Market Update 21st February 2020

 Pace of Active Manager Consolidations Shows No Sign Of Slowing

Bar a few mega merges, last year we mainly witnessed a consolidation of small sized asset managers. Downward pressure on pricing from regulatory changes and ever-growing inflows into cheaper passive alternatives have left beleaguered boutiques more open to the idea of merging. The industry consolidation we saw last year shows no signs of stopping this year with the focus seemingly shifting from small to mid-sized firms.

This week, Jupiter announced its intention to buy Merian Global Investors while Canadian investment giant Franklin Templeton made an unexpected acquisition of rival Legg Mason for $6.5bn. As much as Franklin boss Jenny Johnson argues that it’s an offensive move, the firm has been bleeding assets for a while now so it’s hard not to see it as anything but defensive. With the squeeze in charges and the popularity of passive instruments showing no signs of abating, this is now the new normal. Despite the increase in consolidation for smaller fund houses, it may not be enough to bring costs down to a level to compete with the largest of players nor for it to be attractive enough against passive alternatives.

 

JAPAN: VAT Might not have been a good idea

Japan’s economy shrank at the fastest rate since 2014 as a questionable timed tax hike, coming in amidst the trade war played a part in the downturn. Typhoon Hagibis was also another factor in annualised GDP falling 6.3 per cent last quarter. It appears that Japan hasn’t learnt from a similar sales tax raise in 2014 which led to consumers closing their purse strings and plunging the nation into recession. Last quarter had a similar theme as spending fell 2.9 per cent.

Unfortunately for the Japanese it appears things won’t get better this quarter. Worries over a technical recession which happens when an economy contracts over two consecutive quarters is rising due to the anticipated strong impact from the Coronavirus. Only a few days after the announcement, Korea also sounded the warning bell saying it must do everything it can do support the economy which was just showing signs of recovery pre-virus outbreak.

 

UK: Housing Market showing early signs of recovery

The dispelling of Brexit gloom coupled with the unusually warm weather this time of the year has led to house buyers flocking back into the property market. Transaction activity rose last month and with it so did property prices. Asking prices rose £2500 for the month of January alone and the average asking price for a home now stands at around £309,399 – just £40 shy off historical records.

Commercial real estate is also showing tentative signs of recovery. A few months of relative calm after a decisive victory has helped lift sentiment and whet the appetitive for further buying and selling for investors. This renaissance also appears to extend to UK commercial property fund managers. Last year saw the sector hit with almost £2bn in outflows and funds with a high exposure to the retail sector punished. This week BMO UK Property fund switched its pricing from “bid” basis which tends to happen when these funds are experiencing outflows to “offer” indicating the fund is gearing up for an acquisition.

 

 

EU: Commissioner fights against US Tech Dominance

A long running fiery battle between Google and the EU started in 2010 over accusations that the search engine was pushing rivals from search results to promote its adverts and Google Shopping service, looked to have been simmering down and heading towards a settlement in 2014. But the arrival of EU Competition Commissioner Margrethe Vestager promptly reversed this course and instead handed out $9bn in fines against Google. The former Danish finance minister has since become well known for her dogged pursuit of US tech giants culminating in Donald Trump describing Vestager as the worst person he’s met.

Despite infuriating Trump, Vestager and other EU officials this week published a new digital strategy which will rein in Silicon Valley. The new strategy will focus on fair competition, digital protection for individuals and sustainability. Fair competition will mean opening up high quality data, which are currently hogged by big tech, effectively allowing tech start-ups compete on a level playing field.

News Update 14th February 2020

 Sajid Javid succumbs to Johnson’s power grab

This week we saw an unexpected change in Downing Street, when the chancellor decided he would rather go through the hassle of moving house than put up with the Prime Minister and his aides trying to take control of the Treasury. Boris Johnson and his advisers have taken an unprecedented step of trying to have complete control of all government departments firmly in Number 10. The one small mercy for Mr Javid is at least he won’t have to go through conveyancing.

While direct control will no doubt be more efficient, as the hidden agendas and power struggles that characterise Westminster will be swept away, we are all aware that good governance requires challenge and oversight. With no one at the cabinet table likely to tell the boss he’s had a terrible idea, the more likely it is a bunch of terrible ideas are about to become policy. Given some of the policies that have made it out of even the most independently minded cabinets, maybe their insights won’t be missed that much.

US: Jobs report gives the economy a positive  start to the year

The pace of hiring within the US kept up its run last month as employers added another 225,000 jobs to the economy – easily beating economic forecasts of 164,000 jobs. Notable job gains occurred in construction, transportation, warehousing and healthcare. Unemployment rates continued to remain low at 3.6 per cent. All this will be pleasing news for President Trump who has made a burgeoning economy a key point in his re-election campaign.

Speaking of election campaigns, the Democratic nominations shook off the technical debacle last week to move onto the second contest in New Hampshire. Results saw Bernie Sanders, Pete Buttigieg and Amy Klobuchar do well while the wheels fell off for early favourites Joe Biden and Elizabeth Warren. While Sanders has performed well in the early states, Iowa and New Hampshire are not very representative of the country and even less representative of Democratic voters. Biden will be hoping to come back in more diverse states like Nevada and South Carolina which are up next.

GERMANY: Coronavirus puts economic growth into quarantine

The tender green shoots of recovery for Germany are at significant risk of getting trampled on by the Coronavirus. Germany, a key economy for the Eurozone, flirted with recession last quarter and the final figures released this week showed a country in stagnation. But its reliance on exports to China make it vulnerable to the sudden stop in activity seen as part of the efforts to combat the virus. This could tip Germany’s, and possibly the Eurozone’s GDP growth negative for the quarter.

For Germany, industrial output was down 3.5 per cent for the month of December while new orders slowed by two per cent. Vehicles are Germany’s biggest export thus global supply chain disruptions alongside the disruption to China could have a strong material impact on GDP growth. For the wider eurozone, sharp drops in factory output for France, Italy and Germany helped drag down industrial production to 2.1 per cent.

EMERGING MARKETS: Cutting season continues

Mexico joined a list of emerging economies in easing monetary policy this year. The nation cut interest rates four times last year, each time by a quarter basis point and the central bank continued the trend at the latest meeting this week. Rates now stand at seven percent.

By cutting rates, Mexico hopes to boost a moribund economy which last year contracted for the first time in a decade. Uncertainty around the free trade agreement and manufacturing weakness were two of the key reasons why the economy struggled last year.

However, early indicators (pre-coronavirus) all tilt towards positive growth this year. Consumer confidence is improving, core inflation remains stable and vehicle production, which is Mexico’s key export, increased in January.