Please see below article received from Brooks Macdonald this morning, which provides a global market update.
What has happened
Yesterday saw more tariff headlines, and with it, more tariff-whiplash for markets. Investors have been struggling to keep pace with the policy-pivots from US president Trump, often in the space of hours, let alone days, and that tariff volatility and uncertainty continued through yesterday. In equity markets, the US S&P500 index finished up +1.12%, and the pan-European STOXX600 index gained +0.91%. The biggest gains (and headlines) however, were over in Germany where its plans to ramp up defence and infrastructure spending has lit a fire under the German stock market, with the country’s DAX30 index up +3.38% yesterday, all in local currency terms.
Tariff watch latest
Just a day after the US imposed 25% trade tariffs on Canada and Mexico on Tuesday, Trump announced yesterday that he has was suspending for one month those tariffs for auto makers – it looks like Trump blinked first, bowing to lobbying from the big US auto companies – Ford, GM, and Stellantis (which includes Chrysler). That said, the US Trump administration continued to stress the coming 2 April implementation date of ‘reciprocal’ trade tariffs with countries around the world that levy US trade currently.
Germany’s fiscal plans are a big deal
More details are shaping up around Germany’s hastily-drawn up plans for possibly as much as EUR 900 billion worth of fiscal spending, which will be split between two funds, one for defence, and one for infrastructure. The sudden zeal of German politicians is being driven by two factors: (1) the unprecedented US withdrawal from providing defence guarantees to Europe going forwards; and (2) the need for German politicians to ram this legislation through the old parliamentary term which has around two weeks left, as there is much less likelihood of securing the two-thirds vote needed to overturn the country’s fiscal debt-brake rule when the new parliament (with different party seat-numbers post the recent German Federal election) takes over later this month.
What does Brooks Macdonald think
Our Brooks Macdonald Asset Allocation Committee guides to a neutral outlook on Developed Europe ex-UK equities, with a broadly in-line-weight across our risk bands relative to our PIMFA benchmarks. While Germany has the debt-to-GDP ratio headroom to allow for this huge ramp in fiscal spending, the same cannot be said of the other major European countries. Supporting this neutral outlook, there are also still significant headwinds for the region, including US tariff risks, increased export-competition from China in autos in particular, and fragile regional economic growth risks more broadly.
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Please see below article received from EPIC Investment Partners, which provides an economic update on the US.
In the minutes from the January FOMC meeting, released yesterday, Fed officials expressed their confidence in maintaining steady interest rates amidst persistent inflation and economic policy uncertainty. “Many participants noted that the committee could maintain the policy rate at a restrictive level if the economy remained robust and inflation remained elevated.” The meeting minutes highlighted the cautious approach Fed policymakers have adopted following their decision to reduce interest rates by a percentage point in the latter months of 2024.
Several officials voiced concerns regarding risks posed by the prospect of another debt ceiling confrontation in Washington. “Participants cited the possible effects of potential changes to trade and immigration policy, the potential for geopolitical developments to disrupt supply chains, or stronger-than-expected household expenditure.” Counterbalancing concerns over tariffs and inflation, the minutes noted “substantial optimism about the economic outlook, stemming in part from an expectation of a loosening of government regulations or changes to tax policies.”
Meanwhile, the US consumer’s financial health is deteriorating at an alarming pace, according to both The New York Fed’s “Household Debt and Credit” report and industry data from BankRegData, with credit card defaults surging to levels not seen since the aftermath of the GFC. In just the first nine months of 2024, lenders were forced to write off a staggering $46bn in seriously delinquent credit card debt – a 50% jump from the previous year.
This troubling development is particularly acute among lower-income households, with Moody’s Analytics chief Mark Zandi noting that “the bottom third of US consumers are tapped out” with a savings rate of zero. The situation appears set to worsen, with $37bn in credit card debt already at least one month overdue.
This distress stems from a perfect storm of factors: aggressive lending during the post-pandemic spending boom pushed total credit card debt above $1tn, while persistent inflation and elevated interest rates have left consumers paying $170bn in annual card interest (yoy to September 2024). With the Fed indicating fewer rate cuts than previously expected for 2025, and Donald Trump’s proposed tariffs threatening to drive inflation even higher, the outlook for stretched US consumers appears increasingly grim.
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Please see below article received from Tatton Investment Management on Friday afternoon, which provides a review of markets over the past week.
AI upset challenges market dynamics
Erratic US politics versus measured central bank action failed to grab the headlines over AI, while positive UK markets should have got a mention.
What’s next for AI investment?
DeepSeek’s surprise challenge to the dominance of the US Mega Tech stocks upset the market this week, but competition should be good news for AI driven productivity.
Central banks diverge
The US Fed held interest rates and the European Central Banks cut them – what are the implications for markets as central bank divergence grows?
AI upset challenges market status quo
It has been another interesting week in markets, although for different reasons than recently. Most of the major regional stock indices have performed well, but global equities are down in aggregate. This is largely down to the underperformance of Nvidia, following the release of a low-cost, more micro-chip efficient AI model from Chinese start-up DeepSeek. It was also accompanied by mixed fourth quarter results from Apple, Meta, Microsoft and Tesla (Amazon and Alphabet report next week). While these “Magnificent 7” (Mag7) stocks performed poorly in aggregate, the overall global picture still looks decent – just with a different regional and sectoral makeup, for now. We consider that a good sign for markets going forward.
The tech sell-off could be good for markets overall.
DeepSeek’s release was labelled a “Sputnik moment” by Western media, and Donald Trump called it a wake-up call for US tech – whose leadership in AI was previously unchallenged. We discuss the impacts on tech and AI in a separate article, so will avoid too much detail here, but the important thing to bear in mind is that DeepSeek is probably a net good for the global economy. Technology becoming more cost and energy efficient (if we believe the story) is a natural part of progress – even if it is not great news for some of the big tech companies.
Investors seemed to agree with this sentiment: the Mag7’s sell-off did not spread across global markets, and many stock indices – like smaller US companies, Europe and the UK – gained through the week. This divergence is significant, because global equity prices have been so strongly driven by the Mag7 in recent times, both up and down. The concentration of capital on this small cabal has been an increasing concern in that time. This week’s moves have increased market breadth for now, which is a good sign.
Coincidentally, investor sentiment towards the Mag7 was dented by Tesla’s disappointing earnings results – which showed last quarter’s revenues down 8% from a year before. The electric carmaker’s stock shot up after November’s election, due to CEO Elon Musk’s role as Trump adviser, but was volatile this week. Tesla’s earnings miss might just be a blip, but one does have to wonder whether there is a tension between the profit interests of the electric car mogul and the “drill baby drill” president he has attached himself to. Interestingly, Tesla’s stock price moved less than one might have expected given the fact that analysts adjusted their outlook for earnings down by over 5% (according to Bloomberg’s data).
This meant that Tesla’s valuation actually rose, with the forward price-to-earnings multiple (for the next twelve months) rising from 120 to over 130. It was by far the most expensive of the Mag7 even before the election, when it traded around 80.
All this contributed to volatility in the Mag7, as some of the shine seemed to come off the world’s biggest stocks. Many would argue this was overdue.
Foreign investors feel good about Britain – even if Britons don’t.
It was non-US stocks’ time to shine this week and none shone brighter than the UK. Encouragingly, gains in the FTSE 100 (which is dominated by multinationals) were almost identical to the FTSE 250 (whose companies are more sensitive to the domestic economy), suggesting a broad improvement. This was helped by the continued fall in government bond yields, making equities more attractive by comparison. Thankfully, we seem to be over the gilt market anxiety seen a few weeks ago.
Now that bond markets have calmed down, Chancellor Rachel Reeves is continually talking up the government’s focus on pro-growth policies – such as in the discussion of a new Heathrow runway. The effects of this should not be underestimated. UK media has been consistently negative about the economy and the Labour government’s ability to manage it, but we think that the narrative was too pessimistic. No one denies that there are problems, but consistent growth-focussed policy (even if it is not the best policy) goes a long way to stabilising expectations.
Foreign investors have been generally averse to UK assets since before the Brexit referendum, which is partly why UK stocks have had consistently lower valuations than elsewhere. But lately, foreign investors are increasingly seeing Britain’s stocks and bonds as attractively priced – just perhaps in need of a jumpstart. We will have to await the follow-through, but Reeves’ growth talk might be helping, judging by this week’s rally.
UK policy clarity contrasts with US uncertainty.
The UK’s rally was similar to the uptick in European stocks, but the key difference is that the European Central Bank (ECB) cut interest rates this week, while the Bank of England (BoE) is expected to hold rates steady at its meeting next week. That means UK equity faces a slightly more challenging environment than on the continent. Nevertheless, the UK is probably also helped by ECB rate cuts, as European investors should have easier access to capital, with which they can buy competitively priced UK equities. More importantly, Britain’s economy should be helped by tentative signs of a rebound in European demand.
We discuss central bank meetings in separate article – where we note that uncertainty around Trump’s policies is forcing the Federal Reserve into a reactive, rather than proactive, role. Whatever one thinks about Trump’s politics, policy uncertainty makes it harder for people and businesses to plan ahead, which can weigh on economic sentiment.
The president seems to have adopted the “move fast and break things” mentality of his disruptor-in-chief Elon Musk. His administration certainly is moving fast – as shown by its attempt to ban all federal funding grants and then its rapid U-turn – but the problem is that it might end up breaking things. The funding ban was probably designed to be divisive (benefitting those aligned with Trump’s politics and punishing those opposed) but divisiveness does not build broad confidence.
After much anticipation – and excitement from US investors – we are now in a phase where Trump’s policies will start affecting the real economy, rather than just market sentiment. Disappointing business confidence numbers, released last week, suggest that might not be as positive as US investors believed in November. Those numbers are still open to revision, but we will have to watch the data closely from here.
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Please see below article received from Brooks Macdonald this morning, which provides a global market update.
What has happened
There was a lot going on yesterday. In central bank news, while the Bank of Canada cut interest rates, the US Federal Reserve stayed on hold as expected – that is probably in contrast to the European Central Bank who are expected to cut when they announce at 1.15pm UK-time later today. After the US close yesterday, we had mixed reactions from three ‘Magnificent Seven’ US tech companies, with Meta and Tesla both up in after-marketing trading, but Microsoft down; instead, it was US tech company IBM that stole the limelight with its shares up almost +9% after the close on better numbers and blowout guidance. Elsewhere, a reminder that Asian markets are quieter this week given China is shut for new year celebrations.
DeepSeek or ‘DeepFake’?
Microsoft and OpenAI this week confirmed they are investigating whether the Chinese AI start-up DeepSeek illegally used OpenAI’s proprietary models in order to train its DeepSeek competitor model. The news has also drawn a political response from US President Trump’s Whitehouse AI ‘tsar’ David Sacks: “there’s substantial evidence that what DeepSeek did here is they distilled knowledge out of OpenAI models, and I don’t think OpenAI is very happy about this” – Sacks added that “it is possible” that DeepSeek is guilty of Intellectual Property (IP) theft, and labelled DeepSeek a “copycat” model.
Bullish US tech talk shores up sentiment
US tech leaders were in upbeat mood yesterday following their latest results: Meta’s Mark Zuckerberg predicted that 2025 would be a “really big year” for Meta’s plans in AI; Tesla’s Elon Musk said he saw “epic” growth for the company ahead; Microsoft’s CFO Amy Hood said commercial cloud service bookings were looking “far ahead” of what the company had been expecting; while IBM CEO Arvind Krishna talked of “a faster-growing, more-profitable IBM”. Next up for the ‘Magnificent Seven’ megacap tech group is Apple which has results out after the US close this evening. After that, Alphabet and Amazon follow next week, with Nvidia book-ending things in late February.
What does Brooks Macdonald think
If China’s DeepSeek stole OpenAI’s IP, that will clearly ratchet up broader US-China geopolitical tensions. Yesterday US White House spokesperson Karoline Leavitt said that US officials were looking at the national security implications, adding that Trump is considering additional trade tariffs on Chinese goods imports and new curbs on Nvidia chip exports into China. All in all, it suggests that the eventual hit to China’s economy from the fallout of this week’s DeepSeek episode might be rather a lot bigger than the Chinese tech start-up’s claimed sub-US$6 million chatbot development cost.
Bloomberg as at 30/01/2025. TR denotes Net Total Return.
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Please see below article received from EPIC Investment Partners this afternoon, which provides market predictions for 2025.
As next week’s FOMC meeting approaches, we turn to our proprietary Fed funds model for insights into the likely path for US interest rates. Developed in the 1990s, the model analyses US capacity utilisation, unemployment, and inflation to predict the appropriate federal funds rate. While the neutral rate—or r-star—represents the interest rate that neither stimulates nor restricts growth, the model focuses on projecting short-term policy adjustments by analysing capacity utilisation and unemployment. At present, the federal funds rate remains above the neutral level, estimated at roughly 3%.
Capacity utilisation, a key indicator of economic slack, currently stands at 77.6%, below its historical average. This underutilisation signals room for economic growth without triggering inflation, providing scope for a more accommodative policy stance. With inflation expectations anchored at 2% and a real rate of 0.5–1%, the neutral rate is estimated at approximately 2.5–3%, serving as a benchmark for evaluating monetary policy. Historically, periods of below-average capacity utilisation have supported lower rates, as slack reduces inflationary pressures. While a pause in rate adjustments is likely in January, gradual cuts toward this neutral range seems likely as 2025 progresses.
The neutral rate is closely tied to capacity utilisation and unemployment, key inputs in our Fed funds model. While the model does not explicitly estimate the neutral rate, it aligns federal funds rate predictions with prevailing economic conditions, reflecting shifts in these metrics. Periods of high slack, for example, signal the need for lower rates, aligning policy with prevailing economic conditions.
Market expectations for 2025 broadly align with the model’s forecast for federal funds rate adjustments, which consider both economic slack and inflation trends. Despite the uncertainty surrounding fiscal policies under the current administration, the economy remains below the conditions needed for a neutral monetary policy stance. Monetary policy remains restrictive, with rates above neutral estimates. A pause during the January meeting would provide an opportunity for the Fed to evaluate incoming data and refine its outlook. Should inflation continue to moderate alongside subdued capacity utilisation, a gradual shift toward the neutral rate is expected as economic slack persists and inflation moderates. However, the transition will require careful calibration to prevent reigniting inflationary pressures or undermining growth.
Further Fed easing sets the stage for opportunities in fixed-income markets. Looking through the uncertainty of fiscal policies, higher-quality investment-grade emerging market bonds are particularly well-positioned to benefit from declining interest rates and stabilising global economic conditions. Mexican credit, in particular, looks attractively valued, offering compelling opportunities for investors looking for opportunities to diversify. These assets combine robust credit profiles with attractive yields, making them a compelling choice for investors looking for alpha opportunities. With risk sentiment likely to improve alongside monetary easing, 2025 offers a favourable environment for higher quality emerging market debt.
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Please see below article received from EPIC Investment Partners this morning, which provides a global market update.
Despite US Treasury yields suggesting higher growth and inflation in the years ahead, demographic trends tell a different story. By 2033, annual deaths in the United States will surpass births, leaving net migration as the sole driver of population growth, according to the Congressional Budget Office (CBO). Without sufficient immigration, the population would shrink, undermining economic growth, worsening fiscal pressures, and intensifying the challenges of supporting an ageing society.
Recent OECD data starkly illustrates the issue: the working-age population’s growth rate has fallen to just 0.15%, sharply down from its peak of 2.24% in July 2000. Declining birth rates and an ageing population are primary drivers, but restrictive immigration policies have further compounded the slowdown.
From 2017 to 2021, annual net migration averaged only 750,000, a significant reduction driven by stricter border enforcement, reduced refugee admissions, and tightened visa restrictions. The CBO projects net migration to average 1.4 million annually in the coming decades, but this estimate appears overly optimistic given persistent political resistance and growing global competition for skilled migrants.
The stakes are immense. Without sufficient immigration, the US faces a shrinking workforce and fewer taxpayers to support an expanding number of retirees. Social security and healthcare systems, already strained, will face widening funding gaps, increasing the fiscal burden on younger generations. Slower economic growth would further constrain the government’s ability to meet its obligations, driving the debt-to-GDP ratio even higher.
Demographic shifts also reshape inflation and interest rate dynamics. A shrinking population reduces demand, creating deflationary pressures akin to those seen in Japan, where decades of demographic stagnation have coincided with weak growth and persistently low inflation. In the US, these deflationary trends could partially offset upward pressures on interest rates caused by sustained fiscal deficits.
Immigration is the clearest solution. Migrants not only fill labour shortages but also sustain demand and drive innovation. Between 2000 and 2018, immigrants accounted for nearly half of the growth in the working-age population. However, countries like Canada and Australia are actively competing for talent, adopting aggressive immigration policies that threaten to outpace the US. To remain competitive, the US must streamline visa processes, expand pathways for high-skilled workers, and implement integration programmes.
The bond market’s pricing, reflecting expectations of sustained growth and inflation, conflicts with long-term demographic realities. Projections for net migration must be realised to avoid population decline. If migration fails to meet these expectations, the US risks slower growth, intensifying fiscal pressures, and reduced global competitiveness.
Given these demographic and fiscal constraints, long-term bond yields appear too high. A return to zero-bound interest rates is plausible as debt servicing and demographic stagnation exert downward pressure. Persistent budget deficits make the current debt trajectory unsustainable, underscoring the urgent need for deficit reduction and immigration reform. Without these changes, a disruptive market correction may ultimately enforce this reality.
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Please see below article received from Brooks Macdonald this morning, which provides a global market update.
What has happened
Yesterday saw more pressure heaped on global government bond markets, with bond yields rising and bond prices falling. In the US, the 20-year Treasury yield traded above 5% intraday for the first time since November 2023. Over in the UK, intraday the 10-year Gilt bond yield hit 4.79%, its highest level since 2008, along with the highest UK 30-year yield since 1998, at 5.35%. Even in Japan, which had previously been the last hold-out on ultra-low interest rates, the 10-year JGB bond yield at 1.17% earlier this morning is around its highest levels since 2011. Looking to the day ahead, US stock markets will be closed today to mark a national day of mourning for former US President Jimmy Carter, while the US bond market will shut early at 2 pm New York time.
US Federal Reserve meeting minutes
Yesterday saw the minutes from the US Federal Reserve’s latest (December) meeting published. Of note, US central bank officials were said to be taking a “careful approach” to any future interest rate cuts given the risks around inflation. In particular, the minutes noted that “almost all participants judged that upside risks to the inflation outlook had increased”, due to “recent stronger-than-expected readings on inflation and the likely effects of potential changes [under President-elect Trump] in trade and immigration policy”.
US debt issuance tests markets
Higher US government bond yields this week have been strained further by the size of US Treasury issuance. There has been some US$119bn worth of government debt issued this week already, in addition to heavy corporate bond issuance as well. That has led investors to demand higher yields, in part reflecting higher risk premiums for holding longer-dated debt in particular.
What does Brooks Macdonald think
It seems global bond markets have kicked off 2025 with a bit of a bang, with bond yields in the UK and abroad rising across their maturity curves – although there has been some ‘buying-the-dip’ in US bond markets overnight. To a degree, equity markets can cope with higher bond yields if the broader economic picture remains constructive. The risk is that if bond yields continue to drive higher, and stay there, should the inflation/economic growth mix deteriorate this could start to weigh on economic activity and cause a reassessment of risk across asset classes.
Index
1 Day
1 Week
1 Month
YTD
TR
TR
TR
TR
MSCI AC World GBP
1.1%
1.9%
-0.1%
1.9%
MSCI UK GBP
0.1%
1.0%
-0.5%
1.0%
MSCI USA GBP
1.4%
2.0%
0.0%
2.0%
MSCI EMU GBP
0.3%
2.5%
0.8%
2.5%
MSCI AC Asia Pacific ex Japan GBP
0.7%
1.1%
0.0%
1.1%
MSCI Japan GBP
0.3%
0.2%
-0.5%
0.2%
MSCI Emerging Markets GBP
0.4%
0.8%
0.1%
0.8%
Bloomberg Sterling Gilts GBP
-0.9%
-1.7%
-3.9%
-1.7%
Bloomberg Sterling Corps GBP
-0.6%
-1.1%
-1.7%
-1.1%
WTI Oil GBP
0.0%
3.7%
12.5%
3.7%
Dollar per Sterling
-0.9%
-1.2%
-3.0%
-1.2%
Euro per Sterling
-0.7%
-0.9%
-0.6%
-0.9%
MSCI PIMFA Income GBP
0.1%
0.4%
-1.2%
0.4%
MSCI PIMFA Balanced GBP
0.3%
0.7%
-0.9%
0.7%
MSCI PIMFA Growth GBP
0.6%
1.2%
-0.5%
1.2%
Index
1 Day
1 Week
1 Month
YTD
TR
TR
TR
TR
MSCI AC World USD
-0.1%
0.6%
-3.1%
0.6%
MSCI UK USD
-1.1%
-0.3%
-3.5%
-0.3%
MSCI USA USD
0.2%
0.7%
-3.0%
0.7%
MSCI EMU USD
-0.9%
1.2%
-2.3%
1.2%
MSCI AC Asia Pacific ex Japan USD
-0.6%
-0.2%
-3.0%
-0.2%
MSCI Japan USD
-0.9%
-1.1%
-3.5%
-1.1%
MSCI Emerging Markets USD
-0.9%
-0.5%
-2.9%
-0.5%
Bloomberg Sterling Gilts USD
-2.1%
-3.2%
-6.9%
-3.2%
Bloomberg Sterling Corps USD
-1.9%
-2.5%
-4.8%
-2.5%
WTI Oil USD
-1.3%
2.2%
9.1%
2.2%
Dollar per Sterling
-0.9%
-1.2%
-3.0%
-1.2%
Euro per Sterling
-0.7%
-0.9%
-0.6%
-0.9%
MSCI PIMFA Income USD
-1.1%
-0.9%
-4.1%
-0.9%
MSCI PIMFA Balanced USD
-0.9%
-0.6%
-3.9%
-0.6%
MSCI PIMFA Growth USD
-0.6%
-0.1%
-3.5%
-0.1%
Bloomberg as at 09/01/2025. TR denotes Net Total Return.
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Please see below article received from EPIC Investment Partners yesterday, which provides an update on the US economy.
US consumer prices rose 0.3% in November, marking the largest monthly increase since April. The increase, which matched economists’ expectations, was largely driven by shelter costs and food prices.
Shelter expenses, particularly hotel and motel rooms, accounted for nearly 40% of the CPI increase. Hotel lodging costs jumped 3.7%, the highest since October 2022. Food prices climbed 0.4%, with notable increases in eggs (up 8.2% due to avian flu) and beef prices, though cereal and bakery products saw a record decline of 1.1%.
The annual inflation rate reached 2.7%yoy through November, up slightly from October’s 2.6%. While this represents significant progress from the June 2022 peak of 9.1%, core inflation (excluding food and energy) remained steady at 3.3%yoy, showing limited improvement in underlying price pressures.
There were some positive signs in the report. Rent increases slowed to 0.2%, the smallest gain since July 2021, and motor vehicle insurance costs moderated. However, new and used vehicle prices increased, in part due to hurricane damage replacements.
US PPI figures due later will grab market focus with the Final Demand figure expected at 2.6%yoy in November, from 2.4% previously. Despite sticky inflation concerns, markets expect the Fed to implement a third consecutive interest rate cut next week, to a range of 4.25-4.50%.
Looking ahead, inflation pressures may slow as rent costs continue to cool and labour market slack increases. However, some market makers are concerned that potential policies from the incoming Trump administration, including new tariffs and immigration changes, could pose inflationary risks. Treasury Secretary Janet Yellen also warned that the incoming Trump administration’s proposed sweeping tariffs could fuel inflation, hurt US competitiveness, and raise household costs. Our view is that tariffs can dampen demand rather than accelerate price increases resulting in lower long-term inflation.
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Please see below article received from EPIC Investment Partners this morning, which provides an insight into economic theory.
The traditional Phillips curve has long been a cornerstone of macroeconomic theory, suggesting a straightforward relationship between unemployment and inflation. The underlying theory posits that as unemployment falls, increased economic demand leads to higher wages, which in turn drives up prices and inflation. However, researchers have historically struggled to consistently demonstrate this relationship in real-world data.
Groundbreaking new research now reveals that the relationship is far more nuanced and distinctly non-linear, with firms responding to economic changes in surprisingly asymmetric ways. The most striking finding is how firms respond asymmetrically to economic shifts. When facing positive economic changes, companies are much more likely to raise prices than to lower them during negative shifts. This “convexity” in pricing behaviour helps explain why inflation can be sticky and unpredictable.
The OECD’s recent warning about persistent services inflation provides crucial context. With services price inflation at a median of 4 percent across rich nations, the non-linearity becomes especially relevant. The research uncovered that this non-linear pricing behaviour is most pronounced during periods of high inflation with firms becoming more responsive to economic signals and creating a potentially self-reinforcing cycle.
Interestingly, the study found that the convexity varies across different economic contexts. Firms with average price growth above 4 percent exhibit a strongly non-linear response to positive versus negative shocks. In contrast, firms with lower price growth show a more linear pricing pattern.
The implications extend beyond simple economic theory. The non-linear relationship suggests that monetary policy tools may be less effective than previously thought, with firms’ pricing strategies creating economic momentum that could push the economy towards unexpected trajectories. For policymakers, this research highlights the importance of understanding firm-level pricing dynamics. During periods of high inflation, prices can become much more responsive to positive economic shocks, creating potential risks for economic stability.
This research fundamentally challenges traditional macroeconomic models, revealing that economic systems are far more complex and adaptive than previously understood. The non-linear pricing dynamics demonstrate that firms are strategic actors who actively interpret and respond to market signals, not passive recipients of economic conditions. These insights have significant implications for investment managers and policymakers alike, highlighting the need for more sophisticated approaches to understanding and modelling economic scenarios and resilience and designing targeted strategies in an increasingly nuanced economic landscape.
Like a dance, economic relationships are about rhythm, timing, and unexpected moves, not just simple steps forward or backward.
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Please see below article received from EPIC Investment Partners this morning, which provides an update on India’s thriving economy.
In the four years to the end of November 2024 the Indian stock market returned 77.2%, a compound annual growth rate of 15.4% (USD). This compares to the -0.8% and -0.3% compound rate of return of Asia ex Japan and emerging markets respectively. In Asia, only Taiwan (+13.3% CAGR) comes close.
PM Modi’s business friendly approach with a focus on infrastructure development and the country’s relatively favourable demographics have all played their part. More recently the focus is turning to building out India’s manufacturing capabilities which looks likely to be a significant contributor to future growth. Perhaps more an accident than a design, India’s geopolitical position has improved markedly in recent years.
In short, India’s stars are aligned.
Domestic retail flows into equities have played an increasingly significant role. In round numbers, monthly net flows into mutual funds have risen threefold or more over the same four year period. However, for the prospective investor this comes at a price. On both a price earnings ratio or price to book measure, India is roughly twice as expensive as the Asian or emerging equity universes.
Some lingering disappointment in the BJP’s performance in the national elections earlier this year has been followed by a number of underwhelming corporate results and a weaker than expected third quarter GDP print. The market has consolidated.
Step forward Maharashtra, India’s second most populous state and largest state measured by GDP, accounting for just over one eighth of Indian GDP. The state assembly elections held late last month saw the BJP and Allies win a thumping victory. The BJP won 132 seats (up from circa 100) and the BJP alliance won 235 out of the 288 seats.
The Economic Advisory Council for Maharashtra has laid out a vision for the state economy to grow to US$1tr before the end of decade with manufacturing rising from 16% to 21% of GDP. There have been large transformative infrastructure projects for Mumbai over the past decade (trans-harbour link, new airport, 300km metro, coastal roads etc) which are now maturing. The target over the next decade will be further expansion of coastal roads and metros and using the new airport as a development hub and progressing a high speed rail project to completion.
India may not be cheap but it knows where it is going.
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