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In a week of mixed fortunes for global investors, those with government bond allocations were far the happier. Equity markets sold off across the board as a cocktail of events conspired against investors.
It started so well after MSCI increased the weighting of Chinese A-shares in its emerging-market indices. At present, the A-share market makes up only around 0.7% of the MSCI Emerging Markets benchmark. But this will rise to around 3.3% by November, which will force index-tracking funds to increase their weightings accordingly. Active investors have been anticipating this shift, but it puts this market on more radar screens.
Bulls in the China shop
The strong start to the week from the A-share market came despite further signs of a slowing Chinese economy. This week, China cut its official growth target for 2019 to a range of 6.0 to 6.5%. Meanwhile, the Caixin/Markit services purchasing managers’ index was weaker than expected at 51.1 for February. This was the lowest reading for four months.
But this gloomy picture is resulting in some positives for China’s companies. In an attempt to stimulate the slowing economy, the Chinese authorities have been cutting taxes. This week, Beijing reduced the top rate of VAT, which should provide an earnings boost of between 7% and 9% for A-share companies.
We continue to find opportunities in this market, but the 4% fall today (following a rise in excess of 20% for the year to date) reminds us that it will be a rollercoaster ride.
ECBottoming? Not quite
The European Central Bank revised down its growth and inflation expectations for 2019, finally catching up with economic reality. It announced another targeted longer-term refinancing operation (or TLTRO to its friends), designed to give banks access to cheap funding. This, allied with low interest rates as far as the eye can see, is undoubtedly a stimulus, but also a reflection of a troubled economy. That being said, we expect a rebound in growth in 2020 relative to 2019’s low base, but are conscious that risks are skewed to the downside.
Another international body that is slow to change its opinion is the Organisation for Economic Co-operation and Development (OECD); despite the International Monetary Fund (IMF) cutting its 2019 global growth forecasts back in January, only now has the OECD slashed its estimate from 3.5% to 3.3%. In its statement, the OECD put particular emphasis on Europe and on the potential consequences of a no-deal Brexit.
Wall Street woes
In the US, the S&P 500 was down 2.0% by Thursday’s close. E-commerce titan Amazon was among the notable decliners. The company’s mooted move into supermarkets may put pressure on its margins at a time when its web-services business – Amazon’s most profitable part – is facing fiercer competition.
Amazon’s ambitions were, however, the cause of considerable disquiet among investors in supermarket operators. Shares in Kroger plunged on Wednesday as disappointing fourth-quarter results were compounded by the competitive threat from Jeff Bezos’s behemoth.
Lower for longer
With the FTSE (World) Europe ex UK index down 0.5%, European stocks also performed poorly. Banks led the declines on the back of the ECB announcement. Keeping interest rates ‘lower for longer’ has negative implications for banks’ profitability – and for the euro, which fell to a 21-month low against the US dollar.
Domestic divergence
In the UK, the FTSE 100 was relatively unaffected by the global sell-off. But as so often, this appeared to be largely due to a weaker pound. This benefits many of the FTSE 100’s constituents because they earn the bulk of their earnings overseas – earnings that are magnified when sterling falls. In contrast, the more domestically focused FTSE 250 had a bumpier ride. At Thursday’s close, the mid-cap index was down 1.1%.
And finally …
Yesterday was World Book Day – although many schools have been celebrating the event today. But as children appeared at school dressed as characters from their favourite books, the nature of the celebration came under some scrutiny.
According to a survey by eBay, many British parents are spending substantial sums on kitting their kids out for World Book Day, with some splurging as much as £100. Social media appears to be increasing the pressure on parents to ensure that their children cut a suitably literary dash – which can then be endlessly Instagrammed. And while 46% of parents spent money on a costume, only 36% actually bothered to buy their kids a book.
Canny parents, of course, can nudge children towards books whose characters require no costuming at all. But why not combine that with encouraging a taste for the classics? George and Weedon Grossmith’s 1892 novel The Diary of a Nobody might just be perfect …
