21st August 2018

Rathbones: Yin and Yang

Copper is the world’s favoured conduit of electrical current. It is also a popular method of tracking the conduit of global trade.

The red metal’s price peaked just before the new year at $334 per pound, it has since slumped more than 20% to roughly $260. Since June, its descent has been especially rapid. Investors seem to be expecting a slowdown in global trade. This scenario would hit China hard, which is probably why the Shanghai Stock Exchange Composite Index (in sterling) fell 16% over the past six months. The renminbi was almost 10% weaker on Monday than it was at the end of March.

Chinese economic data wasn’t very flash last week. Fixed-asset investment growth slowed to 5.5% during the first half of the year, the lowest rate since data began. Retail sales were also lower than forecast, but 8.8% growth isn’t to be sniffed at, even if it is slightly below the 9.1% expected. The nation’s GDP growth decelerated by 10 basis points to 6.7% in the second quarter.

In response, Chinese leaders have reached for the old crutch: infrastructure stimulus. More projects will be approved in the coming months, the government announced. The banking regulator is also encouraging banks to increase lending to infrastructure construction and exporters. The IMF has already warned that this path will exacerbate the country’s debt problems.

Meanwhile, Chinese diplomats will fly to America for another round of trade discussions.  Whether this parley will succeed is anyone’s guess. Does the US actually want to broker a deal or is it happy with a world of steadily rising protectionism? The S&P 500 was the only major developed index to rise last week, posting a 0.9% return in sterling terms. Over the past six months, the S&P is up 16% in sterling terms – the yin to Chinese equities’ -16% yang.

The mood of US investors, businesspeople and consumers is buoyant, economic data are strong across all measures. A resurgent housing market is adding a further leg to growth, too. Following the financial crisis, most states’ housing markets spent many years in the doldrums. Some property markets recovered relatively soon, but many are only now coming out of their funk. As property prices rise, homeowners become more confident – or simply free to sell their house and pursue new opportunities after labouring in negative equity for a decade.

Fed Chair Jay Powell will speak at the Jackson Hole economic symposium, which starts Thursday evening. This year’s focus is on the concentration of market power in a handful of firms and the impact of this on competition and productivity. Some commentators are hoping Mr Powell will use his speech to shed light on the Fed’s potential game plan during any coming recession.

Source: FE Analytics, data sterling total return to 17 August 

Hope springs eternal

UK inflation accelerated 10bps to 2.5% last week, its first rise since November.

Transport was a large driver of the move, which will no doubt have half the country’s commuters seething. Still, wage growth at 2.7% (excluding bonuses) is outstripping price rises. Bonus.

It could be worse, however: oil prices are about 40% higher than a year ago. Drivers are getting stung at the pump, but they and everyone else are lucky this hasn’t flowed unchecked through to retail prices. Same goes for the almost 11% increase in raw materials (including fuel) that manufacturers have had to absorb in the year to 31 July. Factory gate prices were up just 3.1% over the same period. All of this flows from sterling and its terrible weakness. And sterling’s terrible weakness flows, like all things, from Brexit.

It’s not all rubbish though. The UK unemployment rate fell 20bps to 4% last week, a phenomenally low figure not matched since the mid-1970s. So why is wage growth so very poor? Well, one theory is that the quality of employment is hiding what is effectively underemployment. That commanding position of employers may be on its way out: zero-hours contracts fell 12% over the year. There are 780,000 Britons still on these flexible contracts. If they continue to disappear, perhaps we the next phase will be greater wage rises. However, given the nation’s anaemic growth in productivity that would likely boost inflation.

Just ask the commuters – what the country needs is investment to boost productivity and deliver better real wages and living standards. But, because everything flows from Brexit, we’ll have to wait for now.

Bonds

UK 10-Year yield @ 1.24%
US 10-Year yield @ 2.86%
Germany 10-Year yield @ 0.30%
Italy 10-Year yield @ 3.12% 
Spain 10-Year yield @ 1.45%

Investment Commentary, Investments