Reindeer, Gorillas & Unicorns

Christmas Day is just around the corner and you will hopefully be leaving out a drink for Santa and carrots for his reindeer.

With the festive season finally here, retailers have revealed the top selling toys. The biggest seller this Christmas appears to be unicorns! This could well be due to the success of the 3D computer-animated comedy film series Despicable Me. Why is a unicorn special? Well, ‘it’s so fluffy’.

‘Despicable Me’ could be used to describe a number of world leaders and politicians in 2017. Management teams and fund managers have certainly had a lot to cope with in 2017 from Brexit and Trump, to North Korea and Middle East tensions. 2017 has also seen continued rapid technological change driven by the internet and growth of social media. Many business models have fared well with the pickup in the global economy however some of the new disruptive internet technology businesses have really started to shake up some traditional industries. For example, think about taxis and Uber or holiday accommodation and Airbnb. Some internet businesses founded in recent years are now larger than many global businesses that were founded over a hundred years ago. The world is full of new internet gorillas with the likes of Amazon, Alphabet, Apple, Tencent and Alibaba. 2017 has also seen the internet phenomenon Bitcoin and the growth of state sponsored cybercrime.

Besides gorillas, 2017 has seen the rise of unicorns. These are internet start-up businesses that have grown in a short period of time from nothing to a market value of over $1bn. If 2017 was the year of gorillas and unicorns what about 2018? Well, with the exception of Japan, global central bankers are starting to unwind years of stimulus. Given this fact, is 2018 the year we eventually see one of the stimulus driven speculative asset bubbles burst?

What have we been watching?

Both PM Theresa May and President Donald Trump received a bloody nose last week. The UK Government lost a vote by a narrow margin in the House of Commons that makes it more likely the final Brexit deal will have to be approved by Parliament. In the US, while Donald Trump is within reach of his first legislative victory, he has seen the Republican majority in the Senate cut to a wafer- thin margin after a special election in Alabama. Otherwise, the US Fed increased interest rates as expected but there was a surprise, small increase in borrowing costs by the authorities in China.

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The EU has agreed to move Brexit talks onto the second phase. The UK appears to have accepted that the onus is on it to come up with a solution to the Irish border issue. How PM Theresa May can do this without losing the support of the DUP remains to be seen.  In the meantime, PM Theresa May’s first defeat, with the failure to pass the EU Withdrawal Bill, will complicate the Brexit process but increases the chances of a ‘soft Brexit’ although how this fairs with ‘hard Brexiteers’ within the Conservative party also remains to be seen.

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In the UK, Bank of England (BoE) governor Mark Carney will no doubt send Chancellor Philip Hammond a Christmas card but he will also have to send a letter explaining how he intends to bring inflation back towards the 2% target. Inflation had been expected to peak by November but in December CPI hit 3.1% with airfares contributing to the increase. Food inflation hit a four-year high. The Land Registry/Office of National Statistics reported a 0.5% dip in UK house prices in October, compared to 2016. The EY ITEM Club however, forecasts that house prices could rise by between 2%-3% in 2018.   Unemployment dropped to its lowest level since 1975 but wage growth at 2.3% remains well behind inflation, which is likely to continue to dampen consumer spending. Energy bills are also likely to head higher for reasons we highlight below. The Bank of England latest report signalled more hikes ahead but offered no real clues as to when.

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In Europe, there was no fresh news on coalition government talks in Germany. However, in Italy, media reports suggested a general election was likely to be held in March 4^th and that the country’s president could dissolve parliament straight after Christmas. The European Central Bank (ECB) revised it growth and inflation outlook. The ECB now expects economic growth of 2.4% for 2017, 2.3% in 2018, 1.9% in 2019 and 1.7% in 2020. Inflation over the same period is expected to dip from 1.5% to 1.4% before rising to 1.7% by 2020. December ‘flash’ manufacturing data for the eurozone was very positive.

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In the USA, pipeline inflation pressures appear to be building with core producer price inflation of 2.4%. The Fed increased interest rates by 0.25% as expected but left its forecast for core inflation unchanged at 1.9% in 2018 and 2% in 2019 suggesting that three more interest rate hikes are possible next year.  Meanwhile, President Trump is within reach of his first big legislative victory as US Congress prepares to pass his tax reform bill. Republicans appear to have enough votes to pass the bill this week despite opposition from Democrats.  However, Trump also suffered a setback last week when Democrat Douglas Jones scored an upset in Alabama, a deeply Republican state, capturing the US Senate seat in a special election. This will cut the Republican Senate majority to a thin margin of 51-49, so it only requires one dissenter in future for legislation to fail. Douglas Jones takes office on January 3^rd so should not affect this week’s tax vote.

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Bank lending in China grew by 9% in November. China’s central bank has slightly increased the borrowing costs it charges in open market operations, a sign the authorities are determined to control excess debt and risk taking.

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Brent oil briefly touched a new high of $65 on news of the shutdown for about three weeks of the Forties pipeline after a crack was discovered. The pipeline carries about 40% of North Sea oil production. Meanwhile, wholesale gas prices for same day delivery to the UK in January increased by 20% to the highest level in four -years after an explosion at a key gas distribution hub in Austria. Oil prices subsequently edged lower however, on news of higher gasoline stockpiles while OPEC increased its forecast for non-OPEC oil supplies in 2018. The International Energy Agency has also increased its forecast for US shale oil output.

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Finally, spare a thought this Christmas for those Bitcoin owners who have forgotten, mislaid or had stolen, the password to their digital wallet. Some $55bn is estimated to have been lost this way. Bitcoin is not regulated and neither does it have a customer service department.

Alpha Bites is going to take a well-earned break over Christmas but will be back in early 2018. Until then, here’s wishing all our readers a Merry Christmas and happy New Year!

 

Read Last Week’s Alpha Bites – 50,000 Shades of Debt

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.