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April 2013 Market Commentary

02.04.2013

When I started making notes for this Bulletin at the beginning of March it was quite clear what the main ‘story’ was going to be.

On March 20th Chancellor of the Exchequer, George Osborne, would deliver his Budget – and with the UK in very real danger of slipping into a ‘triple-dip’ recession and the Conservatives trailing in the opinion polls, it was simply going to be the most important speech the Chancellor had ever delivered.

But in the event, the Budget turned out to be little more than a side-show on a wider stage. Yet again events in the UK were overshadowed by a crisis in Europe. This time it was Cyprus, where the banking crisis led to an ever more acrimonious bailout from the EU which also involved Russia and a clear worsening of relations between Moscow and the government of German Chancellor Angela Merkel.

In the Far East, new North Korean Supreme Leader Kim Jong-un continued to rattle his sabre, threatening South Korea and anyone else within range of his missiles – which apparently included the West Coast of the United States. In the long run this story may occupy more column inches than the problems in Europe, but in March events were dominated by what was happening on a small island in the Mediterranean.

UK

The month started badly for the UK in general and George Osborne in particular. There was a shock contraction in the manufacturing sector with the Purchasing Managers’ Index falling to 47.9 and – not surprisingly – an opinion poll revealed that only 1 person in 5 thought that the Chancellor’s austerity policies were working.

The economic gloom was graphically illustrated for the Chancellor on the day before his Budget speech when Astra-Zeneca announced 2,150 job losses in his own Tatton constituency. As he rose to speak, there were more than a few Tory backbenchers sharpening their knives and eyeing up Mr Osborne’s back.

The speech was probably best summarised by John Cridland, Director-General of the CBI who declared that “the Chancellor had a weak hand, but played it well.” Certainly, George Osborne was at pains to level with the British people, freely acknowledging that tough times lay ahead, but promising a budget that tackles the economy’s problems head on helping those who want to work hard and get on.

The measures announced included investment in the UK’s infrastructure, moves to stimulate the housing market and the building industry and a commitment to reduce Corporation Tax to 20% – well below the level of all the major European economies.

Inevitably, though, the Chancellor had to acknowledge that his monetary targets had been blown off course by events in the wider world. These days, there is only so much influence that a British Chancellor has – something that was graphically illustrated as the Cypriot winds started to blow.

Having been briefly above 6,500 (registering a 5 year high) the FTSE closed the month at 6,411. That’s a rise of only 1% in the month but, encouragingly, the FTSE is up 9% in the first quarter of 2013.

Europe

As above, the month in Europe was dominated by events in Cyprus. With the country’s banks in trouble, Cyprus had approached the EU for a bail-out – and that’s where the trouble started.

The Cypriot banking system has boomed in recent years, with some estimates putting it at eight times the basic Cypriot GDP, with much of the new found deposits coming from individuals who have amassed fortunes in the former Soviet Union.

The initial conditions imposed by the ‘Troika’ – the EU, the ECB and the IMF – proposed a levy on all bank savings in the country. This didn’t go down at all well with the Cypriot Government, who promptly started holding talks on a possible bail-out with Russia. When those negotiations broke down a compromise was eventually hammered out with the EU, which saw a severe ‘haircut’ – possibly up to 60% – for anyone with deposits of more than €100,000 in Cyprus’ leading banks. In addition there was the imposition of currency controls, with Cypriot citizens now unable to take more than €1,000 abroad, and restrictions on the use of credit cards overseas.

The crisis saw the Cypriot banks closed for ten days while queues for withdrawals snaked round the block and cash machines steadfastly refused to give out more than token amounts of euros.

The crisis also exposed some deep divisions in Europe – as noted above, between Germany and Russia in particular. As the German pressure group Tax Madness put it, “The Russian oligarchs and Mafiosi have parked their laundered money in Cyprus. Why should the German taxpayer bail them out?” There is little doubt that Russian depositors will suffer badly under the terms of the bailout – and there is equally little doubt that the Russian authorities will now take a hard line with German companies operating in Russia.

There are two important lessons to take from the Cypriot debacle. Firstly – to mis-quote George Orwell – some euros are now more equal than others. Ask Russian depositors if they would now trade their €1m in Cyprus for €750,000 in Frankfurt or Paris and you would be knocked over in the rush. Secondly, the words ‘it cannot happen here’ no longer apply. Whatever bank you are saving with you must be aware of the compensation limits which apply. If you are in any doubt at all then please don’t hesitate to talk to us.

Despite the problems, the major European stock markets did not suffer in March, with the German index closing up 1% at 7,795 and France virtually unchanged at 3,731.

USA

So far this year the Dow Jones index is up by 11%, having risen a further 4% in March. It closed 2012 at 13,104 and ended March at 14,578 with the index now established at record levels, finally surpassing the heady days before the words ‘banking crisis’ had ever been spoken.

The US continues to provide good news on jobs – 236,000 were added in February and for now at least, the Democratic President appears to have found a way of working with the Republican Congress.

Manufacturing data was slightly disappointing towards the end of the month which caused the index to fall back slightly, but as CNN proudly proclaimed, it was “a stellar quarter” with the S&P 500 index joining the Dow at a new record level. They went on to point out that ‘stocks remain reasonably valued’ and that they were trading on a lower multiple of earnings than had been the case before the banking crash.

In the circumstances it seems almost churlish to point out that the US continues to rack up a trade deficit of between $40bn and $50bn every month. More cautious investors pointed out that this bill may need to be paid one day but, in March at least, they were drowned out by the sound of champagne corks popping.

The Far East

As Cyprus dominated the European news in March, the increasingly bellicose statements coming out of Pyongyang dominated the Far Eastern agenda. In mid-month computer hackers paralysed some South Korean banks and broadcasters and suspicion immediately fell on the North. By the end of the month Kim Jong-un was threatening to close down a factory complex which North Korea shares with the South (one which generates much of North Korea’s limited foreign earnings) and warning the US that San Francisco and Los Angeles were within range of his missiles.

With Kim Jong-un having been in power for less than a year it is difficult to know what to make of his rhetoric – whether it’s a case of empty vessels making the most noise, or whether it is something more sinister. But this story – and its wider implications for the region – clearly has some way to run.

Meanwhile new Chinese Premier Li Keqiang announced that there would be less state control of the economy – apparently the measure is needed to help the Chinese economy maintain an annual growth rate of 7.5% until 2020.

If China achieves this aim, the world may look significantly different. According to the Financial Times China’s cash reserves are around $3.3 trillion dollars. To put that in perspective, the rumoured Qatari bid put a value of $10bn on Marks and Spencers. Manchester United is worth a paltry $1.5bn. The market capitalisation of Shell, the biggest company in the FTSE-100 index is just over $200bn.

The simple fact is that China could buy vast chunks of Europe’s core manufacturing businesses and some of its most iconic names without batting an eyelid.

However, the Chinese stock market still fell by 3% in March as did the Hong Kong market. But there was a completely different story in Japan where the market closed the month at 12,398 for a 7% increase in the month. Having ended 2012 at 10,395 the Nikkei Dow is up 19% in the first three months of 2013.

Emerging Markets

As regular readers know, the star performer of world stock markets over the past 12 to 18 months has been Venezuela, with the stock market regularly recording spectacular monthly increases. However, President Hugo Chavez died on March 5th, having ruled the country since 1999. Whether his eventual successor will bring such stability remains to be seen.

Along with China, Brazil, Russia and India (the other countries covered by the ‘BRIC’ acronym) all saw their stock markets fall in March. All of them are also down on a year-to-date basis, with Brazil recording a worrying fall of 8% in the first quarter of the year. March saw a lot of negative publicity about Brazil’s hosting of the Word Cup in 2014 and the Olympics in 2016 and these stories seem unlikely to go away in the near future.

The month also saw the usual spectacular rises and falls in emerging markets around the globe. Venezuela had another brilliant month; the market in New Zealand plumbed the depths.

But it was Cyprus that really dominated March’s headlines and, as we said in the introduction, it completely overshadowed George Osborne’s Budget. March was a turbulent month and if you have any questions or worries about events in the month then please don’t hesitate to contact us.

And finally…

A small sliver of good news for the UK economy to finish the month… Food group Symingtons have announced that they will be bringing noodles home. Having previously produced them in Guangzhou and Hangzhou provinces, the noodles will now be made at a new factory just outside Leeds. The company added that the noodles will complement production at their gravy factory in South Yorkshire. Friday night takeaways may never be the same again…

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Clear advice explaining jargon, repeating if required, and accurate. Mr C - Solihull

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Adrian Smith

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