February 2015

The great thing about writing this bulletin is that you make a note of something which looks hugely significant around the middle of the month and then something else comes along which makes it pale into insignificance. In this case the ‘hugely significant’ event was the fall in UK inflation – what came along was the Greek election result and victory for Syriza, the far-left coalition under Alexis Tsipras.

In truth the result of the Greek election was never in doubt from the moment it was called, with Syriza promising to ‘restore the dignity’ of the Greek people and reverse the last five years of austerity. They won 36.3% of the popular vote and 149 seats in the Greek parliament – two short of an outright majority. However it took less than an hour for them to agree a coalition with the far-right ‘Independent Greeks’ party, ANEL, who won 13 seats with 4.75% of the vote. Like Syriza, ANEL campaigned on ending the austerity imposed on Greece by the ‘Troika’ (the European Union, European Central Bank and International Monetary Fund).

Syriza’s victory – and their immediate demand for a reduction and/or re-negotiation of Greek debts – was not met with universal joy throughout Europe, with German newspaper Bild suggesting that any debt write off was out of the question and ‘an agreement was an agreement.’ The new Greek finance minister Yannis Varoufakis is equally adamant that Greece cannot be expected to repay all its debt, citing the partial write-off of West German reparations after the Second World War as a precedent.

The only certainty at the moment is that the negotiations will be long, hard and complex. Angela Merkel has ruled out cancelling any of Greece’s debt: meanwhile Syriza is refusing to soften its demands and has already stated that the minimum wage will be raised from €500 per month to €751. Symbolically, Varoufakis announced that the 600 cleaners sacked at the finance ministry will regain their jobs. You can’t imagine that Frau Merkel and her economically prudent colleagues will be able to understand why one ministry needs 600 cleaners.

In the rest of the world it was a great month for Apple – as we report in the section on the US – but the International Monetary Fund cut its forecast for global economic growth. Wary of full-blown deflation in Europe, the Central Bank announced a massive programme of quantitative easing. The pace of growth in the UK slowed down, but to the great joy of the British public the General Election campaign moved into full swing the minute the Christmas decorations came down – still with three months to go to the vote itself.

As for world stock markets, January was a decidedly mixed month. Some markets – Russia and Germany – made significant gains, whilst others – Brazil and the US – marched firmly in the opposite direction.

UK

As noted above, figures released in the middle of the month showed that UK inflation has fallen to 0.5%. This means that Bank of England Governor Mark Carney will have to write a letter to the Chancellor explaining why it has fallen so low: the letter and the inflation report will be published on February 11th. As the Chancellor has said on several occasions the UK is not immune to the slowdown – and possible deflation – affecting the rest of Europe. There will be nothing in the Governor’s letter that he doesn’t already know.

There was more bad news for the Chancellor as it was confirmed that UK growth for last year was 2.6% – significantly below the 3% figure he had so proudly trumpeted in the Autumn Statement. Growth for the last quarter was down to 0.5% (as opposed to expectations of 0.6%), giving rise to fears that the UK recovery was running out of steam.

There was, however, good news in the motor industry, with UK car production at a 7 year high, and Jaguar Land Rover announcing plans to hire 1,300 new staff at its Solihull plant in order to build the new ‘Jaguar crossover sports utility vehicle.’

Waitrose announced plans to open 26 new stores and hire 2,000 extra staff, but this was countered by more depressing news from Tesco, who confirmed the impending closure of 43 stores.

Fortunately the FT-SE 100 index of leading shares was much more Waitrose than Tesco in January and started the year with a healthy rise of 3%: having opened the year at 6,566 it finished January at 6,749.

Europe

There were really only two words that mattered in Europe this month: ‘Greece’ (see above) and ‘deflation.’

The ECB has been worrying about deflation – a vicious circle of falling prices and falling demand – for some time now and eventually bowed to what many saw as the inevitable, announcing a €1.1tn programme of quantitative easing (QE). And yes, that abbreviation is for trillion. This bond buying programme is intended to stave off the threat of deflation and stimulate the European economy in the same way that the QE programme supposedly has in the US.

Will it work? Only time will tell, but Europe slipped deeper into deflationary territory in January with prices down 0.6% a year ago: the comparable figure for December was 0.2%. Clearly the fall in oil prices has a lot to do with this – European energy prices falling 8.9% in January – but there are clear and worrying signs of deflation in other areas as well.

This news – plus the result of the Greek election – pushed the euro to an 11 year low against the US dollar. Interestingly the Swiss National Bank cut the ceiling on the Swiss franc in January – it immediately leapt by 30% against the euro.
As we mentioned above, the IMF cut its forecast for global growth, with the slowdown in Europe being a significant contributory factor: growth for 2015 was estimated at 3.5%, as opposed to a forecast in October last year of 3.8%.

Fortunately the main European stock markets were already anticipating much of this gloomy news and – perhaps relieved that is wasn’t worse – moved upwards in January, anticipating the ‘wall of money’ from the quantitative easing programme. The German DAX index was up 9% at 10,694 whilst the French CAC-40 index rose 8% to 4,604.

US

The numbers are quite simply staggering. $18bn profit for the last quarter of 2014 – that’s roughly £1bn a week. 74.4m iPhones sold – that’s 34,000 every hour – with sales up 70% in China. I’m obviously talking about Apple, the company that sits on a cash pile of $178bn – more than the UK spends every year on the NHS and education.

January was the month when the old and new economies in the US went in opposite directions. For much of the last year we were reporting encouraging signs from the US economy – but on Tuesday 27th the Dow fell heavily following a string of disappointing results from traditional ‘bellwether’ companies, including Procter & Gamble, Pfizer, Caterpillar and Microsoft. Shares in Microsoft were down 9.4% – its biggest one day fall since July 2013.

Contrast that with the results from Apple – incredibly, 1% of the world’s population bought an iPhone in the last quarter of 2014 – and from Facebook, which beat expectations with mobile advertising accounting for 69% of its revenue in the final quarter. “We got a lot done in 2014,” said CEO Mark Zuckerberg, as the company ended 2014 with 1.39bn monthly users.

But overall, US growth was down in the last three months of the year: economists had forecast 3% growth in Q4 but in the event it came in below expectations at 2.6% and well down on the 5% growth recorded in the third quarter. This was reflected on Wall Street, with the Dow Jones index closing January at 17,165 – a 4% fall in the month.

Far East

As Apple waxed so Samsung waned, forecasting a 37% fall in quarterly profits from a year earlier. In the event the profits came in slightly ahead of market expectations at $4.7bn – roughly a quarter of Apple’s. South Korea as a whole also saw weak growth in Q4, with the economy only expanding by 0.4%

It was also bad news for China’s growth figures as the economy slowed to its lowest level of growth in 24 years, “only” expanding by 7.4% in 2014 (against 7.7% the previous year). And for the first time in 15 years China missed its growth target, which had been 7.5% for the year. You have to think that won’t do someone’s career prospects a lot of good…

Worryingly, China’s manufacturing growth contracted for the second consecutive month, with the Purchasing Managers’ Index for the sector at 49.8 (with any figure below 50 indicating pessimism as opposed to optimism).

On the stock markets China’s Shanghai Composite Index was down 1% at 3,212, while the South Korean market had a modest rise of 2% to 1,953 – perhaps in relief that the trading figures weren’t worse.

Japan’s index was up 1% to 17,674 but the Hong Kong market fared much better, recording a 4% rise in January to 24,507.

Emerging Markets

January was an eventful month for the countries we cover in this section. Standard & Poor’s downgraded Russia’s debt to junk bond status – ranking Russia alongside Argentina, Ukraine and Greece – and yet the Russian stock market enjoyed a stellar month, rising by 18% to finish the month at 1,648. There were suggestions that inflation might finally be coming under control – which allowed interest rates to be cut from 17% to 15% – and there were also hopes that the QE programme in Europe would boost the Russian economy.

India also enjoyed a good month, following its excellent performance in 2014. The market there rose a further 6% in January, ending the month at 29,183.

In contrast the Brazilian market went in the opposite direction, falling 6% to 46,908. Not only was the economy steadfastly refusing to improve, there was also bad news on the meteorological front as Brazil’s three most populous regions battled with the worst drought for 80 years.

And finally…

Sadly, we must now turn our attention to a country that’s in real trouble. Whilst we’ve already detailed the problems facing Greece, Russia and Brazil, we must now turn to a country facing perhaps the gravest economic threat of them all. Not only is the economy in Venezuela now officially in recession – the country also faces a possible shortage of ice-cream.

Naturally the Government has denied this (how could it not?) but Coromoto, the famous ice-cream shop in the city of Merida, has announced on Facebook that it will be “closing for the high season due to a lack of milk.”

Furious denials have followed from the Ministry of Tourism but other shops are expected to follow suit. Coromoto offers 850 different flavours of ice-cream: these range from beer to beans to trout to mushrooms in wine and hot dog flavour. I can only apologise if you’re reading this while eating your breakfast…

February 2015 Market Commetary Sources