TODAY’S FAYRE – HAVE EQUITIES PEAKED?

TODAY’S FAYRE – Sunday, 6th August 2017

 

 

Loving in truth, and fain in verse my love to show,

That she, dear she, might take some pleasure of my pain,—

Pleasure might cause her read, reading might make her know,

Knowledge might pity win, and pity grace obtain,—

I sought fit words to paint the blackest face of woe;

Studying inventions fine her wits to entertain,

Oft turning others’ leaves, to see if thence would flow

Some fresh and fruitful showers upon my sunburn’d brain.

But words came halting forth, wanting invention’s stay;

Invention, Nature’s child, fled step-dame Study’s blows;

And others’ feet still seem’d but strangers in my way.

Thus great with child to speak and helpless in my throes,

Biting my truant pen, beating myself for spite,

“Fool,” said my Muse to me, “look in thy heart, and write.”

 

Philip Sydney – poet – 1554-1967

 

We are in the middle of another great test match at Old Trafford on a good cricket wicket, which has offered help to both bat and ball.  So pleased for Jimmy Anderson that he bowled so well at his home ground, having named the stand at one end after him, for his considerable contribution to England’s and Lancashire’s cricket. Today England will do well to get South Africa out to win, as the wicket is starting to look easy paced!

 

I suppose Usain Bolt has every right to earn the ballyhoo, brouhaha and adulation for his amazing contribution to athletics and in particular in the 100 & 200 metres in the past decade.  Many rate him as ranking as the greatest sportsman of all time with Muhammed Ali. I have to admit that athletics does nothing for my taste buds. I hugely respect their achievements but I am a team sport person.

 

To all intents and purposes the mature economies of the world have enjoyed virtually zero official interest rates for the best part of a decade.  We have inhaled the intoxicating and addictive fumes of quantitative easing to such a degree that being weened away from it, which should be inevitable, could prove as unpredictable as a drug addict going ‘cold turkey!’ During this period equity geeks, fund and hedge fund managers have backed the truck up and have seen an amazing return on their investments – for example, since 6th March 2009 – FTSE +112% DAX +201% DOW +233%, S&P 391% and NASDAQ +262%. The FTSE has underperformed the other indices because of desperate performances by miners, oil and banks at some point during this nine year cycle. Not surprisingly these global indices, which would also include the Nikkei and maybe the Hang Seng are starting to look a little rich for many peoples’ blood.  I appreciate that many Central banks, the IMF and other luminaries are talking global growth up, but there has to be a case for a correction before too long.

 

Why? There is no doubt that cheap money and QE have fuelled many of the asset bubbles – mainly property and equities.  The bond market needs careful watching as the level of borrowing is almost at epidemic proportions and there are cleverer people than me who feel some sort of implosion cannot be ruled out in the future. Consumer borrowing on a global basis is at record levels with wage inflation remaining anaemic. Of course retail, the backbone of most economies, is reliant at present on low interest rates with no wage inflation momentum. Any hike in rates at present would kill the goose that laid the golden egg – a disaster for the economy!

 

When mature economies are weened away from QE, starting by tapering off this facility, which the US’S FED intends to do, interest rates will at some time have to go up. Profits margins are so wafer thin at present, that it seems unlikely in the current climate that these record valuations for equities can be sustained. Quantitative Easing was a necessary evil when introduced at the time of the banking crisis.  Few would doubt that, but withdrawing it may have serious ramifications –Central banks are damned if they do and damned if they don’t. For now in the UK, there seems little possibility of any withdrawal from QE and as for the ECB it is hard to tell as Draghi talks in ‘Bletchley Park’ coded language – maybe I am too thick to understand him!

 

I suspect that President Trump was delighted to see such ebullient Non-Farm Payroll data in the wake of the desperate problems he is experiencing with White House staff and Robert Meuller’s Grand Jury over Russian election interference. 209k jobs were created in July with the unemployment rate falling from 4.4% to 4.3% and it is down from 8% in 2009. Food & healthcare sectors faired the best.  However wage inflation at 2.5% was still a little too benign, though inflation itself stands at circa 2%. Many expected this sort of number, having seen the ADP Employment index on Wednesday create 177k jobs in the private sector. Consequently the pressure on the Dollar temporarily eased, lifting Treasury yields plus giving equities some respite, BUT there certainly appears to be some resistance to the S&P and the NASDAQ from cracking on, despite some great results from the likes of Apple, Boeing and UnitedHealth. Investors may be feeling that valuations may have reached a temporary zenith! Just in passing I, like many others, was delighted to see that Irene Rosenfeld quit Mondelez, the confectionary group, remembering her disgraceful behaviour at Kraft when it bought Cadbury Schweppes.  She lied about the UK staff, who lost their jobs.  

 

Last week the S&P 500 added a parsimonious 0.14%, with the FTSE doing well in adding 1.95% in value with good results from HSBC, an improved effort from RBS, with NEXT on a roll with oil and mining looking good, providing the momentum. European bourses managed an average gain of 1.2% and the Nikkei trod water as the Yen became uncomfortably strong. Talking of RBS, it reported on Friday the first 6 monthly profit for 2 years (£939 million) but the bank will fail to make money this year as it has the DOJ’s claim for miss-selling mortgage backed securities to answer to, which may cost £5 billion.  No provision for PPI was made, which was encouraging. Tier One Capital came in at 14.7% – very satisfactory.  To date since 2009 RBS has lost £58 billion, but there appears to be some light at the end of the tunnel. The balance sheet is much smaller – circa £1.1 trillion down from £2.2 trillion 9 years ago. The bank cannot return to the market until a dividend is in sight. It looks as though Williams & Glyn will not have to be sold under EU law.  £500 million may be made available to lend to SMES. CEO Ross McEwan has reason to feel pleased.  RBS has taken legal advice against the prospect of another Independence challenge and may shift its Scottish clients into a subsidiary, operating under its Adam & Co licence. RBS is opening an office in Amsterdam as a contingency plan for BREXIT.  Only 100-150 people will man it.  It is not an all-out EXODUS as many ‘remainers’ would have us believe, though in passing Deutsche Bank will be moving 4000 people, mainly to Frankfurt.  Goodbye! and remember you enjoyed some great years in London!  Have fun in Frankfurt, but I doubt the real international business will be there!

 

Much has been written about the MPC and Mark Carney’s comments accompanying the Inflation Report last Thursday.  No change in rates, but the voting maybe 5-3 with Andy Haldane possibly replacing Kirstin Forbes voting for a rise. Mr Carney believes the economy is too brittle at present with wage inflation below inflation (2.9%), though an increase cannot be ruled out at the end of the year with 1% official interest rates on the cards by the end of 2018. I do not subscribe to this.  The Bank has altered growth down to 1.7% from 1.9% for 2017 and from 1.7% to 1.5% for 2018.

 

UK companies posting numbers this week – Monday – GW Pharma, Tuesday – Intercontinental Hotel Group, Standard Life, Morgan Siddall, WorldPay, Paddy Power Betfair, TP Icap, Pets at Home, , SIG Rotork, Wednesday – G4S, L&G, Interserve, Hastings Group, Mylan, Thursday – Card Factory, Coca-Cola EP, Prudential, Amec Foster Wheeler, Evraz, Cineworld, PageGroup – Friday – Old Mutual

 

US companies posting results this week –Monday – Tyson Foods, CBS, Tuesday – Ralph Lauren, Dean Foods, Wednesday – Office Depot, Jack-In-The-Box, Eastman Kodak, Thursday – Macy’s, Nvidia, Nordstrom, Friday – JC Penney

 

Economic Data – Halifax House Price Index, Tuesday – BRC Retail sales, NEISR GDP, Thursday – RICS House Balance, UK Construction, Manufacturing output and Industrial production

 

 David Buik

Market Commentator – Panmure Gordon & Co

 
+44 (0)20 7886 2775

Mobile – 0044 7788 144 877

Panmure Gordon & Co

One New Change | London | EC4M 9AF​

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