The Weekly - The rise of electronic currency

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01/10/2019
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The power of the internet and more specifically, social media, continues to influence all of our lives, often without us even realising it. YouTube stars are appearing more and more as celebrities on reality TV shows alongside the traditional retired athletes, TV presenters and politicians, as producers attempt to draw a younger viewing audience. Most of us over the age of 40 will never have heard of most Youtubers but some are millionaires at the age of 20 and as a result, are already starting to appear as clients for wealth managers

The marketing industry has had to evolve dramatically as traditional visual strategies involving billboards, newspapers and terrestrial TV have been replaced by the virtual world. Now marketing is more portable and accessible on smartphone screens where WhatsApp, Facebook, Netflix, YouTube and Instagram have control over the user database, and the displayed adverts are allocated to the highest bidders. A Youtuber with several million followers who can influence fashion from footwear to accessories, is in a very powerful position, hence the wealth. This is the domain of Generation Z, a generation with which most readers will not identify, being those born between the mid-1990s and early 2000s and who have never known a world without smartphones and the internet.

Slowly but surely the world is changing to adopt e-commerce, and businesses are having to adapt with it or run the risk of failing behind. This couldn’t be more apparent than on the high street, with the rise of Amazon to the cost of traditional bricks and mortar businesses. We are also seeing this with banking and increasingly the demise of cash, where the smart debit card and PayPal are taking over. We have all heard of Bitcoin and many people will have been spooked by the fraudulent scare stories. However, the principle behind it is sound, whereby an individual’s bank account doesn’t need to be administered by a bank anymore and can be replaced by an electronic cryptocurrency wallet in cyberspace, accessed via a smartphone. This is where Facebook is going with its Libra initiative, which has attracted the attention of regulators. Walmart is doing the same with Stablecoin, which works on the same principle. As a user, you transfer US Dollars to your cryptocurrency account and the funds are then available to spend via Facebook, as many of us access online retailers via the Facebook app.

This is a short step away from having your salary paid into a non-bank account which automatically credits the accounts where you do spend your money, whether that be Apple Pay, PayPal or some other payment intermediary, which is after all, the main thing that most of us use banks for. Banks are a transaction administrator between our employer and where we spend our income. Facebook has said that its main motivation is to reach the world’s unbanked and the underbanked. Amazon will be next undoubtedly because if it doesn’t support cryptocurrency payments, it stands to lose a significant e-commerce opportunity. This all serves to eliminate the banking intermediary business where charges are incurred for the privilege of depositing cash and the administration of your purchases. BACS transfers still take three working days and money is made on deposits over these periods as well as on your account balance. The same goes for debit and credit cards which often charge the retailer up to 2.5% for the costs of transaction processing. Of course, ultimately, it is the consumer that pays. Cut out the credit and debit cards, which means no plastic in your wallet, and there you have it, an electronic payment world without currency fluctuations or delay, just as if you carried your bank balance around in a suitcase which you opened up every time you pay for something; the suitcase being your smartphone.

As investors we have to be alert to this but it is yet another example of the internet moving market power away from business towards the consumer, while corporations that do not adapt will not be able to compete. The simple process of paying for drinks at a bar has transformed to waving a payment card, with cash redundant. There is no reason why this shouldn’t transform again to waving your phone – we all have one which we gaze at many times a day. Losing it is no different to losing your wallet or purse but in fact, most have their phone about their person more often than their wallet or purse. Any parent can testify to the catastrophe that occurs should a teenage offspring lose or break their phone. We can only imagine the furore that must occur for a career YouTuber!

The internet is undoubtedly a force for good in terms of shifting power to the consumer, intensifying competition and driving down prices which naturally fall to the lowest cost producer viz-a-viz Amazon. There are also threats which need to be controlled such as content abuse, trolling and electoral interference but this will surely come as regulation catches up. More importantly, social media has become the scourge of the political elite where their every move, word or deed goes viral, to be exploited by their opponents. Democracy has been transformed and the news media along with it, where the headlines are dominated by the actions of our leaders, literally by the hour. This introduces an infinite amount of noise into the investor environment where it is very easy to become distracted by the political agenda.

 

UK equities rise on hopes for lower interest rates

The FTSE 100 made late-week gains whilst other major markets were falling last week as a Bank of England (BoE) policymaker pointed to the possibility of lower rates going forward. The UK large-cap index made a weekly gain of +1.1%, climbing to 7,426 at Fridays close.

BoE member Michael Saunders, considered one of the more hawkish members, said that the central bank might still consider lowering rates even if a Brexit deal is reached. Sterling dropped on the news, culminating in a weekly loss of -1.4% against the US Dollar and -0.8% against the Euro. This ended a run of three consecutive weeks in which the Pound rallied against both currencies on the back of a perceived lower probability of a hard ‘no-deal’ Brexit. The UK base rate currently sits at 0.75%.

US markets lost ground, the S&P 500 slipping to a weekly loss of -1.0% in the face of mixed signals on the Trump/China trade dispute as well as some downbeat economic data. Volatility, as measured by the Chicago Board Options Exchange Volatility Index, known as the ‘VIX’, rose 3.60 to 16.15. Chinese negotiators are due to travel to Washington on October 10th to resume high-level trade talks amid speculation the two parties may announce a further postponement of previously scheduled tariff hikes.

European markets recovered some ground on Thursday and Friday but were ultimately unable to avoid closing the week in the red; the German DAX 30 down -0.4% and the French CAC 40 succumbing to a -0.9% loss. The European Central Bank’s (ECB) recent decision to cut rates and reintroduce quantitative easing led to the resignation of committee member Sabine Lautenschlager on Wednesday, in protest at the policy. This is not the first time this has happened as another German ECB member, Juergen Stark, did the same in 2011 following the launch of the bank’s €80bn per month programme.

On the back of recent volatility, the price of a barrel of Brent Crude oil slipped -3.2% to $61.59 whilst the US West Texas Intermediate fell by a similar margin to $56.57 per barrel at Friday’s close, as Saudi oil production came back on line.

 

The week ahead

The latest round of production indices (PMIs) from the UK are released this week with the manufacturing sector forecast to have remained firmly in contractionary territory during September. If proven accurate, it will be the fifth consecutive month of declining output reported by the sector. The services sector is expected to show modest growth once again, albeit remaining on a downwards trend.

In the US, September’s Labour Market Report is due on Friday with unemployment expected to have held firm at 3.7%. Payrolls are forecast to have shown growth of 140,000 new jobs, broadly in line with the level reported in August whilst wage growth is also expected to have remained healthy. Meanwhile, the Institute for Supply Management releases its PMI equivalents with the manufacturing sector expected to post a return to growth after falling below the 50.0 mark last time.

PMIs are also amongst the more notable publications from both the Eurozone and China this week. Eurozone unemployment data has already been released this week with the headline rate dropping to 7.5%, the lowest for more than a decade. Meanwhile, it’s a busy week for Japanese data with industrial production, retail sales and unemployment all released over the next couple of days.

 

The value of an investment with Rowan Dartington may fall as well as rise. You may get back less than the amount invested.

Past performance is not indicative of future performance. Currency movements may also affect the value of investments.

Source: FE Analytics (information is correct as at 30th September 2019)

Source: FTSE International Limited ("FTSE") © FTSE 2019. "FTSE ®" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

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The information contained does not constitute investment advice. It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Full advice should be taken to evaluate the risks, consequences and suitability of any prospective investment. Opinions provided are subject to change in the future as they may be influenced by changes in regulation or market conditions. Where the opinions of third parties are offered, these may not necessarily reflect those of Rowan Dartington.