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December 2013 Market Commentary

02.12.2013

Click click merrily on high – the virtual tills are ringing.

The Guardian’s bid for Financial Headline of the Year brought down the curtain on ‘Black Friday’ and heralded ‘Cyber Monday.’ Black Friday is the Friday before the Thanksgiving weekend in the US: it is supposed to be the day on which stores move into profit for the year as eager shoppers – seduced by special offers – flood the malls. This year Wal-Mart was good enough to bring the tradition to the UK: apparently, fisticuffs were witnessed at several Asda stores as restrained shoppers waited patiently in line for their turn with the special offers…

Cyber Monday is no less important to the retail trade – it’s the first Monday back at work after the November pay packets land in people’s bank accounts and celebrates the age-old British tradition of shopping online when the boss isn’t looking. Last year it was estimated that £10,000 per second was spent online as British employees sneakily visited Amazon and friends.

Away from the Christmas preparations, November was the usual mixture of triumph and disaster. The UK upturn in the third quarter was confirmed – then immediately labelled “unsustainable.” There was good economic news for Ireland and Spain – but youth unemployment in Europe continued to soar. The Dow Jones index hit a record level and Chinese manufacturing was at an 18 month high – but the month ended with China scrambling fighter jets and directing them towards Japanese and US planes, as tension escalated over disputed territory in the South China Sea.

UK

November started well, with the Bank of England raising its growth forecasts for the UK economy, from 1.4% to 1.6% for 2013 and from 2.5% to 2.8% for 2014. However, Paul Fisher of the Bank said that things were still “a long way” from normality, and his boss, Governor Mark Carney, added his views at the end of the month. He confirmed the upturn in the economy in the third quarter, but said the upturn was “unsustainable” as long as it was based solely on an increase in consumer spending.

Sadly, consumers don’t appear to have been doing that spending at Tesco. The giant retailer unveils new figures early in December and the trading results are widely expected to be disappointing, as Tesco finds itself trapped by Waitrose at one end of their market and Aldi at the other. Chief Executive Philip Clarke’s claim that he can turn the business round was met with widespread scepticism.

Even worse news emerged surrounding the Co-op Bank as lurid allegations centred on former chairman, the Reverend Paul Flowers. Several commentators wondered how a Methodist minister, whose only experience of banking was as a junior clerk, managed to end up as Chairman and, more particularly, why the Financial Conduct Authority hadn’t queried the appointment. Inevitably a rescue plan was being floated: as usual the figures quoted were being measured in billions.

By the end of the month all attention in the UK was starting to focus on the Chancellor’s Autumn Statement, which will be delivered on December 5th, having been delayed a day to allow the Prime Minister to return from a trade mission to China. The Chancellor does at least have the support of the FTSE-100 index: although it fell 1% to 6,651 in November, the index remains 13% up in 2013 and still in sight of that elusive all time high of 6,933.87 achieved in December 1999.

Europe

The ECB surprised everyone at the beginning of November by cutting interest rates to 0.25% amid fears of deflation in the Eurozone. Mario Draghi, the ECB President, warned that the outlook could deteriorate in the coming months. “The risks are all on the downside,” he commented.

There was plenty of downside for France and Holland as Standard & Poor’s downgraded both of them. France went from AA+ to AA as the ratings agency warned that high unemployment would make it difficult for the Government to bring in significant economic reforms. Holland lost its coveted AAA rating and was downgraded to AA+, leaving only three countries in the Eurozone with triple-A ratings from all the major ratings agencies. Germany is the easy one to guess successfully: the other two are Luxembourg and Finland.

It was not all doom and gloom for the nation states, however. Spain’s credit rating finally took a step in the right direction, and Ireland announced that it would exit its three year €71bn bailout package in December.

European car sales were up 4.7% in October – a rise for the second successive month – boosted by a surge in Spain. But there was bad news for VW, who had to recall 2.6m vehicles including 640,000 in China – which is now the biggest car market in the world.

Sadly there was no escaping the awful scale of youth unemployment in Europe. It reached a high of 24.4%, with 57% of the under-25’s in Spain now without a job.

On the stock markets, the German index performed particularly well, with a rise of 4% in November to finish at 9,405 (up 24% in the year). The French index closed more or less unchanged at 4,295 but is still 18% ahead in 2013.

US

There may only be 140 characters but they’re worth a lot of money! Twitter finally came to the stock market with an initial valuation of $14.5bn – and saw the share price promptly double in early trading. At around $30bn Twitter is still small in comparison to internet giants Facebook ($120bn) and Amazon ($163bn) – and for traditional stock market investors there is also one other small point to worry about: it loses money. The bean counters reported a loss of $134m for the first nine months of the year, leading Wired to comment, “outside of Silicon Valley and Wall Street it’s hard to get excited about Twitter.”

But maybe the enthusiasm for Twitter was simply reflecting the increasing business confidence in the US. The Purchasing Managers’ Index confirmed a rise in October, and figures for the third quarter showed growth of 2.8% – a figure that was higher than expected and an increase on the 2.5% growth in the economy seen in the second quarter. The growth was driven by rising exports, businesses increasing stock levels and a pick-up in the home construction sector.

It was not, however, a good month for investment bank JP Morgan, who finally agreed to a record $13bn settlement (that’s ‘fine’ in old money) for misleading investors during the US housing crisis.

However, the Dow Jones index was in a thoroughly optimistic mood, finishing the month at 16,086 having clocked up several all-time highs in November. The index was up 3% in the month and is now up 23% for the calendar year.

Far East

On the face of it, it has been a good month in the Far East: in China, both exports and imports rose, fuelling hopes of a recovery in the area and there was also growth in the service sector. Chinese manufacturing was at an 18 month high, with the Purchasing Managers’ Index also up, reflecting a growth in confidence.

The Chinese economy grew by 7.8% in the third quarter compared to a year ago. In contrast the Japanese economy declined by 0.5% in the same period.

All the leading stock markets in the region did well in November, but it was the Japanese market that stole the show, rising by 9% to close at 15,662. The Nikkei Dow closed 2012 at 10,395 so it has now risen by more than 50% this year. China was up 4% to end the month at 2,220 whilst the market in Hong Kong was 3% better at 23,881.

Sadly, the month ended with increased tension in the area. China has unilaterally declared a new ‘air defence zone’ in the South China Sea, and duly scrambled its fighter jets in response to US and Japanese planes flying through the area. Like the dispute between Japan and China over the Senkaku Islands, this doesn’t seem to be an argument which will be settled in the near future.

Emerging Markets

It was a relatively quiet month for the leading markets in this sector. Both the Russian and Indian indices fell by 2% to close November at 1,479 and 20,792 respectively. Brazil – still dogged by uncertainties over construction and grumbling domestic discontent as the World Cup and Olympics approach – saw the market down 3% in November at 52,482.

Astonishingly, the stock market in Venezuela – long a favourite of this report – fell in November. In a country where they clearly like big numbers, and where the stock market appears to be on an ever-upward spiral, the market declined from 2,609,685 to finish at 2,490,633. Nevertheless, it is still up by over 400% since the start of the year, and by 533% on a rolling 12 month basis.

And finally…

Nostalgia broke out in our office in November as it was announced that Burton’s Foods had been sold to the Ontario Teachers’ Pension Plan for £350m. Nothing special there you might think: after all, the OTPP also own Camelot, the operators of the National Lottery. But Burton’s Foods make Jammie Dodgers and Wagon Wheels, the mainstays of the school tuck shop! Sadly if you now go into a shop and buy a Wagon Wheel you’ll find that they’re about half the size you remember from your schooldays. Or is that a sign we’re getting old…

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Adrian Smith

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