Hibernation didn’t seem such a bad option in February. If not for the “Beast from the East”, then for the way volatility returned to the world markets.
The markets received a rude awakening in the first week of the month with signs of inflation creeping back into the US. One of the (few) successful programs implemented by President Trump has been a cut in corporation tax. This has led, in many cases, to companies passing some of this saving on to their employees in the form of higher wages. The fear is that this could cause a rise in inflation and has raised the prospect of higher and more frequent interest rate rises by the US Federal reserve. As often happens, these fears travelled around the world like wildfire and several records were broken for “biggest one day falls in history”.
It is very easy to get glum about these types of events; however, it does serve as a reminder that this is how markets normally work. The rise in value of the world markets over the last 12-24 months could not go on forever and the very nature of saving and investment is that asset prices rise and fall. Investing is a long-term endeavour – a marathon, not a sprint.
My view is very simple, I do not worry about short term fluctuations in the markets. Risk is an everyday part of what we do and is the reason why we spend so much time with new and existing clients alike talking about risk. Although we cannot remove risk completely, by diversifying our model portfolios, we can minimise risk by holding a variety of asset classes with the aim that they complement each other in times of stress.
I will end this section by saying that, by the end of February, most markets recovered some ground (but not all). Despite this, in my opinion, we should expect further volatility over the next few months. It is also good to remember, that volatility can work both ways.
February saw a politically quiet month, with the only stories in town being Angela Merkel’s attempts at staying in power for another 4 years and the impending elections in Italy with an anti-immigration party butting heads with an anti-EU party for supremacy. I will cover more of these stories in next month’s note.
Moving on, and I’ve not mentioned Brexit once yet!
After January’s news of Carillion’s collapse with the loss of 1000s of jobs, February didn’t hold any better news. A litany of companies made announcements of job cuts and liquidation. Morrisons, Sainsburys and Centrica announced job cuts with Maplin’s and Toys-R-Us likely to disappear from the high street with the loss of jobs. The latter’s demise causes me huge distress as it removes a cheap Saturday afternoon outing for my children.
Perhaps the worst news, though, was reserved for Tesco. It now faces the largest ever claim for equal pay in UK employment history – £4bn to be precise. That’s a lot of Club Card Points.
With all this talk of jobs, it’s probably no surprise that we saw an increase in the unemployment totals – ticking up to 4.4%. Despite this, wage growth also grew which saw the Bank of England take a similar tone to the US Treasury – interest rates may go up sooner than expected.
There was, amongst the thorns, some good news. UK productivity was the strongest since 2008, manufacturing was also up in December and again the highest since the financial crisis. Mortgage approvals for first time buyers were at their highest for 11 years and RBS finally recorded the first profit since we all bailed them out.
It wouldn’t do for me not to mention Brexit. With little over 12 months to go before we bid adieu to our European friends, February 2018 contained little more than a lot of speeches. Johnson, May, Corbyn, Davies (where he assured us we would not experience a Mad Max dystopia after Brexit), Barnier and Cable (who remembers the Lib Dems?) all gave us their views. Each speech on the UK side was generally met with a European politician saying what was being proposed wasn’t possible and the semantics between leaving “the” customs and leaving “a” customs union seemed to take up endless column inches.
The home markets were not immune to world events, and both the FTSE100 and FTSE-All share were down 4% and 3.8% respectively. The £ was also down against the dollar, falling by c. 3%. Over 12 months, the same markets are running at -0.43% and +0.71% respectively.
As mentioned above, Angela Merkel spent February trying to form a government. Her efforts seem to be bearing fruit, and she is expected to be able to start her 4th term in office (Update 6th March, this has now been completed and she now heads a coalition government). As the de facto leader of the EU, she faces many challenges, one of which is dealing with the old Eastern bloc countries. With anti-immigration sentiment already strong in EU member states like Poland, Slovakia, Hungary and the Czech Republic, there may well be increased tensions in the EU in the months ahead.
EU leaders can, however, console themselves with the news that the EU economy grew at its fastest pace for ten years in 2017, with figures confirming that the 28-member bloc expanded by 2.5% in 2017. Growth in the final three months of the year was 0.6%, mirroring that of Germany and France.
February saw the German DAX index down 5.71%, the French CAC down 2.94% and the Greek main market down 3.91%. Over twelve months, the same markets have produced growth of 5.08%, 9.51% and 62.62%(!)
With the demise of companies like Maplin’s and Toys R Us, it doesn’t take a retail expert to know this is, in large part, due to the rise of the online giants. Companies like Amazon and Netflix are rightly cited as shaking up their respective sectors (it is a widely known fact that Blockbuster passed up the chance of buying Netflix for $50m in 2000 – where are Blockbuster now?). Along with Apple and Google they are all in a race to become the world’s first trillion-dollar company. A cautionary tale to those who don’t adapt to change, but also a sobering thought that these companies are becoming more powerful and influential on all our lives.
One anomaly this month was the fortunes of Sky’s share price. Shares rose 27.3% in February, as Comcast made a rival bid to purchase the company and attempt to gazump Rupert Murdoch’s 21st Century Fox bid.
Generally, economic figures coming out of the US were positive with unemployment down again and wages up. However, as noted in my introduction the rise caused a wobble in the markets and led to the sharp falls we witnessed in the markets.
The month ended with good news for supporters of the President. Shortly after seeing his approval rating go above 50% for the first time in eight months, Donald Trump announced that he would be running for re-election in 2020. The news comes 980 days before Election Day – easily eclipsing the 582 days there were before polling when Barack Obama announced his intention to run again in 2012.
The two US indices we follow had differing fortunes in February. The S&P500 had a modest fall of 0.81%, whereas the Dow Jones fell by a more substantial 4.28%.
Far East & Pacific Basin
Other than the markets taking up the front pages of the local press, there were few other stories dominating in the region.
One of the least covered stories is the proposed changes to “term limits” in China, the number of times a leader can stay in office.
Currently, this is set at two but there are moves afoot to allow Xi Jinping to stay in power indefinitely. This could endow him with power and longevity that even Mr Putin would be envious of.
Away from China, life was much more peaceful around the Pacific. With the only other notable story being that Japan has raised its state pension age to 70, in response to their aging population. A story that is all to familiar to us in the UK.
The Chinese and Hong Kong stock markets were down 7.64% and 6.21% respectively. The Shanghai Stock Exchange was reacting to events in the US, as well as a crackdown on some CEOs of large companies for “economic crimes”. Japan also suffered along with the rest of the markets, down 4.46%. The best performing market on our list was the Australian ASX index which saw a relatively small loss of 0.38%.
Little of note to report in this section this month, only to reiterate the market losses already mentioned were repeated across the developing world. The Indian markets were down 4.85%, and this was repeated in a variety of other markets not on our list.
So, was there anything to smile about in February? Well, unless you had a hankering for a Family Bucket from KFC, there were some things that could raise a smile. My favourite story in February involved Iceland (the country, not the frozen food specialists) and a problem they had encountered.
The country has impressive green credentials, with virtually all of its energy coming from renewable sources: because of this, many firms have set up data centres there, keen to tick the ‘renewable sources’ box in their annual report. Now, it seems, many of these data centres have turned to mining Bitcoin to generate extra revenue. Unfortunately, mining Bitcoin – via computers solving complex mathematical problems – uses a lot of power. So much so that energy experts are warning that Iceland simply will not have enough energy.
So, in a twist of irony – Iceland creates green energy for its citizens, the lure of green energy attracts data centres, the data centres use all the energy, ordinary Icelandic citizens wonder why the lights have gone out.
As always, if you wish to discuss any issues raised in this commentary or anything else, please do not hesitate to get in touch.