Labour targets the Square Mile
Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets last week (18 – 22 November 2019).
Markets were volatile on concerns over a phase one trade deal with China, after Washington passed a bill that was critical of Beijing’s actions in Hong Kong. The Labour Party launched its election manifesto, which contained measures that were called an attack on the City of London
The FTSE 100 was flat over the week by mid-session on Friday and the midcap FTSE 250 rose 0.3%.
With US markets now regularly hitting all-time highs, Garry White questions whether the market exuberance is justified here.
It really is vitally important to sit down with your family and talk about money. Charles Stanley investment manager Tsitsi Mutiti explains why here.
UK election & Brexit
Labour has launched its general election manifesto, promising to "transform" the UK and to renationalise rail, mail, water and energy. The policy document also said that a Labour government would slap an £11bn windfall tax on oil and gas companies to create a “just transition fund” and help shift the UK towards a green economy without creating mass job losses. Labour would also reverse some of the cuts to corporation tax seen since 2010 and expand Britain’s existing financial transaction tax on shares to trading in other assets, including foreign exchange, interest rate derivatives and commodities. The tax will be based on who does the trade rather than where the transaction takes place. It will also de-list companies from the stock exchange that fail to take adequate steps to deal with climate change and encourage financial watchdogs to promote green investments. It also proposed reversing inheritance tax cuts and imposing VAT on private school fees. However, the party continues to trail the Conservatives in polling ahead of the 12 December election.
Boris Johnson postponed a planned cut in UK corporation tax from 19% to 17% as part of his election campaign, a move he claimed would allow £6bn investment in the NHS.
How could the general election affect your investments? Rob Morgan takes a look here.
The US Senate unanimously passed legislation aimed at protecting human rights in Hong Kong, drawing condemnation from Beijing and adding further complications to sensitive trade talks.
The legislation has been sent to Donald Trump for his consideration and has sparked significant ire in Beijing. The People’s Daily described the move as a “serious provocation against the entire Chinese people”. The Global Times said the Act should be renamed the “Support Hong Kong Violence Act”.
However, Chinese President Xi Jinping tried to ease trade fears on Friday. He said his nation wanted to work toward a phase one trade agreement with the US – but on the basis of mutual respect and equality. “We didn’t initiate this trade war and this isn’t something we want,” President Xi said in a speech in Beijing. “When necessary, we will fight back, but we have been working actively to try not to have a trade war.”
Donald Trump and Apple chief executive Tim Cook toured a manufacturing plant in Texas. President Trump said during the tour he was looking at whether to exempt Apple from the 15 December tariffs, that would hit consumer goods such as laptops and tablets. Mr Cook had previously told Donald Trump that the tariffs could hand an advantage to South Korea’s Samsung. However, he was also clear on what he really wants. “When you build in the United States you don’t have to worry about tariffs,” the president said pointedly.
The Trump administration issued a new 90-day extension to its Temporary General License to allow US companies to continue doing business with controversial telecoms equipment maker Huawei. However, the Chinese downplayed the extension, arguing it will not have a substantial impact on the company’s business and does not change the fact that it is being treated unfairly.
UK public sector net borrowing jumped to £11.2bn in October, the highest borrowing recorded in October in five years. It compares with £8.9bn in October 2018 and economists’ expectations of £9.3bn.
UK manufacturing output continued to fall in November, according to the CBI’s latest industrial trends survey. Although orders picked up by more than expected from the nine-year low seen in October, they stayed well below their historical average. The CBI’s total orders balance improved to minus 26 in November from minus 37 in October – and was above consensus expectations of minus 30.
President Donald Trump and Federal Reserve Chairman Jerome Powell, who have been at odds over the direction of monetary policy, met at the White House to discuss a variety of economic issues. It is believed Mr Powell reiterated that Fed policy was not influenced by political considerations, but President Trump reiterated his view that US interest rates were too high.
Three US interest rate cuts appear to be having their desired effect, as the US housing market picked up. The number of permits for future US home construction jumped 5% to 1.46m in October, the highest level since May 2007.
Christine Lagarde gave her first speech as President of the European Central Bank (ECB) to call for more fiscal spending by European governments. “It is clear that monetary policy could achieve its goal faster and with fewer side effects if other policies were supporting growth alongside it,” Ms Lagarde said. “There is today a cross-cutting case for investment in a common future that is more productive, more digital and greener.”
Record-low interest rates in the Eurozone have led to “excessive risk-taking in some sectors” as financial firms pursue profits, the ECB warned. “While the low interest rate environment supports the overall economy, we also note an increase in risk-taking which warrants continuous and close monitoring,” Luis de Guindos, Vice-President of the ECB said.
The ECB published its latest financial stability review – the first under the leadership of newly appointed president Christine Lagarde. It made a number of points including warnings of excessive leverage in some sectors and urging further banking consolidation across the continent. You can read the report here.
Japan's exports fell by 9.2% year-on-year in October – the most significant fall in exports in three years. It was mostly driven by falling shipments of cars and aircraft engines to the US.
John Redwood asks whether we are nearing the bottom of the industrial recession? Read his analysis here.
The impeachment hearings into Donald Trump’s alleged pressure in Ukraine to investigate rival Joe Biden’s activity in a quid pro quo for aid continued. Former National Security Council official Fiona Hill testified that the Republicans’ “fictional narrative” that Ukraine interfered in the 2016 presidential election plays into Russian President Vladimir Putin’s hands. This followed testimony from EU Ambassador Gordon Sondland, who claimed that the instruction came from Mr Trump's personal lawyer, Rudy Giuliani. If found guilty in a majority vote in the House, the president will face an impeachment trial in the Senate. However, two-thirds of members of that Republican-controlled chamber would need to vote for Donald Trump to be removed from office. It is illegal in the US to seek foreign help to gain electoral advantage.
Is gin the new prosecco? Private-investor darling Fevertree Drinks warned that full-year sales will miss annual forecasts following a weak performance in the UK. The upmarket tonic maker said its UK sales for the off-trade – supermarket and off-licence sales – were below expectations in the second half of the year on the back of "weak consumer spending” as Britain’s gin frenzy may be going the way of the prosecco craze a number of years ago. Despite the downbeat UK news, its shares rose following the announcement due to positive news from its US business, an engine of future growth. The group has new distribution deals across the Atlantic, while the company has also signed a contract with a new bottling partner on the West Coast for 2020. Nevertheless, its shares have fallen by about 8% this year.
Semiconductor supplier IQE warned it will register a “mid-single digit” full-year operating loss as a result of lower revenue. The first quarter of 2020 is forecast to remain weak, with revenue returning to “moderate” growth thereafter.
Payments specialist Equiniti warned that full-year underlying earnings would be at the lower end of market expectations as a result of weaker high-margin UK corporate activity.
Germany’s Thyssenkrupp warned of deeper losses ahead and scrapped its dividend, as new CEO Martina Merz of the industrial group cautioned that restructuring could take up to three years.
US retailers are also having a torrid time. Macy’s issued its third profit warning this year and Kohls also reduced guidance.
Saudi Arabia’s Aramco's initial public offering (IPO) has attracted approximately 73 billion riyals ($19.47 billion) in institutional and retail orders so far, reports suggested. Aramco plans to sell 1.5% of the company, or about 3 billion shares, at an indicative price range of 30 riyals to 32 riyals, valuing the IPO at as much as 96 billion riyals and giving the company a potential market value of between $1.6 trillion and $1.7 trillion.
In some good news for Hong Kong’s long-term viability as a financial centre, Chinese e-commerce giant Alibaba closed its order books to institutional investors early for its upcoming secondary listing in the troubled Chinese territory. The shares officially start trading next week, but reports suggest they have already risen in grey market unofficial trading ahead of the official debut. Alibaba’s shares have been trading as ADRs in New York since 2013 after failing to gain approval from Hong Kong regulators for its unusual governance structure. Its ADRs will continue to trade in New York.
Accounting software group Sage reported a 13% drop in full-year organic operating profit to £432m, as its margins were squeezed by increased investment in its cloud and subscription products.
Oil prices were little changed over the week, with Brent crude prices rising 0.6% to around $63.30 a barrel.
Predictions of the demise of fossil fuels look overdone. China raised its coal-fired power capacity by 42.9 gigawatts (GW), or about 4.5%, in the 18 months to June, according to a new study by the US-based research network Global Energy Monitor. It also noted that China has another 121.3 GW of coal-fired power plants under construction – almost enough to meet the energy needs of a country the size of France.
Meanwhile, the US coal industry continues to shrink, despite a pre-election promise by Donald Trump to save the industry. After nearly 50 years in operation, one of the largest coal-fired power plants in the Western United States shut its doors for good this week. The Navajo Generating Station, a 2,250-megawatt plant located in Arizona and operated by Salt River Project, closed because it was “uneconomic” to operate. Garry White explained last year why the US coal industry is likely to be doomed. You can read the piece here.
British Gas owner Centrica stemmed the loss of energy customers this year and reaffirmed its full-year guidance after a "solid" second-half performance.
The oil market is now caught between the need for higher prices to sustain the producers, and lower prices brought about by a current surplus of output. John Redwood takes a look here.
There was another twist in Rio Tinto’s long-running saga over its massive Oyu Tolgoi underground copper project in Mongolia. The country’s parliament agreed to seek "comprehensive measures" to improve the terms of the Asian nation's involvement in the project. Legal agreements in 2009 and 2015 have dictated the terms of Rio’s involvement in the mine, which is undergoing an expansion that will cost more than $6bn. Rio wants these agreements to be honoured, but the country has been requesting a larger share of Oyu Tolgoi's profits. Nevertheless, it appears that progress is being made in solving the dispute.
There was some welcome positive news for Petra Diamonds, which sold a 20.08 carat blue diamond found at South Africa’s famous Cullinan mine for $14.9m. In September, the miner announced a double-digit fall in annual profits as a result of weak prices. Its shares are down by more than three quarters in the year to date.
Hochschild Mining shares fell after its first production guidance for next year showed output is expected to decline by more than 5%.
Chinese electric carmaker WM Motor is seeking up to $1bn in funding within the next six months, as the aspiring Tesla rival targets one new model a year. WM launched its new vehicle, the EX6 SUV, at the Guangzhou Auto Show this week. Since going into mass production just over a year ago, the automaker now has more than 20,000 cars on the road in China.
Electric car maker Tesla unveiled its first pickup truck, in an effort to capture a slice of the biggest vehicle market in the US. The three top-selling vehicles in the US are pickup trucks, with Ford, GM and Fiat Chrysler currently dominating the market.
Stock market failure Aston Martin Lagonda launched its first SUV – the DBX – this week, a vehicle that is very important for reversing the fortunes of the 106-year old carmaker.
Turnaround specialist Melrose Industries said that the strike at US automaker General Motors had hit sales at its automotive and powder metallurgy units for four months. The car parts division of the GKN business that Melrose bought last year counts Volkswagen, GM and Ford among its customers.
Airlines & travel
Following the demise of Thomas Cook, easyJet unveiled plans to relaunch its package holiday business. About 20 million people fly with the airline to Europe each year, but only 500,000 book accommodation through the company. The news came alongside its interim figures, which revealed that annual pre-tax profits fell by a quarter because of rising fuel prices and a tough operating environment. The airline said that forward bookings for the first half of the current financial year were “reassuring” and slightly ahead of last year.
Dubai Air Show
The Dubai Airshow ended with Airbus overtaking US rival Boeing in the number of deals, though both plane makers saw wide-body jet deals that ended uncertainty around commitments from Emirates — the world's biggest long-haul carrier. There must have been relief in the boardroom of Boeing after it received a number of orders at the industry showcase in the United Arab Emirates.
Kazakhstan’s flag carrier – Air Astana – announced an order for 30 of its troubled 737 Max aircraft for its recently-launched budget airline Fly Arystana. However, Air Astana has signed a "letter of intent" rather than making a firm order. One other airline was a little shy about making a public announcement. Reports suggested there had been a firm order from an undisclosed buyer for 20 of the Max jets. Emirates also ordered 30 Dreamliners from Boeing, in a deal worth $8.8bn.
Emirates also announced the purchase of 50 Airbus A350-900 XWBs – extra wide body – planes at a list price of $16bn. A discount on the list price is likely, given the order size. Air Arabia also signed a firm order for 120 Airbus aircraft, consisting of 73 A320neos, 27 A321neos and 20 A321XLRs.
A total of $54.5bn of orders were taken. Airbus received orders for 220 aircraft and Boeing for 95.
The government is set to wave through the £4bn takeover of defence company Cobham by US private-equity group Advent, after it offered to address national security concerns. Business Secretary Andrea Leadsom announced that the government would consult on legally binding steps to be taken by Advent and she was “minded to accept” the undertakings. This was despite objections expressed about the private-equity industry’s “short-term hunt for profits”.
Johnson Matthey shares slid after interim profit fell following problems in its Clean Air division. It blamed higher freight costs and manufacturing inefficiencies.
Shares in Halma, which makes detection and health and safety equipment, surged after the company said “good organic and acquired growth” resulted in a strong year-on-year rise in first-half earnings.
Defence contractor Meggitt said it had won a six-year $130m requirements contract with the US Defense Logistics Agency to supply aircraft fuel bladders. Deliveries start next year.
Royal Mail shares slumped after the company admitted its transformation was behind schedule. Interim profits also fell.
The woes are ongoing for B&Q-owner Kingfisher. Third-quarter like-for-like sales fell 3.7% and its new chief executive, Thierry Garnier, admitted he has “much to do” to improve the business. Kingfisher’s French units – Castorama and Brico Depot – saw a 6% drop in sales. The bright spot – as usual – was its Screwfix operation, where same-store sales rose 3.7%. “We are suffering from organisational complexity, and we are trying to do too much at once with multiple large-scale initiatives running in parallel,” Mr Garnier said.
Online electrical goods retailer AO World said it was closing its loss-making operations in the Netherlands to focus on the German business, as it reported a widening of its interim losses. The shares listed at 285p in 2014 and are now down around three quarters from the IPO price.
A preliminary takeover approach has been made for retail logistics company Clipper Logistics by private equity firm Sun European Partners. The company fulfils online orders for retailers such as ASOS and John Lewis.
LVMH upped its offer for Tiffany & Co in a bid to encourage the luxury jewellery retailer to consider the deal. The new takeover offer values Tiffany at around $15.8bn, including $350m in debt. The raised offer marks a premium of about 30% to Tiffany’s stock price before it emerged in late October that LVMH had expressed interest in the jeweller.
Much has been said about the demise of casual dining in the UK, but it appears that Mitchells & Butlers is bucking the trend as it kept a tight rein on costs. The owner of All Bar One, Toby Carvery, Harvester and Browns said operating profits were up by 14%. Management noted that an increasing desire by consumers to eat healthier food meant its customers wanted high-quality food made using superior ingredients and sourcing.
The battle for Britain’s curry lovers continued. Just Eat published the offer documents from Takeaway.com. The group will be acquired by the Dutch company by 31 January if 75% of shareholders back the bid. Non-US investors can download the documents here. Unsurprisingly, South African investor Prosus criticised Takeaway.com’s offer as “unrealistic” as it pushed for shareholders to reject the Dutch company’s approach in favour of its own rival bid.
Tobacco shares rallied after the US Food and Drug Administration did not include a plan for a new tighter nicotine standard rule in its “unified agenda”. This sets the regulatory priorities for the year ahead and such a move had been expected. This boosted shares in British American Tobacco and Imperial Brands.
UK competition watchdog the Competition and Markets Authority is investigating US toy maker Hasbro's proposed £3.3bn deal to buy Peppa Pig owner Entertainment One. The regulator said it was inviting comments on the deal until 5 December.
Shares in Aviva slid after management announced a lacklustre and disappointing strategy update. The insurer will reorganise into five divisions and sell its stake in its Hong Kong business. The news fell short of investor expectations for a broader change in strategy as the company has been under pressure from investors for lagging rivals for a number of years.
HSBC’s investment banking boss is reportedly set to be replaced as part of a shake-up under interim chief executive Noel Quinn. The lender’s head of global banking and markets Samir Assaf is to be moved to a non-executive role ahead of a major strategic shake up in coming months, according to the Financial Times.
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Garry White is Chief Investment Commentator at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.