October 2018 Newsletter

Themes from October

Global equities endured a torrid October with the MSCI World Index down by 9.6%

Italy and EU remained deadlocked after the EU rejected the Italian budget as breaching conditions.

UK Budget brought forward a rise in the personal tax allowance in the higher rate threshold to April 2019 as well as injecting £1bn into the MoD to fight cyber threats.

GE reported a $22.8bn Q3 loss and plans to split its power division. The dividend was cut to 1 cent per quarter.

UK defence companies fell sharply on concerns over possible embargoes / sanctions on Saudi Arabia as a result of Mr Khashoggi’s murder.

HSBC reported Q3 profits of $5.9bn up 28% whilst loans and advances grew $14bn from Q2.

Amazon lost $250bn in market capitalization in the last 2 months – it took Amazon 18 years to reach a $250bn market cap. The CEO Jeff Bezos was criticized for remaining silent on Jamal Khashoggi who was a columnist at the Washington Post, owned by Bezos.

Restaurant Group is buying Wagamama for £559m with £315m worth of funding secured via a rights issue.

Intu Properties received a takeover proposal from John Whittaker for 210.4p per share. The consortium has until 15th November to make a firm offer.

Forthcoming UK Events

1 November GB Nationwide House Prices/ BoE MPC Interest Rate Decision
2 November Construction PMI
5 November New Car Sales/ Markit UK Services PMI
7 November Halifax House Price Index
9 November UK Balance of Trade/ GDP/ Construction Output/ Industrial Production
13 November UK Unemployment Rate/ UK average earnings
14 November Core Inflation Rate / PPI core output/ Retail Price Index
15 November UK Retail Sales
21 November Public Sector Net Borrowing/ CBI Industrial Trends Orders
23 November CBI Distributive Trades
26 November UK Finance Mortgage Approvals

Performance of World Markets (31/10/2018)

North America Value Change +/-(1M)% +/-(1YR)%
DOW JONES (Close) 25,115.76 -1342.55 -5.30 7.20
S&P 500 (Close) 2,711.74 -202.24 -6.90 5.10
NASDAQ (Close) 7,305.90 -740.45 -9.20 8.80
Europe/UK Value Change +/-(1M)% +/-(1YR)%
UK 100 INDEX (Close) 7,128.10 -382.10 -5.10 -4.80
CAC 40 INDEX (Close) 5,093.44 -400.05 -7.30 -7.60
EUROSTOXX 50 (Close) 3,197.51 -201.69 -5.90 -13.50
Asia/Far East Value Change +/-(1M)% +/-(1YR)%
SHANGHAI COMPOSITE (Close) 2,602.78 -218.57 -7.70 -23.40
NIKKEI-225 (Close) 21,920.46 -2199.58 -9.10 -2.20
ASX 200 (Close) 5,830.30 -377.30 -6.10 -1.80
HANG SENG (Close) 24,979.69 -2,808.83 -10.10 -12.60

United Kingdom

The 5.1% drop in UK equities over October was significant given the summer sell off context and ongoing political uncertainties driving sterling lower (normally a positive for UK blue chips).

The “Brexit” grind is nearing conclusion, reducing the risk of a highly disruptive UK exit from the EU. We are told a UK/EU deal is possible before Christmas, an event which will dominate the remainder of 2018.

The reassuring point was positive corporate results. HSBC, Lloyds and Standard Chartered all beat forecasts, citing rising net interest margins, and lower impairments. The end of PPI should deliver EPS growth in 2019.

WPP delayed to December its strategic decision on Kantar and driving stalled EPS growth. WPP will concentrate on lowering debt and repositioning the media giant to counter threats from Google in digital advertising.

China/Japan

Shanghai (-7.7%) and Tokyo (-9.1%) bore the brunt of the global October sell off with both indices in the red for the trailing 12 months. Whilst the Tokyo move partly reflected the rise in the Yen as a safe haven asset, the worries in Shanghai focused on stumbling Sino- US trade talks and the government’s willingness to allow Yuan depreciation as a means of improving competitiveness.

www.xe.com

But the Chinese government has cracked down on border security and travelers returning from Paris and Tokyo with undeclared luxury goods. Chinese consumers account for 2/3rds of the growth in global luxury goods demand. The move seems designed to get Chinese consumers to rein in spending on overseas goods.

Europe

Italian bond yields widened sharply in response to the new populist government insistence on a giveaway budget. However Chancellor Merkel’s election stumbles were largely ignored.

The ECB confirmed its €2.6trn asset purchase scheme will end in 2018 and interest rates could rise in summer 2019. However mindful of the volatile global environment Mario Draghi also mentioned numerous uncertainties, relating to protectionism, fragile emerging markets impacting the EU’s export performance and financial asset volatility. The ECB acknowledged the rise in Eurozone inflation helped by higher wages.

Source: www.ft.com

United States

The catalyst for the October US sell-off was a speech by Fed Chairman Jerome Powell on October 3rd that made clear the central bank planned to push Federal funds above the “neutral rate” to prevent overheating. It was taken as meaning the Fed would remain on its path to hike interest rates regardless of President Trump, higher bond yields or the risk to US equities.

The Fed’s vigilance is in response to the procrastination of former chair Janet Yellen who kept rates low for far too long, and the Trump fiscal stimulus that has led to higher US inflation and the overheating risk. The new leadership believes US monetary policy needs to catch up. That message is understood, US interest rates are rising, it will push up global interest rates, and the decade of cheap money is ending.

The drop in US tech names looks like froth being blown off. Apple, Alphabet, Microsoft are highly profitable companies whose valuations adjusted for cash (enterprise value) do not appear excessive. Still US equities have to contend with a stronger US dollar as higher rates feed through, which is a problem for the global techs.

US bond yields, the main pressure on equity indices rose over October and remain elevated with 10 year yields (3.16%) and 30 year (3.41%) both up (+0.08%) and (0.18%). The 30 year yield, the pricing mechanism for many US mortgages will deliver higher costs ahead of Christmas.

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