Walls and means

He announced construction of his long-touted wall on the US-Mexican border would start immediately. He also floated a proposal that it could be funded by a 20% levy on Mexican imports. Mexico’s President cancelled a meeting with President Trump in protest and his foreign minister argued – accurately – that such an action would not mean Mexico pays for the wall. Instead, American consumers would foot the bill through higher prices for their cars, appliances and avocados. Unfortunately, this argument is likely to be drowned out by bravado and bluster.

Meanwhile, in other news brought to you by Twitter, the North American Free Trade Agreement (NAFTA) is up for renegotiation and the US has quit the Trans Pacific Partnership (TPP). Australia barely batted an eyelid before inviting China to take America’s place at the table. Barack Obama’s ‘pivot to Asia’ has been completely defanged and Mr Trump has delivered just as promised: America has disentangled itself from one theatre of geopolitics. But, if China does join the TPP, exactly how it will affect the balance of power in the East is anybody’s call …

As January wound down, Mr Trump signed a clumsily worded executive order to suspend immigration from extremist trouble spots in east Africa and the Middle East. It left families split between continents and customs barriers. It caught up Americans with green cards (permanent residency rights) returning from holidays and business. It also affected nationalised citizens of the UK and other close allies of the US – although Mr Trump’s administration later clarified that the order doesn’t extend to them and rowed back from including green-card Americans in the dragnet.

This led equity markets to slide backward momentarily as investors pondered the risks of a Trump presidency.

Index

1 month

3 months

6 months

1 year

FTSE All-Share

-0.3%

3.0%

7.3%

20.1%

FTSE 100

-0.6%

2.7%

7.4%

21.4%

FTSE 250

0.5%

3.9%

6.3%

13.2%

FTSE SmallCap

1.4%

5.4%

10.6%

22.9%

S&P 500

0.7%

5.1%

12.2%

35.3%

Euro Stoxx

-0.4%

1.1%

10.5%

25.0%

Topix

2.0%

-0.9%

11.7%

31.7%

Shanghai SE

1.0%

-2.7%

8.2%

24.4%

FTSE Emerging

3.6%

-2.1%

10.7%

41.4%

Source: FE Analytics, data sterling total return to 31 January

Developing nicely

Emerging markets were the stand-out performers for equities last month. China, Hong Kong, Singapore and Brazil rose very handsomely indeed.

Growth numbers were higher than expected, particularly in China. The hub of Asian trade’s annualised GDP expansion was 6.8%, beating forecasts by 10 basis points in the fourth quarter. Emerging market indices were also boosted by dollar weakness. The world’s reserve currency slumped 2.6% in January.

Developing nations are usually hostage to the fortunes of the price of oil and other commodities. However, oil remained range-bound during the month, unable to break out above $57 a barrel. The OPEC production cut came into force with the new year, but producers have been quick to sell stockpiled crude whenever the price rallies. US oil rigs are proliferating as well, particularly shale oil which cost less to sink and can be idled more easily than traditional oil wells. Unless there is a supply shock or a slump in GDP growth, we believe these dynamics will keep the oil price near its current price.

As for the UK, basic materials companies were easy winners in January, rising 12.8%. They were no doubt helped on their way by the buoyant data out of China. In contrast, the oil & gas sector fell 5.4% as investors took profits after a recent soaring run. Telcos were dragged down by BT’s profit warning. False accounting and embezzlement in its Italian business swelled to £530m. Meanwhile, slower government and international corporate business has begun to have an impact on the company’s bottom line. Company managers say the government is taking a firmer approach to contract negotiations and several are not being renewed as expected. Added to that, many formerly nationwide contracts are being broken down and handed to regional authorities. At first glance, you would expect this to reduce the buying power of the public sector; however, it appears that it has made it feasible for smaller contractors to bid for the more manageable chunks of government work.

BT may not be the last giant to be tripped up by a changing landscape…

Bond Yields

Sovereign 10-year

Dec 31

Jan 31

UK

1.24%

1.42%

US

2.45%

2.47%

Germany

0.21%

0.44%

Italy

1.82%

2.27%

Japan

0.05%

0.09%

Source: Bloomberg