Positive sentiment drives momentum

In this week’s bulletin:

  • Multi-year highs for US and Japanese indices but growth shows signs of slowing
  • Positive sentiment drives momentum as the FTSE moves within sight of all-time high
  • Weakening yen creates positive environment for exporters
  • BT reports forecast-beating results and signals appetite for a battle in the sports pay-TV arena


Currencies rather than equities steal the show

  • Markets continue their upward trend but growth slows a little
  • Multi-year highs for US and Japanese indices
  • Gold prices fall further as commodities toil

The dollar consolidated its position above the Y100 level at the end of a week in which a burst of strength for the US currency overshadowed a succession of record highs for equities on Wall Street. The yen’s renewed slide, to its lowest point against the dollar for more than four years, provided fresh impetus for equities and providing a welcome fillip for Japan’s major exporting companies. The Nikkei 225 Average jumped 2.9% in Friday trading to record its best week since early January and to end at its highest point for five years.

However, the positive sentiment enjoyed in US equity markets for much of the week began to show signs of fading as the weekend approached. The S&P 500 Index set record closing highs on each of the first three days of the week but by Friday trading was broadly flat, although it was still on track for another weekly gain. Positive earnings and macroeconomic data, and expectations that the Federal Reserve would continue to provide liquidity, provided much-needed support.

On this side of the Atlantic, European bourses ended a strong week on a positive note with Germany’s Xetra DAX at a record closing high and the FTSEurofirst 300 hitting a 5-year peak as healthcare and telecoms stocks attracted buyers. Telecoms benefited UK markets also – more of that later – as BT rose 12% after raising its dividend and delivering an upbeat outlook. The FTSE 100 Index chalked up a seventh consecutive weekly advance to end the week at its best level since October 2007.

Elsewhere, industrial commodities toiled and posted losses over the week as the demand for equities continues almost unabated. Brent oil was down $1.82 in Friday trading at $101.65 a barrel, a drop over the week of more than $2.50. US copper futures fell 0.8% on Friday to $3.31 a pound. The fall in the price of gold continued due to the strengthening of the US dollar as the yellow metal suffered heavy losses, losing $32 in the final day’s trading to close down 3% over the week.


The only way is not necessarily always up

  • UK market within sight of all-time high
  • Positive sentiment continues to drive momentum

The strength and apparent sustainability of growth in equity markets has seen some commentators daring to mention the possibility we may see the FTSE 100 Index break through its all-time high of 6,930 and furthermore some, for whom the glass is clearly much more than half-full, are forecasting a comfortable 7,000 by the end of the year.

To the end of April, the UK market – measured by the broader FTSE All-Share Index – has gone up for 11 consecutive months. This has never happened before since its inception in 1962. Whilst investors continue to enjoy this run, it remains the case that equities are always subject to volatility and that a correction – of some sort – is likely at some point. If and when it does arrive, this does not necessarily signal an end to the party.

Given the availability of data, the US market provides an interesting case study. The S&P 500 Index has seen three sets of 11 up-months in a row. The first, from June 1949 to May 1950, was followed by a fall of 5.7% then a rise of 18% over the next 12 months. The second, from August 1953 to July 1954, saw a 3.4% fall and then a rise of 38% over the next 12 months. And finally, the period from February 1958 to January 1959 was followed by a flat month’s trading and a 2% rise over the subsequent 12 months (source: Financial Express Analytics).

So what does this mean for equity markets in the short term? In truth, it’s impossible to draw any meaningful conclusions from this data. As all investors are aware, past performance is no guide to the future but what this does demonstrate is that one bad month does not necessarily signal the beginning of a bear market. Volatility, particularly in the short term, is a character trait of equities but so too – over the long term – is the demonstrable ability to outperform other asset classes. We know which way the road leads; what we can’t always see are the bumps along the way.


What price growth in the East?

  • Weakening of Japanese yen creates positive environment for exporters
  • Rival nations move to support their own currencies

Don’t say it out loud but the lost decade, or should that be the lost two decades in Japan’s case, could perhaps be resigned to history. Japanese Prime Minister Shinzo Abe’s aggressive programme of monetary easing, unveiled by the Bank of Japan in April and dubbed ‘Abenomics’, seems to be working – for Japan at least.

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Source: Bloomberg.
Past performance is not indicative of future performance.

Tokyo’s action to revive its economy and pull out of its deflationary quagmire is making rival economies less competitive in the global export race. A new episode in the currency wars may have begun. The yen’s latest fall caps a slide of nearly 30% against the dollar since November, matched by a similar slide versus the euro to Y131. The Y100 barrier against the US dollar is not merely symbolic: analysts and traders believe the yen will now weaken further.

Should that be the case, the government can claim some measure of success. Weakening the currency has been central to Japan’s renewed efforts since the election of Shinzo Abe to arrest two decades of falling prices and to stimulate the economy. The rise of Abenomics has persuaded investors to make sizeable bets against the yen and has fuelled a sharp rise in Japanese equities that has sent the Nikkei more than 60% higher. Whilst some hedge funds and currency traders made millions betting against the currency, the dollar’s push through Y100 hasn’t been welcomed by everyone – particularly those countries whose exporters compete with Japan. Japan’s plans to stimulate its economy had already sparked concerns over a fresh round of global currency wars earlier this year, after the yen weakened significantly against other currencies. And those economies where the pain is being felt the most have started to act.

Last week South Korea’s central bank unexpectedly cut interest rates, citing the damaging effect a weaker yen was having on its exporters. New Zealand’s central bank admitted intervening in the currency market to try to weaken its dollar, which has come under pressure in part because of the weaker Japanese currency. Australia also cut interest rates this week, having previously warned its exchange rate was too strong.

Officials in Japan have stated that their policies are not aimed at targeting the exchange rate, in line with an agreement signed by the G20 nations – yet Japan still faces criticism. Just how far the currency can weaken further before the government and corporate sector begin to worry remains unclear. The yen’s depreciation, combined with soaring energy imports after the Fukushima nuclear disaster in 2011, has pushed Japan into persistent trade deficits. Former Bank of Japan deputy governor, Kazuo Iwata, believes the yen is fairly valued at Y100 to the dollar, but warns that further weakness would represent a market overreaction which could cause problems for Japan’s economy.


A game of two halves

  • Telecoms giant launches deal to compete with BSkyB in sports pay-TV market
  • Consumers likely to benefit as the gloves come off in battle to capture market share

BT shares rose 12% last week after the telecoms giant reported forecast-beating results, declaring a 2% increase in pre-tax profits to £2.5 billion for the year ending 31 March 2013. The group also raised its core earnings outlook to between £6.2 billion and £6.3 billion for 2014/15, a strong growth forecast given its focus on cost-cutting in recent years.

The results followed an announcement earlier in the week that BT would offer its soon-to-be-launched sports channels (featuring Premier League football, Premiership rugby and WTA women’s tennis) for free to its broadband customers in a challenge to BSkyB’s dominance of the UK’s sports pay-TV market. BT has also lowered the cost of its high-speed internet service (with download limits) to £15 per month, compared with BSkyB’s £20 per month unlimited high-speed broadband. The move is seen as an attempt by the telecoms operator to stem the decline in its retail customers and capture a larger proportion of the high-speed broadband market.

The investment team at Majedie, fund manager of the St. James’s Place UK Growth fund, commented, “Fibre [a fibre-optic network] has changed the game for BT. For the first time in a long time it has a compelling product to sell which is not subject to price regulation. Giving sports away for free to broadband customers underlines how serious BT is about returning to growth – it is no longer content to see its customers churning away to rivals like Sky and TalkTalk – now it wants to be the aggressor, and it finally has the technology and the content to do so. Its recent acquisition of 4G spectrum, along with its existing Wi-Fi network should allow it to launch a true quad-play service (phone/TV/home broadband/mobile internet) for the first time.”

Shares in BT reached their highest level in more than five years following the ‘perfect storm’ of an increasing dividend, upgraded outlook and reducing fears about the growing pension shortfall; all of which reflect the efforts being made across the business. “Behind the scenes, management have been working hard to reduce costs and improve the operational efficiency of what has historically been a bureaucratic and stodgy organisation. Meanwhile, rising markets have helped to reduce the pension deficit; and the regulatory headwind of forced reductions in the price that BT can charge for wholesale access to its copper network [the original and rapidly outdated infrastructure] is coming to an end,” added the team at Majedie.

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