June 2015

It now seems hard to remember, but this time last month the UK was only a week away from a General Election – an election that was the most difficult to predict in a generation. The pundits were unanimous: the Election would certainly lead to a hung parliament. There would be weeks of wrangling and quite possibly another Election needing to be held later this year or early in 2016.

In the event David Cameron won a majority – not a sizeable majority but, for the time being at least, a workable majority. The final result saw the Conservatives with 331 seats, Labour on 232 and the Scottish Nationalists as the third party with 56 of Scotland’s 59 seats. Far from weeks of wrangling, last week brought the first Queen’s Speech of a majority Conservative government for nearly 20 years.

Clearly there are storm clouds ahead for the Government. A majority of 12 will keep the party whips on their toes, and the commitment to hold an in/out referendum on Britain’s membership of the European Union has the potential to cause serious division. For now though David Cameron can pursue his renegotiations in Bonn, Brussels and Paris while the Labour and Liberal Democrat parties get on with the tedious business of finding a new leader.

…Meanwhile in the rest of the world it was business as usual. Greece teetered on the edge of default – a sentence that will be repeated every month until further notice – whilst Germany and France edged towards closer European ties. The Nasdaq index in the USA reached a record high, but a revision of the data showed that the American economy had actually contracted in the first quarter of the year.

Chinese exports fell, the Japanese economy grew, there were continuing problems for Russia and there was remarkably good news for the Indian economy, which has now grown at a faster rate than China in two of the last three quarters.

UK

The FTSE 100 index of leading shares started May at 6,961. Despite the Conservative election victory it ended the month just 23 points higher at 6,984 as early euphoria over the result gave way to the realisation that there were still plenty of economic problems to deal with.

Determined to press ahead with his economic policy (or with measures the Liberal Democrats wouldn’t let him introduce) Chancellor George Osborne has announced that a second Budget of 2015 will take place on Wednesday July 8th.

Meanwhile his boss was heading off to Europe. David Cameron began a series of visits to European leaders as he started the negotiations he hopes will allow a ‘Yes’ vote to triumph in the eventual European referendum. At home the battle lines are already being drawn, with Deutsche Bank among others saying it would ‘consider relocating’ if Britain left the EU. Lord Bamford, the Chairman of equipment manufacturer JCB, countered by saying the UK “would be just fine” outside the EU.

This mirrored mixed messages on the economy. The Bank of England suggested that the recovery might be weaker than expected and downgraded growth forecasts: but at the end of the month the CBI cheerfully spoke of economic growth “moving up several gears.” The CBI’s research suggested that business activity had “increased markedly in the three months to May.”

What hasn’t increased markedly is UK inflation, which turned negative in April for the first time since 1960. Bank of England Governor Mark Carney said that he expected inflation to remain very low for the next few months, but “over the course of the year” it should move towards the Bank’s 2% target.

There was finally good news for the UK high street as M&S announced profits up 6% to £662m. And there was good news (of a sort) for Barclays and RBS as they received lower than expected fines for fixing the currency markets.

Europe

‘Plus ca change, plus c’est la meme chose,’ as the French say. I won’t weary you with a detailed account of Greece’s ‘can-pay-can’t-pay’ month. At one point in May it appeared to borrow from the IMF emergency cash reserves to repay a loan to the same IMF – an arrangement many people running businesses might welcome with their bank manager.

Finance Minister Yanis Varoufakis continued to radiate confidence, variously expecting a deal “within a week” and promising that another repayment to the IMF due on June 5th would definitely be made, despite deposits in Greek banks continuing to fall. Greek interior minister Nikos Voutsis was slightly at odds with the party line, telling Greek TV, “This money will not be given and is not there to be given.”

We shall see in June, when Greece has to make a series of repayments to creditors.

Meanwhile the far-left Podemos party made sweeping gains in regional and local elections in Spain. The next Spanish general election will be held on or before December 20th of this year – so this time next year we could simply be substituting ‘Spain’ for ‘Greece’ in this bulletin.

As David Cameron continued his journey round Europe there were suggestions that Germany and France have agreed a pact to bring the Eurozone closer together without the need for any treaty change. The proposed changes will be presented at next month’s EU summit.

Away from the politics, it was confirmed that Germany’s economy had grown by 0.3% in the first quarter of 2015. Although this was a slight slowing down in the rate of growth it still allowed the country to post a €23bn trade surplus in March, the largest since July 2014, with exports growing by 12.4%.
This wasn’t reflected on the stock market however, with the German market closing March at 11,414 – down very slightly in the month. The French market had a similar lacklustre month, closing down 1% at 5,008.

US

There was good news for the US economy early in the month when it was announced that 233,000 jobs had been added in April. The unemployment rate fell to 5.4%, a seven year low.

However the Bureau of Economic Affairs revised its earlier estimate of 0.2% growth for the first quarter, and confirmed that the economy had contracted by 0.7% in Q1. This is the first contraction in a year as the trade gap widened to more than $51bn in March. Factory activity also decreased as Federal Reserve Chairman Janet Yellen suggested that interest rates could finally rise later this year.

In company news Verizon bought AOL for $4.4bn, but it was a relatively quiet month on Wall Street as the Dow Jones index managed a rise of just 1% to finish May at 18,011. However May did see a record high for the smaller Nasdaq index as it closed the month at 5,070.

Far East

Let’s begin in China, where the Shanghai Composite Index rose another 4% in May to close at 4,613; it’s now up 43% since the start of the year and reached a seven-year high during the month.

Much of this rise can be put down to the Government’s stated desire to continue stimulating the economy – which may well be needed, given that exports were down by 6.2% in April against a forecast rise of 1.5%. Imports also fell (by 16% compared to a forecast of 12%) which meant that when the figures were added up China recorded a trade surplus of £21bn for the month.

However, there are clear signs of a slowdown in economic activity, which led to interest rates being cut for the second time this year – down to 5.1%.

The Japanese stock market is also on a sustained upward curve and the market is now enjoying its longest rally since February 1988. The Nikkei Dow gained a further 5% in May, closing the month at 20,563.

It was confirmed that the economy had grown by 0.6% in the first quarter – better than the 0.4% that had been expected – and there was further good news when it was reported that exports were up by 8% on the corresponding period twelve months ago.

The other two major markets in the Far East fared less well in May. Hong Kong slipped back 3% to finish the month at 27,424. South Korea’s KOSPI index retreated by 1% to 2,115.

Emerging Markets

Figures released for the first quarter of the year showed that the Russian economy was continuing to suffer from the falling oil price and the sanctions imposed by the West, as it contracted by 1.9% in the first three months of the year. Vladimir Putin stated that he expected the economy to start growing again next year – a view that was flatly contradicted by the European Bank for Reconstruction and Development, which said it expected the Russian economy to shrink by 4.5% this year and a further 1.8% next year.

There were no such worries in India where the economy surged by 7.5% in Q1. This was up on the previous quarter and ahead of the forecasts, with the Indian economy now growing at a faster rate than China’s in two of the last three quarters. The two countries signed a $22bn trade deal in May, covering renewable energy, media, finance and steel.

The Indian stock market responded to this good news by rising 3% in May, ending the month at 27,828. Not surprisingly the Russian market went in the opposite direction, falling 5% to 1,609. There was even worse news for Brazil, the other major emerging market, where the stock market fell by 6% to 52,760.

And finally…

One for the romantics among you and the lovers of nostalgia. Hornby announced in May that there were to re-launch their range of Thomas the Tank Engine railway sets to mark the character’s 70th birthday. Thomas, famously created by the Reverend Wilfred Awdry, apparently remains the most popular pre-school character in the UK.

Hornby also owns the Airfix and Scalextric brands – I can tell some of you are getting slightly misty eyed now – and the shares ‘steamed ahead’ by 3% on the news of Thomas’s return. The company expects to make full year profits of £1.5m and is valued at £36m. So much for all those bright ideas in Silicon Valley that are instantly valued at a billion dollars…

June 2015 Market Commentary Compliance Notes