The People’s Republic’s Century | AAG Wealth Management

The People’s Republic’s Century

Posted: May 6, 2014

Questions about the pace of Chinese growth and the depth of the US recovery continue to dominate world markets and their expectations for the second quarter. Meanwhile, the deepening crisis in Ukraine has cast a shadow on positive news for the developed world’s economies and significant corporate activity on both sides of the Atlantic. This week opened with HSBC’s monthly survey of manufacturing in China that indicated contraction in the sector and the wider economy. Last week brought news that the US economy only grew 0.1% over the first three months of the year amid severe weather conditions across North America. The day-by-day escalation of violence in eastern Ukraine has started to unnerve investors, particularly in Europe.

The uncertainty over the rate of Chinese growth, last week also brought news of a historic shift in the world economy that puts fears about the 7%+ growth levels in context: revised statistics drawn up for the World Bank and based on purchasing power show that China will supplant the US as the world’s largest economy this year. The era of American economic dominance since the early 1870s, when it overtook Britain, may well be drawing to a close. China remains a developing economy and in per capita terms the US is still five times richer, with all the apparatus and benefits of markets, civil society and state that have been central to its supremacy and more immediately, as fund manager Schroders’ chief economist Keith Wade observes: “For all the talk of the US losing its pre-eminence and influence, its economy is leading the recovery in the developed world and its equity market continues to outperform the global index.”

Global markets last week were focused on the US Federal Reserve and its decision to make a further $10 billion reduction of its monthly bond-buying programme to $45 billion. With the slowdown of the US recovery in the first quarter widely accepted as weather-related rather than due to a deeper malaise, forward-looking data, such as purchasing manager surveys, indicate that the US recovery is underway. However, Schroders argues that, while this is good for global growth, there are signs that the US is playing less of a role driving global growth than in previous cycles. “The engine which drove the world economy for much of the past two decades has become more orientated towards domestic producers than in the past,” observes Wade. “Clearly such an outcome has important implications for global trade, the emerging markets and inflation.”

Highs and lows
But the Fed’s monetary policy that has underpinned the recovery continues to buoy Wall Street, with the S&P 500 index up 0.2% on Monday to 1,884 points after a 1% gain last week. Investors responded positively to stronger-than-expected employment data, with 288,000 jobs created in April and the unemployment rate down to 6.3%. Fund manager AXA Framlington’s chief economist Eric Chaney argues that the weak growth at the start of the year followed by a second-quarter rebound will also give a further boost to equities and bonds. With the S&P 500 only just shy of its all-time high of 1,897 points in April, a bullish Wall Street has become unforgiving towards slowing, if substantial, growth from US tech stocks. Sales forecasts from the sector continued to fall short of market expectations, with LinkedIn shares losing 6% at the end of last week.

In London, the FTSE 100 index was closed on Monday for the public holiday after it had climbed 2% to 6,822 points the previous week. The big market news was US pharmaceutical giant Pfizer’s £63 billion takeover offer for AstraZeneca, which valued the company at £50 per share. AstraZeneca gained more than 17% since the beginning of last week. Pfizer has until 26 May under UK takeover rules to persuade AstraZeneca to enter into further talks. Fund manager Neil Woodford believes Pfizer has undervalued AstraZeneca. (And he relayed this opinion to Pfizer chief executive Ian Read when he was phoned within hours of the launch last week of new venture Woodford Investment Management.) Woodford bought shares in AstraZeneca five years ago when the company was out of favour. Following boardroom changes in 2012, he believes the company’s prospects are bright. “And this is beginning to be recognised by the market. Clearly, Pfizer has recognised it too,” he says.

Meanwhile, the crisis in Ukraine restrained European stocks in a week marked by positive economic data from the region. The FTSEurofirst 300 index ended the week up 1.4%, although it lost 0.2% on Friday to 1,348 points amid investor nerves over the violence in eastern Ukraine. Shares in French engineering group Alstom rose 30% on Wednesday last week after its board accepted a €12.35 billion all-cash offer from General Electric for its energy arm, but left the door open for a rival bid from Germany’s Siemens. Meanwhile, a survey of purchasing managers showed Eurozone manufacturing activity improved in April, giving the European Central Bank (ECB) further room to hold back from adopting loose monetary policy to protect the fledgling recovery.

In Asia, the Nikkei 225 Stock Average gained 0.2% over the week to rest at 14,458 points, amid mixed earnings statements, particularly from its banks and airlines. Earlier in the week, the Bank of Japan cut its target for economic growth to 1.1% for the year to the end of March 2015, down from 1.4%. Japan’s central bank said an increase in consumption tax had curbed household spending, while “sluggishness” in emerging economies had hit exports as production continued to shift overseas. Meanwhile, President Shinzo Abe visited London and other European capitals last week to build trade ties and promote exports. This week, it is the turn of UK and European central bankers to meet and communicate with the markets, although the ECB and the Bank of England’s Monetary Policy Committee (MPC) are not expected to make a policy change this month.

Anglo-Saxon attitudes
Markets are anticipating that the historic low Bank Rate will remain in place until at least 2015. However, fund manager Schroders believes that the more hawkish elements within the MPC could begin to debate an interest rates rise at the MPC meeting on Thursday amid concerns over how to contain the housing market boom. In the meantime, Britain’s savers continue to face near-zero returns from cash on deposit, but there are signs that saving attitudes have started to alter. Savers put almost £7 billion less into Cash ISAs in the last tax year, with £11.5 billion put into the tax-efficient accounts over the 12 months compared with £18.4 billion over the previous year, according to the Bank of England. The amount deposited in Cash ISAs is at the lowest annual level since the Bank Rate was dropped to 0.5% in March 2009. The Investment Management Association reports that Stocks and Shares ISAs received £2.3 billion of new money, up from £1.3 billion in 2012/2013.

The change in attitudes comes as returns from Stocks and Shares ISAs continue to outperform cash deposits. Moneyfacts reports that in the 2013/14 tax year the average Stocks and Shares ISA generated a return of 9.42%, compared with 1.69% from Cash ISAs (which was insufficient to keep pace with inflation). The average Stocks and Shares ISA has achieved positive returns in nine of the 15 tax years since the introduction of ISAs in 1999, and delivered growth of 144%. “With signs of economic recovery and no significant improvement in Cash ISA rates, we would expect to see the popularity of Stocks and Shares ISAs increase further this tax year,” says Richard Eagling of Moneyfacts.

The Budget’s new ISA rules come into force on 1 July, and will allow investors to move money freely between Cash and Stocks and Shares ISAs, with a new limit of £15,000. The changes are an opportune point for savers to consider Stocks and Shares ISAs and the parlous returns from Cash ISAs. Investors are reminded, however, that they should consider the difference between the two types of investments, given that there is no security of capital on investment into a Stocks and Shares ISA, as there is with an investment in a Cash ISA. April brought a further blow to savers, with rates slashed by providers only three weeks into the new tax year. There are different forms of risk, but one variety – as savers have found in recent years – is the erosion of wealth by inflation.


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