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March 2017 Newsletter

Themes from March

PM Theresa May has triggered Article 50 starting the clock on 2 years of negotiations over the UK’s exit from the EU.

US Federal Reserve vice chairman Stanley Fischer has said he expects two more 0.25% rate hikes during 2017. He said the central bank’s outlook had not changed much.

President Trump’s efforts at healthcare reform were derailed in the US Congress and the effort has been abandoned for now. It was clear the new Administration did not have sufficient voting support for the reform proposals.

Babcock International has lost a contract with the Nuclear Decommissioning Agency worth £800m creating an annual revenue loss of £100m from 2021. Babcock shares fell to five year lows.

BC Partners has gone to Shawbrook shareholders with a 330p cash offer. The board rejected a similar offer in early March. The approach is “hostile”.

G4S reported 2016 profits surged from £8m to £198m on revenues up 10.6% to £7.6bn. The CEO identified an order book pipeline of £6.8bn.

DFS Furniture revenues of £379.9m rose 6.8% with profits of £16.7m. DFS will pay a special 9.5p dividend.

Fevertree Drinks provided limited financial guidance in relation to 2017 despite achieving revenue growth of 73% to £102.2m over 2016.

Forthcoming UK Events

3 April GB Markit/ CIPS Manufacturing PMI
4 April GB Construction PMI/ BoE Minutes
7 April Halifax House Price Index/ UK Balance of Trade
11 April UK Core Inflation Rate/ PPI Output
12 April UK Unemployment Rate/ UK Average Earnings
21 April UK Retail Sales
24 April CBI Business Optimism Index/ CBI Industrial Trends
25 April UK Public Sector net Borrowing
27 April UK Nationwide Housing Prices/ CBI Distributive Trades
28 April UK GDP Growth Rate/ BBA Mortgage Approvals

Performance of World Markets (31/3/2017)

North America Value Change +/-(1M)% +/-(1YR)%
DOW JONES (Close) 20,663.22 -149.02 -0.71 16.13
S&P 500 (Close) 2,362.72 -0.92 -0.03 13.99
NASDAQ (Close) 5,911.74 86.3 1.48 20.29
Europe/UK Value Change +/-(1M)% +/-(1YR)%
UK 100 INDEX (Close) 7,322.92 59.52 0.82 19.15
CAC 40 INDEX (Close) 5,122.51 263.93 5.43 18.52
EUROSTOXX 50 (Close) 3,500.93 181.32 5.46 18.54
Asia/Far East Value Change +/-(1M)% +/-(1YR)%
SHANGHAI COMPOSITE (Close) 3,222.51 -19.22 -0.59 7.08
NIKKEI-225 (Close) 18,909.26 -209.73 -1.09 16.98
ASX 200 (Close) 5,864.90 -152.70 -2.67 17.31
HANG SENG (Close) 24,111.59 370.86 1.56 17.62

United Kingdom

Now the clock starts ticking on “Brexit”. UK solicitors Allen & Overy have pointed out the complexity, involving over 400 negotiating points in areas as diverse as science, patents, fisheries. There is a risk of “no deal”. There is a Greenland/ EEC example, a bargaining round that took three years despite being only about fishing rights.

UK blue chips have started to brush off “Brexit”. Its potency is diminishing. There are a few schools of thought on “Brexit” outcomes; a) a mutually beneficial UK/EU deal is possible within 24 months b) a “no deal” in 24 months would be unfortunate and increase uncertainty c) a “transitory period” where issues are cobbled though is a relatively high probability given the pressure of the timeframe.

Next CEO Simon Wolfson calmed investor’s nerves with a special quarterly dividend of 45p and held out the prospect of Next reducing its retail footprint. Still challenging conditions remain with higher cost pressures over 2017.

The Co-Operative Bank needs a buyer as it appears its US private equity owners, and Co-Operative Group are not in a position to inject capital. The sale proposition comes ahead of a key bond redemption costing £400m in 2017. Virgin Money is thought to be interested in part of the Co-Op Bank business.


Japanese equities ended in the red for March reflecting new supply of shares via public floats worth $12.5bn. These have been triggered by new corporate governance rules introduced in 2015 that encouraged companies to unwind cross shareholdings and reduce holdings in listed subsidiaries.

Fuji Electric for example sold of $957m worth of its Fujitsu shareholding. Sumitomo Mitsui Financial also sold $1.4bn of shares to boost its banking capital. There is an increasing tendency for western-style block deals where deals are concluded overnight.

Over March the Japanese Yen appreciated from ¥115 to ¥111 – partly due to a US dollar rethink.

Shanghai equities were slightly lower over March with investors concerned over the escalating Trump blame game over North Korea. The Trump administration has increasingly warned that it may take pre-emptive action over North Korea.

China is introducing new measures to tackle pollution, in particular smog caused by coal burning. Recent data has shown deteriorating standards of air quality in Beijing, Tianjin and over Hebei and Shanxi provinces. China’s “war on pollution” is a three pronged approach to close coal-fired power stations, promote new energy vehicles and investment in green technology.


EU President Donald Tusk received the Article 50 trigger and commented that “I cannot pretend this is a happy day here or in London”. The President has insisted on a phased approach, since backed up by both the French President and German Chancellor that would see the thorny issue of UK liabilities agreed first, prior to any trade deal. The “divorce bill” estimated at €60bn includes the UK’s liabilities in respect of agreed budgets, debt sharing, legal costs of Brexit. The divorce needs to be agreed in late 2018 to ensure Parliamentary oversight in time for March 2019 exit.

The challenge for the EU is to ensure Brexit does not derail the EU project. It cannot be seen as being soft on the UK as it will encourage nationalist movements. The Dutch election provided considerable relief that the EU status quo will be preserved. Dutch PM Mark Rutte was returned with a reduced majority defeating the anti-EU Gert Wilders.

Munich Re announced a further share buyback worth €1bn. For 2017 Munich Re expects net profits in the range of €2bn-€2.4bn. The dividend has been lifted to €8.60 per share.

United States

What can be read into President Trump’s healthcare failure and the emergence of the “Freedom Caucus” as a Congressional roadblock to his campaign promises? It is a setback, not a derailment. Trump is failing to do the central job of the Presidency, persuading sufficient legislators of his policies merits. It amounts to the first real evidence of US checks and balances working.

US capital markets assumed “Trumpcare”, tax cuts, a splurge on defence and infrastructure spending would arrive like busses over 2017. We are now getting the reality. The Dow Jones has run up almost 2,326 points since November 8th 2016 on the premise of earnings growth derived from lower tax bills.

This presents a problem for US markets. Recent gains have been premised on Presidential credibility / delivery of promises. But if “Trumpcare” can be derailed so easily how long before confidence is rattled?

Gander Mountain, one of America’s largest retailers of firearms filed for bankruptcy protection due to slowing customer visits and weaker demand for hunting gear, guns and fishing equipment.

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