Navigating the global markets

Investment markets were broadly dictated from unrelenting geopolitical tensions last month. The typically thinner volumes witnessed, as many enjoy summer breaks, didn’t mean investors were allowed too much respite. Donald Trump played a typically starring role seemingly intent on further dwindling the White House’s Christmas card list. Add that to emerging market debt fears, a UK interest rate hike, domestic retail woes, stagnated Brexit progress and Wall Street’s bullish run and August was hardly a lull. In this article Vertem Asset Management look to recap last month and justify the markets’ resilience despite the perilous landscape

Starting in the US rather than at home seems logical, given they’re as close to the centre spot of the trending macroeconomic Venn diagram as you can get. It’s rare a day goes past without the POTUS being able to log onto Twitter and not instigate another trade war. One he prepared earlier was with China, and August just saw their duel continue with the retaliation over tariffs and other threats. Hard to ignore when you’re the two largest economies in the world.

Moving on, the Turkish economy was already enduring a tough year, the international community begun to lose faith in the current President Erdogan’s ability to shore up the economy, with his macro-economic views losing international investor confidence. Trump then doubled tariffs on Turkish metals and it was a case of the straw that broke the camel’s back on the lira currency. A strange move from a supposed ally, justified because they refuse to release a US pastor on trial in the country. Whether there’s no ulterior motives in the play is unlikely, but Trump certainly smelt blood and took it, with the Turkish lira down nearly 40% year-to-date against the dollar.

This currency devaluation on such a scale highlights risks associated with emerging economies. Turkey’s typically large debt piles denominated in foreign currencies makes sharp devaluations in their currency dangerous. Sharp devaluations see capital outflows as investors look to wash their hands with risk, which then drags the currency lower, and so on. The nerves surrounding Turkey did alleviate from headlines after a Qatari pledge of $15bn came around the same time Trump switched his sights to renegotiating a new NAFTA (North American Free Trade Agreement) with member states including Mexico and Canada. But the saga hasn’t finished yet, Turkey’s problems continue, and they’ve really brought emerging market fears to the forefront. Currently the world sits similar to a school class in which Donald Trump is the teacher and nobody really wants to make eye contact for fear of having to answer a question, or in this case embark on a trade conflict that usually becomes detrimental to both sides.

Despite the doom and gloom US equities continued their impressive bullish run on Wall Street.  The US economy continued to churn out positive economic data releases and pointed to a further interest rate rise in September (further pressure on emerging markets). The tail-end of a strong earnings season caused record highs for both the S&P 500 and the NASDAQ. The latter, which is predominantly composed of tech-stocks, has been helped by the likes of Apple and Amazon posting strong results and this has resulted in the world’s first two companies to reach a market capitalisation of $1 trillion.

Over to Europe, many markets have put up a resilient performance in the face of so many headaches, of course lagging the impressive run in the US. The FTSE 100 lost circa 4% during the month, but we of course have Brexit as the cherry on top to everything else. Watching Brexit unfold is painful, and with the lack of progress it doesn’t make much difference of what side you’re on by now. We failed to materialise any meaningful steps towards a deal which means we still have no idea on the post-Brexit landscape. This becomes an issue because it causes companies to put investment decisions on hold, with some already moving headquarters and diverting recruitment and new office projects. This is one of the core reasons behind the disappointing August manufacturing PMI (Purchasing Managers’ Index) read, which was the weakest since Brexit as exports fell at the sharpest rate for 4 years, confidence sunk to a 22-month low and hiring was seen to stagnate. All of this also explains the measly foreign exchange rates many of us encountered this summer.

Furthermore, as sterling struggles and the economy stutters, we continue to see a pinch in real terms for consumers. As disposable incomes deplete, so do our highstreets. This month headlines were dominated by House of Fraser coming to the brink of collapse had it not been for Mike Ashley’s £90m rescue in the eleventh hour. Also during August Homebase came within a whisker of collapse had it not been for their last minute Company Voluntary Arrangement (CVA) deal backed by creditors. Poundworld was however not as fortunate, and joined the likes of Prezzo, New Look, Toys ‘R’ Us, Mothercare, Debenhams and so on that have either completely gone or shut a large amount of stores this year. Since then Footasylum shares have halved after back to back profit warnings and could be in jeopardy of the same.

The list goes on and headwinds facing the brick and mortar outfits don’t look likely to relent soon. The co-founders of Footasylum are behind JD Sports. The athleisure giant has been one of the standout high-street performers and couldn’t be any different in contrast. They have shown that a successful multi-channel strategy and lack of complacency means you can remain competitive with online-based firms.

The month closed with more positive headlines following a successful deal from Coca-Cola to buy the Costa Coffee business for £3.9bn. Owners of the coffee chain Whitbread, whom also own Premier Inn Hotels had initially looked to separately list the two firms, but Coca-Cola’s more profitable idea sent their shares 14% higher.

Overall as busy as August was the main themes were unchanged.

Vertem
www.vertemassetmanagement.com
@vertemam

Words: Nathan Nicholson, Vertem Asset Management

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