February 2020 Market Commentary

China grabbed the headlines again in January, but this time not for trade. On 31st December, the Chinese authorities had notified the World Health Organisation of an outbreak of pneumonia in Wuhan City, Hubei Province. Today the country is in lockdown, the death toll is rising fast, the number of infected is rising faster.

The trade war with the US has been pushed off the front pages and the disease’s inevitable shock to the economy is starting to kick in amid praise for how China has reacted to the outbreak compared to SARS earlier this century.

The run-up to Brexit – and even the murmurings of the great and the good at the World Economic Forum in Davos became mere sideshows.

As always, here are the details.

With only a few isolated bright spots – Tesco’s Christmas sales were up for the fifth year in a row: Aldi and Lidl did well – it was hard to find any good news for the UK high street over the holiday period.

As the reports filtered through in January, they were almost all equally gloomy, with Morrisons reporting a fall in like-for-like sales, Sainsbury’s saying its sales had ‘slipped’ and John Lewis admitting it may not be able to pay a staff bonus.

It has been estimated that the UK retail sector lost 57,000 jobs in 2019: more worryingly, there are early forecasts that the sector shed another 10,000 jobs in the first three weeks of this year. Department store chain Beales is now in administration, threatening the closure of 22 stores and 1,000 more jobs.

Chancellor Sajid Javid will deliver his first Budget on 11th March. It will undoubtedly contain measures designed to help the high street – the recently announced £1,000 a year rate relief for small pubs is an early indication of that – but with Amazon yet again having a record Christmas, you fear it may be too little too late.

The Eurozone had a poor end to 2019, which was the same story in the UK as factory output in December fell at its fastest rate for eight years. Slowing global demand was blamed – and that was before Coronavirus had been identified.

UK car manufacturing was similarly down: production fell to its lowest level for ten years and is forecast to continue falling this year. We mention Tesla’s success below and the simple truth is that our car manufacturers are facing ever more threats from companies they had never heard of ten or even five years ago. It is hard to see the trend being reversed.

There was, however, some good news as the IMF forecast that the British economy will grow faster than the Eurozone. The IMF sees growth going from 1.3% last year to 1.4% this year and 1.5% in 2021. Of the G7 countries, it is forecasting that only the US and Canada will grow faster than the UK, while Italy, France, Germany and Japan will ‘struggle to keep up’.

Big projects were much in the news in January. Crossrail is now likely to be delayed until Autumn 2021 and – despite claims that its costs are ‘out of control’ – it looks like the Government may well press ahead with HS2. They have already made one controversial decision in allowing Chinese company Huawei to be involved in the UK’s 5G infrastructure: they now look set to ignore economic and environmental objections to HS2.

The Chancellor’s upcoming Budget is promised to be the start of a ‘decade of renewal’. Investment in the UK’s transport infrastructure will be at the top of his list and not just HS2: there will be money available to reverse some of the Beeching cuts to the rail network and – hopefully – re-invigorate local communities.

He will certainly have some healthy tax revenues to play with, as a rise in full-time female workers pushed the UK’s employment rate to a new high of 76.3%. There are now a record 32.9m people in employment in the UK.

The FTSE 100 index of leading shares did not, though, have a record month. Like almost all of the world’s leading stock markets it drifted lower in January as the potential implications of the Coronavirus became clear. It eventually ended down 3% at 7,286. The pound was virtually unchanged in percentage terms, ending the month trading at $1.3184.

Brexit and the UK’s Future Trade Negotiations
The UK voted to leave the European Union on 23rd June 2016. As everyone will now know, we finally left on Friday 31st January, just 1,317 days after the Referendum.

There is now a ‘transition period’ with the EU lasting until the end of this year, during which time the terms of a trade agreement will – in theory – be sorted out. So for the current year, this section of the Commentary will keep you updated on the progress of those negotiations, which are currently due to start in earnest.

Foreign Secretary Dominic Raab has said that the UK “will not be aligning” with EU rules on trade, while Boris Johnson has said there is “no need” to follow the EU’s rules to do a trade deal. Meanwhile, Irish Premier Leo Varadkar has warned against “rigid red lines” and former European Council President, Donald Tusk, has teasingly said there is “plenty of time” to get a trade deal in place before Christmas. Whilst at the same time, hinted at “empathy” for an independent Scotland joining the EU.

As you can see, the war of words has already started. To misquote Macbeth: there will be a lot of sound and fury in the months ahead, much of it signifying nothing. We’ll do our best to sort the wheat from the chaff.

At the same time as negotiating with the EU, the UK will also be pursuing trade deals with countries like the US and Australia. We will also keep you up to date on all those developments in this section of the Commentary.

The year opened with more calls for strikes in France: the CGT union called for more action after President Macron used his New Year’s address to promise to push through his planned overhaul of the country’s pension system. The protests continued throughout the month – eventually leading to clashes between French police and the country’s firemen. February began with no resolution in sight.

Away from French unrest, it was a poor end to 2019 for Eurozone manufacturing, which contracted for the 11th consecutive month. The Purchasing Managers’ Index fell from 46.9 to 46.3 in December, with any figure below 50 indicating a contraction. Figures from the PMI showed that both orders and output were down in December.

One thing that certainly was down was the number of Swedish people taking to the air. The number of people who travelled through the country’s airports was 4% lower in 2019 than in 2018 as ‘flight shaming’’ impacted Swedes’ travel habits. So far no other European country has reported similar figures but it is, perhaps, a sign of what we might see in the coming years.

The year also ended badly for Volkswagen: not only was it overtaken in value by Tesla (as we report below) but Canadian prosecutors were proposing to levy a £110m fine on the company. VW had imported 128,000 vehicles into Canada which violated the country’s emissions standards.

Both the major European stock markets were down in the first month of the year: the German DAX index fell 2% to 12,982 while the French stock market fell by 3% to end the month at 5,806.

January was the month when the impeachment of Donald Trump reached the Senate and – to no one’s surprise – the Republican majority there duly looked after its President. With senators blocking impeachment witnesses, the President is all but acquitted. There appears to be nothing to prevent Donald Trump running for re-election in November, with the bookmakers expecting him to win a second term in the White House.

Away from the trial, economic data showed that both wage growth and jobs had slowed in December. The US added 145,000 jobs in the month, well down on the 256,000 created in November. This capped a year of solid – but slowing – jobs growth as the US labour market expanded for the 10th consecutive year.

The average hourly rate of pay rose at an annual rate of 2.9%, down from the 3.1% recorded in November.

There was, however, no slowing down at Tesla, which saw its shares reach a record high – in the process, giving it a bigger market capitalisation than Volkswagen – as the company beat Wall Street estimates of how many vehicles it would deliver in the fourth quarter. The Silicon Valley carmaker delivered 112,000 vehicles in the last three months of the year, and 367,500 for the year as a whole.

Much less surprising was the news that Amazon had enjoyed a record Christmas, shipping ‘billions of items’, with 5m people around the world signing up for a trial of Amazon Prime or for one of the company’s other subscription services.

Apple also claimed record sales and profits over Christmas, thanks to a surge in demand for the new iPhone 11, but by the end of the month the effects of China’s Coronavirus were being felt.

Starbucks (coffee seems to be the barometer of an economy these days) made the decision to close 2,000 outlets in China due to the virus and the Dow Jones index – which had broken through the 29,000 barrier in the middle of the month when the US/China trade agreement was signed – eventually ended January down 1% at 28,256.

Far East
The news in the Far East was, of course, dominated by Coronavirus. But even without the face masks, there were plenty of worries for the Chinese economy.

Figures released in the middle of the month showed that the economy grew by ‘only’ 6.1% in 2019. While that figure is beyond the dreams of Western economies, it represented China’s slowest rate of growth for 29 years. The Government was already rolling out measures to boost the economy before the Coronavirus hit, beginning the year by cutting banks’ reserve ratios and releasing $100bn (£75bn) into the economy. The longer the virus lasts, the more the Chinese government is likely to pump money into the economy.

Chinese investment in Europe also fell to a nine year low as the Government in Beijing increasingly focused on stimulating domestic demand. As the US/China trade dispute continued through 2019, Chinese investment in Europe fell by 40% and was down by 27% in North America. Investment in the US and Canada fell from $7.5bn (£5.68bn) in 2018 to $5.5bn (£4.17bn) in 2019, the lowest level since 2009.

Unsurprisingly, stock markets in the Far East had risen in the middle of January as the US/China trade deal was signed, but the impact of the Coronavirus wiped out those gains and more, meaning that the four main Far Eastern markets were all down by the end of the month.

The biggest fall was in Hong Kong, where the Hang Seng index dropped 7% to 26,313. The South Korean stock market was down 4% to 2,119 while China’s Shanghai Composite index and Japan’s Nikkei Dow were both down by 2% to 2,977 and 23,205 respectively.

It’s worth noting that as of 3rd February, the Chinese stock market had fallen by 8% and stood at 2,746, no doubt a consequence of the Coronavirus.

Emerging Markets
In January, Amazon boss Jeff Bezos announced an investment of $1bn (£770m) in India, to help digitise small and medium businesses so they can sell online. Announcing the investment, Bezos said the 21st Century is “going to be the Indian century.” But not everyone was pleased at the news, as retailers across the country demonstrated at what they see as a growing threat to local retail markets.

Russian President Vladimir Putin also appeared to be making plans for the next century. He was last elected President in 2018, winning a six year term which would have seen him in power until 2024. However, he now seems to have wearied of the tiresome business of getting re-elected and January found him busy re-arranging the structure of Russian government in a move widely seen as paving the way for him to remain President for life, much as Xi Jinping has done in China.

Despite Jeff Bezos’ investment plans, the Indian stock market fell 1% in the month to close January at 40,723. Brazil’s market was down by 2% to 113,761 but there was – at last – a market which went up in January as the Russian stock market managed a gain of 1% in the month, closing January at 3,077.

And finally…
Last January we brought you the news of Greggs and their vegan sausage roll. This year, the company celebrated Veganuary by releasing the vegan steak bake to an expectant world – a move that proved hugely popular. The company has now announced that its workers will share in a £7m one-off payment as a special ‘thank you.’ Helped by the success of the vegan sausage roll, Greggs CEO Roger Whiteside said 2019 had been an “exceptional year”.

Clearly, though, not everyone is eating vegan sausage rolls and walking five miles a day. The BBC reported that ‘M&S sales squeezed as men shun skinny trousers’ as the mainstay of the British high street was forced to concede that it had overestimated the demand for tight-fitting men’s clothes in the run-up to Christmas. As a result, it was rushing to order more ‘regular’ and ‘relaxed-fit’ clothes.

You can only conclude that people eat more over Christmas… who would have thought?

Let us leave this Commentary with a tale of true love, or at least what Japanese billionaire Yusaku Maezawa hopes will be a tale of true love…

Mr Maezawa – who made his money in fashion – is seeking a ‘life partner’ to accompany him on a trip to the Moon. He will be the first civilian passenger on Space X’s lunar trip, planned for 2023. He wants to share the experience with a “special woman.”

One doubts that he will be short of potential candidates. To paraphrase Mrs Merton’s famous remark to Debbie McGee, ‘What was it that first attracted you to the billionaire Yusaku Maezawa…’


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