus crisis. If so, tax-saving wrappers such as ISAs and pensions will assume even greater importance for those looking to grow and protect their wealth.

Sunak’s request to the Office of Tax Simplification made specific reference to “how gains are taxed compared to other types of income”. Currently, basic and higher rate taxpayers pay 10% and 20% respectively on capital gains (excluding those on residential property), and also receive a tax-free annual allowance of £12,300. Aligning CGT and Income Tax rates, or cutting the annual exemption, would both simplify the system and raise useful tax revenue.

It is also significant that the review includes Private Residence Relief; which would open up a potentially vast pool of tax revenue, given how much of the population’s wealth is tied up in their homes.

“Fewer than 300,000 taxpayers paid CGT in 2017/18, raising £8.8 billion. Against a deficit nearing £350 billion in 2020/21, doubling CGT revenue would make only a minor dent,” says Eddie Grant, Director and Chartered Financial Planner at St. James’s Place. “But from a political viewpoint, CGT has similar advantages to a wealth tax, perceived as a tax on the rich which will not affect most people.”

The timescales for the consultation are short for any changes to be made in the Autumn Budget. However, there is a precedent for CGT rates to be changed mid-year, as George Osborne did it in 2010. The Treasury has downplayed the significance of the review, but individuals considering appropriate restructuring of their investments might be wise to take advantage of current rules.

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

  In The Picture

Face coverings or masks will become mandatory for shoppers this Friday, in a move that, according to new data from polling company YouGov, seven in ten adults support. The poll of 1,600 adults also reveals that most people believe they are good for public health. So why is it that a large minority of Britons (37%) haven’t worn a mask in the past week?

Very few people said that they don’t want to wear them (3%), that they’re uncomfortable (3%), or that it constricts their freedom (1%). Instead, those not wearing masks said that they don’t feel they have to, that it’s not mandatory, or that they’ve not been outside much.

Perhaps politicians could do more. Although some leaders have been spotted with covered faces in the past week, fewer than one in seven respondents had seen masks on the faces of Keir Starmer, Matt Hancock, Rishi Sunak or Priti Patel.

 

 

The Last Word

“To mock the truth, you have to know the truth.”

Actor Idris Elba argues that TV shows featuring offensive depictions should be signposted with a rating system rather than censored.

 

Artisan Partners and TwentyFour Asset Management 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 2020. “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.
 
© S&P Dow Jones LLC 2020; all rights reserved

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