Market review - the wage squeeze

Andrew Milligan

Average weekly earnings have been creeping higher, rising about 2.75% from a year ago. Though this may surprise people, the UK actually does have a tight labour market. The current unemployment rate of 4.2% is the lowest since the 1970s – although of course we live in a very different world now with many more people on gig-type contracts and more self-employment.

The impact of the decline in the pound after the Brexit vote has been putting pressure on UK inflation for some time. But this is finally receding. On the CPI measure, most estimates are that inflation will edge down steadily from 3% a year in January towards 2% a year by the end of 2018.

So incomes are finally rising slowly after adjusting for inflation. One word of warning – oil prices. They’ve started to edge higher driven by political concerns as well as supply problems. This could feed through into petrol costs and therefore the path of inflation and real or inflation-adjusted incomes. At Aberdeen Standard Investments, we own the cruise operator Carnival but trimmed our positions when the oil price started to rebound as this is an increasing cost headwind for such companies.

Sterling took a pounding

Sterling has been on a roller coaster. It rose towards 1.44 against the US dollar, partly as investors took a more positive stance towards the UK/EU negotiations, and partly as the UK economy looked a little stronger than expected. However, a mixture of reassessment of the interest rate outlook, as I talk about below, and some negative headlines about Brexit problems, for example in relation to the Irish border, have taken the gloss off the currency – back down to $1.36!

Looking ahead, the pound could be rather volatile against the dollar and euro, with all that means for volatility in the stock market as overseas profits are translated into pounds at better or worse exchange rates. We have complicated EU/UK talks on transition agreements which really should be completed by October. Then there’s a mass of legislation which needs to be voted on in Brussels and Westminster by spring 2019. All in all, there’s a political and legislative mountain to climb.

Given this backdrop, our portfolios generally include positions in currencies other than sterling – where economic fundamentals are more important than political drivers.

UK interest rates: reading between the rhetoric and reality

The Bank of England’s Mark Carney surprised investors by hinting that interest rates may not rise as quickly as expected. It’s important to note that there’s a subtle distinction between either a central bank providing ‘forward guidance’ to reassure investors or a situation where markets are constantly waxing and waning in response to a series of speeches by the Governor and his colleagues. On this occasion, the Governor’s comments made more sense after the report suggesting the UK economy only just grew in the first quarter – although admittedly the appalling winter weather must have played quite a part. The extent of the rebound into the summer will help determine whether the Monetary Policy Committee can move once or twice this year.

Markets learning to tolerate President Trump

Financial markets were initially quite shocked when President Trump started tweeting about trade tariffs with China. But they’ve since learned to adjust, helped by more moderate comments from other members of the White House Administration, plus statements from Chinese and European officials.

Investors remain aware of the potential risks – a trade war is the last thing which the world economy needs – but they also know that the President has a well-recognised negotiating style. Initially he advances a very strong proposal and uses a series of threats as a way to reach an outcome which is more satisfactory to him. Or in this case, to the voter base who support his views about ‘making America great again’!

So for now the situation has calmed down, but as with any brush fire it could burst into life again at a moment’s notice.

Has the emerging market recovery stalled?

Emerging markets performed well until the sell-off at the end of January, and haven’t recovered much since. On the other hand, some of the developed markets have recovered better. There are several factors that may be causing this divergence:

  • The rise in the US dollar – after range trading for much of 2018, the trade-weighted dollar index has moved up in recent weeks
  • Worries about new US tariffs and trade rules at a time when activity has slowed in Europe and a lesser extent China; in other words investors are worrying about export destinations for emerging market companies
  • The tech sector, which is an important (over 25%) part of the emerging market indices, hasn’t had a great year – valuations were stretched and political concerns caused many investors to reassess their positions

We remain positive on the outlook for emerging markets within our equity and debt portfolios, on the grounds that the strength of the US economy as the tax cuts come through will benefit many emerging market exporters. There are indeed imbalances in a number of emerging market economies, but they’re well recognised by markets.

More trouble for the UK high street

The UK high street continues to see some of its big names in big trouble. Of course many consumers are cautious when it comes to spending, perhaps worried about their jobs and the wage squeeze. However, there are several other very important factors at play in the UK and other countries too. We might sum them up as ‘the threat from the internet’.

Online shopping is a way of life for many people, across a growing range of sectors. There have been some recent high-profile failures on the high street, such as Maplin and Toys R Us. Another aspect that’s affecting the shelf–life of high street shops is that many households are choosing to buy fewer goods and experience more activities. There’s been a shift in behaviour with more people deciding that they have enough ‘stuff’ and are choosing to spend their money on hotels, bars, restaurants, cruises or other leisure activities instead. Our UK portfolios include some of the winners, such as online retailer Boohoo.

Facebook’s fall from grace

Facebook’s data breach and Mark Zuckerberg’s congressional inquiry have dominated the headlines in recent weeks. And it looks more likely that the US will implement more stringent privacy laws, similar to the introduction of GDPR in the UK and Europe. But what does that mean for investors, tech companies and the digital economy?

Truth be told, it’s too soon to tell. Many people noted that the US Senate didn’t appear to understand social media very well when it held its inquiry with Mark Zuckerberg. So will any new legislation be well drafted?

It’s true the share price of Facebook did fall but it’s still very much up since the start of 2017. So it will be important to look at the degree of regulation on a case-by-case basis. And while there are concerns about other aspects such as slower sales of smartphones from Apple and other major suppliers, the fact is the demand for other products and for cloud computing goes from strength to strength.

All in all, an investor will need to undertake some very deep research and be very stock-specific about what they include or exclude in a portfolio. At Aberdeen Standard Investments we remain overweight in Alphabet, which includes Google.

Diversification is a key element of 1825’s approach to investing. The 1825 Portfolios benefit from specialists being involved at every stage of the investment cycle – from setting the strategic asset allocation, to carefully selecting investment funds based on expert research. Both the underlying investments and asset allocation are actively managed to ensure the portfolios meet our clients’ financial planning objectives.

If you have any questions about your investment strategy, your 1825 Financial Planner will be happy to help.


The information in this blog should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in. Information is based on our understanding in April 2018.

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