Market Views: Multi-Asset
Market movers: April's charts of the month
Aluminium spikes on Russian sanctions
The announcement of fresh US sanctions on Russia triggered a sharp rally in the London Metal Exchange (LME) spot aluminium price in early April.
Rusal was among those included in the sanctions. This is an oligarch-controlled company that accounts for around 6% of global aluminium production and 6% of the global supply of alumina; the raw material extracted from bauxite that is smelted to produce the metal.
With many global companies forced to stop doing business with Rusal, this led to concerns over supply chain disruption for global aluminium producers, and manufacturers of products that use aluminium. Industries including can makers, car manufacturers and aerospace companies were all facing increased costs.
As the spillover effects of the sanctions unfolded, political pressure on the US, notably from European allies, increased. Towards the end of April the US Treasury subsequently extended the time limit for sanctions compliance with Rusal by five months to October. It also opened the door to easing sanctions against the company, should its oligarch owner sell his stake.
The net effect was to reduce supply risks, in turn alleviating upward pressure on aluminium prices, as highlighted in the chart below.
Americans underprepared for retirement
My colleague Duncan Lamont drew my attention to the rather alarming chart below produced last week by the Federal Reserve Bank of St Louis.
It plots retirement balances by percentile of US households. It shows that the median household in the US has a mere $1,100 in retirement account savings. Even the 70th percentile of households has only around $40,000. The leap to the 90th percentile is dramatic, with about $310,000 in savings for those households, reflecting perhaps the wealth inequality prevalent in the country. More information can be found at the St Louis Fed website here.
Getting a measure of the M&A market
With its finger on the pulse of boardroom sentiment, Ernst & Young’s latest Global Capital Confidence Barometer suggests a buoyant merger and acquisition (M&A) market may have further to run.
Based on a survey of global executives, 86% of respondents expect M&A activity to improve over the next 12 months, versus 57% at the time of the previous survey. The report says optimism around the global economy is driving this expansionary mood, with 99% of executives seeing the world economic growth outlook as stable or improving.
Business leaders appear not to have been dissuaded from M&A by increased geopolitical uncertainty, with two-thirds anticipating they will complete more deals in the next 12 months compared to the prior 12-month period.
Capital expenditure (capex) – the amount a company invests in equipment and manufacturing plants – has been weak or even falling since 2012.
As shown in the chart below, there are signs that capex is on the rise again. Analysts at Schroders believe that stable GDP growth – particularly in the US – should see the trend continue in a number of sectors through 2018.
Companies increasing their capex may in the short-term see returns to shareholders drop or plateau, as capex takes priority over dividends. On the other hand, the companies who build the new plants, re-tool the factories, and produce the new equipment or robotics should be the short-term beneficiaries as spending picks up.
This is a topic we’ll be looking at in greater depth in an article next week.
Weak growth may make May UK rate hike unlikely
GDP figures for Q1 2018 show the UK economy grew just 0.1% compared to the final quarter of 2017. This represents the slowest quarterly growth rate since Q4 2012. The recent wintry weather was partly to blame as it took its toll on the construction sector, which fell 3.3% and was the biggest drag on growth. However, the Office for National Statistics, who produces the data, said that overall the effects of the snow were “generally small, with very little impact observed in other areas of the economy”.
Some in the market had been expecting the Bank of England to raise interest rates in May, but that prospect has receded sharply following the weak growth data.
Azad Zangana, Senior European Economist and Strategist at Schroders, continues to forecast a 25 basis points hike in November, with two more in 2019.
Other countries also experienced a slowdown in growth in Q1. France’s economy expanded by 0.3% compared to 0.7% in the final quarter of 2017. US GDP growth slowed to 2.3% annualised after 2.9% in Q4 2017.
Supermarket merger catches shorts on the hop
Remaining in the UK, the tie-up between two of the country’s best-known supermarket brands, J Sainsbury’s and Asda, caught most people by surprise, not least a number of leading hedge fund firms.
Data tracking the level of short-selling in UK companies showed that ahead of the merger announcement, Sainsbury’s was one of the top-10 most shorted UK stocks.
The chart below came from data from shorttracker.co.uk’s Short Interest Tracker, which shows details of all short positions in UK-listed companies that have been disclosed under the FCA's Short Selling Regulations.
Short-selling involves a fund looking to profit from a decline in the share price, by borrowing and selling shares with the aim of buying them back later at a lower price.
Mergers and acquisition announcements are a key risk to short-sellers, since they are liable to precipitate sharp and fast upward moves in share prices. Indeed, Sainsbury’s shares rose over 15% following the Asda merger announcement on the final day of April.