Weekly Market Commentary – 8th November 2019

US Election 2020: Don’t Trust the Polls just yet
This week while the UK election got off to a blundering start, with a series of gaffs and candidate resignations, the US election is gaining momentum despite being a full year away. New polling showing Donald Trump losing to all major Democratic candidates caused a great deal of excitement, with even normally sensible fund managers we talk to actively discussing how they think future president Warren will impact their portfolios. The peculiarities of the US electoral system means national polls are much less relevant than we may think.

The 2016 election was decided by 4 states and just 77,000 voters. Among this group, president Trump remains more popular. It is also extremely early to be considering potential matchups against Trump despite the media attention; Warren has had a good run in the polls vs. front runner, former vice president Joe Biden, but at this point in the 2007 Democratic primary most opinion polls had Hillary Clinton as heavy favourite over Barack Obama. A lot will change once primary voting begins in Iowa in February.

UK: Brexit Uncertainty Hampers Service Growth
The latest soft data for the UK showed activity for the dominant service sector practically static, rising from 49.5 points in September to 50, a level where the sector is neither contracting or growing. Business levels were supported by existing contracts, but with fewer service contracts coming in and existing backlogs starting to dwindle, there is real concern that the sector could remain stagnant for a while longer. Meanwhile, manufacturing and in particular construction, (which forms the remainder of the PMI composite) remains in contraction.

According to Markit, new service work has declined seven times in the first ten months of 2019. In turn, workforce numbers continue to fall as firm’s lower headcount to deal with the drop-in demand. However, the outlook for the sector is slowly improving albeit from historically low levels. Political uncertainty has been the foremost concern, and there is hope this could be reduced if Brexit is resolved in early-2020.

Oil: OPEC Struggle to cope with US Shale oil rise
OPEC, an intergovernmental organization that controls a meaningful portion of the world’s oil supply, this week announced that its mulling further cuts. The US is now the world’s largest oil producer due to rising output from shale oil as the process of hydraulic fracturing (“fracking”), becomes ever more refined. This oversupply means that OPEC’s slice of the global oil pie is expected to shrink from 37 to 31 per cent by 2024.

The glut in oil also means that the price continues to hover at low levels, great for consumers but a headache for OPEC members, the majority who rely on oil revenues to cover their national spending. OPEC and its allies have lowered supply this year in order to boost the current price of oil which has been holding at around $60 dollars per barrel. But with US oil output expected to increase by 40 per cent over the next six years, the cartel’s current strategy of continual cuts may end up backfiring in the long term.

Retail: Mothercare falls into Administration
This week, Mothercare became the latest high-profile casualty on the high street, appointing administrators to wind down the business after it became clear that its journey to profitability was never going to reach a conclusion. 79 shops are expected to close, putting 2,500 jobs at risk. Mothercare’s highly profitable international business will not be included in the administration. The 58-year old company joins the likes of Bonmarche, Toy ‘R’ Us, Maplin and HMV in the list of retailers who have succumbed to administration since 2018.

Mothercare has struggled to cope with both the consumer rotation to ecommerce and intense competition from supermarkets who have muscled in to Mothercare’s niche, often offering cheaper alternatives. Factor in consistently high overheads its more surprising that retailer, who has only had two years of positive earnings (before tax) since 2013, lasted so long.

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