July 2016

This time last month David Cameron was firmly in place as UK Prime Minister, facing the equally secure Jeremy Corbyn across the despatch box. Both of them were backing Remain in the forthcoming EU Referendum and – despite the occasional flurry of support for Leave – the UK looked set to stay a member of the European Community.

So what happened? Was it fear of immigration? Worries about sovereignty? Or a desire, not for the UK to ‘take back control’ but for ordinary people to take back control from a political class seen as increasingly distant and out-of-touch?

Whatever the reason, the UK woke up on the morning of Friday 24th June with 17,410,742 people having voted Leave – a majority of just under 1.3m. And with that, chaos broke out. Cameron swiftly offered his resignation, Corbyn is currently fighting for his political life and no-one has the slightest idea who will invoke Article 50 – the first formality for leaving the EU – or when it will be invoked.

As we’ll see below, the initial reaction of the markets to ‘Brexit’ was wholly negative: with the UK stock market, the pound sterling and markets around the world all falling sharply. However the stock market recovered quickly and at the time of writing (Friday July 1st) has recovered all the lost ground and more. The pound – although down since Brexit – has, for now, also avoided the more pessimistic predictions.

Did anything happen in the rest of the world? Surprisingly, yes. First quarter growth in the US was revised upwards but – more worryingly – there was a sharp fall in May’s job creation figures. Meanwhile, Microsoft put its hand down the back of the corporate sofa and found $26bn to buy LinkedIn.

Japan continued with attempts to expand its economy while Brazil battled to stop its economy contracting any further. Meanwhile, New Zealand was rocked by a serious crime wave…

UK

Clearly the Referendum dominated all other UK news in June and, as I write, the ramifications are still unfolding. However, it would be a mistake to think that the Referendum was the only thing to happen in June.

We’ve written many times in this Bulletin about the plight of the UK’s High Street. June saw Amazon launch a full grocery service to customers in East and Central London. The company said it will ultimately roll out deliveries across the UK. Coincidentally, My Local went into administration in the last few days of June, possibly with the loss of thousands of jobs.

Another sector worrying about job losses was the UK’s oil industry. A report by Experian predicted that job losses for this year could reach 40,000 – on top of the 84,000 jobs the sector lost in 2015. The report said that the UK’s offshore industry supported 453,000 jobs – either directly or indirectly – at its peak in 2014.

Fortunately 4,000 jobs were saved as Tata sold its steelworks at Scunthorpe to Greybull Capital, with the workers agreeing to accept pay cuts and reductions to their pensions.

What of the numbers? Figures released for May showed that UK inflation was unchanged at 0.3% in May, whilst the ONS revealed that the house price had risen 8.2% in the last 12 months. ‘Average’ was very much the word though: prices in London were up by 14.5% whilst those in the North East rose by just 0.1%.

The ONS also released the unemployment figures, showing that the rate in the UK was down to 5% – the lowest since 2005. The number of people in work rose by another 55,000 with the employment rate at a record high of 74.2%.

How did the FT-SE100 index of leading shares react to all the excitement? In the run up to the Referendum both the stock market and the pound rose and fell with Remain’s standing in the opinion polls. Both fell sharply when the result was known – and the gloom deepened when credit ratings agency S&P removed the UK’s AAA rating. Brexit, it said, could lead to ‘a deterioration of the UK’s economic performance.’ Rival agency Fitch also lowered the UK’s rating from AA+ to AA, forecasting an ‘abrupt slowdown’ in growth in the short term.

However, Bank of England Governor, Mark Carney, then made a speech hinting at both lower interest rates and further stimulus measures. The FTSE picked up on this and made impressive gains in the last three days of the month to finish June at 6,504 – up 4% on the month as a whole, and also up 4% for the first half of the year.

Europe

Much of Europe’s attention in June was focused on the UK, as its politicians constantly warned of the dangers of Brexit. German business leaders clearly weren’t distracted, as the figures for April confirmed a trade surplus of €25.6bn for the month, up from €21.8bn a year earlier, with exports rising by 3.8%.

Unemployment in Germany is now down to 4.2% whilst the inflation rate crept up slightly in June to 0.3%.

The French balance of payments went in the opposite direction, with a trade deficit of €5.21bn in April. Inflation in June was up to 0.2%, but unemployment remains worryingly high at 10.2%.

There was concern about the European steel industry, with campaigners warning that it ‘will not survive’ if the EU grants China a special international trading status. The European Steel Association urged the EU to reject the idea, saying that China would flood the market.

Meanwhile, beleaguered car maker VW is planning a major ‘drive’ (sorry…) into electronic cars. It plans to launch 30 all-electric models and reposition itself as the leader in ‘green’ transport. High levels of investment will be needed as the firm moves on from ‘dieselgate’ but Chief Executive Matthias Mueller hopes that by 2025 electric cars will account for 20-25% of the company’s sales.

Understandably, June wasn’t a good month for the German and French stock markets, clearly unsettled by the prospect of Brexit leading to more uncertainty in Europe. Both markets fell by 6% in June, the German market to 9,680 and the French index to 4,237. Spare a thought, though, for investors in the Greek stock market: it fell 17% in the month from 651 to 542.

US

In this commentary we’ve regularly reported on the US job creation figures – with 200,000 new jobs frequently being added in a month. There was a startling slowdown in May, with the Labor Department confirming that only 38,000 jobs were created in the month, the fewest since September 2010. The unemployment rate did fall from 5% to 4.7% – the lowest since November 2007 – but this was largely due to people dropping out of the labour force and no longer being counted as unemployed. These were worrying figures for the US economy, and may well hamper the Federal Reserve’s ability to raise interest rates later in the year.

In the short term, the Fed was citing the uncertainties caused by Brexit as a reason for keeping rates on hold at between 0.25% and 0.5%. The US Central bank also said it expected a ‘slower path’ to future rate rises.

Microsoft certainly didn’t seem to anticipating a ‘slower path’ as they cheerfully shelled out $26bn to buy professional networking site LinkedIn. Microsoft will pay $196 a share – a premium of 50% on LinkedIn’s share price. Why so much? The deal will give Microsoft access to LinkedIn’s network of 430m users worldwide, and presumably the chance to boost sales of its business and e-mail software.

In other company news, Saudi Arabia’s Public Investment Fund pumped $3.5bn into the ride-hailing app Uber, valuing the company at $62.5bn. Uber will use the money to expand in the Middle East, where 80% of the company’s users are women.

The month ended with US economic growth for the first quarter of the year being revised upwards from 0.8% to 1.1%, helped by stronger export sales. However, growth in consumer spending went the other way: it was revised downwards to 1.5%, the slowest pace for two years.

What did they make of all this on Wall Street? ‘Just enough’ was the answer. Having opened the month at 17,787 the Dow Jones closed at 17,930 for a rise of 1%. On a ‘year to date’ basis the Dow is up by 3%, having started the year at 17,425.

Far East

The month started with Japan delaying the planned increase in its sales tax – from 8% to 10% – until 2019. Prime Minister Shinzo Abe is still trying to stimulate the Japanese economy and reverse more than a decade of deflation. ‘I want to fulfil my responsibility by accelerating Abenomics more and more,’ he told the ruling Liberal Democratic Party.

Good news swiftly followed, as Japan’s economic growth for the first quarter was revised upwards to 1.9%. Conversely, the Japanese stock market fell on the news, with some analysts predicting that Mr Abe might not press the accelerator quite as hard as he’d originally planned.

Figures for May showed that Japan had posted its first trade deficit for four months, with exports falling by 11%. Unemployment was steady at 3.2%.

Obviously there was no messing about with a trade deficit in China: just the surplus of $50bn for May, although this was down from the $58.8bn reported a year earlier. Growth for the first quarter was confirmed at 6.7%, with inflation falling to 2% in May, down from the 2.3% recorded in April.

…And China continued to protect its own manufacturers. Beijing’s Intellectual Property Office ruled against Apple in a patent dispute, saying that the iPhone 6 and 6S models were similar to Shenzhen Baili’s little-known 100C phone. In theory, this could halt sales of the new iPhone in Beijing. For now, Apple has appealed to a higher court.

By and large, June was a quiet month on the Far Eastern stock markets – with the notable exception of Japan. The Chinese and Hong Kong indices were virtually unchanged in June, ending the month at 2,930 and 20,794 respectively. The South Korean market fell back by 1% to 1,970 – despite a record trade surplus of $11.6bn. However, there were significant falls in Japan. The Nikkei Dow was down by 10% to 15,576 and is now down by 18% in the last three months.

Emerging Markets

As we mentioned in the introduction, Brazil’s economy continues to contract. It shrank by 0.3% for the first quarter of 2016, the fifth consecutive quarter in which the economy has contracted. The country also continues to battle with the negative impact of the Zika virus and the uncertainty caused by President Dilma Rousseff’s pending impeachment trial.

The problems were highlighted when the state of Rio de Janeiro declared a state of financial emergency – less than 50 days before the Olympics.

Despite all this, the Brazilian stock market performed well – possibly because the 0.3% contraction wasn’t as bad as the 0.8% that had been predicted. So the market cheerfully ignored the bad news and bounced up 6% to 51,527. On a year to date basis, it is up by 19% – the best performance of any of the markets we cover in this Bulletin.

The other major emerging markets we cover had rather more sober months. The Indian market was up 1% in June to 27,000 and is now up by 4% for the year to date. The Russian stock market was virtually unchanged in June at 1,891, but remains 7% ahead for the first six months of the year.

And finally

Sadly this month, we must finish with reports of a major crime wave in New Zealand, where high prices and spiralling demand are impacting… the avocado economy. Hundreds have been stolen from orchards, with thieves using rakes to drag the fruit straight off the trees. New Zealand doesn’t import avocados, so clearly an entrepreneurial thief has decided to meet the growing demand from local restaurants. If you happen to be a ‘Kiwi’ and are approached by someone peddling avocados from a bag marked ‘swag’, please do alert your local authorities…