European Stoxx 600 started the week with a 0.1% gain to flirt with two-month closing highs, while Germany’s Dax opened up 0.3% to its best levels of the year. At the time of writing, the FTSE was at a 14-month high, almost hitting the 7,000 mark – a gain of more than 1,000 points since February. Surely this is bull territory. But the world is unstable, and there’s concern around corporate investment, hiring, house-prices and global growth.
Many market commentators have suggested that the weak GDP report from Japan, which followed on from the weak picture from the US and China, means that it’s more likely the Bank of Japan will boost its stimulus – proving further that monetary policy appears to be the only game in town when it comes to propping up economies. Is this healthy?
Interestingly, Lord Rothschild’s vehicle, RIT Capital Partners plc, published its half-year results on Monday in which he said:
The six months under review have seen central bankers continuing what is surely the greatest experiment in monetary policy in the history of the world. We are therefore in uncharted waters and it is impossible to predict the unintended consequences of very low interest rates, with some 30% of global government debt at negative yields, combined with quantitative easing on a massive scale.
He goes on to concede that monetary policy has supported the market and asset prices despite anaemic economic growth and acute geopolitical risks.
The conclusion that RIT has come to is that ‘in times like these, preservation of capital’ is essential, so asset allocation on quoted equities has been reduced from 55% to 44%. Sterling exposure reduced to 34% at the end of June and now stands at approximately 25%, while holdings of gold and precious metals increased to 8%.
RIT’s share price has been on the march for a long time now and is trading at a premium to NAV, which indicates that investors agree… Although asset managers investing in other asset managers has always struck me as a little odd. Does that constitute fees on fees on fees?
For another take, look no further than JP Morgan Cazenove, reiterating its ‘overweight’ stance on UK equities, which it believes should continue to outperform even in the aftermath of the Brexit vote. JPM said the ‘UK is a defensive play with very high dividend yield and the FTSE 100 is one of the key plays on emerging markets’.
If ever you needed evidence that the FTSE 100 is dislocated from the real UK economy, here it is. Buy the FTSE for EM exposure. Although with 72% of FTSE 100 sales derived abroad, it stands to reason the FTSE 100 will benefit from the weaker pound, so there’s more to it than monetary policy after all!
For the real economy, let’s hope that consumers continue to spend. We’ll have some more clarity on the state of the economy this week and the impact of Brexit, with The UK inflation report released by the ONS on Tuesday – inflation has ticked up to 0.6% in July, apparently because of fuel and booze. It is also likely that a weak sterling will make imports more expensive – import prices have risen 6.5% year-on-year, their fastest rate in five years.
It is worth noting that the ONS collects data in the middle of each month, which would have been only a couple of weeks after the referendum, so it is unlikely that the weaker pound will have had a material impact on the figures – that will take a couple of months.
In short, by the end of the year, expect your pint to be much more expensive. At least we can blame Europe for that, or now that we are out (or not out as the case maybe), we might have to look in the mirror and blame ourselves. D’oh!