January Market Commentary


By Chancellor

Introduction

At the start of 2016, Brexit was seen as unlikely and President Trump was seen as impossible. David Cameron was busy negotiating a deal with his European counterparts which would surely secure a comfortable majority for the ‘Remain’ camp – and while Donald Trump might manage a few wins in the primaries, he’d eventually give way to one of the mainstream Republican candidates, who would in turn be beaten by Hillary Clinton.

We all know what happened and with elections due next year in Holland, France and Germany 2017 could be equally dramatic. But let’s first look back at December, and also cast an eye over the whole of 2016. It was a year when the pound fell by 15% against the dollar, when the FTSE ended at a record high and the Dow Jones index closed within touching distance of 20,000 – and when the price of crude oil nearly doubled from the low it reached in January.

All but three of the major stock markets we cover in this commentary were up in December, whilst for the year as a whole, eight were up, two virtually unchanged and only one (China) was down in the year. We also keep a watchful eye on Greece, where the market advanced 2% in 2016 as the country continued to battle with its creditors and the far-left government of Alexis Tsipras became increasingly unpopular.

UK

December started on a downbeat note in the UK, with the pace of manufacturing growth slowing slightly and Bank of England Governor, Mark Carney, warning that increasingly sophisticated robots posed a threat to 15m jobs in the UK. (But not, fortunately, to the Governor of the Bank of England…)

Presumably some of the jobs under threat will be those concerned with burgers and fries, but McDonalds gave the UK a big vote of confidence when it announced that it would move its non-US tax base from Luxembourg to the UK. This means that UK tax will be paid on royalties the firm receives outside the US.

There was mixed news for the UK housing market in December. Nationwide reported average house price growth across the UK at 4.5% in 2016, with London for once below the average at 3.7%. The average price of a house in the UK is now £205,937 – but home ownership among the young has fallen significantly over the past 20 years. In 1996 46% of those aged 25 owned their own homes: that figure has now fallen to just 20%.

Very firmly in the ‘good news’ column, eight months of uncertainty came to an end for the steelworkers at Tata’s Port Talbot plant when the company gave a commitment to secure jobs and production there and at other steelworks across the UK. The growth of the UK economy was revised upwards for the third quarter – from 0.5% to 0.6% – and in company news Sky agreed to an £18.5bn takeover from 21st Century Fox.

We won’t weary you with the progress – or lack of it – of Brexit. The Chancellor dared to voice the opinion that perhaps a four year period of withdrawal might be sensible, duly raising the blood pressure of some newspaper headline writers. Meanwhile, Europe turned its collective back on Theresa May, discussing Brexit without her.

Whatever the Prime Minister’s problems, they weren’t shared by the FT-SE 100 index of leading shares, which finished the year at a record high of 7,143. The market was up 5% in December and 14% for the whole of 2016.

Europe

As we mentioned in the introduction, 2017 will be a significant year in Europe with elections due in Holland, France and Germany. This time next year will we be reporting on the European equivalent of Brexit and President Trump? It wouldn’t be surprising, and there was an indication of the popular mood when the Italian government of Matteo Renzi was heavily defeated in a referendum on constitutional reform held in early December.

Commentators are now predicting a “period of uncertainty” in Italy. That’s also a phrase which can be applied to the Italian banks with suggestions that the Italian government will be asking for €15-20bn from the European Stability Mechanism to help the country’s banking system.

The chief casualty appears to be Monte dei Paschi, the world’s oldest bank, which failed to raise the €5bn it needed to re-capitalise from private investors. The Italian government was forced to step in, with the bank crippled by years of losses and loans that can never be repaid. Before Christmas the bank’s funding shortfall was put at €5bn – a rather less festive assessment after the holiday put the figure at €8.8bn.

No doubt Angela Merkel tut-tutted at this Southern European profligacy as she announced plans to run for a fourth term as Chancellor: and no doubt the right wing Alternative fur Deutschland will have plenty to say on that score by the time the elections are held in September…

As we all know Christmas is a time for traditions, and VW reaching another deal over its emissions crisis is fast becoming one. This time it was with the US authorities over 80,000 VW, Audi and Porsche cars. There was equally bad news for Deutsche Bank as it reached a $7.2bn ‘settlement’ with US authorities over its mis-selling of mortgage-backed securities.

Despite these seasonal gremlins December was a good month for the German stock market, with the DAX closing up 8% in the month at 11,481. This enabled the market to post a 7% rise for the whole of 2016, and it was a similar story in France where a strong performance in December – up 6% to 4,862 – allowed the market to finish up 4% for the year as a whole.

US

Donald Trump is due to become the 45th President of the United States on 20th  January. His cabinet is now complete, with new Treasury Secretary Steven Mnuchin vowing a tax overhaul ‘not seen in decades’ in a bid to boost the US economy.

Peter Navarro – the man Trump has picked to head US trade and industrial policy – also appears to have been making vows, specifically about China. Navarro has described the Chinese government as ‘despicable, parasitic, brutal, amoral, callous and ruthless’ – and that’s just a start. Clearly, the Trump presidency will see an entirely different style of negotiating and diplomacy to the Obama years: to say that 2017 will be worth watching is an understatement.

…But the President-Elect appears to have made a promising start economically, with the news that Japanese company SoftBank is to invest $50bn in the US, creating up to 50,000 jobs. Trump also claimed the credit for air-conditioning company Carrier Corp’s decision not to re-locate to Mexico, keeping another 1,000 jobs in the US.

Meanwhile, the US Federal Reserve raised its benchmark interest rate by 0.25%, only the second increase in a decade. The rate was moved to a range of 0.5% to 0.75% as the Fed cited stronger economic growth and rising employment. Some analysts are expecting further rises, with Kathleen Brooks of City Index saying “the US economy will be on fiscal steroids in the next few years.”

Wall Street certainly seems to have taken steroids since Trump’s victory, with the market constantly reaching new highs in December and threatening to go through the 20,000 barrier. In the event the Dow Jones index closed the month at 19,763 – up 3% for the month, 8% for the last quarter of the year and 13% for the year as a whole.

Far East

Gambling seemed to be the key theme in the Far East in December, as Japan legalised casinos and those investors who’d taken a punt on the Chinese ‘selfie firm’, Meitu, hit the jackpot after it was valued at $4.6bn. Meitu’s key selling point is that it lets you ‘beautify’ your own selfies – a service a few of us might need  after Christmas and New Year…

More seriously, concerns were expressed that the Chinese property market is overheating, with many first time buyers in the major cities being priced out of the market: according to the National Bureau of Statistics the average property price rose by 11% in China’s seventy biggest cities for the year to September 2016.

Tackling this problem will be a job for the next leader of China’s central bank, as Zhou Xiaochaun steps down in 2017 after steering the Chinese economy for fifteen years: commentators have suggested that this will allow President Xi to further consolidate his hold on power.

Across the China Sea, Japanese Prime Minister Shinzo Abe signed off a record defence budget, reflecting a year of continued tensions with China, and North Korea’s nuclear and missile threats to the region. Presumably, the outlook is therefore good for Japanese defence contractors – but it is much less rosy for Toshiba, whose shares fell 20% in one day last week and are now down by 40% since  26th December. Most people think of Toshiba as an electrical firm: in fact, it’s now a diverse conglomerate, with the shares falling due to worries that its US nuclear business – responsible for a third of the company’s revenue – may be worth less than previously thought.

On the region’s stock markets the best performer in December was Japan, with a rise of 4% to 19,114. The market there is more or less unchanged for the year, but it is worth noting that it is up 16% in the final quarter of the year. China’s Shanghai Composite index fell by 4% in December to end the year at 3,104: it is down by 12% for the year as a whole, but all the damage was inflicted early in the year, with a slight recovery taking place in the second half of 2016. Hong Kong was down 3% in December to 22,001 and is another market to be virtually unchanged for the year as a whole. Finally, South Korea ended the year at 2,026 – up 2% in December and 3% for the whole year.

Emerging Markets

It’s the Emerging Markets section of the commentary which takes the New Year’s Honours, with Brazil the best performing stock market of the twelve we cover, closely followed by Russia. Despite falling 3% in December to end the year at 60,227 the Brazilian stock market rose by 39% in 2016, having ended last year at 43,350. The Russian index was up 6% in December to finish at 2,233 where it is up 27% for the year as a whole and 13% in the final quarter of 2016.

There was an interesting development in Russia as commodities trader Glencore and Qatar’s sovereign wealth fund together bought a 19.5% stake in Rosneft, Russia’s largest oil company. They paid $11.3bn for the stake (which equals that already held by BP) as Russia sought to sell some state assets in a bid to balance its budget and end a two year long recession.

The other major emerging market we cover, India, saw its stock market virtually unchanged in December at 26,626: it finished up just 2% for the year as a whole. The Indian central bank surprised most observers by holding interest rates at a six year low of 6.25% and the deadline for depositing discontinued 500 and 1,000 rupee notes came and went. The notes – worth approximately £6 and £12 – will no longer be legal tender as Prime Minister Narendra Modi bids to combat widespread corruption.

And finally…

We cover the thorny subject of debt in the first ‘and finally’ of 2017 – specifically, Cuba’s debt to the Czech Republic. Cuba owes the Czech Republic $276m, a debt dating back to the time when Cuba and the then Czechoslovakia were part of the Communist bloc.

On the very sensible grounds that they don’t have much money but do have a lot of rum, Cuba has suggested repaying the debt with bottles of rum – an offer which would give the Czechs enough Cuban rum to last a century. Sadly, the curmudgeonly, unimaginative Czech officials have said they’d like to be paid in cash. Perhaps the Cubans should throw in a few million cigars to clinch the deal…

Happy New Year…

 

Sources