Investment Blogs

Please see the below Tatton Investment Management Monday Digest article received this morning – 04/12/2023:

Overview: December brings a price shock reversal

Expectations are growing for Eurozone rate cuts in time for Easter. Speculation intensified followed the release of provisional European inflation data for November that surprised on the low side for the third month running. Overall consumer price inflation came in at 2.4% year-on-year in November, less than half the pace as recently as August. In the US, even though inflation is still between 3% and 4%, some central bankers are validating these ‘next move is down – earlier than thought’ expectations. US Federal Reserve (Fed) member Christopher Waller is noted for similar views to those of Fed Chair Jay Powell, so markets reacted quickly when he said diminishing inflation would naturally allow the Fed to cut rates. Clearly, it is no longer too soon to talk of cuts.

Looking at the changing inflation picture, by far the weakest area of pricing power is now in goods and energy. OPEC+ finally met last week via videoconference, and a cut of 900,000 barrels per day (bpd) was announced. An OPEC+ statement said Russia, the United Arab Emirates (UAE), Kuwait and Iraq made a “voluntary” pledge, while Saudi Arabia would continue its unilateral one million bpd cut until April 2024. Most of the OPEC+ problems are driven by potential global oversupply, with US shale gas extraction increasing and new oil fields opening in in Brazil (which has been invited to join OPEC+). Meanwhile, Saudi Arabia is trying to bring Iran back into the fold as well. Iran is talking about production rising to 4 million bpd next year, a level they’ve not approached in 20 years.

The fall back in energy prices might signal growth worries, but lower energy prices are at the same time a growth spur for the wider economy. The right price is one which stabilises the supply/demand balance, and we should be grateful we are in a period where prices are moving gradually and bearably. This suggests that while we may be experiencing weaker growth now, the likelihood is that costs will be cut naturally and we are in the final stages of a welcome return to normality.

UK inflation exceptionalism

The Bank of England (BoE) continues its expectation management programme. Last Tuesday, Jonathan Haskel, an external member of its Monetary Policy Committee (MPC), told a Warwick University crowd that rates will “have to be held higher and longer than many seem to be expecting”. This came after similar warnings in recent weeks from BoE Chief Economist Huw Pill and Governor Andrew Bailey. The BoE’s Deputy Governor Dave Ramsden warned last week that UK inflation is becoming more “home-grown”, and repeated the messaging that wage growth was driving UK-specific price pressures. That is why, despite the fallback in energy and other input prices globally, Britain’s inflation “is going to be really difficult to squeeze out of the system”.

The BoE and other economists worry Britain’s supply side problems may stem from a combination of pandemic hangovers and Brexit frictions that imposed extra costs on goods and labour relative to our largest trading partner just before the global economy entered an unprecedented period of supply bottlenecks. In this light, UK-specific inflation pressures are unsurprising – as is the BoE’s focus on wage growth from a structurally tighter labour market.

Tight labour markets would suggest interest rates indeed need to remain high. But one could actually argue this is a bigger problem for the US, where growth has stayed strong thanks to a seemingly unshakeable American consumer. In the UK, however, sentiment among both consumers and businesses remains dour. Indeed, despite the BoE’s laser focus on wage growth, for most of the last year headline wage growth figures have been below headline inflation – meaning cuts in real terms. The MPC knows the effect of longer-term rates (often tied to mortgages) on the fragile UK economy, and is likely trying to persuade where it cannot directly control. After all, expectation management is as much a part of monetary policy as interest rates.

Wind of change for renewables?

It has been a miserable year for investors in the renewable energy sector. Tighter oil supplies have pushed up the price of fossil fuels, increasing the short-term returns on oil and gas stocks. When you add in the tightest global monetary conditions in decades – which have hammered valuations for all long-duration assets – it is a recipe for disaster, since clean energy stocks are seen as longer-term investments. The S&P Global Clean Energy Index has fallen over 30% year-to-date. In fact, S&P’s Clean Energy Index achieved dizzying heights at the start of 2021, thanks to sharply rising energy costs and an expected political drive for the global green transition. But shifting macroeconomic factors pushed fossil fuel companies ahead, with clean stocks losing nearly 60% from the January 2021 peak.

Such a prolonged downturn has starved renewables of much-needed investment – particularly damaging for capital-intensive projects like building wind and solar farms. Project cancellations or modifications are happening everywhere you look across the industry (Vattenfall, Siemens Energy AG and Li-Cycle, to name three), with profitability and balance sheet concerns at the root of all of their announcements.

The solution – as energy analysts have argued for years – would be to properly align incentives so that short-term cyclical forces do not outweigh longer-term transitional needs. We have seen at least some progress on this front recently, and the green shoots of a cyclical recovery are also helping to shift the mood. These factors have helped change investor perceptions with the S&P Clean Index rising more than 7% in November. But cyclical moves can only do so much, particularly with markets and the underlying global economy in such a delicate position. For sentiment to swing back around fully, markets need to feel drive to longer-term structural change. The results of the UN COP28 summit will therefore be vital, but rumours that host nation United Arab Emirates plans to use the venue to promote deals for its national oil and gas companies are less than encouraging. Even if investors buy into the renewables story, it will make little difference if politicians are not willing to stand up and join in.

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

Carl Mitchell – Dip PFS

Independent Financial Adviser

04/12/2023

Please see below an article published by the Federation of Small Businesses (FSB), which was published and received late yesterday (23/11/2023) afternoon and provides their take on the Chancellor’s recent Autumn budget and the impact this will have for small businesses:

Round-up of how the Government’s Autumn Statement affects small businesses.

The Government’s Autumn Statement on 22 November 2023 included a number of measures affecting small businesses and the self-employed. Here is a round-up of the key points you need to know:

• National Insurance Contributions (NICs) for employees will be cut by 2p, from 12% to 10%, from 6 January 2024, and Class IV NICs for the self-employed are to fall from 9% to 8% from 6 April 2024. Class II NICs for the self-employed will reduced to zero and then abolished from 6 April 2024. This is UK-wide. The announcements on Class IV and Class II NICs were as a result of FSB campaigning.
• The small business multiplier for business rates in England will be frozen for next year’s bills, removing the scheduled CPI inflation increase, and the 75% discount for retail, leisure and hospitality SMEs in England has been extended until March 2025, after it had been due to run out in March 2024.
  Both of these England-wide measures on business rates followed successful campaigning by FSB with the Government in Westminster. FSB teams in Scotland, Wales and Northern Ireland will be able to leverage this win and any consequential funding generated for devolved administrations to extend similar support to these hard-pressed sectors in their own economies.
• New measures to tackle late payments. From April next year, companies with a turnover of £5 million or more will be banned from bidding for public contracts if they have a record of paying their suppliers after 55 days or more. After a year, this will decrease to banning those who pay over 45 days, reducing to 30 days the year after, in line with the Prompt Payment Code. This is UK-wide, and is the result of extensive campaigning by FSB. We will continue to campaign to build upon this.
• HMRC to rewrite guidance around the tax deductibility of training costs for sole traders and the self-employed. This will provide more clarity to business on what costs are deductible, and ensure that sole traders and the self-employed can be confident that updating existing skills, or maintaining pace with technological advances or changes in industry practices, are allowable costs for tax purposes. FSB welcomed this, having campaigned for it.
• The income tax cash basis for the self-employed and partnerships is being expanded and simplified from 6 April 2024. Currently, only those with turnover under £150,000 may calculate profits based on when they get income or make payments, known as the cash basis. The new measures will remove the £150,000 threshold, with an option to choose the accruals basis, which records revenues and expenses before payments are received or issued, if preferred.
• The Making Tax Digital for Income Tax Self-Assessment threshold will be maintained at £30,000, and changes will be made to simplify and improve the system from April 2026.
• Alcohol duty has been frozen until 1 August 2024.
• The two current R&D tax relief schemes have been merged, and a new scheme for R&D-intensive firms has been created. These schemes will be implemented from April 2024. For small businesses to qualify for the R&D intensive scheme, 30% of their total expenditure will need to be spent on R&D; this was previously set at 40%.
• The Employers National Insurance holiday for small employers who take on veterans, a measure secured by FSB in partnership with X-Forces Enterprise, will be extended by a year.
• Full expensing, which grants businesses 100% capital allowances on qualifying new plant and machinery investments, will be made permanent from March 2026. Most small businesses, however, are already covered by the Annual Investment Allowance set at £1m.
• New Investment Zones have been announced in Greater Manchester, the West Midlands, the East Midlands, and Wrexham and Flintshire. The financial incentives for Investment Zones and tax reliefs for Freeports have been extended from five to ten years.
• Extension of the Growth Duty to Ofcom, Ofgem, and Ofwat, meaning that these important regulators will be required to have regard for economic growth and ensure that regulatory action is only taken when needed, and that it is proportionate to those that they regulate, including SMEs.
• £50 million will be spent on a two-year apprenticeships pilot in England, to look at how starts can be encouraged in growth sectors, and to address barriers to entry in high-value apprenticeships.
• Legislation will be introduced next year to encourage the uptake of Open Banking-enabled payments.
• The National Living Wage will increase. From 1 April 2024, the National Living Wage (NLW) will increase by 9.8% to £11.44, with the age threshold lowered from 23 to 21 years old.  
  • 21 and over, £11.44, up by £1.02, 9.8% 
  • 18-20 year old rate, £8.60, up by £1.11, 14.8% 
  • 16-17 year old rate, £6.40, up by £1.12, 21.2% 
  • Apprentice rate, £6.40, up by £1.12, 21.2% 
  • Accommodation offset, £9.99, up by £0.89, 9.8% FSB will campaign for further measures in the Spring Budget to make the NLW increase more affordable for small employers

Please check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Carl Mitchell – DipPFS

Independent Financial Adviser

24/11/2023

Please see the below the Daily investment Bulletin from Brooks Macdonald, which was received this morning – 16/11/2023:

What has happened

Bond markets reversed some of their rally on Wednesday as markets pondered whether the dovish pivot had travelled a little too far in the short term. Stronger than expected corporate earnings and economic data also pushed back against the soft landing narrative, suggesting an economy which still has plenty of momentum. Despite these moves, US equity markets managed to secure a small gain.

Economic data

The sell-off in bonds was driven by a series of positive economic releases with the US retail sales numbers one of the most highly anticipated. The headline retail sales contracted by a smaller amount than expected with the September reading actually revised up. The New York Fed’s Empire State manufacturing survey expanded reasonably positively compared to expectations for a contraction and Target saw a strong earnings released with a 17.8% share price gain on the day.

China/US meeting

President Biden and Chinese Premier Xi met in California yesterday to discuss US/China relations. The mood music from the meeting was largely positive with Biden characterising the talks as ‘some of the most constructive and productive discussions we’ve had.’ In terms of concrete actions from the talks, the leaders agreed to reopen high-level military communication which had been suspended after Speaker Pelosi visited Taiwan in August 2022. Climate Change, Artificial Intelligence and the upcoming Taiwanese elections were all discussed with the press conference focusing on the last point in particular. A counter-narcotics working group is being set up to tackle the export of chemicals used to make fentanyl which is behind a recent drug epidemic across the US.

What does Brooks Macdonald think

The US/China summit took a tone of cautious diplomatic optimism which will be welcomed by investors. On the sidelines of the summit were representatives from major US corporations looking for a steer as to the future trade opportunity with China. Premier Xi addressed business leaders, saying that ‘China is both a super-large economy and a super-large market… modernisation for 1.4bn Chinese is a huge opportunity that China provides to the world.’ With the US Presidential elections looming, these positive relations may become more fraught as Republicans and Democrats compete on their hawkish Chinese stances, but yesterday’s de-escalation was welcomed by markets.

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

Carl Mitchell – Dip PFS

Independent Financial Adviser

16/11/2023

Please see the below Tatton Investment Management Monday Digest article received this morning – 06/11/2023.

Overview: Central bank dovishness proves contagious

Last week, we noted how negative sentiment in stock markets can become a self-perpetuating destructive force for an entire economy as the investing public feels the heat of feeling poorer (at least on paper). But seven days later, we look back at an impressive stock market recovery that proved far more substantial and persistent than anyone would have dared to suggest possible. So, what has fundamentally changed? Well, not the economic data, where there has been no significant changes from the previous ‘not as bad as expected’ string of releases. What did change though was that – contrary to expectation – the US Federal Reserve (Fed) seemed to adopt a similarly somewhat dovish tone to the European Central Bank (ECB) of the previous week.

Few were expecting any interest rate move from the Federal Open Markets Committee (FOMC) this month, but a majority of commentators thought another 0.25% move in December likely given next month’s meeting has more research inputs. But after Wednesday’s meeting, Fed Chair Jerome Powell gave the strong impression the FOMC is becoming convinced their work is done; that the employment market is becoming less heated, wage growth is calming, and inflation is set to come back towards target. It felt like the opposite of the Fed’s September message and the market reacted accordingly.

In comparison, the Bank of England (BoE) is still in more of a bind. Its Thursday meeting concluded with the same ‘no rate rise’ decision as their US and European counterparts, while the BoE’s statement acknowledged the stress in the UK economy, with interest rates hurting many. Nearer-term measures of inflation in the UK also are helpful at the margin but the BoE’s biggest worry remains and differs in that measures of wage inflation are still uncomfortably high. 

Indeed, overall the mix of monetary and fiscal policy globally has already begun to shift to accommodation. The fiscal supports from China announced last week, and Japan this week, are substantial and added to investor perceptions that the investment environment may be about to become friendlier. Of course, much depends on the US. We’ve repeatedly seen that bouts of equity market positivity have supported households and businesses with already strong savings balances. The tight US financial conditions leading up to the FOMC meeting have been loosened in only two days. Following relatively weak US employment figures today, FOMC members have to believe the easing in the US labour market is more than seasonal if they are to hold on to their new-found dovishness.

What last week’s market moves also suggest is that institutional investors have been short of risk assets, both in equity and bond markets, while private households have been diverting money into their savings rather than investment accounts. This type of rebalancing flow may be ‘short-term’ but it can still go on for some time. Nevertheless, this past week’s market action informs us that the ‘higher for longer’ rates perception that only just sunk in over October may have already reached its expiry date given central bankers’ unexpected dovish tones. 

Does Emerging Markets growth always mean returns?

Why would you invest in Emerging Markets (EM)? In a word, growth. As the name suggests, developing economies generally have high potential to develop, and foreign investors are keen to get in on the action. It does not always work out, of course, but that is just part of the game: high risk comes with high reward. We have written a lot about emerging markets in recent months, from the obvious China – whose ‘emerging’ status perhaps stretches the definition somewhat – to India, Brazil and Argentina. The risk-reward profile of EM investment means that for every India or Brazil success story, there are plenty of Argentina-style cautionary tales.

This simple mantra goes some way to explaining why EM assets are generally considered risk-on, doing well when global investors (primarily concentrated in wealthy developed nations) feel confident and vice versa. But in reality, things are a little more complicated. EM assets – certainly those in the benchmark MSCI EM index – have arguably been more affected by weakness in China (whose assets make up around 30% of the index’s total market capitalisation) than monetary tightening in the US and Europe this year. On the other hand, as we noted in recent months, Brazil and India have fared surprisingly well, despite weak global growth and tight financial conditions.

One obvious yet often overlooked complication for EM investors is that there is a world of difference between EM growth and returns on EM assets. China is the clearest example of this. Chinese gross domestic product (GDP) expanded from just over $11 trillion in 2015 to nearly $18 trillion in 2022 – meaning 62.4% growth, according to the World Bank. In that time its benchmark CSI 300 stock index grew just 10%, with plenty of volatility along the way. In contrast, the US economy grew just under 40% in the same period, but delivered 86% equity growth. Chinese stocks have sunk 8% this year, while US companies have added 10% to their share values. This reflects the fact that Chinese companies have faced huge problems – prompting an exodus of western capital. And yet, despite undeniable growth disappointment in the world’s second largest economy, the absolute level of growth has held up okay – certainly compared to the dire performance of Chinese equities.

When making the case for EM investment – either in a specific region or in EMs more generally – economists and analysts often point to growth-supportive factors, like weakness in the US dollar or supportive trade conditions. But those factors do not always weigh in favour of EM assets themselves. Indeed, they can often suggest foreign companies with EM exposure. Other asset classes – like corporate or government bonds – can often provide more exposure to EM growth. Growth, on its own, is rarely enough.

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

Carl Mitchell – Dip PFS

Independent Financial Adviser

06/11/2023

Please see below an article published by Invesco and received late yesterday (26/10/2023) afternoon, which provides a snapshot of the big headlines of Q3 2023:

Please check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Carl Mitchell – DipPFS

Independent Financial Adviser

27/10/2023