14.01.2020

WeekWatch 13/01/2020

 Show Interest

WeekWatch 13/01/2020

 Show Interest

Stock take

It is 104 years this month since Mark Sykes, a UK diplomat, and François Georges-Picot, his French counterpart, agreed on how to divide the old Ottoman provinces in the Middle East (excluding the Arabian Peninsula) between their respective countries. The Sykes–Picot line was drawn across the region, and thus the contemporary states of Syria and Iraq came into being.

Who controls them now? Last week, Vladimir Putin made a surprise visit to Damascus, where he was pictured meeting with Bashar al-Assad; in Iraq, meanwhile, the assassination of Qassem Sulaimani was carried out under orders from the White House. Sulaimani was Iran's most powerful general and a major regional figure. While Iran mourned and preached war, its response was careful – a mere 22 rockets aimed at US bases (as opposed to personnel) in Iraq; Iran's first direct military action against the US in 40 years was in fact designed to cool tempers. That care was perhaps undermined when Iranian anti-aircraft missiles mistakenly shot down a passenger plane, killing 176 people; and the Iranian government initially denied responsibility, only to later backtrack.

For investors, such rapid developments in the Middle East can be hard to interpret, and still harder to relate to economic and corporate fortunes. However, General David Petraeus, former Commander of the US Central Command (which covers the Middle East), and Director of the CIA, is uniquely positioned to comment, and spoke to media last week.

The former general, who is now Chairman of the KKR Global Institute, told US media that it is “impossible to overstate" the importance of the US drone strike on Qassem Sulaimani. Petraeus likened the role of the former general to a combination of the Iranian equivalents of the CIA Director, Head of US Central Command (who oversees the US presence in the Middle East), Commander of Joint Special Operations Command and presidential envoy for the Middle East region.

Market participants may lack his expertise, but they were also quick to react to events; investors flocked to gold and government bonds in the wake of the assassination, but there were flows back into risk assets when Iran apparently sought a de-escalation. As for whether these flows were justified by what had transpired, at least some of the answer may lie in Petraeus’ comment that the death of Sulaimani was, in fact, “bigger than Bin Laden.”

Nevertheless, the Iranian attempt to de-escalate immediately raised hopes that calm could be restored, and saw investors take heart by heading back into equities. What changed matters perhaps even more was the downing of a passenger plane – and the fact the Iranian government denied culpability before reversing its story. As things stand, the biggest risk may yet be to the government in Tehran, if the demonstrations of the past few days are anything to go by.

Equity highs
As this rapid chain of events unfolded, investors took the S&P 500, Nasdaq and Dow Jones all to new highs. There were also tailwinds beside the US–Iran de-escalation late in the week, among them continued US–China rapprochement ahead of the 15 January signing of a stage one trade deal, and Beijing announcing some liberalising moves in its financial sector.

Yet there were troubles and tensions too: a new hardline Beijing representative in Hong Kong; disappointing jobs figures in the US; and disappointing Christmas retail numbers for both the US and UK. Kohl's, the major US department store, reported a 0.2% drop in sales in the last two months of 2018, while JC Penney did even worse, suffering a 7% plunge in sales in the last nine weeks of the year. In the UK, similar troubles were felt at both John Lewis and M&S; and the latest GDP data showed the economy actually contracted in November. Yet the UK equity market is another story – so blighted by political uncertainty that its correlation with commercial realities is exceptionally changeable.

"Since the 2016 EU referendum, the UK equity market has felt like the land that time forgot," said Richard Colwell of Columbia Threadneedle, manager of the St. James's Place Strategic Managed fund. "Greater clarity over Brexit and UK politics should not only spur an immediate stock market rally but also encourage a longer-lasting reappraisal of UK-listed companies. UK valuations are at 30-year lows compared with international equities as a whole, touching levels last seen in the early-1990s recession when judged by a range of measures. Similarly, sterling is now back at a 34-year low against the dollar."

Wealth Check

Millions of savers who leave money in the same account for years should get a better deal under new plans proposed by the Financial Conduct Authority.

The proposals, which could take effect early next year, are designed to overcome the problem of savings rates being slashed at the end of an introductory bonus period. It would mean banks have to introduce a single long-term interest rate that is paid to both long-standing customers and those whose introductory offer had just ended.

It’s estimated that 70% of savers leave their money in the same account for years, sometimes receiving as little as 0.1% in interest, as banks gradually reduce rates over time.1

UK Finance, which represents the major banks, said that the additional costs of the regulation would need to be recovered through higher mortgage and loan rates, and possibly through lower introductory rates.

“These changes would be some welcome news for cash savers, but the outlook is still pretty bleak,” said Phil Woodcock, Head of Investment Communications at St. James’s Place. “The average easy access account rate is currently just 0.60%.2 The risk in holding cash as part of a long-term strategy is that the interest doesn’t keep pace with inflation, so the spending power of your money is reducing.”

The proposals came in the same week that three members of the Bank of England’s Monetary Policy Committee said they may be willing to cut interest rates at the end of this month, depending on how the economy has performed since the general election.

1 Source: FCA report, 9 January, 2019
2 Moneyfacts, December 2019

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

© S&P Dow Jones LLC 2020; all rights reserved

Link to the original St. James's Place article is here: https://www.sjpinsights.co.uk/article/weekwatch_13_01_2019

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