Weekly Market Commentary: 30th August 2019

Boris Moves to Suspend Parliament

As we march towards the Brexit deadline, Prime Minister Boris Johnson has decided to play his hand and take an unprecedented step by attempting to suspend parliament for five weeks. Much like in football when a team holds the ball close to the corner flag, Boris Johnson is simply running down the clock. By muzzling Parliament, he is either confident that the opposition is weak enough not to oust him and form a replacement government, or if they do, he will play the role of the conductor, championing the will of the people in the ensuing general election.

While proroguing parliament until 14th October shows shades of despotism, it also sends a message to the EU to either accept his deal or progress to a no-deal divorce. In the meantime, the opposition will have to come up with an effective strategy to stop Boris’s plan. It’s now close to two and half years since Article 50 was triggered and next week looks like the only opportunity to challenge a No-Deal Brexit.

US: Equity or Bond Market for income seekers?

This week the relationship between US bonds and equities turned on its head. For the first time since the financial crisis of 2007/08, income from US dividend paying stocks is higher than long-dated government debt. Dividend yield for the S&P 500 stood at 1.98 per cent marginally greater than the 30-year US Treasuries (1.94 per cent). This indicates investors looking for a steady income stream may be better off looking towards the US equity market.

However, companies will look to grow their dividends annually and will struggle to cut them even in bad times as that would be a signal to the market that the company is in trouble. This factor along with recession fears fuelled by global uncertainty may make companies susceptible to big swings in share price, in turn proving troublesome for investors who made the switch from US treasuries into equities.

M&A: Investors unhappy with Altria and Philip Morris Merger Talks

Over a decade ago Altria spun off Philip Morris [PMI]. Altria focused on improving sales in America while PMI targeted overseas markets. However, both companies were caught out by tightening regulations on tobacco, subsequently having to raise prices and trim costs in order to remain profitable. Given that PMI’s rival, British American Tobacco, became the largest publicly traded tobacco company three years following its acquisition of Reynold America, a merger between PMI and Altria would help both companies keep up amidst intense competition.

However, the planned merger, which would create the world’s largest tobacco company wasn’t well received by investors – and the devil is in the details. A ‘merger of equals’ approach could see a potential ‘take under’ for Altria. PMI has been outperforming Altria driven by its international exposure. An additional concern is Altria’s heavy investment into e-cigarette company Juul, whose popularity with young people increases the risk of PMI getting burnt by a regulatory crackdown on tobacco alternatives.

Healthcare: Johnson & Jonhson ordered to pay for Opiod Crisis

This week, drug making company Johnson & Johnson has been ordered to pay £468m for its role in adding to Oklahoma’s opioid addiction crisis. As this is the first case to
go to trial, it could open the floodgates for similar rulings on other opioid makers and distribution companies. Opioids were involved in almost 400,000 overdose deaths in the US from 1999 to 2017 and since 2002, 6000 people have died in Oklahoma alone. (Data and chart source: National Institute for Drug Abuse)

Judge Thad Balkman ruled that Johnson & Johnson bore responsibility for its part in creating the worst recorded drug epidemic in US history by pushing false claims about the safety of its range of narcotic painkillers. Surprisingly, the share price for the company went up five per cent after the ruling. Investors had feared that the cost would be much higher as the state of Oklahoma had asked for a $17bn fine.

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