This time last year we produced our first End of Summer Review. We described it as a ‘reflection on some key events over the last few months’: would they, we wondered, ‘give us an idea of what might happen in the run up to Christmas?’
First of all, let’s reflect on what the world looked like 12 months ago.
The big story this time last year was North Korea. ‘The tensions between North Korea and the rest of the world continue to escalate,’ we wrote as North Korea fired a rocket over Japan’s Hokkaido Island, just 800 miles north of Tokyo.
President Trump reacted by threatening that the US would stop trading with any country ‘doing business’ with North Korea. Principally, of course, that meant China and – as we shall see below – we are now heading towards a full scale trade war between the world’s most powerful economies. Twelve months on, North Korea is making noises about disarmament, but the tensions between Washington and Beijing continue to simmer.
Closer to home, one of last year’s sections was entitled ‘Can Theresa May survive?’ A year on, the answer is ‘yes’ but as her Chequers plan for Brexit is dismissed on all sides, it is entirely appropriate to ask the question again.
Enough of the introduction: let’s look at the last few months in more detail.
The Trump Tariffs
It’s official – they are now known as the ‘Trump Tariffs’ and have their own Wikipedia page.
Donald Trump campaigned on a platform of protecting American jobs and – having started with products as unlikely as washing machines and solar panels – imposed a 25% tariff on steel imports and 10% on aluminium from Canada, the EU and Mexico on 1st June this year.
It is important then to note that the tariffs are not solely directed at China – despite Trump accusing China of everything from illegal currency manipulation to ‘economic rape’ during the election campaign. And $50bn worth of tariffs on Chinese goods were duly imposed on 6th July.
So far, Morgan Stanley estimate that the Trump Tariffs cover just over 4% of US imports. Traditionally, protectionist measures such as tariffs do not work in the long term as all they are doing is protecting inefficient industries – and 80% of 104 economists surveyed by Reuters believed that the tariffs will harm the US economy in the short term.
Whatever the economists think, this is exactly the basis on which Trump ran for office. He has called the North American Free Trade Association, ‘the worst deal the US ever signed’ and called the planned Trans Pacific Partnership a deal which would ‘signal the death blow of American manufacturing’.
So the current tariffs are not a whim – and clearly a long, drawn out trade war with China would have global implications. Like many Americans, Trump believes that China has stolen US intellectual property, and says the tariffs will make the US a ‘stronger, richer nation’.
In response, the Chinese introduced tariffs on 128 different US goods, with 120 (including fruit and wine) taxed at 15% and a further eight (including pork) taxed at 25%.
The US list of Chinese products now extends to more than 1,300 products, with the Chinese ambassador to the US saying that his country ‘has no alternative other than to fight back’.
The problem, of course, is that neither side will back down – and risk showing weakness – and that the trade war will go on for some time, with increasing numbers of tit-for-tat tariffs. Trump fairly and squarely (and possibly correctly) blames his predecessors for allowing the situation to develop and for allowing the theft of US intellectual property. Ultimately, China needs the US as a market and, as we report below, the trade war and the consequent implications for world trade have severely impacted the Chinese stock market this year – but the longer this dispute goes on, the harder it becomes to resolve.
How have the world’s stock markets fared?
A quick overview of the world’s leading stock markets shows a very mixed picture so far in 2018. On a year-to-date basis, two markets have made significant gains but China’s Shanghai Composite Index is sharply down and two of the other major Far Eastern markets are also down by significant amounts.
It may not be down by the same amount as the Far Eastern markets, but the UK’s FTSE-100 index of leading shares has had a difficult year; beset by worries about Brexit and political uncertainty, the FTSE started the year at 7,688 and ended August at 7,432 where it is down 3% for the year as a whole. The market was up for the year at the end of July but a 4% drop in August more than wiped out that small gain.
In Europe, the picture is mixed: the German DAX index is down 4% at 12,364 whereas the French stock market is up 2% in 2018, closing August at 5,407.
This time last year we were reporting that America’s Dow Jones index was ‘up 11% for the year as a whole at 21,948’. The Dow subsequently finished 2017 at 24,719 and at the end of August was up a further 5% at 25,965. Whatever the rest of the world thinks, Wall Street likes its President.
As mentioned above, the Chinese stock market is down sharply this year. Having ended last year at 3,307, the Shanghai Composite now stands at 2,725 – down 18% for the year as a whole and the biggest faller among major world markets. Having started the year at 29,919 and touched 33,000 at one point, Hong Kong’s Hang Seng index is now down 7% at 27,889. The South Korean market is down 6% in 2018, closing August at 2,323. The only major Far Eastern market to buck this trend is Japan, which ended 2017 at 22,765 and ended August up exactly 100 points at 22,865.
The major success stories of 2018 have both come in Emerging Markets, with the Indian stock market – helped by a fall in the value of the rupee – up 13% at 38,645 at the end of August. Despite widespread condemnation and subsequent sanctions in the wake of the Skripal affair, the Russian stock market closed August at 2,346 having started the year at 2,109 – a rise of 11%. The Brazilian market has – as the Brazilian market always seems to – fluctuated widely during the year, but it closed August at 76,678, up just 276 points on the level at which it started the year.
Can Theresa May survive?
A year ago, the Prime Minister was in trouble. She had called a General Election, tossed away a double digit lead in the opinion polls and found herself reliant on Ulster’s Democratic Unionists to prevent Jeremy Corbyn walking through the door of 10 Downing Street.
The Prime Minister is still in trouble, she has produced the ‘Chequers Plan’ – her vision of Britain’s future relationship with the EU after March next year – and seen it widely ridiculed. She has managed the seemingly impossible task of uniting the opinions of EU chief negotiator Michel Barnier and arch-Brexiteer Jacob Rees-Mogg and support for her proposals has plummeted among Conservative members (with the party now having fewer members than the SNP).
So a beleaguered leader heads to Birmingham for the Conservative Party Conference at the end of this month. Few things in life are certain apart from death, taxes and the leader of the Conservative Party getting a standing ovation, but this year that may come under threat. Theresa May is personally unpopular and increasingly seen as an electoral liability. The knives are being sharpened – and you wonder if May herself might not long for the peace and tranquillity of a few more walking holidays…
Can Donald Trump survive?
The success of the US stock market both this year and last year is mentioned above. The popularity ratings of Donald Trump are way above those of leaders like Angela Merkel, Emmanuel Macron and Theresa May. But the question of his possible impeachment over alleged wrongdoing during the Presidential campaign refuses to go away. An increasing number of his inner circle are under investigation, with several deciding to cut deals with the prosecutors rather than defending the President. Trump has taken to Twitter – as he does – to declare that, “If I’m impeached, the stock market crashes.” All things considered, you may feel it is more likely that Donald Trump will feature in our 2019 report than Theresa May…
The Brexit negotiations
Last year, we stated: ‘Just over five months on from the triggering of Article 50 the simple fact is that very little substantive progress has been made. Talks continue and hopefully more progress can be made after this month’s German elections, when Angela Merkel is likely to win a fourth term as Chancellor.’
Well, Angela Merkel did win a fourth term as German Chancellor and finally managed to cobble together a coalition that would allow her to continue in office. Talks have continued, albeit with rather different personnel as Boris Johnson and David Davis have both resigned to be replaced by Jeremy Hunt and Dominic Raab as Foreign Secretary and Brexit Secretary respectively.
Has any progress been made? As above, Michel Barnier has poured scorn on Theresa May’s Chequers proposals. Tory MPs heading back to Westminster are now discussing a free trade agreement with the EU similar to Canada’s; or some sort of membership of the European Free Trade Area, perhaps along the lines of the Norwegian or Swiss model – or simply dropping 27 business cards on the table and leaving with ‘no deal,’ which would see the UK operating under World Trade Organisation rules.
With seven months to go until the 29th March deadline for leaving the EU, not only has no deal been done but no one appears to have any idea what kind of deal they are trying to do. Two or three European leaders have already quietly floated the idea of extending the 29th March deadline to allow a deal to be cobbled together; it does not seem out of the question.
The Crystal Ball…
In the introduction, we wondered if the events of the past few months would shed any light on the events we might see leading up to Christmas. In the UK, it is likely to be a turbulent four months for the Prime Minister but despite this, it looks as though the UK economy will continue to do well. Unemployment is now down to its lowest level since 1975 and the Chancellor recently enjoyed a bumper July for tax receipts, probably giving him the freedom to inject money into the NHS in the Autumn Budget.
As above, it looks unlikely that President Trump will be impeached, and the major players in Europe will stay in place. But there will be plenty of threats to the EU’s status quo as the Italian government plans a massive €80bn investment in infrastructure to try and kick-start its flagging economy, and the Visegrad Group – Hungary, Poland, the Czech Republic and Slovakia – continues to defy Brussels over immigration quotas.
There will, of course, be what Harold Macmillan famously described as ‘Events, dear boy, events’. Rest assured that whatever those events might be we will be here to answer any questions you have on them, or any aspect of your financial planning. We are never more than a phone call or an email away.
* These notes are for your information and interest only: they should not be taken as financial planning advice. The stock market figures – and any other figures quoted – were accurate as of 31st August 2018.