September Market Commentary 2016

By and large August was a good – but unexciting – month for the major world stock markets we cover in this commentary. There were no dramatic gains – Hong Kong was the star performer with a rise of 5% – and two or three markets did their best to do nothing at all, but there were no major falls. Despite bad news (again) about the slowdown in the Chinese economy, August was almost a month where the ‘steady as you go’ mantra applied everywhere.

There was a rally in the oil price in August: having been below $30 a barrel in February the price touched $51 a barrel in August, before slipping back again as fears persisted about oversupply.

In the UK the month ended with Theresa May taking the cabinet to Chequers for a ‘brainstorming session’ on Brexit. There seems no sign of Article 50 being invoked any time soon (and thereby triggering the formal process of leaving the EU) but the new PM remains firm in her assertion that ‘Brexit means Brexit.’

UK

Whatever happened at the end of the month, August got off to a shaky start as a poll by market researchers, GfK, recorded the biggest slide in consumer confidence for twenty six years in the immediate aftermath of the vote to leave the EU.

Four days later the Bank of England cut interest rates for the first time in more than seven years, with the base rate reduced from 0.5% to 0.25%. Bank of England Governor, Mark Carney, made it very clear that he wanted households and business to feel the benefits of the reduced rates. The Bank also committed an extra £100bn in an attempt to encourage the clearing banks to lend, and avoid a post-Brexit recession.

Gradually the news for UK plc improved through the month – although the High Street suffered yet another blow as British Home Stores closed its doors for the final time.

Retail sales were up in July, and UK tourism was also up, helped by the fall in the value of the pound. UK unemployment fell in the April to June period, with 1.64m now out of work and the jobless rate steady at 4.9%. By the middle of the month the FTSE-100 index had reached a fourteen month high at 6,851.

There was more good news when the Society of Motor Manufacturers and Traders revealed record sales of second hand cars for the first six months of the year – up 8% to 4.18m vehicles – and the World Tourism and Travel Council predicted 3.6% growth for the UK travel industry this year.

Finally, the Department for International Trade reported that a record number of investments were made in the UK by foreign firms in the year to April 2016. They recorded 2,213 inward investment projects – up 11% on the previous year.

By the end of the month the FTSE had slipped back slightly to close August at 6,782 – a rise of just 1% in the month, although the market is up by 9% on a year-to-date basis. The pound was far more stable than it had been in the immediate aftermath of the Brexit vote, and ended the month down very slightly against the dollar at $1.3142.

Europe

For much of August it looked as though this section on Europe would be short – if not non-existent. The continent appeared to have gone on holiday…

True, the Bundesbank broke off from applying the Factor 10 to give younger Germans the unwelcome news that they may need to work until they’re 69. While the German state pension system is in good health at the moment, it will ‘come under pressure’ in future decades. The Bank therefore floated the idea of raising the pension age to 69 by 2060.

Meanwhile, 27,000 staff at Volkswagen downed tools far earlier than age 69 as production of the Passat and Golf ground to a halt following a dispute with suppliers. Another month, another problem for VW…

But basically, not much else to report. And then – as they so often do – the European Commission rode to the rescue, politely suggesting to Apple that they should pay $13bn in back taxes to the Irish Government.

The Commission said that Ireland had enabled Apple to benefit from a corporate tax rate of a maximum of 1%, with the company paying an effective rate of 0.005% in 2014. ‘Member states cannot give tax benefits to selected companies,’ said Competition Commissioner Margrethe Vestager. Unsurprisingly Apple said they would be appealing against the ruling: rather more surprisingly the Irish Government also said they disagreed with the record penalty and would also be appealing, to ‘protect the integrity of our tax system.’

As you’d expect, the move was met with widespread criticism in the US. Charles Schumer, a leading Democrat, called it a ‘cheap money grab’ while White House spokesman, Josh Earnest, said that if Apple paid the back taxes it might offset the amount against tax payable in the US, ‘and so harm US taxpayers.’

We suspect this one will take some time to sort out: the only thing you can be sure of in the short term is a steady flow of tax lawyers to Dublin and Brussels.

There was rather more certainty on the German stock market in the month with the index moving up 2% to 10,593. In contrast, the French market was clearly on the beach: it moved by precisely two points in August, starting the month at 4,440 and ending it at 4,438.

US

The month started badly in the US with figures for the second quarter showing that the economy had grown far more slowly than had been expected – at a rate 1.2% against forecasts of 2.6%. Conversely, consumer spending surged in the three months to June, rising at an annual rate of 4.2%, the fastest pace since the fourth quarter of 2014. The jobs numbers were also encouraging, with 255,000 jobs being created in July.

Inevitably, though, this prompted talk of a rise in interest rates, with an increase before the end of the year now looking more likely. This certainly seemed to be the view of Janet Yellen, head of the Federal Reserve: speaking at an annual meeting of central bankers she said that ‘the case for an increase … has strengthened in recent months.’

In company news, Walmart bought the online retailer jet.com for $3.3bn and in yet another blow to traditional shopping, Macys announced the closure of a hundred stores. Uber – the ride-sharing app and pioneer of the sharing economy – finally gave up its attempt to get the better of its rival in China – the splendidly named Didi Chuxing – and turned its attention to the Indian market.

The Dow Jones index reacted to all the news with studied indifference – or perhaps with a Gallic shrug. It drifted down just 31 points in August to close the month at 18,401.

Far East

It was also a bad start to the month in the Far East, as July’s figures confirmed a drop in Chinese exports – seen as a snapshot of the wider global economy. Exports fell by 4.4% compared to a year ago: this was an improvement on June’s 4.8% fall but was still weaker than had been expected. Imports were also disappointing, falling by 12.5% in July. A few days later it was also confirmed that retail sales and industrial output had failed to reach July expectations, underlining the difficulty China is having as it attempts to move the economy away from a reliance on manufacturing and exports to more domestic consumption.

Hopefully therefore, there’ll be plenty of domestic demand for air travel. China has now launched its first aircraft-engine manufacturer – the Aero-Engine Group of China – in a bid to wean itself of western suppliers.

It appeared to be a similar story across the China Sea in Japan, as exports fell for a 10th consecutive month, largely thanks to a stronger Yen. Exports were down 14% from the same period a year previously.

It was therefore little surprise that Japan’s economy grew at a weaker-than-expected rate in the second quarter of the year, despite an aggressive spending policy by the government. Japan’s GDP grew at 0.25 in the three months to June, against expectations of 0.7%. The government responded with yet another stimulus package, injecting 28tn Yen into the economy – equivalent to £200bn.

Unsurprisingly Japanese inflation continued to fall, as July saw consumer prices drop for the fifth month in a row. Inflation was down by 0.5% in the month, the biggest monthly fall for three years.

Despite all the gloom, it was a good month for Far Eastern stock markets. Hong Kong led the way, with a 5% rise to 22,977 and China wasn’t far behind, the Shanghai Composite index rising by 4% to 3,085. Japan was up by 2% to 16,887 and the ever-cautious South Korean index was up 1% to end the month at 2,035.

Emerging Markets

It’s not an economy we’ve previously covered, but let’s start this section in Mongolia, where the tugrik lost 7.8% of its value this month, making it the world’s worst performing currency. China takes 90% of Mongolia’s exports and – while the country is rich in gold, copper and coal – the slowdown in China and the subsequent collapse in world commodity prices has played havoc with Mongolia’s economy and its currency.

No such problems in India – still the world’s fastest growing economy and now with a new head of its central bank. Inflation remains one of India’s big worries and Urjit Patel, the new head of the Reserve Bank, has been tasked with keeping it under control. Hopefully Mr Patel liked what he saw on the Indian stock market in August, as the market rose a sedate 1% to close the month at 28,452.

The Russian index was also up by 1% to end August at 1,972 and the Brazilian market made it a hat-trick, also rising by 1% to 57,901.

And finally…

The highlight of any athlete’s career is obviously an Olympic gold medal – but sadly in the US it comes with a substantial tax bill. Spare a thought therefore, for ace gymnast Simone Biles who tumbled her way to four golds and one bronze – and also to a tax bill when she returns home. With the US Olympic Committee giving prize money of $25,000 for a gold, $15,000 for a silver and $10,000 for a bronze, poor old Simone will have a tax bill of just over $43,000 – and that’s before the IRS take a look at her endorsements.

Most countries exempt their athletes from tax on prize money. Maybe the answer was for Simone to be taxed on the real value of the medals. Gold medals – mostly made of silver with gold plating – are worth roughly $600 based on current commodity prices, while silver medals are worth around $300. Sadly for those in third place the bronze medals are mostly made of copper and have barely any monetary value. They’re worth around $4, just about the price of a coffee at Starbucks…