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February 2014 Market Commentary

03.02.2014

Well, not a good start to the year. In order to bring you this bulletin we record the month-end figures of eleven of the world’s leading stock markets. They were all down in January: Germany and France were the ‘best’ performers with falls of only 3% whilst Brazil and Japan recorded falls of 8%.

Last month, the US Federal Reserve announced that they would be gradually reducing the $80bn a month stimulus package – and stock markets took it in their stride. This month the markets took fright and gave up much of December’s gains.

In some ways this was surprising: most of the economic forecasts made for the world economy in the coming year were optimistic. For example, the World Bank upgraded its forecast for global growth, and it was generally agreed that the risk of ‘sudden shocks’ – such as an implosion in the Eurozone – would be much reduced in 2014. Nevertheless, the markets are a law unto themselves, and promptly went into reverse.

UK

Despite the fall in the FTSE-100 index, it ended the month at 6,510, down 4% on its closing level of December 31st – it was generally a good month for the UK economy. George Osborne must certainly have felt vindicated by many of the optimistic forecasts, despite promising “a year of hard truths” and indicating that £25bn of savings were still required. Osborne warned that the UK economy still had a long way to go, and appeared to be largely looking to the welfare budget for his savings.

This didn’t deter the housing market, which grew by 8.4% in 2013 (with London and Manchester the best performing areas). The trend looks set to continue as figures released at the end of December confirmed that mortgage lending was at a six year high. According to Bank of England figures a total of £12.4bn in new loans was approved in December.

The IMF gave a very upbeat forecast for the UK economy, predicting growth of 2.4% in the coming year: that was up from its previous forecast of 1.9%, which is higher than for any other European country. This forecast seemed to be on track when figures were released at the end of the month showing that the UK economy was growing at its fastest rate since 2007.

Meanwhile, UK inflation fell to 2% in December, down from 2.1% in the previous month and unemployment fell sharply to 7.1%, with most economists having expected a fall to 7.3%.

An unemployment level of 7% is the Bank of England’s ‘forward guidance threshold’ at which it will theoretically consider raising interest rates. However Governor Mark Carney gave a very clear signal that there were no immediate plans to raise rates. “The UK economy is well short of escape velocity,” he said.

Christmas trading figures for the UK high street were released and were disappointing for both Marks & Spencer and Tesco. The big winner was Next, with sales up by 12% and shares jumping by 10%. Anyone who’s ordered something online at 10pm and had it delivered the following day won’t be surprised.

Europe

January was not a good month for the leaders of Europe’s biggest economies. German Chancellor Angela Merkel broke her pelvis in a skiing accident, whilst French leader Francois Hollande made the headlines for all the wrong (rather more salacious) reasons.

There was further bad news for M. Hollande with data suggesting that the French private sector – presumably where the French leader will look for job creation – was contracting.

However one area of Europe’s economy that does appear to be looking up is the Spanish black economy, now reckoned to be worth a fraction under 25% of the nation’s GDP. In contrast official growth was described as ‘slow.’

The news was also good for Berlin, which is fast developing a reputation as Europe’s Silicon Valley. Apparently the city’s image as ‘poor but sexy’ is helping to draw in talented designers, developers and entrepreneurs from all over Europe, attracted by low rent and eager investors.

As already noted, European stock markets were down in January, with the German DAX index falling by 3% to close at 9,306. In France the index was down by a similar amount, ending the month at 4,166.

US

President Obama delivered his annual State of the Union address, promising “a year of action” and that he would tackle inequality “with or without Congress.” The President is facing some of his lowest approval ratings since taking office in 2009 and jockeying to replace him is already well under way. Hilary Clinton (who will be 69 in 2016) is the early front-runner for the Democratic nomination: as yet there is no clear candidate for the Republicans.

Approval ratings for the economy were rather better than for the President. The US economy grew by 3.2% in the fourth quarter of 2013 – exactly in line with expectations – as it benefitted from strong household spending and rising exports. Consumer spending was up 3.3% – the best performance since the fourth quarter of 2010.

As expected, the Federal Reserve trimmed another $10bn a month from its stimulus package, saying that “growth in economic activity has picked up.” However the Dow Jones index ended the month lower at 15,699 as investors worried about disappointing company results at home – Amazon, for example, saw its shares fall 11% as it missed fourth-quarter expectations – and problems overseas, as some emerging markets reacted badly to the tapering of the stimulus package.

Far East

From time to time in last year’s bulletins we touched on the tensions between China and Japan, and sadly this seems to be a trend which will continue in 2014. Japan clearly fears the rise in China’s defence spending, especially as US influence in the region decreases. Continuing disputes over the Senkaku Islands and the new ‘air defence zones’ that have been introduced are not going to go away.

China is well on the way to becoming the world’s biggest economy, and its economic power is now driving much of the region’s growth. Asian markets were certainly hit by the slowdown in the Chinese service sector, as the Purchase Managers’ Index declined sharply from 52.5 in November to 50.9 in December (figures above 50 indicate growth.)

For those of you who like large numbers, the Chinese trade surplus for 2013 was $260bn – up 12.8% on 2012 as exports to the US and Europe recovered. That’s an interesting contrast to the debt-laden US, which spends $450bn a year simply paying the interest on its debt.

In Japan the inflation rate rose to 1.6% in December, whilst unemployment fell to 3.7%. However the big news was the trade deficit, which went in exactly the opposite direction to China’s surplus. The deficit for 2013 was 11.47tn Yen, up from 6.94tn the previous year: December was the 15th straight month of deficit as fossil fuel imports surged.

All the major markets in the Far East were down in January: as already reported, Japan was down 8% to close the month at 14,915, whilst the Chinese market fell 4% to 2,033. In Hong Kong the Hang Seng index was down 5% at 22,035 and the South Korean market declined by 3% to 1,941.

Emerging Markets

Despite the falls in their stock markets the news from the major emerging markets was generally good in January. Figures confirmed for November saw the trade surplus in Russia rise to $16.5m – up 12% year-on-year.

Full year figures were posted in Brazil, with a surplus for 2013 of $2.56bn. However this is the lowest figure since 2001 and sharply down on last year’s surplus of $19.4bn. Interest rates in Brazil rose to 10.5% as the central bank tried to curb inflation.

Interest rates were also increased in India – up to 8% – as inflation rose again to 7.5%. Third quarter growth for the Indian economy was 4.8%, slightly ahead of general expectations.

Like the rest of the world the major emerging stock markets were down in January, with the Brazilian index recording another big fall – down 8% to 47,639. The Indian stock market fell by 3% to 20,514 whilst the Russian market was down a similar amount at 1,454.

And finally

There may be doom and gloom in some corners of the world and the Chancellor may be warning of “a year of hard truths” and tough choices.

Fortunately there are no such black clouds in the English Premier League, where transfer spending has just set a new record of £760m, including £130m in the January transfer window.

With BT now rivalling Sky for the screening of matches and worldwide demand for the rights remaining strong there is little sign of the gravy train slowing down. That’s excellent news, as we know many clients were worrying about how Wayne Rooney would cope if he didn’t get his new contract and the rumoured pay rise to £300,000 a week…

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