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Rathbone Weekly Commentary

Market Commentary
Commentary By: Rathbone Unit Trust Management Limited
Commentary Date: May 23, 2017


Stay active, stay healthy

The ‘Trump trade’ continued to unwind last week with US shares slumping sharply lower. President Donald Trump’s trademark sledgehammer handling of the firing of FBI Director James Comey, a man known for his meticulous paper trails, has led to claims of a cover-up of improper Russian connections and calls for impeachment. Expect this to flare up again when Mr Comey appears before the Senate intelligence committee sometime after Memorial Day (29 May).

This executive branch paralysis is neither here nor there for markets, really. But it means that the likelihood of Mr Trump’s Cabinet making any headway on its tax measures or infrastructure spending appear slim right now. The government is instead running desperately from fire to fire.

The US equity market is still resilient though, willing buyers stepped into the breach, helping the S&P 500 recover most of its losses. Economic data explains why: weekly jobless claims, a leading indicator of employment strength, fell again to an exceptional low of 232,000 while the Philadelphia Fed Manufacturing Index jumped to 38.8 and the Bloomberg Consumer Comfort Index remains elevated.

All sectors are not moving the same way, however. S&P 500 financials and the automotive sector have slumped from their early-March highs, while information technology continues to soar. Interestingly, industrials are holding their own. Perhaps investors expect strong manufacturing numbers in the US PMI release on Wednesday. We expect this divergence within indices – both in the US and around the world – to continue throughout this year and beyond. We believe an increase in the global risk-free interest rate and the unwinding of ultra-loose monetary policies will divide companies between the strong and the weak, the slothful and the dynamic. Passive strategies may not offer the strong gains they enjoyed over the past few years during a rising tide of central bank-driven liquidity. Our head of multi-asset investments, David Coombs, has detailed this more fully in his report Fortune favours the active.

Brazil is a case in point. The country’s stock market plunged 10% last week after President Michel Temer was caught on tape agreeing to pay hush money to a witness in a long-running anti-corruption probe. This dragged down emerging market indices and is likely to remain a volatile millstone around broad indices of global developing nations.

Also on Wednesday, we will be able to pore over the minutes from the 2 May Federal Reserve meeting. A 25-basis-point rise in the Fed funds rate is baked in to markets, so the minutes can only disappoint in the short term. Other than that, the Fed may shed more light on whether they expect to make more than two increases to the benchmark rate in 2017.

Index 1 week 3 months 6 months 1 year
FTSE ALL-Share 0.6% 4.4% 12.9% 27.2%
FTSE 100 0.7% 3.8% 12.6% 28.3%
FTSE 250 0.3% 7.0% 13.8% 21.8%
FTSE Small-cap -0.4% 5.5% 15.7% 27.3%
S&P 500 -1.4% -3.0% 3.9% 32.7%
Euro Stoxx 0.7% 11.0% 21.5% 42.4%
Topix -0.9% -1.6% 3.5% 31.6%
Shanghai SE -0.7% -8.2% -8.5% 17.1%
FTSE Emerging Index -2.0% -0.6% 10.0% 44.4%
Source: FE Analytics, data local currency (£) total return to 19 May

It’s just a jump to the left

The manifestos are out.

Labour has gone back to its roots with an election manifesto arguing that the pivotal natural monopolies of power generation, rail, water provision and the postal service should be run by the state rather than private owners.

Higher fares and poor service by many rail franchises have helped pave the way for public support of this argument. As has a series of damning reports into the management of the UK’s privatised water companies. Eighteen months ago, the National Audit Office (NAO) reported that the companies had benefited from an £800m windfall from tax cuts and exceptionally low interest rates over the five years to 2015. It was not passed on to consumers. What was passed on was large amounts of untreated sewage into rivers and beaches around the country. Environmental regulators have stepped up the severity of punishments recently in the face of thousands of breaches. Thames Water was fined a record £20.3m this year for releasing 1.4bn litres of untreated sewage into London’s rivers between 2012 and 2014.

The NAO’s 2015 report argued that water services were much more efficient under private ownership than they were before the 1989 privatisation. But the poor environmental performance must be cleaned up if private ownership is to win the battle for public opinion.

Exactly how Labour’s renationalisation programme would be funded has not been answered. Many of Labour’s other costly policies have been costed, rough enough. Revenue will be boosted by taxing the wealthier more heavily, starting at £80,000, and a tax on financial transactions. And there is the obligatory billions that will be gleaned from tax avoidance. If these savings were really the low hanging fruit both parties argue, you would have thought it would have already been picked. Instead, this line in the budget is increasingly becoming a statistical discrepancy item: one to help you balance the ledgers.

The Conservatives have also lurched to the left on several issues, leaving businesses and their backbenches buzzing with anger. The idea of adding worker representatives on company boards has resurfaced, as has the pledge to curtail immigration. A bold move to lose the triple-lock pension, means test the fuel allowance and reform the provision of aged care was a surprise – until it was reversed today in yet another U-turn. The Conservatives appear to have abandoned the strategy of supporting home ownership through subsidies and will instead try to boost the number of rentals offered by charities and councils … through more subsidies. Prime Minister Theresa May’s hawkish stance on housing provision may cause some pain among housebuilders. If the Conservatives follow through, there will be half a million houses to be built, but at what margin?

Labour has gained rapidly in the FT’s poll of polls, rising from a nadir of about 25% to 32%, mostly on the back of fading support for the smaller parties. The Conservatives’ popularity has increased only slightly, but that could be because they boast 47% in the polls. That is a yawning gulf for Labour to catch, with just three weeks to go.

Meanwhile, across the Channel the EU is drawing up its directive for the Brexit negotiations. It is expected to centre on the penalties for leaving and how to deal with the porous Irish border without smashing the almost 20-year-old Good Friday Peace Agreement.

There is likely to be little mention of trade, if at all, despite the Government’s continued hope for the contrary.


UK 10-Year yield @ 1.10%
US 10-Year yield @ 2.24%
Germany 10-Year yield @ 0.38%
Italy 10-Year yield @ 2.13%
Spain 10-Year yield @ 1.57%

Economic data and companies reporting for week commencing 22 May

Monday 22 May

US: Chicago Fed National Activity Index (Apr), Fed’s Kashkari to speak at Minneapolis Fed Conference.

Tuesday 23 May

US: New Home Sales (Apr), Richmond Fed Manufacturing Index (May)
EU: FRA: Business/Manufacturing Confidence (May), Own-Company Production Outlook (May); SPA: Trade Balance (Mar); GER: IFO Business Climate/Expectations/Current Assessment (May)

Full-year results: AVEVA, Electrocomponents, Entertainment One, Severn Trent

Preliminary results: HomeServe
Half-year results: Paragon, Shaftesbury
Quarterly results: MHP, Nostrum Oil & Gas

Wednesday 24 May

US: PMI Manufacturing/Services/Composite (May), FOMC Meeting Minutes, Fed’s Kaplan speaks in Toronto
EU: PMI Manufacturing/Services/Composite (May), ECB account of the monetary policy meeting; GER: GfK Consumer Confidence (Jun), Import Price Index (Apr), PMI Manufacturing/Services/Composite (May); FRA: PMI Manufacturing/Services/Composite (May); SPA: PPI (Apr)

Full-year results: Babcock, Marks & Spencer, Pennon Group, Vedanta Resources
Half-year results: Britvic
Quarterly results: Great Portland Estates
Trading update: Dixons Carphone, Kingfisher, Softcat

Thursday 25 May

UK: GDP (Q1)
US: Wholesale Inventories (Apr), Initial Jobless Claims (20 May)

Full-year results: Halfords Group, Intermediate Capital Group, QinteiQ Group, Renewi, Tate & Lyle, United Utilities
Preliminary results: B&M European Retail
Half-year results: Daily Mail & General Trust
Quarterly results: MegaFon, Seadrill

Friday 26 May

US: GDP (Q1), Durables Goods/Ex Transportation (Apr), University of Michigan Sentiment (May), Fed’s Bullard speaks on US economy in Tokyo
EU: ITA: Manufacturing Confidence (May)


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