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Rathbone Weekly Commentary

Date: December 11, 2017


Christmas come early

US investors in particular have led a dash from growth businesses such as tech to languishing value names, including banks and the retailers that have been this cycle’s pariah.

Perhaps the strong retail sales for the Thanksgiving season was enough to show the old bricks and mortar model isn’t dead. It helps that the department stores were able to boost their take of online sales as well. Still, while Americans appear to be in confident spirits, we feel this move to retailers is premature. Global growth is likely to be lower next year as advanced economies slow. In this environment, we feel scarce growth will push investors back to those quality companies that control their markets and have pricing power. Retailers are in the business of enticing people into shops; nowadays it takes an annual shopping festival and sharp bargains to do so. Neither lumpy cash flows nor razor-thin margins are good for the value of earnings.

We have seen this “reflation” trade before: expectations of accelerating inflation, faster interest rate hikes and increased wage growth would lead to a different kind of world that would reward value stocks. It always petered out after a month or so. On Wednesday, the US Federal Reserve will almost definitely raise its interest rate from the 1.0-1.25% band to 1.25-1.5%. The last time it moved the rate higher was six months ago. So much for a quickened pace of monetary policy. The Fed’s current guidance is for three further hikes in 2018, but we believe two at a maximum is most probable. US core inflation, which strips out petrol and food, is forecast to stay flat at 1.8% when it’s reported on Wednesday. Wage growth seems likely to continue creeping, rather than bursting, higher.

As for the Bank of England, it will likely sit tight at 0.5% when its committee meets on Thursday. UK inflation appears to have topped out at 3%, with the next reading due tomorrow. We believe the UK’s higher inflation is mostly due to the large post-Brexit move in sterling, which has slowly seeped through the supply chain to consumers. Worldwide, inflationary pressures should remain subdued as populations age and globalisation works in the opposite way to what most expect.

Index 1 week 3 months 6 months 1 year
FTSE ALL-Share 1.1% 1.2% 1.3% 12.0%
FTSE 100 1.3% 0.9% 1.0% 10.9%
FTSE 250 0.8% 2.6% 2.6% 16.2%
FTSE Small-cap -0.4% 1.0% 3.5% 18.2%
S&P 500 1.2% 6.6% 6.2% 12.4%
Euro Stoxx 1.6% 1.0% 3.8% 23.3%
Topix 0.6% 6.9% 7.5% 15.0%
Shanghai SE -0.1% -5.9% 3.8% -0.2%
FTSE Emerging Index 0.4% -1.2% 6.1% 17.1%
Source: FE Analytics, data local currency (£) total return to 8 December.


Between a rock and a hard border

At the last hurdle, Theresa May’s year-long slog toward a broad initial deal over the terms of Brexit hit a snag.

Arlene Foster, the leader of the Democratic Unionist Party (DUP) and First Minister of Northern Ireland, almost scuttled a compromise deal that tried to resolve the post-Brexit problem of the border separating Northern Ireland and the republic. The DUP was upset because it wants Northern Ireland to be more tightly bound to the UK, rather than to Ireland.

There are deep divisions and ancient issues here. Ulster unionists feel they are more British than Irish, and don’t want any solution that would leave Ulster with closer ties to Ireland than Britain. If this were the case, it would bolster the case for the unification of Ireland, something unionists have fought bitterly for a century.

After some last-minute bartering and obfuscation, the Cabinet and the DUP came to terms: Northern Ireland would adopt the same regulations as the UK, and the UK wouldn’t enact any changes in single market rules that would undermine the open Irish border and the 1998 Good Friday Agreement. This could save up troubles for further down the road, however. These terms – which equate to a soft Brexit and following EU regulations and standards with no say – are definitely not what pro-Brexit Conservatives want.

Still, “sufficient progress” on all necessary issues means the UK and EU can move on to trade negotiations next year. This is a good thing. Although, the histrionics and horse-trading will continue. We expect this to create a rocky path for sterling over 2018 as the two sides hash out a palatable deal.


UK 10-Year yield @ 1.28%
US 10-Year yield @ 2.38%
Germany 10-Year yield @ 0.31%
Italy 10-Year yield @ 1.65%
Spain 10-Year yield @ 1.40%

Economic data and companies reporting for week commencing 11 December

Monday 11 December

EU: ITA: Retail Sales (Oct)

Tuesday 12 December

UK: CPI/RPI (Nov), PPI Input/Output (Nov)
US: NFIB Small Business Optimism (Nov), PPI Ex Food and Energy (Nov)
EU: GER: ZEW Survey Current Situation/Survey Expectations (Dec)

Quarterly results: Ashtead Group
Trading update: Balfour Beatty

Wednesday 13 December

US: MBA Mortgage Applications (8-Dec), CPI Ex Food and Energy (Nov), FOMC Rate Decision
EU: Industrial Production (Oct); GER: CPI (Nov), Wholesale Price Index (Nov); ITA: Industrial Production (Oct)

Trading update: Bellway
Half-year results: Dixons Carphone
Quarterly results: TUI

Thursday 14 December

UK: Retail Sales Ex Auto Fuel (Nov), Bank of England Bank Rate/Asset Purchase Target
US: Import Price Index (Nov), PMI Manufacturing/Services/Composite (Dec)
EU: PMI Manufacturing/Services/Composite (Dec), ECB Main Refinancing Rate; FRA: CPI (Nov), PMI Manufacturing/Services/Composite (Dec); SPA: CPI (Nov); GER: PMI Manufacturing/Services/Composite (Dec)

Trading update: Bunzl, Centrica, Ocado, Petrofac, PZ Cussons,

Friday 15 December

US: Empire Manufacturing (Dec), Industrial Production/Capacity Utilisation (Nov), Manufacturing Production (Nov), Total Net TIC Flows (Oct), Net Long-term TIC Flows (Oct) EU: Trade Balance (Oct)


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