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August 2017 Newsletter

Themes from August

Kim Jong-Un resumed North Korea’s test firing of ballistic missiles in the direction of Guam and over Japan. The move brought international condemnation and caused volatility on world markets.

BHP Billiton hiked its final dividend to 43 cents from 14 cents after reporting profit of US$5.89bn +192% on FY2016.

Jackson Hole meeting concluded with the world’s central bankers suggesting the time for scaling back stimulus measures was approaching. Both ECB President Mario Draghi and Janet Yellen Federal Reserve chair remained silent on monetary policy.

Hikma Pharmaceuticals revised its sales guidance down to US$2bn for 2017. Following a slump in its share price, it announced significant price hikes for its US drugs in one case quadrupling the price.

Sterling declined sharply to lows of €1.078 on concern over the lack of progress in the UK/EU “Brexit” talks.

Provident Financial is to leave the UK100 index following the CEO’s departure, and news of a likely £100m loss in the consumer credit division arising from low collection rates.

Dixons Carphone provided profit guidance of £360m-£440m – £80m lower than previous guidance due to less interest in mobile phone upgrades and higher expenses.

Forthcoming UK Events

1 September CPIS Manufacturing PMI
4 September Construction PMI
5 September New Car Sales / Services PMI
7 September Halifax House Price Index
8 September Balance of Trade/ Industrial Production/ NIESR GDP
12 September PPI Input / UK Retail Price Index/ UK Inflation Rate
13 September UK Unemployment Rate/ UK Average Earnings/ UK 10 year Gilt Auction
14 September BoE Interest Rate Decision/ MPC Minutes Meeting/ GB Retail Sales
19 September 30 year Treasury Gilt Auction
20 September BoE FPC Statement
21 September UK Public Sector Net Borrowing

Performance of World Markets (31/8/2017)

North America Value Change +/-(1M)% +/-(1YR)%
DOW JONES (Close) 21,948.10 56.98 0.26 19.31
S&P 500 (Close) 2,471.65 1.35 0.05 13.95
NASDAQ (Close) 6,428.66 80.54 1.27 23.18
Europe/UK Value Change +/-(1M)% +/-(1YR)%
UK 100 INDEX (Close) 7,438.42 66.42 0.90 8.78
CAC 40 INDEX (Close) 5,093.66 -0.11 0.00 4.76
EUROSTOXX 50 (Close) 3,427.74 -21.62 -0.63 13.38
Asia/Far East Value Change +/-(1M)% +/-(1YR)%
SHANGHAI COMPOSITE (Close) 3,360.81 87.78 2.68 9.46
NIKKEI-225 (Close) 19,646.24 -278.94 -1.40 20.08
ASX 200 (Close) 5,714.50 6.10 -0.11 3.61
HANG SENG (Close) 27,970.30 646.31 2.37 22.09

United Kingdom

The decline in sterling/ Euro to £/€1.08 over August suggests concerns over the “Brexit” talks and a higher risk of “hard” Brexit where the UK crashes out of the EU without a deal. The talks are not going well with the EU’s negotiator Michel Barnier claiming the UK was “suffering from nostalgia, making key requests that amounted to getting the benefit of the EU single market without being part of it”.

Importantly Mr Barnier claimed that the UK’s plan to have EU standards cut and pasted into UK law and then be automatically recognized by the EU were impossible, as they lacked the EU’s supervising and enforcement. He said that the UK’s attempts to start talking to EU countries directly going over the head of the commission would fail.

A Recruitment & Employment Confederation Survey (23rd August) found 31% of employers expecting the UK economy to worsen, and urged the UK government to give greater clarity over Brexit.
Provident Financial’s CEO Peter Crook left after admitting a sharp deterioration in the collection rate to 57% post the move to an online platform. The dividend has been cancelled amidst concerns over the balance sheet.

Dixons Carphone revised its profits down by £80m contradicting its bullishness in June. Whilst one factor is the delay to mobile phone upgrades, the lurking suspicion is UK customer habits have changed reducing footfall and demand.

China/Japan

China’s official factory gauge strengthened further in August – the PMI Index rose to 51.7 from 51.4 – its fastest pace since April 2016. Steel futures prices jumped 9% over August adding to year to date gains of c. 50%, another strong indicator of Chinese construction growth. The Chinese Yuan appreciated sharply over August v USD.

Source: www.xe.com

The North Korean situation is assumed can be solved via diplomacy, but the risk of a military confrontation cannot be discounted. It has become clear that North Korea is developing improved ballistics that could carry nuclear missiles. Is the world ready to take the risk of Kim Jon-Un holding a nuclear arsenal with first strike capability? This is a problem that will have to be addressed.

Europe

German GDP in Q2 accelerated to 0.6% its fastest growth rate since 2014. The positive economy is a big help for Chancellor Angela Merkel ahead of September 24th Federal elections. Polls suggest Merkel holds a 16% lead over rival Martin Schulz.

The German auto industry is suffering from its very high exposure to diesel. Both France and the UK have moved to ban petrol and diesel from 2040. The US auto industry (Tesla) and others (Volvo/ Geely) are anticipating consumer demand shifting to electric/ hybrid vehicles and moving away from diesel. In some EU countries demand for diesel is down 20%-25% in 2017 ahead of Euro 6 (a new cleaner diesel technology). VW has launched a new scrappage scheme offering discounts of £1800 – £6000 to buyers who trade in their old diesel models.

The Euro maintains upward momentum v USD.

Source: www.xe.com

United States

US President Donald Trump’s rather stupid remarks in relation to the Charlottesville protestors is the latest in a series of mis-steps leading to a loss of Congressional support and amongst key business leaders. A lot of uncertainty exists on the delivery of the Trump legislative agenda. It is said Donald Trump and Mitch McConnell have not talked for many weeks.

Hurricane Harvey should cost less in insurance claims than either Katrina ($75bn) in 2005 or Sandy ($30bn) in 2012. The extensive flooding of Houston has so far led to closure of refining capacity and spikes in petrol prices. Insured losses could be $1.2bn – $2.3bn according to Air Worldwide, a provider of catastrophe risk modeling software. Footing the bill for Houston is the familiar gamut of global reinsurers, Munich Re, Swiss Re and AIG.

Campbell Soup warned that 2018 sales are likely to fall due to changing customer preferences and shopping habits. Adjusted Q2 EPS of 52 cents missed forecasts of 55 cents whilst sales were $1.66bn. The shares closed at $46.20 down 8.11%.

The S&P 500 was flat over August (+0.05%) not surprising given the market rating, currently 24.6x against a median P/E of 14.6x since records began. The broad blue chip index has shown signs of “tiredness” recently as investors have become weary due to concerns about the White House agenda.

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