In this week’s bulletin:
- Institutional investors are backing long-term UK infrastructure projects.
- Chancellor’s Autumn Statement issued amid strong signs of UK economic recovery.
- S&P500 surges to almost 1,800 points on strong US economic data.
- Japanese ultra-loose monetary policy drives equities up 50% in 2013.
The Crystal Palace
David Cameron’s trade mission to China last week brought to mind a previous diplomatic flourish in 1793 led by the Anglo-Irish statesman George Macartney, who famously observed after the Seven Years’ War that Britain’s territorial gains had created “a vast empire, on which the sun never sets”. The sun has still not quite set on Britain’s fragmentary scattering of Caribbean tax havens and barren outcrops dotted across the southern oceans (as well as that rock that sits, for many a Spaniard, like a bad molar at the mouth of the Mediterranean). But the Tory-led government’s delegation, in the spirit of their 18th century forerunners, went east to further prise open markets for Britain – without the modern equivalent of a 64-gun man-of-war or imperial intent.
Interestingly, the Qianlong dynasty some 220 years ago – a mere blip of time for the Middle Kingdom – sent Macartney packing and empty-handed with a follow-up letter to George III saying thanks for the visit but no thanks. Elements of the Chinese state press last week were as underwhelmed by the foreign entourage as the Qianlong court – and as their former comrades in Moscow were by this “small island” at September’s G20 summit. The Global Times dismissed Britain as “just an old European country good for travel and study” which are, of course, two very respectable pursuits for well-rounded individuals or a service-orientated economy.
As well as developing deeper trade ties for UK business with the world’s most populous nation, the Cameron mission has recognised the importance of attracting further Chinese wealth and investment in Britain, beyond its students in our universities and coach tours around the picturesque villages of the Cotswolds or elsewhere. The sovereign wealth fund China Investment Corporation, for example, already has holdings in Heathrow Airport (the former BAA) and Canary Wharf. One of the more curious initiatives is ZhongRong Holdings’ £500 million plan to build a replica Crystal Palace on the south London site where the vast cast-iron and plate-glass hall burnt down in 1936. Relocated from Hyde Park after the Great Exhibition of 1851, the Crystal Palace showcased Britain’s leadership in industry, technology, the arts and the pursuit of organised pleasure and games.
Although there is widespread hyperventilation over the rise of China in the 21st century, deepening trade and investment opportunities with Asia’s largest economy is eminently worthy – and those ties are more likely to allow dialogue on other more contentious issues. The prospect of £50 billion worth of Chinese investment in UK infrastructure projects, in addition to the £6 billion of deals the 127-strong business delegation generated from the mission, has to be seen as a positive development for the British economy and investors. And there’s a resonance as Britain gets back on its feet to the thought of a gleaming structure that once embodied ideas of progress and the benefits of capitalism rising again on the hills overlooking the City of London.
Britain’s institutional investors are also directing more long-term investment towards the infrastructure projects that will help build on the steady improvement of conditions for Britain’s economy. Last week a group of six insurers committed to spend £25 billion on infrastructure investment over the next five years. Prudential, Aviva, Legal & General, Standard Life, Friends Life and Scottish Widows made the move following negotiations with the Treasury and the Association of British Insurers. The insurers were able to pledge the funds after the European Union’s Solvency II directive, which redefines how much reserves insurers need to hold, clarified the status of long-term infrastructure investments without onerous capital requirements.
The move by the UK insurers came as the government unveiled its broader £375 billion infrastructure plan to 2030 and beyond. This includes an agreement with Hitachi and Horizon to build a new nuclear power station in Wales and a further £50 million redevelopment of Gatwick Airport’s train station. Meanwhile, the Treasury is to double asset sales to £20 billion by 2020 to help fund these projects.
Danny Alexander, chief secretary to the Treasury, said that the insurer’s £25 billion pledge was a “major vote of confidence” from the City in the government’s handling of the UK economy. The government is considering more sell-offs to follow the Royal Mail float, which has lifted investor and stock market confidence. Sales will include the government’s 40% stake in Eurostar and property owned by London and Continental Railways.
Meanwhile, George Osborne unveiled his Autumn Statement amid further signs of UK economic recovery. Construction output reached a six-year high in November, while the Markit/CIPS construction Purchasing Managers’ Index rose above 60 points in November (with 50 indicating economic growth). The Office for Budget Responsibility (OBR) said that the UK economy would grow 1.4% this year – more than double the level expected at the time of the Budget in March – and 2.4% in 2014. The OBR also revised down its expectations for borrowing to 2018, by when Osborne said the UK would be running a budget surplus.
Britain’s largest public companies are looking to increase their capital investments as confidence rises in the UK economy. More than one-third of FTSE 350 companies surveyed by the Institute of Chartered Secretaries and Administrators expect to expand in the UK over the next 12 months. British industrialist Sir John Parker, who is chairman of miners Anglo American and deputy chair of ports group DP World, said: “A rise in capex is one of the biggest votes of confidence that the economy is improving and that it’s going to continue to improve.”
The Bank of England last week also held the UK interest rate at the record low it has remained at since March 2009 and its quantitative easing (QE) programme at the £375 billion level set in July 2012. The mix of positive economic news and the steady message from the Bank of England helped push up the FTSE 100 index at the end of the week – by 1% on Friday, to 6,552 points – but the index was down over the five-day period by 1.5%, which is its fifth successive weekly loss. It still remains up 11% this year.
Strong economic data is also emerging on the other side of the Atlantic. Improved US manufacturing, construction and retail figures have raised the prospect that Washington could start to unwind the $85 billion-a-month stimulus programme this month. Last month the US unemployment rate fell to a five-year low of 7% while the monthly number of new jobs has been 200,000 or more for the last four months, according to the US Labor Department. The Fed will be able to take the statistics as evidence the recovery has gained the momentum it requires to taper QE at the next Federal Open Market Committee on 17 December.
US equities surged again last week on the back of these further signs of recovery, with the S&P 500 index resting less than one point short of the 1,800 points level at the end of the week. US equity bulls are expecting the index to continue its 2013 run and rise above the 2,000 point mark, with an Investors Intelligence survey of US market sentiment showing that bulls now outnumber bears fourfold, which is the highest ratio since 1987. Meanwhile, the ten-year US government bond yield briefly touched 2.93% on Friday, which is its highest for nearly three months. However, it ended the week up 12 basis points at 2.87%.
PIMCO’s chief executive Mohamed El-Erian said the employment report was good news for Main Street and Wall Street. El-Erian said that the job report is also good for higher-risk assets. Markets have remained uncertain about what level of economic strength the Fed required to normalise its monetary policy, but if further improvement in the employment market is followed by business investment in plant and equipment – two “big ifs”, he said – the markets will be right to read this as a sign for the Fed to make a retreat from QE.
Further improvement for the world’s largest economy also gave some lift on the other side of the Atlantic to the FTSEurofirst 300 index, which inched up on Friday by almost 1% but lost 2.7% over the five-day period and closing at 1,270 points. Mario Draghi, the European Central Bank president, last week showed no sign of hurrying into new policy measures, despite concerns about low inflation and weak growth in the eurozone.
There were hopes that Draghi might unveil a new longer-term refinancing operation (LTRO) to encourage more lending by banks in the eurozone. The ECB president last week kept the interest rate at a record low of 0.25% as a response to a growth rate of just 0.1% in the third quarter, while inflation crept to 0.9% from 0.7%. Draghi cut rates last month as a safety margin against deflation and to spark growth across the region.
However, Draghi suggested that the ECB was studying a new framework for channelling liquidity to the region’s banks. There was talk in the markets that the ECB could try its version of the Bank of England’s Funding for Lending Scheme. With no action from the ECB, the euro strengthened against the dollar to $1.37.
In Tokyo, the Nikkei 225 Stock Average rose by around 1% on Friday, but the positive movement did not offset its first weekly decline in a month as it lost 2.3%. However, Japanese equities have had a strong run this year with gains of 51% this year; and earlier in the week, on Tuesday, reached a six-year closing high. Prime Minister Shinzo Abe’s ultra-loose monetary policy, known as Abenomics, has fuelled this surge in 2013.
Fund manager Hugh Young of Aberdeen Asset Management believes that Japan’s performance has been “light years ahead” of the rest of Asia. Strong performers for Young’s portfolio include Chugai Pharmaceutical, Japan Tobacco and Unicharm. However, he says there is quality across the Asia-Pacific region, including in Australia and Korea.
Investments in China have been mixed this year, said Young. Winners include the insurer AIA in Hong Kong, and HSBC. However, Japan remains the star performer. But, as Abenomics boosts business and equity markets and combats deflation, the Japanese economy is perched on a deep structural fault – the demographic time bomb of an ageing population and shrinking workforce (and no mass immigration policy to plug the gap).
In Britain, debate focused on the decision to raise the State Pension age to 68 in the mid-2030s and 69 in the late 2040s. Osborne argued for the need to control pension costs. “There is not a bottomless pit of money,” he told the BBC. “The alternative is a pension system that would collapse because it was unaffordable.”
Ageing populations may be the greatest challenge facing the developed nations. People are living longer and require income to meet their longevity. However, investors are still wary of pursuing the riskier investments that can provide that income within a diversified portfolio, with fund manager BlackRock reporting that around 32% of affluent investors expected to increase cash savings in the next 12 months.
Cash remains the comfort blanket for many investors. Clearly, the financial crisis has dampened appetites for risk. Curiously, this caution suggests that the 2013 rally has not been driven by irrational exuberance, at least among retail investors. There is a compelling argument for those who have delayed to think again about income for the future – whether for travel or study or to enjoy home comforts or, even, to build palaces…