With trade tensions not alleviating through last month global caution persisted. The FTSE 100 had a rough start and declined by as much as 300 points before recovering to end the month at 7,510.
The recovery was driven by a fall in the value of sterling from Brexit concerns. The reason we commonly see this inverse relationship play-out is because the FTSE 100 has many constituents whom make a large proportion of their earnings outside the UK. So, the weaker the pound is versus other currencies, the smaller proportion of earnings that are eroded when translated back. The relationship with sterling means quite often the FTSE 100 can move higher as sterling falls and visa-versa.
Let’s touch on Brexit – we still have no idea in regard to the ultimate outcome. Negotiations have rumbled on, but a grasp on developments is extremely hard to translate through fugazi threats and headlines, especially as politicians have increasing ulterior motives. Still, some progress has been made, albeit material. What is clear is the sticking points are really digging their heels in, the Irish border debate for example. Furthermore, Theresa May is negotiating as much with the EU as she is with her own backbenches. In an ideal world Theresa May would love to clinch a last-minute deal, and say it was always in the bag. Back in the real world though, where do we go now?
Many see the upcoming October EU summit as the most likely opportunity for a final agreement between both sides. However, considering we’re well into October and a Brexit plan isn’t a university assignment which can be saved by a last-minute all-nighter, a deal by this point is very unlikely. That’s why an emergency November meet has already been pencilled in.
With May’s support dwindling by the day, approval from the House of Commons could become the main risk. Either way on March 29, 2019 we’re gone. Whether it’s a hard Brexit or a soft Brexit, is yet to be known. Throughout October and towards the end of the year expect to see more and more pressure on the value of sterling, businesses postponing investments and investors erring on the side of caution.
Last month we highlighted the outperformance across US equities. Spurred on from underlying earnings growth, strong economic data and some trade relief, US equities have managed to continue its bull run into September. We actually began the final quarter with some trade tension respite, as the US, Canada and Mexico agreed to a new trade agreement effectively re-writing the existing North American Free Trade Agreement, better known as NAFTA. Of course, as long as Chinese and US relations don’t improve they will overshadow markets and likely keep a broad lid on any significant advancements for bourses. Yet, last month we saw the S&P 500, NASDAQ and Dow Jones indices all experience new record highs, and a further interest rate hike from the Fed. One problem with this, as we touched on last month, is the effect of a strong dollar on emerging markets and so this will have to be closely monitored throughout the quarter.
This month one area of immediate interest is the stock market debut for Aston Martin. The luxury car manufacturer is looking to raise capital to take the firm into a new era. The new CEO, a former Nissan executive, looks to firstly broaden the range of vehicles and also leverage the brand strength to move into less familiar markets such as luxury homes and private submarines. They also aim to increase their appeal to female customers, having sold approximately only 4,000 vehicles to women across their 105-year history. On their opening day of trade shares closed 4% lower which valued them at roughly £4.4bn, meaning they could become the first car manufacturer to be listed on the FTSE since Jaguar.
Tying the automotive theme with trade worries, Tesla is one of the first large corporates to express early worries and impacts from increased import tariffs in the Chinese market. Although in all honesty they have more important issues that include Elon Musk inciting law suits with British cave-divers. Elon Musk being accused of securities fraud. Elon Musk firing flamethrowers while smoking weed online. But the share price volatility clearly has nothing to do with any of that. Nothing at all.
The final quarter is so vital to many businesses for the simple fact that it encompasses the festive season. The high-street disarray is well known to us all, making this Christmas more important than ever. Last quarter we saw a spate of profit warnings and cautious statements, with Christmas lynch pinned to success/survival. To name a few particularly vulnerable; Moss Bros, Bonmarche, Sports Direct, DFS, Carpetright and Laura Ashley.
We have already seen profit warnings from Ted Baker, Ryanair and Royal Mail during the first week. Ryanair after a calamitous year of strikes has hit profits at the same time passenger numbers from the UK dwindled because of the warm weather spell. Royal Mail endured their worst 2-day performance ever following their profit warning, so they’ll be hoping we have plenty of Christmas cards to dish out. Ted Baker have been hit by the warmer start to Autumn and the collapse of House of Fraser but remain a stronger proposition than some fashion retailers who have issued similar profit warnings.
In conclusion investment markets aptly have plenty of trick-or-treat to come. A Wall Street taper from recent highs, Brexit, domestic retail pressures and more could all go one of two ways.
Excitingly though politically dominated headlines will likely keep us all entertained for the foreseeable future.
Words: Nathan Nicholson, Vertem Asset Management