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Week in review: Pigs in muck

As China’s Year of the Pig arrived this week, investors were glad to say farewell to the year of the dog. Although equities in the UK and Japan remained “high on the hog” during the week, stock indices in other markets succumbed to a styful of familiar economic and political woes.

In the U.S., President Donald Trump’s State of the Union address did little to heal the divide that caused last month’s prolonged government shutdown. Although the president appealed for unity, he condemned “ridiculous partisan investigations” and renewed his call for a Mexican border wall. He also pledged to send 3,750 additional U.S. troops to the border. Furthermore, the president announced a new summit with North Korean leader Kim Jong-un in Vietnam toward the end of this month. Investors showed little reaction to the address but instead focused on corporate earnings–which were mixed–and the S&P 500 was fractionally down by Thursday’s close.

Disney brings home the bacon

Among the most eye-catching results were those from Walt Disney, which exceeded expectations by a substantial margin. Investors were particularly excited by the inclusion of a new results line for “direct to consumer and international”. This heralds the company’s forthcoming streaming service, which will be launched later this year to challenge competitors such as Netflix. Although the shares initially rose sharply following the announcement, a sell-off on Thursday erased the gains.

More concerning, in our view, were the fourth-quarter 2018 results posted by Alphabet, the parent company of Google. Although Alphabet beat analysts’ expectations for its revenue and earnings per share, investors were concerned with the scale of its capital expenditures in 2018—roughly US$25 billion. Alphabet’s share price slid in response.

Tusks bared

With the Article 501 deadline drawing ever closer, there was no end in sight to the Brexit deadlock. Nor was rhetoric toned down as UK Prime Minister Theresa May sought to sweeten her deal through negotiations with European Union officials. According to Donald Tusk, the president of the European Commission, there is a “special place in hell for those who promoted Brexit without even a sketch of a plan of how to carry it out safely."

Although Mr. Tusk emphasized that the Withdrawal Agreement was not up for negotiation, this didn’t seem to alarm investors in the UK. The FTSE 100 Index2 was up 1.0% by Thursday’s close. Despite mood music being pessimistic in Brussels and Dublin, it is interesting to note that sterling barely budged—a hard Brexit is certainly not reflected in this price. Banks, however, have been preparing for the worst. This week, UBS was cleared to move €36.5 billion (about US$41.4 billion) of its assets from the UK to Germany in response to the “external shock of Brexit.” Barclays has already received similar dispensation to move business to Dublin.

Bristling like boars

Some might say that the UK has made a “pig’s breakfast” of Brexit. But even putting that aside, we’re hardly living through a golden age of European diplomacy. This week, relations between France and Italy took a sharp turn for the worse. The spat came after Luigi di Maio, Italy’s deputy prime minister and the leader of the Five Star Movement, met gilets jaunes (“yellow vest”)3 protesters in France. The meeting followed the French Parliament’s enactment of a law to curb the protests and caused a furious reaction from President Emmanuel Macron’s government. France recalled its ambassador from Rome, saying that hostile remarks from Italy’s leaders were “without precedent since World War Two.”

European investors were unimpressed by the quarrel. The FTSE World Europe ex UK Index4 had lost 0.2% by Thursday’s close. Gloomy economic data didn’t help. German factory orders were reported to have fallen by 1.6% in December, contributing to a larger-than-expected annual decline of 7%.

Pigging out

In China, markets were closed this week. While Chinese investors celebrated the Year of the Pig with dumplings and firecrackers, their Japanese counterparts also were in a cheerful mood. Despite continuing worries over the U.S.¬–China trade war, the Tokyo Stock Price Index (TOPIX)5 made a reasonable start to the Lunar New Year, gaining 0.3%.

And finally …

It’s not only people who’ve been celebrating the Chinese New Year. In Hong Kong, wild boars also appear to be reveling in the occasion. The snouted scavengers are an increasingly common sight in the densely populated territory, drawn by the detritus on its streets. While some welcome the animals as a good omen in the Year of the Pig, others have more concrete concerns—such as the dangers posed by 200-pound animals with razor-sharp tusks.

Nor is this porcine phenomenon confined to Hong Kong. Thanks to the opportunities afforded by infrequent rubbish collection, wild pigs have become a regular feature on the streets of Rome, too. Denmark is now building a 26-mile fence along its border with Germany to keep wild boar away from its pig farm—an altogether less controversial border barrier than Donald Trump’s wall.

1 Article 50 is a clause in the European Union's Lisbon Treaty that outlines the steps to be taken by a country seeking to leave the bloc voluntarily.

2 The FTSE 100 Index is a market capitalization-weighted index of the 100 largest companies traded on the London Stock Exchange. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.

3 The yellow vest movement is a populist, grassroots political movement advocating economic justice that began in France in 2018.

4 The FTSE World Europe ex UK Index tracks the performance of large- and mid-cap stocks in developed markets in Europe, excluding the UK.

5 The Tokyo Stock Price Index (TOPIX) is a capitalization–weighted index of large and mid‐sized companies listed on the Tokyo Stock Exchange.

Companies are mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.

International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods; these risks are generally heightened for emerging market investments. Stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies.

ID: US-080219-82462-1