This week, it’s January through to June 2017. Next week, I’ll look at the second half of what’s been an exciting, unexpected and, at times, quite bizarre year.
It’s a bit of a bumper edition this week: now that we’re comfortably into December, the last two newsletters of the year are going to round up 2017. Obviously this is not a comprehensive guide to the year, but I’ve tried to capture a handful of the news items that were important to economies, investors and consumers, and will likely continue to be so.
Donald Trump was sworn in as the 45th President of the United States. There’s plenty to talk about here, but I wanted to pause on stock markets. Trump, perhaps more than other presidents, has enjoyed taking credit for driving markets while in power. And it has been a bumper year for investors, with world stocks rising 20 percent, global growth at its strongest since 2010 and market volatility at the lowest on record.
This week, the Dow hit a record high on the news that the Senate has approved a tax bill that could see corporate tax drop from 35 percent to 20 percent. Many commentators have argued that Trump’s pro-business stance – slashing red tape and lowering taxes – has emboldened corporates. Don’t forget, though, that Trump is pro-(big)business, not pro-markets. We should expect his protectionism to catch up with not just America but the world. As other countries (India and China were complaining about Trump’s anti-immigration stance just this week) enact countermeasures, don’t expect the goldilocks economy to last forever.
People started talking about digital-only banks. Perhaps it was the fact that Monzo and Atom got celebrities on board (in the forms of Tom Odell and Will.i.am), but it was also the month that the former raised £22m, which allowed it to roll out to customers, and Revolut, which now leads on market share with over 1m customers, launched a UK current account.
Expect at least one of the handful of players in this sector to be bought by a major bank (Atom is already 30 percent owned by Spanish giant BBVA). As one founder said to me the other day, “if I were them, I’d be buying us all now. The alternative is watching the threat to their business get bigger and bigger. Then it’ll be too late.” But how likely is the death of banking as we know it, really?
The world’s largest fund manager turned to robots to stock-pick. In the same month that it agreed to pay George Osborne £650,000, BlackRock cut jobs in actively managed equities, dropped fees and turned to computers to do the job better.
The robo move among managers isn’t actually new – many, including BlackRock, have been using software and data science techniques to improve results for institutional investors for years. But this year, the focus shifted to private investors. Part of this is because larger firms have some catching up to do, with robo-advisors like Nutmeg, MoneyFarm, Wealthify and Scalable Capital offering better deals – often via products like ETFs – to those who have felt priced out of the market in the past. What we haven’t seen yet is robots that can give advice based on your full financial position – which is what financial advice is, regulatorily speaking. Robo-advisors usually offer simplified advice (based on information you’ve given) and restricted advice (making suggestions only from their own product suite).
This week this interesting article was published, arguing that large passive investors owning bigger chunks of the economy could lower competition.
The UK has its first coal-free energy day since the Industrial Revolution. While this story made for a great headline, something renewables still struggle with is cost.
A piece in the FT over the summer looked at the hidden costs passed onto the consumer by renewable power. We know wind and solar add cost to the network – like the need to constrain production at times, or pay producers to not produce for a time in order to balance the system – but it’s hard to put a figure on it. The FT cited research by Gordon Hughes, a former economics professor, who estimates that these costs now amount to £22 per MWh on average. This is at the saturnine end of the estimates, but would mean that the power for which the wholesale energy market paid £38.50 per MWh was actually worth only £16.50 to it. And Hughes believes that, as renewables form a larger part of the system, the balancing costs will magnify to around £80 per MWh for chunks of each year for 10 years. Over the coming year, keep an eye on the rise of hydrogen and fuel cell technology – we still need new ways forward.
Emmanuel Macron wins the French presidential race – which was a defining moment not just for France, but for the European Union. Macron recognises that, in order to survive, the EU needs to complete its intended purpose: fiscal, rather than just political, union across the bloc. He wants member states to create a common Eurozone treasury which would be led by one finance minister.
But will it work? If you have one currency, you need one monetary policy for that area, which also means having the same interest rate. But different economies will need different interest rates depending on their fundamentals at given moments in time. Getting this sort of system to work at scale seems near impossible. Besides, just this week EU finance ministers were raising raising objections to Macron’s plans. Can the sclerotic Brussels move fast enough to save itself, or are we about to witness its demise, with economically beleaguered peripheral nations filing out after the UK?
Brexit in the balance as Theresa May loses her majority. What a disaster! And this week, we’ve been reminded again just how much of a miscalculation the snap general election was for the Tories, with Northern Ireland’s DUP halting Brexit talks between the UK and EU. Between June and today, we’ve had the reemergence of the soft/hard Brexit classification, numerous calls for a second referendum and Labour failing to unify over a Brexit stance.
To my mind, it looks increasingly likely that we’ll exit the EU without a deal. This wouldn’t be a complete disaster because the World Trade Organisation provides a ready-made framework for world trade, which is what most countries across the globe use. Business is not so sure, however, with concerns about rising import costs and the fact WTO rules don’t cover key areas of pan-European cooperation like security and aviation. But for the time being, the UK has a big bargaining chip: the EU needs our money to fill the budget black hole that could emerge once we have left. I’m sure all many of us want for Christmas is a smooth (and cheap) Brexit.
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