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No not North Korea and Iran, nor Hilary Clinton and Donald Trump, nor Sepp Blatter and Michel Platini but very young children! Some parents and grandparents may have experienced first-hand the ‘terrible twos’ or the unruly behaviour of some children at the age of two. Although it does appear as if Iran is no longer on the naughty step! Which got us thinking.
Stock markets can sometimes behave like very young children, by throwing a tantrum. For example during 2015, global markets threw a ‘taper tantrum’ when the US Fed first hinted that it was considering ending the long period of record low US interest rates. Likewise, markets had another tantrum towards the end of 2015 when the ECB initially, didn’t deliver against optimistic expectations for more stimulus.
The US has now taken the plunge and increased interest rates and flagged further quarter point rises in 2016. Are we going to see more ‘taper tantrums’ in 2016 as other central banks flag a possible, gradual return towards more normalised monetary policy? Perhaps, if UK employment and wage growth continue to improve or the recovery in the Eurozone region gathers pace, then either the BoE or ECB might cause a tantrum? Disappointing economic data from the USA, last week has led some to suggest the US Fed might reverse its interest rate hike but we believe this would smack of panic and really cause a tantrum in markets.
In Asia, the PBoC and BoJ are walking a tightrope, albeit different to the USA and Europe with investors expecting more stimulus, so the disappointment will be if this proves to be less than expected. Either way, we suspect that at some stage in 2016 we could well see markets throw another tantrum with one of the central banks.
What have we been watching?
Talking of the terrible twos, the Oil and Mining sectors continued to drag on the FTSE 100. Global markets remain volatile and many movements in the share prices of UK companies were caused by very small amounts of trading volume. Besides weak commodity prices, market nerves were unsettled by more Islamic State terror attacks in Turkey and Indonesia which affected the share prices of airline, hotel, tour holiday companies, theme park and cruise ship operators.
While we cannot control short term market behaviour, we take comfort from the fact that, while still very early into a new year, trading updates from many of our companies, while cautious, generally continue to be in line with management expectations. We continue to focus on experienced management teams of cash generative businesses that have good long term profit and dividend growth potential and are better able to weather the current market turmoil.
We do not see the end of the world even though it may feel like it! 2016 faces the same issues as 2015, with low inflation and anaemic global growth. The devaluation of many emerging market currencies is possibly a reflection of low global inflation with the collapse in oil prices. Focusing on businesses with genuine growth prospects and some self-help potential continues to seem the right course of action to us.
West Texas crude and Brent oil prices continued to slide with both, at one point, dropping below $30. A sign of the pain this is causing was reflected in Bahrain which, is following Saudi Arabia’s lead and removing petrol subsidies for citizens leading to a 56% increase in petrol prices. Saudi Arabia is looking to ‘sell part of the family silver’ in considering a potential floatation of its Aramco national oil company with an initial offer of $100bn to $500bn. BP announced 4,000 job losses worldwide while BHP Billiton has incurred a $7.2bn write down on the value of its US shale assets. Russia is slashing budget expenditure by 10% to cope with lower revenues as a result of falling oil prices. When will the pain end for oil producers?
With oil at about $30 we must have reached the point of capitulation where existing production could be shut down in higher cost producing areas like the North Sea and US shale regions. The million dollar question is when does the supply and demand reach equilibrium? Some oil industry analysts are suggesting H1 2016, some H2 2016 while others are predicting not until late in 2017. However, the lifting of sanctions against Iran, while expected, is nonetheless, not only an additional supply of fresh oil but cheaper sourced oil.
The impact of economic slowdown in China and falling oil prices on wealthy Middle East consumers has also been reflected in the luxury goods market with Bentley Motors reporting an 8% drop in car sales in 2015.
Oil is not the only commodity to be hammered over the last year with metal prices like copper and iron ore falling significantly as the Chinese economy slows. Last week Rio Tinto announced that it was freezing staff pay and cutting travel budgets. The CEO said that he expected the mining industry to remain under significant stress and the situation is not temporary.
In the UK, BRC retail sales data echoed a number of the downbeat trading statements, particularly from clothing retailers due to wet weather, with Q4 retail sales up by just 0.9%. By comparison data from credit card company Visa Europe suggested that UK consumer spending increased by 2.3% with eating out/cinemas etc. providing most of the growth. UK industrial output dropped 0.7% in November, the biggest fall since early 2013. Sterling dropped to a five year low against the US Dollar which should be a small crumb of comfort to UK manufacturers. This data, together with the falling oil price would appear to push any decision by the BoE on raising interest rates further down the road in 2016.
Eurozone industrial production declined by 0.7% in November due to a combination of lower energy output, capital goods and consumer durables. Nerves were further tested by news that following the VW emissions scandal that anti-fraud investigators had raided some of Renault’s sites sending the shares down by 20% at one point.
In the USA, the Fed’s ‘Beige Book’ which reviews the economic outlook flagged the risk to US growth from the strong Dollar and the impact of lower oil prices on the US shale oil industry. This comes ahead of the US Q4 2015 earnings reporting season, where analysts are expecting a 6% decrease in earnings per share for the S&P 500 companies.
US economic data was weak with retail sales and industrial production both below expectation which has pushed the chances of the next 2016 US interest rate hike back out to September.
Japanese machinery orders suffered their biggest fall in eighteen months. The data which, tends to be volatile is nonetheless a worrying sign for capital spending by companies.
Chinese trade volumes contracted less than expected in December with exports down by 1.4% and imports down by 7.6% resulting in a trade surplus. However, a note of caution is required as the data may have been distorted by capital flight as reflected by the unexplained surge in volume of trade from Hong Kong. All eyes will now be on this week’s official Q4 GDP data release.
Finally, an example of the law of unintended consequences. Taxpayers in parts of Switzerland have been asked by the fiscal authorities to delay paying tax bills. The reason? The longer the tax authorities has cash on its books the more likely it will incur costs as a result of negative interest rates charged by Swiss banks. This is the result from last year’s efforts by the ECB to weaken the euro. Sadly, in the UK, we do not think HMRC will be so kind to taxpayers!
This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.
You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.
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