Team No Comments

Evergrande a grand problem?

The impending default or restructuring of Evergrande, China’s second-biggest property developer, dominated China’s news last week. Please see below article received from Legal and General yesterday afternoon, which discusses the effects of this on the broader market.

Localised, so far

Evergrande accounts for 6.5% of liabilities in China’s property sector, and its sales make up roughly 10% of all property transactions in the country. Evergrande could therefore pose a systemic risk, but so far stress in the financial sector has been localised. Interbank spreads are not elevated and the renminbi has held up well.

After a string of incidents that have given equity investors concerns about China – such as regulation of tech, education and casinos – its stock market has slipped behind international peers, but over a longer-term perspective it remains close to recent highs.

Evergrande’s problems could still affect the broader economy beyond the financial channel. People are no longer buying off-plan properties from the company; if this feeds through to Evergrande’s building activity, it could leave a noticeable impact on GDP. August property sales and starts were already in contractionary territory, and GDP is under pressure from Covid-19 outbreaks and lockdowns.

We believe the authorities have the levers to steady the ship, however, and will do so soon. This would likely involve a liquidity provision via a reserve requirement ratio (RRR) cut, fine-tuning of property financing policies, and measures to ensure Evergrande can continue its regular operations.

There is a manageable path forward, in our view, but China’s history of managing delicate situations in financial markets is not unblemished, so this remains a risk to watch in the weeks ahead.

Blockages but not stoppages

The release of the Federal Reserve’s Beige Book earlier this month led to discussion about the effects of supply-chain disruptions on corporate earnings. Last week’s Goldman Sachs US Industrials conference was an opportunity to hear directly from the companies in the middle of the supply-chain issues.

Five things caught our eye:

1. Overall, there was a very consistent message across companies. All are dealing with supply-chain challenges, but all are also talking about strong demand and a growing order backlog, which bodes well for 2022.

2. There is no uniform picture of the disruptions across individual companies and sub-sectors. Some are reporting supply-chain issues getting better than they were in the second quarter; others are seeing things deteriorate. It really seems to depend on your very specific sub-sector.

3. Pricing-power optimism is high. That matches the strong pricing-power sentiment evident in other data sources, and suggests most companies think they can pass on higher input costs if needed.

4. Companies did not take the opportunity to guide lower or to issue a profit warning, so they seem confident they can hit third-quarter numbers despite supply-chain issues.

5. There was a muted market reaction to all the supply-chain commentary. Most stocks were down over the week, but that’s not materially different from the wider market. The comments didn’t shock investors, so expectations for the third quarter appear to have largely adjusted.

It’s too early to sound the all-clear on that front, as there are clear blockages, but it seems there are no economy-wide stoppages, which we believe makes for a good start to the traditional ‘profit warning’ season.

Currency market at a standstill

One of our currency traders told us last week that she has been seeing the same spot levels in developed currency markets for months now. It’s not that we love volatility, but there is a lack of action in the currency space. Idea generation is easier when prices are on the move as momentum traders will enforce the trend up to the point where positioning and sentiment become stretched, and a contrarian approach starts to look more promising.

We know volatility is low across financial markets, reflected in the realised volatility of assets and implied volatility in option markets having dropped sharply since the pandemic peak in March last year. But where equity volatility (e.g. the VIX index) and bond volatility (e.g. the MOVE index) have recently moved more sideways, currency volatility in developed markets continues to grind lower (e.g. the CVIX index).

The impact on prices of this low-volatility environment is quite different too. It’s a boon to equity markets, with one market after another reaching new all-time highs; a blessing for credit issuers keeping spreads historically tight; and a godsend to bondholders, with longer-end yields reversing much of the sharp increase from earlier this year despite high inflation prints. Stable spreads and yields may sound dull, but they allow fixed-income investors to continue earning that credit spread and capture the rolldown of longer-dated bonds.

In currencies, things are different. Carry is almost non-existent with interest-rate differentials at a historical bottom, while spot prices have stopped moving. To quantify our trader’s observation, we calculated the average distance between today’s spot price and the six-month trailing average across all 45 developed crosses. That average is just 1%, close to its lowest point over 20 years, which illustrates that developed currency markets are stuck.

We don’t have many active currency positions open and don’t take much risk in this asset class at the moment. It’s tempting to chase smaller and smaller movements, but in our view it wouldn’t be good portfolio management and so we prefer to be patient and wait for bigger opportunities to come.

We will continue to publish relevant content and news as we head into Autumn in the UK.  

Stay safe.



Team No Comments

Merits for a dedicated China allocation

Please see the below article from Invesco received over the weekend:

The economic success of China presents appealing investment opportunities in a broad range of sectors. Not only that, but efforts to loosen the reigns have enabled much easier access to its financial markets.

But how can investors gain exposure to China? Most international investors do so via a multi-country portfolio or index, however we believe this may not provide the best exposures, given China’s economic rise, strong risk- adjusted returns (see Table 1), and unique opportunities. Our view is that investors should consider a standalone China allocation.

In our view, China is an exceptional emerging market

Though it’s classified as an emerging market, we believe China warrants its own allocation. Its equity market is the second largest in the world – well ahead of the third largest, Japan, which is only around 40% of China’s size. Japan is already treated as a distinct asset class.

China’s GDP is now higher than that GDP of India, Russia, Africa, and Latin America combined, and we believe it’ll continue to deliver premium growth going forward. The COVID-19 crisis has served to strength China’s economic leadership (Figure 1). Thanks to effective containment, it has managed to emerge strongly from the pandemic. Real GDP expanded +2.3% year-on-year in 2020 – the only major economy globally that delivered positive growth. Economic activities were strong entering 2021, benefiting from continued recovery in both domestic and external demand. This contrasts with other emerging markets whose outlooks remain clouded by uncertainties surrounding the pandemic.

Figure 1. China is expected to deliver premium GDP growth over the world

In our view, the Chinese economy is poised for long-term structural growth. The strengths we see from a broad range of economic indicators will likely continue. China is also repositioning its growth drivers towards consumption and services, which are already the largest contributors to GDP growth. We expect its consumption market to hit US$17 trillion by 2030, supported by an expanding middle class and sustained income growth. Policy support is expected to be strong given consumption’s strategic importance to the government’s long-term growth plan. These can enable China to generate sustained expansion going forward and to remain the largest driver of global growth.

Historic appealing risk-adjusted returns

China’s strong economic prospects have been reflected in its equity market performance (Figure2). We compared the return and risk profile of Chinese equities and Emerging Markets ex-China equities on a five-year basis. Chinese equities delivered a much higher annualized return, and even after adjusting for risk, they offered a premium over Emerging Markets ex-China equities (Table 1).

Figure 2. Equity market performance of China relative to EM (April 2016=100)

Position into the future

China’s importance in the MSCI EM index has risen in recent years. Its index weight has increased to around 40% now from below 25% five years ago. We expect its index weight to keep rising given faster economic growth and further A share inclusion. Over the past 20 years, we’ve seen the return correlation between China and Emerging Markets structurally rising to around 0.9 from 0.6 (Chart 3). Once China’s weight exceeds a certain threshold, we believe emerging market equities could become almost indistinguishable from China alone.

Figure 3. Historic return correlation between China and EM

A dedicated China allocation could make it easier for investors to capture the entire opportunity set in China, discover new names as well as alpha sources.

Unique domestic opportunities

The growth of the Chinese economy means that there are now more than 5,500 competitive Chinese enterprises, across a broad range of sectors, listed across mainland China, Hong Kong, and the US. We believe they provide a large selection of alpha sources for investors to choose from when constructing their portfolios.

Compared to other emerging markets (except Taiwan and Korea) that remain dominated by traditional growth sectors, the communication services, consumer discretionary and healthcare sectors together account for above 60% of the MSCI China Index. They make up just 17% of the MSCI EM ex-China index (Chart 4).

In our view, this is another compelling argument for a dedicated China allocation. Given the structural changes the pandemic has made to the way we work and live, it provides investors with the chance to position for the future.

Figure 4. China may offer abundant investment opportunities in structural growth sectors that have been strengthened by COVID-19

What factors could challenge our views?

Pushback 1: COVID-19 will have long-lasting impact on employment and income growth in China

As consumption becomes more important to its economic growth, there’s a concern as to whether China can generate the employment and income growth needed to support ongoing strength in domestic consumption. Considering the uncertainty caused by COVID-19, this is valid.

In fact, the government’s surveyed unemployment rate rose to +6.2% in February last year and urban households only saw an increase of +0.5% in their disposal income in the first quarter. These data points are however improving as the economy recovers.

Unemployment rate fell to +5.1% in April this year. On the income side, growth also picked up to +12.2% in the first quarter of 2021.1 We expect further improvement in 2021 as economic activities are on track for normalization.

Long-term, the government continues to focus on the quality of growth rather than quantity. Employment is being prioritised in various policy decisions – with the goal of promoting and stabilising it.

Meanwhile, income inequality is on top of the policy makers’ agendas as well. China released its new Five-Year Plan this year and there is strong emphasis on social welfare and improving income equality in the document.

Challenge  2: Geopolitical tensions with the US will derail its long-term growth

Our team believes the geopolitical tensions with the US will be an ongoing topic. This is in line with many investors’ views. That said, we don’t expect this tension to derail China’s long-term economic progression.

Our view is that it’s worth investing in China, even with the ongoing tensions. It’s large and expanding domestic market is a valuable feature of its economy allowing it to enjoy unique economic and business cycles. These cycles rely on its domestic strength, helping to shield it from geopolitical complications. On a corporate

level, Chinese companies derive over 90% of their revenues from the domestic market and less than 5% from the US.2

Challenge 3: ESG standards are low in China

ESG development is gaining traction in China. An upward trend in disclosure rates of environmental, social and governance indicators is gradually catching up with global and regional standards.

During the United Nations General Assembly last year, China also pledged to reach carbon neutrality by 2060. We believe this ambitious commitment exemplifies China’s desire to pursue long-term sustainable growth and will propel the wave of ESG development going forward.

Regulators are a powerful force in China, which should drive further improvement in ESG disclosures among Chinese companies. The China Securities Regulatory Commission (CSRC) is expected to publish guidelines for mandatory corporate disclosure on ESG issues soon. We believe continued financial liberalization to attract more foreign investors will also drive ESG development in China. Increased focus on ESG by international investors should lead to rising awareness and improvements in ESG practices.


It’s for these reasons that we believe investors should consider a dedicated China allocation. Besides premium growth, the country may also offer the benefits of abundant, attractive investment opportunities. Its investment universe is deep and diverse and thanks to structural growth, may provide investors with ample compelling opportunities.

We believe investors can consider adopting an all-share approach when investing in Chinese equities. This means selecting opportunities irrespective of listing locations. Both onshore and offshore Chinese markets have unique listed companies and together, they represent the complete opportunity set for investors. We believe investors can look to experienced managers to make the best stock selection choices.

We have various views on China, please see Friday’s blog about Alibaba and Apple and regulatory scrutiny.  From my point of view I think it’s a time for ‘Active’ fund management in China and the region. 

Keep checking back for more of our regular blog content including market insights and views from some of the world’s top investment managers.

Andrew Lloyd DipPFS


Team No Comments

Alibaba and Apple face increasing regulatory scrutiny

Please find below details in relation to the market values of Alibaba and Apple, received from AJ Bell, yesterday afternoon.

The tide seems to be turning against large tech no matter where they are listed as regulators hit back

Thursday 16 Sep 2021 Author: Martin Gamble

E-commerce giant Alibaba has lost roughly half its market value since founder Jack Ma criticised China’s financial regulators last October.

That has led to the current backlash against not just the technology sector but also the gaming, education and entertainment industries. A Goldman Sachs basket of US-listed Chinese shares has halved since peaking in early 2021.

For Alibaba, all roads seem to lead to its mobile payment platform company Ant whose initial public offering, thought to be worth around $37 billion, was suspended last November.

On 13 September 2021, Alibaba’s shares were again under pressure after state regulators said they wanted to break up Alipay, Ant’s leading mobile payment app which has over 1 billion users.

Beijing wants to create a separate independent app for the loans business which issued around 10% of the country’s non-mortgage consumer loans last year.

In addition, it is requiring Ant to share user data in a new credit scoring system which would be partly state-owned, according to the Financial Times.

The real issue for the regulators is maintaining control of the monetary system, argues current affairs magazine The Diplomat.

Alipay customers use a currency issued by the platform’s parent company Alibaba, rather than the state currency renminbi, when they use their phones to make a transaction.

It just happens that the Alipay currency has a one-to-one exchange rate with the state currency (renminbi) and is backed by reserves held by Alibaba. The problem is that Alibaba isn’t regulated as a commercial bank and therefore operates outside the financial system.

The Chinese central bank is looking to solve this problem by being one of the first to issue its own digital money and integrating Alipay and other private payment systems, regaining control of the currency.

It’s not just China cracking down on large technology companies. Phones and computer giant Apple lost a pivotal case against gaming company Epic Games, maker of the hugely successful Fortnite. Apple had blocked the game after Epic tried to bypass the Apple app store payment system.

While US District Judge Yvonne Gonzalez Rogers stopped short of calling Apple a monopolist and found that the commission it charged app developers (30%) wasn’t a violation of competition law, Rogers said Apple’s conduct was anti-competitive.

The ruling means Apple is forbidden from stopping other companies’ apps including buttons or external links that direct customers to purchasing mechanisms as well as in-app purchases.

Benedict Evans, an independent technology analyst, says Apple generated around $15 billion last year from app commissions which only represents 5% of company revenue, so even if they were to eventually disappear it would be small beer in the bigger picture.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

David Purcell

Financial Administrator

17th September 2021

Team No Comments

Brooks Macdonald – Daily Investment Bulletin

Please see investment bulletin below from Brooks Macdonald received yesterday – 15/09/2021

What has happened

Despite a decline in bond yields, triggered by the US CPI release, equities failed to make ground with the US index falling driven by value sectors such as banks. Those sectors which are more sensitive to the pricing of longer-term rates, such as technology, outperformed.


Whilst it may feel like every US CPI release this year has been a surprise to markets, yesterday’s release was the first downside surprise since November last year. The month on month headline number came in at 0.3% vs expectations of 0.4%, with some of the key transitory sub-components retreating. Used cars and trucks saw their first decline in 6 months after driving much of the month on month increase earlier in the year. Not every component slowed however and energy picked up, driven by gas prices. The US core CPI number that excludes this energy element (as well as food) rose just 0.1% month on month compared to the 0.3% expected. Whilst there are signs of a deceleration of inflationary pace, energy and commodities more generally are likely to cloud the near term numbers even if they ultimately prove transitory. Over in the UK, the CPI release this morning showed inflation of 3.2% year on year, against market expectations of just 2.9%, a sign that the deceleration may not be a global phenomenon yet.

The Winter Plan

England’s Chief Medical Officer announced that ‘winter is coming’ as the UK government unveiled its toolkit for fighting COVID during the colder months in the Northern Hemisphere. Plan A is to effectively stick to the current guidance and use the vaccination driver (first/second doses and boosters) to increase population level immunity. Plan B would see a reversal to the status quo earlier in the summer with masks and work from home advice amongst the options. The UK Prime Minister was keen to stress that lockdowns remained available to the government but this looks increasingly unpalatable politically which may mean the government leans into Plan B earlier to avoid needing to make that decision.

What does Brooks Macdonald think

The US CPI number is the most hotly anticipated of the inflation releases, partially because the US is the world’s largest economy but also as it is being used to predict the path of inflation in other developed nations. Yesterday’s deceleration points to an easing of some of the transitory factors that have muddied the data over the summer but with commodities hitting decade highs, it is unlikely to entirely reverse short term.

Another quick update from Brooks Macdonald, these regular investment bulletins help us keep up to date with what is happening in the markets.

Please continue to check back for our latest blog posts and updates.

Charlotte Clarke


Team No Comments

Brewin Dolphin Markets in a Minute: Stock markets ease as inflation fears return

Please see below for Brewin Dolphin’s latest Markets in a Minute Article, received by us yesterday evening 14/09/2021:

US and European stocks fell last week as the prospect of higher inflation and slower economic growth weighed on investor sentiment.

The S&P 500 and the Dow ended their four-day trading week down 1.7% and 2.2%, respectively, amid a higher than-expected rise in producer prices and concerns about the Delta variant’s impact on the economic rebound.

The pan-European STOXX 600 eased 1.2% as the European Central Bank (ECB) said it would trim its emergency bond purchases. The FTSE 100 also fell 1.5% on concerns the Bank of England could start increasing short-term interest rates.

In contrast, Japan’s Nikkei 225 extended the previous week’s gains, adding 4.3% amid ongoing optimism that the new prime minister will bring further fiscal stimulus. China’s Shanghai Composite rallied 3.4% after newspapers reported ‘candid’ talks between the country’s leader Xi Jinping and US President Joe Biden.

S&P 500 ends five-day losing streak

The S&P 500 added 0.2% on Monday, ending its five-day losing streak, as rising oil prices boosted energy stocks. Airlines and cruise line operators also performed strongly, after the seven-day US Covid-19 case average fell to 144,300 from 167,600 at the start of the month.

UK and European stocks also edged higher, after a top European Central Bank official said recent gains in inflation did not yet pose a risk, and that the extremely low level of inflation seen in 2020 needed to be taken into account.

The FTSE 100 opened Tuesday’s trading session down 0.3%, after the Office for National Statistics reported that while UK company payrolls have returned to pre-pandemic levels, the recovery is uneven and labour shortages are likely to persist for the rest of the year.

US producer inflation accelerates

Last week saw the release of the latest US producer price index, which is a measure of inflation based on input costs to producers. The index rose by 0.7% in August from the previous month, which was a slowdown from July’s 1.0% increase but above estimates for a 0.6% rise.

The index rose by 8.3% on an annual basis, which was the biggest yearly increase since records began over a decade ago. This followed a 7.8% annual increase in July.

The data, which comes amid supply chain issues, a shortage of goods, and heightened demand related to the pandemic, suggests inflationary pressures are persisting despite the Federal Reserve’s insistence they will prove temporary and ease through the year.

Firms are also facing cost pressures from the tight labour market. The closely watched US Jobs Openings and Labor Turnover Survey (JOLTS), released last Wednesday, showed there were a record 10.9 million positions waiting to be filled in July, up from 10.2 million in June. It marked the seventh consecutive month of increased job openings, fuelled by factors such as enhanced unemployment benefits, school closures and virus fears.

ECB to trim bond purchases

Over in Europe, the ECB said it would move to a ‘moderately lower pace’ of pandemic emergency bond purchases following a rebound in eurozone economic growth and inflation. ECB president Christine Lagarde sought to reassure investors by stating that the shift to a slower pace of purchases was not tapering. This contrasts with the US Federal Reserve and the Bank of England, which have signalled they plan to start tapering asset purchases this year.

In comments reported by the Financial Times, Lagarde said the economic rebound was ‘increasingly advanced’, but added: “There remains some way to go before the damage done to the economy by the pandemic is undone.” She pointed out that two million more people are out of work than before the pandemic, and many more are still on furlough schemes.

Lagarde added that a fourth wave of infections could still derail the recovery, while supply chain bottlenecks could last longer and feed through into stronger-than-expected wage increases.

BoE split over rate increase

BoE governor Andrew Bailey gave a speech last week in which he revealed the central bank’s policymakers were evenly split between those who thought the minimum conditions for considering an interest rate hike had been met, and those who thought the recovery wasn’t strong enough. According to Reuters, Bailey said he was among those who thought the minimum conditions had been reached, but that they weren’t sufficient to justify a rate hike.

The comments have led to speculation that the next vote could skew towards raising the base interest rate, which currently stands at 0.1%.

Bailey also said there were signs that the UK’s economic bounce back from the pandemic was showing some signs of a slowdown. Indeed, data published by the Office for National Statistics on Friday showed monthly gross domestic product (GDP) grew by 0.1% in July – lower than the expected 0.5% rise and the 1.0% growth seen in June. Output in consumer-facing services fell for the first time since January, driven by a 2.5% decline in retail sales. Output from the construction industry also dropped amid a shortage of building materials and higher prices.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well

Paul Green DipFA


Team No Comments


Please see below the latest article received from Legal & General Investment Management’s Asset Allocation Team which was received late yesterday (13/09/2021) afternoon and covers their views on a number of topics:

As you can see from the above Shortages are being felt globally and the initial thoughts on the labour market improving in Autumn have been curtailed slightly as a result of people reassessing their work/life balance.

They also disagree with the consensus that equity markets are heavily over-priced and their recession indicators remain benign. They believe there are still investment returns to be achieved despite the market rally being behind us.

These views represent the LGIM Asset Allocation Team and other providers views could differ.  

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner


Team No Comments

Watch margin debt as tech giants keeps powering S&P 500

Please see below article received from AJ Bell yesterday afternoon, which examines which factors could disrupt the stocks currently leading the US market to record highs.

The S&P 500 index continues to barrel higher, setting fresh peaks as it does so. The American benchmark has advanced for seven straight months, its best run without a loss since its 10-month romp between April 2017 and January 2018, even if some of the market technicals have not convinced everyone.

As this column noted last month, the small-cap Russell 2000 index and the Dow Jones Transportation index have yet to set fresh peaks, to imply the current advance lacks the breadth that provides confidence in the foundations of the upward move.

In this context it is interesting to note the first dip in US margin debt since February 2020, just as the pandemic hit and investor confidence quickly drained away.

Margin debt is the amount of money an investor borrows from their broker via a margin account to buy shares (or even short sell them).

This looks smart when markets are rising (as the investor or trader can get more exposure) but looks less clever when markets are falling. Indeed, falling asset prices can force so-called margin calls where the investor or trader must start repaying the loan – and sometimes they must sell other positions to fund that repayment, creating a negative feedback loop in markets.

This first dip in margin debt must be watched, especially in light of Securities and Exchange Commission queries about regulatory filings from the investment platform Robinhood and questions about its business model and whether payment for order flow is appropriate.

It remains to be seen whether this dampens some of the liquidity flow which has done so much to elevate certain sections of the US stock market but it may be no coincidence that what looked like some of the frothier areas have started to flag.


Whether trading losses are sparking a slight decrease in risk appetite or whether a more cautionary approach (perhaps considering Federal Reserve reverse repo operations and talk of tapering) is lessening demand for initial public offerings, cash shells known as SPACs and growth and tech stocks is hard to divine.

But what is clear is that some of the hottest areas of the US market are showing some sign of cooling.

New market entrants have started to lose their appeal, judging by the performance of the Renaissance IPO ETF and Renaissance International IPO ETF. The former is currently tracking the performance of 72 American new floats, the latter 62 global ones.

The International vehicle may be suffering owing to its 44% weighting toward China and the US-oriented version is at least trying to claw back lost ground.

Enthusiasm for cash shells set up to acquire what they fancy is also waning. The Next Gen Defiance SPAC Derived ETF, which tracks a basket of nearly 300 SPACs is down by more than a third from its high.

This is perhaps less of a surprise when you consider the data from which shows how 308 SPACs are looking for a target even though 263 have already floated. In the end, supply may be outstripping demand.

Even Cathie Wood’s ARK Innovation ETF, the darling of growth and momentum-seekers, has found the going to be a bit tougher of late. The $22 billion behemoth, whose biggest holdings are Tesla, Teladoc and Roku, trades a fifth below its high (although supporters will counter that it is up by a quarter from its spring lows).

None of this is conclusive and the attempted rallies in the ARK Innovation ETF and the Renaissance IPO ETF could yet signal the next upward surge in US equities. Investors would do well to keep an eye on them and trends on the monthly margin debt figure from FINRA as useful indicators of market sentiment.

Yet for the US market to really roll-over its leaders must falter. And in fairness there is little sign yet of investors falling out of love with Facebook, Apple, Amazon, Netflix, Google’s parent Alphabet and Microsoft.

Their aggregate $9.8 trillion market cap is the equivalent of more than three times that of the FTSE 100 and they represent a quarter of the S&P 500’s value between them. If the S&P is to stumble, these names will have to do so.

Spotting what could cause that is the hard bit, such is their dominance, and in the absence of regulation it may take a jump in interest rates or a wider, unexpected shock to prompt investors to sell such core holdings, just as happened with the oil price shock and inflation in 1973-74.

This did for the previously unassailable ‘Nifty Fifty’, an informal designation for 50 popular large-cap stocks in the 1960s and 1970s.

Please check in with us again shortly for further news and market analysis.

Take care.



Team No Comments

Why gloomy US jobs data didn’t derail the market

Please see the below article from AJ Bell:

The point at which the Federal Reserve could start tapering bond purchases might have been kicked down the road.

The US equity markets have remained resilient in the face of poor US non-farm payroll growth in August. The consensus estimate was for an increase of 735,000, however the reported figure was just 235,000.

Two factors explain the market’s apparent irrational exuberance to what appears at first glance to be a very bearish jobs report.

First, the media has focused on one specific aspect of the report, which presents an overly dismal picture of the American jobs market. A more detailed and stoic examination of the data depicts a more optimistic scenario.

Second, the apparent weakness in the jobs data is likely to prompt the Federal Reserve to postpone any plans for tapering bond purchases that are part of its economic support measures, which is likely to underpin current equity valuations.

While the August headline non-farm payroll figure was distinctly disconcerting, other aspects of the jobs report were far more encouraging.

The unemployment rate fell to 5.2% in August from 5.4% in July. Moreover, wages continued to grow, increasing 4.3% on a year-on-year basis, and 0.6% on a monthly basis. This compares with estimates for 4% and 0.3% respectively. In addition, the job gains for July were revised up to 1.1 million.

Another potential source of optimism relates to labour shortages. The removal of additional unemployment insurance payments is likely to act as a catalyst for workers to re-enter the jobs market. Better access to childcare as schools reopen should also remove a further obstacle for individuals hoping to get back into work.

Keep checking back for more of our regular blog content including market insights and views from some of the world’s top investment managers.

Andrew Lloyd DipPFS


Team No Comments

Daily Investment Bulletin

Please see below, Daily Investment Bulletin, received from Brooks Macdonald yesterday afternoon, which provides information on economic developments impacting European and US markets.

What has happened

Monetary policy and COVID provided the drum-beat for investors on Tuesday. In Europe, markets fell as investors appeared to be nervous around the chances that the European Central Bank (ECB) might taper from its current ‘significantly higher’ level of PEPP (Pandemic Emergency Purchase Programme) asset purchases when ECB governors meet on Thursday. Meanwhile, over in the US, markets were similarly weak as the COVID delta variant continued to weigh on sentiment in the wake of last week’s weaker US jobs report. At a sector level, technology stocks were a relative outperformer on the day.

UK government signals tax rise on workers, businesses and shareholders

UK prime minister Johnson announced a tax hike for workers, businesses and shareholders on Tuesday. Billed as necessary to help support the NHS as well as social care spending needs, national insurance, which is tax on earnings, will rise by 1.25% from April 2022 for both employees as well as employers. As the Institute for Fiscal Studies noted on Tuesday, ‘it is really a 2.5 per cent tax rise on earnings … today’s announcements constituted a Budget in all but name’. The Institute of Directors also rounded on the tax plan this week, calling it ‘an extraordinary time to be considering adding to the cost of employing people’. As well as the increase to national insurance tax, there is also a hike on dividend tax with an increase of 1.25%. According to the plans announced, from April 2023, national insurance tax rates will revert back to the current level and the rise will be replaced by a new dedicated ‘health and social care levy’, which will become a separate tax on earned income from April 2023. Separately, the government also confirmed on Tuesday that the ‘triple-lock’ formula for annual state pension increases would be suspended for one year. Instead, the calculation will be based on the greater of 2.5% or inflation, while the third component of average wage increases would be disregarded for one year.

US plans COVID ‘six-pronged strategy’

On Tuesday it was confirmed by White House press secretary Psaki, that US President Biden would later this week on Thursday outline a ‘six-pronged strategy’ and which would involve ‘working across the public and private sectors to help continue to get the pandemic under control’. The announcement is likely to include an update on the plans, initially announced in August, around delivering COVID vaccine ‘booster jabs’ likely later this month. According to US CDC’s vaccine tracker (US Centers for Disease Control and Prevention), 75% of US adults have now had at least one vaccine dose.

What does Brooks Macdonald think?

The UK rise in national insurance contributions breaks a key Conservative manifesto pledge not to increase any of the main rates of tax. That said, it’s worth remembering that this promise pre-dates the COVID pandemic which went on to up-end many governments’ spending plans around the world. In terms of what it means for markets, perhaps more significant is the broader cadence from policy makers, in that following the unprecedented levels of fiscal support during the pandemic last year, this year, fiscal prudence seems to be the dominant theme. At the edges, this also perhaps adds a bit of a headwind for those investors looking for a sustained fiscal impetus to drive a durable reflationary narrative. As we have said before, with 2021 being a year of transition, this is not the year to try to decisively swing the asset allocation ‘bat’ behind any one particular investment style. Instead, balance in portfolios remains key.

Source: Bloomberg as at 08/09/2021. TR denotes Net Total Return.

Please check in with us soon for further relevant content and market news.


9th September 2021

Team No Comments

LGIM Asset Allocation Team

Please see below the latest article from the Legal & General Asset Allocation Team which was received on 06/09/2021 and details their thoughts on markets:

Dancing in the dark

Markets remain in a holiday mood. The narratives on which we are focusing are slow-moving – inflation, the Delta variant, and the usual politics and economic datapoints. Could it be that investors are dancing in the dark, totally oblivious to the risks out there?

As with all Key Beliefs emails, this email represents solely the investment views of LGIM’s Asset Allocation team.


The Jackson Hole symposium is supposed to be a largely academic affair, but it excites investors as we’ve had a few shock policy announcements in the past.

This year, though, Federal Reserve (Fed) chair Jay Powell choose to relax investors. He doubled down on the view that inflation is likely to prove transitory, and gave five reasons to believe recent elevated readings could be temporary:

1) The lack of breadth behind the inflation spike. We largely agree with this assessment. However, we will be watching carefully should we see signs of broadening, especially in traditionally more sticky services.

2) Moderating inflation in pandemic-sensitive components. No dispute from us here. Used-car prices appear to have flattened off and indeed we expect them to become a large drag on inflation in 2022 as prices fall back to more normal levels.

3) Wages that remain consistent with inflation goals. While true, it is surprising that wages have not been weaker given the rise in unemployment. With demand expected to continue growing well above trend, if participation fails to fully recover the danger is that wage pressures intensify next year.

4) Stable long-term inflation expectations. Again true, but our research finds that the formation of inflation expectations is largely adaptive, so the risk is that the longer actual inflation remains elevated the more it might begin to place upward pressure on inflation expectations.

5) Global disinflationary pressure. Powell believes there is little reason to think this has suddenly reversed or abated. We nevertheless find evidence that some of the factors could be moderating, as globalisation seems less intense with countries increasingly looking inward and becoming more protectionist. Fiscal policy, while not yet fully embracing modern monetary theory, appears far less disciplined. Finally, and perhaps most important, is the shifting behaviour of central banks, led by the Fed. Its new framework is a commitment to run the economy hot, partly because it believes continued global disinflationary pressure and well anchored inflation expectations will ensure any inflation increase is so gradual it will have time to adjust policy smoothly.

All in all, Powell could well be proved correct. We also expect inflation to fall back to target for a while next year, but risks to this sanguine inflation outlook appear to the upside.

The power of love

If you ever need a clear example of the power of Strategic Asset Allocation (SAA), compare the performance of UK mid-cap managers versus US large-cap managers over the five years ending June 2020. The best-performing UK managers achieved 36.7%, while the worst-performing US large-cap manager performed slightly better with a 36.8% return. SAA drives portfolio returns, plain and simple!

There are many different models for SAA, some developed by Nobel Prize-winning economists. One unique point about our SAA approach is that we don’t believe it makes sense to presume that one model is able to capture the ever-changing complexity of financial markets well enough. We try to learn and take something from many different models.

For instance, the Yale model gets lots of attention among investors. It is heavily invested in absolute-return strategies and illiquid assets, and has hardly anything in standard asset classes like government bonds and equities. It helps that the endowment does not run daily or weekly liquidity funds and can spend a lot on fees and governance. We see the value of alternatives as well. They form an important and differentiating part of our strategies, but we look for solutions that fit daily liquidity and a more limited fee budget.

Finally, when it comes to building an SAA portfolio, we believe it is all about seeking exposure to the rewarded risks in a (cost) efficient way, getting rid of unrewarded risks, and trying to prevent a dangerous concentration of risks.

As with most things in investment, SAA is more an art than a science and investors should be wary of putting all their money in one model.

Back to life, back to reality

Perhaps surprisingly given the rally we have seen in equities and the narrative moving at a snail’s pace over the summer, consensus positioning isn’t that extreme.

One of our favourite sentiment indicators, the ‘bull minus bear’ survey of the American Association of Individual Investors, is flagging quite neutral sentiment.

The reality is that many people remain cautious. In our view, the most prevalent worries are:

1) Valuations. People usually point to absolute equity valuations, which indeed are scary, but we think valuations relative to bonds matter most.

2) Potential for rising inflation and interest rates. Though inflation is one of our key worries, we are more relaxed about the downside risks to equity markets from rising inflation and interest rates.

3) Peak growth momentum. The Delta variant and its rolling impact on growth is front of mind for many investors. Although growth momentum is fading, that needn’t necessarily take equities lower. Earnings momentum remains favourable, allowing valuations to drift lower while markets grind higher.

We therefore believe the bullish market case remains in place: the economy seems mid cycle, with massive excess savings, quite neutral positioning, and committed support from central banks.

Please continue to check back for our latest blog posts and updates.

Charlotte Ennis