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WEEKLY MARKET ROUND-UP – 16/12/19

Tories secure largest majority since 1987

By this morning, the Conservative Party under Boris Johnson’s bombastic leadership had secured a comfortable parliamentary majority winning 364 seats in last night’s general election compared to just 202 for Labour. With 60 lost seats, this represents the worst Labour election showing since 1935.

The news saw sterling hit an 18-month high against the dollar this morning and sent UK stocks higher amid huge trading volumes.

The result was most warmly welcomed by smaller, more domestically-focused stocks with the FTSE 250 hitting an all-time high. Boris Johnson and girlfriend Carrie Symonds arrive at 10 Downing Street after the Conservative victory. Credit: news.sky.com It added close to 5% in early trading. Both the FTSE 100 and All-Share indices had gained more than 2% by 10am, led by gains from the UK’s banks, utilities and telecom stocks.

Blue Friday

As Quilter Investors portfolio manager Paul Craig observes, “Politics aside, this is the ‘least-worst’ outcome for UK investors. The big winners so far have been companies like BT and the utilities that were threatened with nationalisation under Mr Corbyn’s warmedover 70s socialist agenda.

“In the Cirilium portfolios we were deliberately underweight in the UK, however, our strong skew toward UK domestic stocks should compensate for this nicely. Because we hedge the currency exposure on our fixedincome holdings we’re also well placed to deal with the spike in sterling strength.

“Taken with Mr Trump’s conspicuously well-timed new conciliatory stance toward tariffs, this is a double-dose of good news for markets. This looks like being a much better Christmas for investors than last year and should be a real boost for active managers.”

Drax turns negative on carbon outlook

The UK energy company Drax plans to become carbon-negative – where it captures more carbon than it produces – by the end of the next decade.

Drax generates 5% of the UK’s electricity and runs the largest power station in the country in North Yorkshire, which used to run exclusively on coal. In recent years it’s converted four of its six burn units to run on renewable biomass in the form of wood pellets.

Drax said extending carbon-capture technology to two of its units by 2030 will remove eight million tonnes of carbon dioxide from the atmosphere each year.

However, it currently receives government subsidies of c£2m a day to fund the transformation but it has yet to secure further subsidies to allow it to meet its target.

Poll vaulting

Sterling edged to a two-and-a-half year high against the euro on Tuesday (10 December) as the election polls appeared to suggest a Conservative Party majority in Thursday’s election.

The move higher was particularly striking given the latest GDP figures for the UK showed that in October the economy grew at its slowest annual pace in almost seven years at just 0.7%. The figures showed industrial output fell 0.7% in the three months to October while manufacturing contracted 0.3% although services grew by 0.2%.

Normally this would weigh on the currency, however, investor sentiment appears to have been buoyed by the suggestion that a Conservative majority would end the political uncertainty by securing Parliamentary approval for Brexit by the 31 January deadline.

Roof falls in on UK property funds

Last week saw the M&G Property Portfolio and its Prudential feeder funds being forced to ‘gate’ investor withdrawals. Following 2019 redemptions of c£1.5bn and losses in the retail portion of its portfolio, M&G shuttered the fund for the second time in three years.

As Quilter Investors assistant portfolio manager CJ Cowan explains, “This is a reprise of the squeeze on the sector in 2016, which resulted from the mismatch between funds that offer daily liquidity, but which invest in illiquid assets.

“Fortunately, the industry has made great strides to address this issue and cash buffers are now much higher. We think the risk of contagion is also more muted than in 2016 as most of the ‘hot money’ has left these funds leaving behind longer-term investors who better understand the risks involved.”

Dog walking app is put down

SoftBank is reportedly selling its 50% stake in Wag, a dog-walking app, and giving up two seats on the board in the latest setback for its Vision Fund.

In January 2018 Softbank agreed to pay $300m for a 50% stake in the US-based business, which matches dog owners with nearby walkers. The deal valued Wag at around $550m, however, it has since struggled to compete in its market and reports suggest SoftBank agreed to sell its stake back to the company at a loss.

This is the latest disappointment for the Vision Fund, which took a $4.6bn hit from WeWork’s failed IPO earlier this year. It’s also invested heavily in Uber, which has so far failed to live up to expectations after its flotation in May this year.

No cure for cancer (yet)

Monday (8 December) saw two giants of the pharmaceutical world, Merck and Sanofi, lavishing huge sums on tiny drug developers thought to be leaders in their field. Merck’s $2.7bn offer for ArQule was twice the latter’s valuation on Friday while, Sanofi’s $2.5bn bid for Synthorx was almost three times its value, even after the shares surged 40% last week.

The deals are the latest moves by ‘big pharma’ to capture a greater share of the lucrative cancer treatment market. Merck’s chief cancer offering, Keytruda, already generates $3bn a quarter but this year it also snapped up Peloton Therapeutics ($1bn) and Tilos Therapeutics ($773m).

So far in 2019, Eli Lilly has spent $8bn on Loxo Oncology, Pfizer has paid $10.6bn for Array Biopharma, GlaxoSmithKline has parted with $5.1bn for Tesaro and Astellas Pharma agreed to pay c$3bn for Audentes Therapeutics.

Chart of the week

Slowing growth: The OECD slashed its growth forecast for 2019 in its latest World Economic Outlook, as it cited trade tensions, weak business investment and political uncertainties as key inhibitors to global economic growth.

If any article in this market update has an effect on your finances and you would like professional advice, then please get in touch.

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