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Rathbone Weekly Commentary

Date: April 16, 2018

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Empire for the advertising

An obscure British shopping trolley company can be turned into the world’s largest media giant, and then be eclipsed by an upstart tech company toting the motto, “don’t be evil”. For 33 years, Sir Martin Sorrell was WPP. Then he was driven out swiftly under the cloud of an expenses scandal, strongly refuting claims of impropriety. Like the other advertising legend, Don Draper, he has no contract – or the barest of them – and so he left immediately. It also means he hasn’t got the typical non-compete clause tying him down.

Sir Martin has spent decades laying bricks for his empire and it never bothered the board before. What was it that caused such sudden and public disagreement? And what is WPP now? Many people say that without Sir Martin’s experienced hand on the tiller, his wizened knowledge of every corner of his far-flung empire, the company can’t be sustained. That WPP truly is Sir Martin.

The cornerstone flaw at the bottom of public markets is a consequence of what makes them great. The ability to bring together the disparate cash savings of millions and use it to build something great, comes with the requirement that you hire people to run it that know more about your investment than you do. WPP is but a topical example of this age-old investment conundrum. Whether it’s agents of the East India Company lining their pockets with investors’ money in the British Raj or company managers splurging money on specious projects that are no good for shareholders.

WPP is truly one of the greatest media companies in the world, built over decades from a shell company and a burnt-out Northampton factory. But it is undergoing an identity crisis in an age of lower-value digital advertising. It has also lost the public face that tied it together. It’s up to investors to decide whether the parts are worth more than the sum; whether its long-time chief executive was the real asset; or whether he created an empire for his own ego that got too sprawling for one man to control.

Index 1 week 3 months 6 months 1 year
FTSE ALL-Share 1.3% -5.2% -1.6% 3.4%
FTSE 100 1.2% -5.5% -1.8% 3.1%
FTSE 250 1.6% -4.3% -1.1% 4.4%
FTSE Small-cap 1.5% -4.4% -0.6% 7.2%
S&P 500 0.9% -8.1% -2.2% 1.6%
Euro Stoxx 0.6% -6.0% -4.1% 8.7%
Topix -1.0% -7.5% -0.5% 7.4%
Shanghai SE 0.0% -8.9% -8.7% -7.2%
FTSE Emerging Index -0.6% -6.6% -2.2% 6.3%
Source: FE Analytics, data sterling total return to 13 April 2018

 

Fog of war

Over the same 33 years Russia has, in the eyes of the West, evolved from evil empire to hopeful westernised democracy and back to evil empire again.

The weekend air strike against Russian ally, Bashar al-Assad’s Syrian government, by American, French and British jets and warships won’t have helped the fractured relationship any. The measured response to the latest Syrian chemical weapon atrocity came early Saturday morning, with a targeted missile attack against three chemical weapon sites and, seemingly, little collateral damage.

Whether these strikes will be enough to deter Mr al-Assad from using chemical weapons again in the civil war in Syria is unclear. Since 2012, there have been more than seven confirmed instances of chemical weapons being deployed by the Syrian regime, according to the New York-based Arms Control Association. Many more are unconfirmed. This is not the first retaliatory air strike. That’s not to say the Syrian rebels are much better. They have executed many people in horrific ways, blown up ancient landmarks and governed their territories cruelly. Syria’s civil war is indeed a mess that is likely to remain so for some time.
There could be some blowback from Russia, which is supporting Mr al-Assad’s regime so that it can eliminate the extreme Islamist movement that lurks within the Syrian rebellion. Some say Russian hackers could launch cyber attacks against the three nations.

Last week, in response to further rumours of meddling in the US election, the US imposed yet more sanctions on what is increasingly becoming a European pariah state. The latest round of punishment sent the rouble tumbling more than 6% against the dollar; the MSCI Russia index was down roughly the same amount. But that’s small fry compared with the damage done to the currency due to the multi-year slump in oil prices: since June 2014 the rouble has slumped 45% against the dollar.

Despite these rising tensions – to say nothing of the tariff threats between American and China – markets were relatively robust last week. The S&P 500 closed up 2%, European and UK markets rose roughly 1.25%, and the Topix was up 0.6%.Geopolitical cut and thrust delivered daily rallies and corrections, but beyond this, investors focused on the FOMC minutes. They suggested the Federal Reserve was taking a more hawkish stance against the backdrop of a robust US economy, meaning it may raise rates three times more this year. Last week inflation came in as expected at 2.4%, 20 basis points higher than the previous month. Later today US retail sales growth will be released, a strong leading indicator of the economy. That is followed tomorrow by US housing starts and industrial production figures. The outcome of these measures will help inform investors of the likely path of interest rates.

Bonds

UK 10-Year yield @ 1.44%
US 10-Year yield @ 2.83%
Germany 10-Year yield @ 0.51%
Italy 10-Year yield @ 1.79%
Spain 10-Year yield @ 1.23%

Economic data and companies reporting for week commencing 16 April

Monday 16 April

US: Empire Manufacturing, Retail Sales Growth, Business Inventories, NAHB Housing Market Index
EU: German Wholesale Price Index

Quarterly report: Carr’s Group, JD Sports Fashion

Tuesday 17 April

UK: Claimant Count, Jobless Claims, Average Weekly Earnings, Unemployment Rate
US: Housing Starts, Building Permits, Industrial Production, Manufacturing Production, Capacity Utilization
EU: Eurozone ZEW Survey; GER: ZEW Survey

Annual results: AA, AFI Development, Christie Group
Quarterly report: JD Sports Fashion, Associated British Foods
Trading update: Ashmore group

Wednesday 18 April

UK: CPI, RPI, Producer Price Index, House Price Index
US: MBA Mortgage Applications, Crude Oil Inventories
EU: Eurozone Construction Output, CPI

Quarterly report: Hochschild Mining, Moneysupermarket.com
Trading update: Bunzl, Jupiter Fund Management, RELX, Segro, Telford Homes

Thursday 19 April

UK: Retail Sales Growth
US: Initial Jobless Claims, Continuing Claims, Philadelphia Business Outlook, Leading Index,

Quarterly report: Debenhams, Sky
Trading update: Rentokil Initial

Friday 20 April

EU: Consumer Confidence; GER: Producer Price Index

Interim management statement: Reckitt Benckiser

 

 

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