Investment Blogs

Please see below todays (10/03/2023) Daily Investment Bulletin from Brooks Macdonald:

What has happened?

Earlier on Friday, the Bank of Japan (BoJ)’s last meeting under outgoing Governor Kuroda was the epitome of a non-event. There was no change to its -0.1% interest rate, no change to the +/-50bp tolerance band around its 0% target for 10-year JGB yields, and nothing in the accompanying BoJ statement that would suggest an imminent end to yield-curve-control. Instead, market volatility has centred around falls in the US banks sector on Thursday, led by a -60.41% share-price fall in SVB (Silicon Valley Bank) Financial Group, a California-based firm specialising in funding to venture-capital-backed companies to the tech sector. The turmoil started late Wednesday when SVB Financial Group announced a $2.25bn share-sale to shore up capital after being hit by loses on its securities portfolio. Negative sentiment spread across the US bank sector yesterday, even including far-better-capitalised banks, with JP Morgan shares off -5.41% on the day. The SVB news was also seen driving a risk-off move in US Treasuries, with 2 year yields down -20bps to 4.87%, its biggest daily fall in over 2 months, and the ‘10-year less 2-year’ yield spread steepened up through -1%, closing at -97.3bps on Thursday. Closer to home, this morning, we’ve seen UK GDP for January come in at +0.3% month-on-month, better than the +0.1% market consensus expected.

US jobless claims gives some support to the bulls

Thursday saw US weekly Initial Jobless Claims data, which showed that claims had risen to 211,000 during the week ending Saturday 4th March. That was higher than market estimates for 195,000, and up from 190,000 the week before. It also marked the first time claims has come in above 200,000 since early January. Cutting the data another way, the week-on-week gain in claims of 21,000 was the biggest weekly gain in 5 months, since October last year. That said, whilst this is a pick-up in claims, it’s coming from a low base. For context, the US labour market remains tight, with the US JOLTS (Job Openings and Labor Turnover Survey) data out earlier in the week showing that there was still a ratio of 1.9 job openings for every 1 unemployed person in January – that’s down from 2.0 in December last year, but well above the circa 1.2 level before the pandemic.

US non-farm payrolls

Today sees the first instalment of a double-header of crucial data that could tip market expectations (and the Fed for that matter), either towards a 25bp or 50bp hike on 22 March. US non-farm payrolls are due at 1:30pm UK time, and the Bloomberg market consensus is looking for a month-on-month gain of 225,000 (which incidentally is up from an earlier 215,000 estimate at the start of this week). Meanwhile, the unemployment rate is expected to stay unchanged at a 53 year low of 3.4%. Within the release, average hourly earnings are expected to be up 0.3% month-on-month, the same as last month’s gain. After today, markets will be looking ahead to the US CPI (Consumer Price Index) print due next Tuesday.

What does Brooks Macdonald think

After a run of stronger economic data recently, markets are firmly in the mindset of ‘bad-news-is-good-news’. That’s to say, bad news for the economy translates as reducing the urgency of central banks to hike interest rates, and that would be good news for risk assets. So, will markets get some bad economic news today? To be fair, it all feels a bit US-centric right now in terms of the news flow, but we won’t have long to wait to see if the US jobs data later today, or the US CPI data on Tuesday next week plays ball.

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

10/03/2023

Please see the below market update from Church House Investment Management received yesterday:

After the relief for bond markets in January as longer-term yields fell back despite the latest round of base rate increases, February saw a sharp reversal.

The US ten-year yield jumped from 3.5% to 4%, with a similar 50bp jump in UK yields taking the ten-year Gilt to 3.8%.  Of course, this led to steep falls for Gilt prices, which are now down for the year.  Possibly the most dramatic was the jump in Eurozone yields where the German ten-year Bund hit yield levels not seen since 2011, negative rates now being consigned to a historical oddity.

The change in mood followed better economic data with subsequent warnings of more to come from central bankers.  Here is Jerome Powell, Chairman of the US Federal Reserve, at yesterday’s testimony to the Senate Banking Committee:

“The data from January … have partly reversed the softening trends that we had seen … just a month ago … the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous [FOMC] meeting.”

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated …If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

Chairman Powell continues to stress that they will be guided by the “totality” of the data as it emerges.  Next up being the US employment figures due on Friday, which are likely to set the tone for the next few weeks, along with inflation figures the following week.  Expectations for the peak levels to be reached by central banks have been ratcheted up again with a 50bp increase from the Federal Reserve later this month now anticipated (to 5.25%).  The Bank of England also meets later in the month and expectations have also been raised for their next move, we expect a 25bp increase to 4.25%.

Most equity markets sold-off as the mood soured in the bond markets, but the UK held on to modest gains (it does look quite compelling in an international context and seriously shunned…) and a mooted Middle Eastern bid for Standard Chartered contributed.  Consumer staples out-performed as usual in nervous markets, notably L’Oréal, Unilever, Walmart; oil stocks jumped again after good figures and despite a weakening oil price.  In contrast, mining stocks had a poor month, notably Anglo American, Barrick Gold and Newmont with a falling gold price and concerns that the Chinese recovery might disappoint.

We don’t think that much has changed with our four key questions/concerns for the year:

• Have we seen the worst of inflation?
• How far will the Federal Reserve (and the other CBs) go?
• Will the recession be worse than currently expected?
• Is there an endgame in Ukraine or does it get worse?

Despite the noise, we still expect to see lower inflation as the year unfolds with a shallow recession the most likely.  But we do expect the swings in sentiment to be repeated over coming months with markets in thrall to the employment, inflation and other economic releases.  Stick with (shorter-dated) sterling corporate fixed interest and take a fresh look at the UK equity market!

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

Andrew Lloyd DipPFS

09/03/2023

Please see below, Brewin Dolphin’s ‘Markets in a Minute’ article summarising the key economic and markets news from the past week. Received late yesterday afternoon – 07/03/2023

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

08/03/2023

Please see below article from Tatton Investment Management received today regarding their market commentary:

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

Adam

06/03/2023

Please see the below article from Invesco received this morning:

Key takeaways

• In our analysis, Invesco experts offer key insights into the changing risks facing markets and offer their views on what this means for fixed income and equities.
• The outbreak of conflict on 24 February 2022 exacerbated inflationary pressures. And in hindsight it seems clear that central banks reacted too slowly.
• Geopolitical and energy risks, though still present, have receded. The focus has largely shifted to monetary policy and whether central banks can curb inflation and avoid recession.

On the first anniversary of Russia’s invasion of Ukraine, the outlook for the global economy is much changed. Geopolitical and energy risks, though still present, have receded. The focus has largely shifted to monetary policy and whether central banks can curb inflation and avoid recession.

So, Russia’s belligerence is just one facet of a complex macroeconomic environment. After years of persistently low inflation, the post-Covid economic restart in late 2021 unleashed inflationary forces across the world as pent-up consumer demand was released despite snarled supply chains. The outbreak of conflict on 24 February 2022 exacerbated inflationary pressures. And in hindsight it seems clear that central banks reacted too slowly. In Europe, meanwhile, the war has had an outsized impact, especially on its energy security.

Amid this backdrop, Invesco experts offer insights into the arc of economic, geopolitical and policy changes since the war started. They also offer their views on key asset classes and environmental, social and governance (ESG) considerations.

Flexible thinking in the fixed income space

The period following the invasion was the worst ever for global credit, which lost 18% from January to October, surpassing even the drawdowns of 2008.

“In truth, the conflict was more of an aggravating factor to the monetary tightening by central banks which had started in Q4 2021,” said Co-Head of Global Investment Grade Credit Lyndon Man.

“Nevertheless, we did see European assets impacted more acutely given the physical proximity and the tighter squeeze on energy supplies.”

Man expects the US Federal Reserve’s rate hikes to “top out” this year, notwithstanding some recent hawkish comments.

“The European Central Bank is playing catchup and European spreads remain wider3 vs. US; Asia also looks attractive having underperformed last year. Though we had a strong rally in January, yields are still at highs not seen since 2009, while flows and corporate fundamentals remain broadly supportive,” he said.

European equities: Renewables in focus

Fears that Europe could face widespread energy shortages were commonplace at the outbreak of the war. But a relatively warm winter helped countries navigate the crisis despite higher energy prices.

“After the initial shock sell-off when Russia invaded Ukraine and subsequent short-term market recovery, energy security and inflation have become the dominant themes driving the European market,” said European Equities Fund Manager James Rutland.

“Energy costs have already fallen substantially, with economists revising up their negative economic forecasts accordingly. With inflation starting to fall from high levels, we could see the headwind from falling real wage growth turn into a tailwind and therefore a rather better outlook for the consumer alongside the broader economic environment,” he said.

ESG and policy: The energy transition

The EU agreed to phase out the bloc’s dependency on Russian fossil fuel imports in March last year. It banned almost 90% of all Russian oil imports by the end of 2022 (with a temporary exception for crude oil delivered by pipeline). In December, it followed up with the introduction of a temporary emergency energy price cap to protect its citizens from excessively high gas prices.

“While much of the response this past year has been dealing with the immediate priority of keeping the lights on by finding alternative sources of gas and oil, political focus is starting to shift towards more structural reforms. These include the structure of the European electricity market and measures to further support renewable energy,” said Invesco’s EU Government Relations and Public Policy team.

The energy trilemma – energy security, affordability, and sustainability – points to renewables in the medium to long term as a resolution to some key underlying pain points around regional energy supply and fossil fuel-led inflation, according to Sudip Hazra, Head of ESG Research.

“Calls for the oil and gas sector, which has the expertise and cash flow to increase investments into the energy transition via diversification into renewables, look set to continue,” he said.

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

Andrew Lloyd DipPFS

03/03/2023

Please see below the latest article from Brooks Macdonald providing their Weekly Market Commentary, which was received late yesterday afternoon (27/02/2023):

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

28/02/2023

Please see below Daily Investment Bulletin from Brooks Macdonald:

What has happened

Equity markets saw huge intraday volatility yesterday as risk assets initially surged then retreated before staging an end-of-day rally. The afternoon sell-off was catalysed by further revisions to the US and European inflation prints whereas the final rally has been attributed to technical factors generating buying activity in the options market. While the focus was on the inflation data, Nvidia’s shares surged following their upside beat to revenue forecasts, this helped lift semiconductor shares more broadly.

Inflation data

The Euro Area core inflation print for January was revised upwards by 0.1% yesterday, bringing the year-on-year rate to 5.3%, the highest since the Euro was formed. This will increase the pressure on European bond markets while also giving additional justification to more hawkish members of the ECB to continue to tighten policy aggressively. The US also saw upward revisions to inflation with the PCE inflation measure rising by an annualised 3.7% in Q4 rather than the 3.2% previously. The core PCE number was also revised higher, from 3.9% to annualised 4.3%, showing that the inflationary slowdown in Q4 was less dramatic than markets had hoped.

Jobs data

The release of the weekly jobless claims provided more comfort to market with both the number of new unemployment claims for the week, and the ongoing number of claims, coming in lower than market expectations. Before anyone prematurely declares victory on the tightness of the labour market, the last 3-months of data have continued to show a tight labour market on many measures.

What does Brooks Macdonald think

While the market moves were dramatic yesterday the volume of market data and news was relatively light. One additional area of volatility was the UK gilt market with the Bank of England’s Mann saying that she believed ‘that more tightening is needed, and caution that a pivot is not imminent.’ One should note that Mann is known as one of the tougher hawks on the Monetary Policy Committee but these comments helped bond markets to almost fully price in a 25bp interest rate hike when the Bank of England next meets in March. This would bring the base rate up to 4.25%

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

Adam

24/02/2023

Please see todays Daily Investment Bulletin from Brooks Macdonald:

What has happened

Despite a slightly more upbeat tone to US markets at the start of the day, indices ultimately fell slightly on the back of the release of the latest Federal Reserve minutes. The Federal Reserve terminal rate crept up towards 5.4% after this release while European equities also fell after catching up with the market losses seen late on Tuesday.

Federal Reserve minutes

There has been quite a bit of water under the bridge since the latest Fed meeting, including the strong US jobs report and the stickier US CPI print. Markets were however keen to glean the consensus of the committee and whether it matched the more dovish interpretation given by Fed Chair Powell in the press conference. On the decision to downshift to 25bp interest rate hike increments, this was supported by ‘almost all’ participants.

Prospect of tighter policy

Despite the broad agreement on the downshift, the minutes show significant concerns that insufficiently tight monetary policy now could lead to sticky inflation, a risk that has heightened since the meeting. Specifically, the minutes said that the Fed ‘observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures, leading inflation to remain above the Committee’s 2 percent objective for a longer period and pose a risk of inflation expectations becoming unanchored.’ Overall, the minutes echoed the more cautious and hawkish central bank narrative that has been expressed by many of the Fed’s voting members in subsequent interviews and press events. President Williams for example yesterday said that he did not want the ‘inflation expectations anchor to slip’, which may require a tougher short term monetary policy response in light of the recent robust economic data.

What does Brooks Macdonald think

The market has largely come towards the Fed’s position over the last few weeks given the stronger economic data. This means that the meeting minutes’ focus on the risks of prematurely loose financial conditions chimes with the bond market’s pricing. One of the metrics that has been highly volatile is the 2-year inflation breakeven which, after approaching 2% around a month ago, now implies an average inflation level of 3%. The Fed will be keen to push that number lower by stressing its commitment to fight inflation.

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

Andrew Lloyd DipPFS

23/02/2023

Please see below, a ‘Monday Digest’ from Tatton Investment Management discussing the key economic news from the past week. Received this morning – 20/02/2023:

Overview: markets acknowledge the enduring stickiness of inflation

After a surprisingly strong start to the year in January, February has brought market consolidation rather than a continued uptrend – despite the FTSE100 finally passing the psychologically important threshold of 8,000 points. In last week’s digest we wrote that the prevailing ‘Goldilocks’ market sentiment of not-too-hot (growth, inflation), not-too-cold (rates coming down again soon) was being replaced by a more realistic view that rates will in all likelihood have to stay higher for longer than previously hoped. Inflation is stubbornly persistent – even as goods and energy/commodity price rises have indeed proven to be transitory – and tight labour markets have carried so-called second-round effects from last year’s price shock into the ‘stickier’ areas of goods and services.

Commentators from the US Federal Reserve (Fed) and the European Central Bank (ECB) have added further evidence to this view, as both said last week that central banks need to do more in their fight against inflation. This came after US consumer price index (CPI) inflation data contained both good and bad news, whereas the producer price index (PPI) inflation data showed a worrying uptick. Worrying, because falling raw material and energy costs were not enough to counterbalance price rises from rising labour and other input costs. While global government bond yields rose quite sharply after the central bank comments, they are not yet making investors fear recession is imminent. Credit spreads – for us the best indicator of fears of a recession – rose slightly last week, but are still close to the lowest levels of the past six months.

That said, the rise in bond yield levels may push the resumption of profit growth out towards 2024, which makes equities once again look relatively expensive and therefore vulnerable to corrections. This means that while we remain optimistic for the 2023 central scenario, we are more cautious for the near-term and have been taking the opportunity to lock in some of the attractive yields this period of uncertainty has brought. The shift in perspective has not necessarily changed the long-term picture of a relatively benign economic slowdown. Rather, the past weeks’ data points have injected a dose of realism into market sentiment.

Falling profit margins meet declining inflation

The last few company earnings reports for 2022 are trickling in, and at the aggregate level they look pretty bad. US companies took a big hit in the last three months of the year, and overall profits are either lower or roughly the same as in 2021 – depending on which measure you use. Relative earnings growth for the next twelve months (the rest of 2023 and the start of 2024) has also been revised down. For US equities, average earnings per share (EPS) is expected to grow by less than 4% compared to the 12 months just gone. European companies are even more sluggish, projecting 2.1% growth. By comparison, the historical averages for both US and Europe are around 11% EPS growth year-on-year.

In the light of rising interest rates and consequent slowing growth across the world, investors are braced for recession. On the face of it, corporate results back up those signs. Still, sales growth slowed rather than fell in the fourth quarter of 2022. What caused the earnings declines were therefore compressing profit margins, which declined markedly. The simple explanation would be that wages and other input costs are growing faster than sales, while on the revenue side of the equation a certain level of price discounting has crept back in following the extraordinary pricing power suppliers enjoyed during the initial post-pandemic period. That matches up with the general stagflation story, as well as with central bankers’ concerns about potential wage-price spirals.

The relationship between inflation and corporate profits is not straightforward, but in general you would expect inflation to cut into a company’s profit margins. The post-Covid episode seems to have differed from other potentially inflationary periods in that many companies appear to have raised prices on existing inventory rather than applying the price rises only to new stock. But regardless of why companies wanted to raise prices, it is still significant that they could. Moreover, the realisation that they could raise prices without choking off too much demand might mean firmer pricing power down the line. But in terms of the current outlook, it is important that rising margins were primarily a defensive move, coming from a position of expected weakness rather than strength. The opposite seems to be happening now, but for the same reasons. Profit margins are coming in, relieving a big chunk of the inflationary pressures we saw before. Whereas before, companies expected sharply higher costs and an okay short-term demand picture, now they see falling input costs and widespread talk of a recession. With sales growth already slowing, businesses likely feel the need to rein in prices – or at least hold them steady – to retain customers.
 
China’s post-pandemic recovery taking time to come through

Chinese investment assets have managed quite a turnaround over the last few months. Since November, China’s benchmark CSI 300 index has rallied by more than 15%, although gains over the last month have been harder to come by. Near-term confidence has probably been knocked by the spy balloon controversy, but markets are still clearly positive about Chinese growth this year. This is helping not only Chinese assets, but emerging markets more broadly. In fact, some market analysts have warned that buying into China’s reopening is becoming a crowded trade.

Despite the high degree of hope around China’s bounce, commodities have lately been surprisingly subdued. Copper, the industrial metal most sensitive to Chinese construction and technology production, rose sharply towards the end of last year. Since then, however, that rally has reversed somewhat. The same is true for energy, which gained momentum after the end of Zero-Covid, but has since cooled. This dynamic is also playing out across a range of industrial metals, including iron and palladium. Both are indicators of swings in the health of domestic vehicle demand. The fact palladium prices have come down is particularly interesting. While other metals point to the strength (or lack thereof) of Chinese industry, cars are more an indicator of consumer spending. Consumers appear to be slower than expected in regaining confidence.

In short, we have yet to see any conclusive signs of a strong post-Covid, post-regulatory crackdown bounce in China, despite the conducive conditions. However, we should not be worried yet that the 2023 Chinese growth spurt might fall short of expectations. When Beijing declared the end of Zero-Covid, we argued it might take some time for the results to show, in part because of seasonal factors. China celebrated its Lunar New Year at the end of January, and is only now coming to the end of its Spring festival – a month usually reserved for spending time with family, often away from the big cities. We said earlier this year that March might be the time when we see growth begin in earnest, and that is still possible. In terms of background conditions, the reopening bounce is very much on: it might just take a little longer to get going

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

20/02/2023

Cut and pasted from an A J Bell email received Thursday afternoon 16/02/2023:

It’s important to understand how the rule changes will impact your financial planning

Author: Tom Selby

The earliest age a pension can be taken is going up to 57 in 2028. Those who are 50 now might not be aware the impact this will have on their decisions. Can you elaborate? Steve

Tom Selby, AJ Bell Head of Retirement Policy, says:

You are referring to the ‘normal minimum pension age’ (NMPA), which is the youngest age someone with a defined contribution pension can access their retirement pot.

The NMPA is currently set at age 55 and is scheduled to rise to age 57 in April 2028, the same date the state pension age is due to increase to 67. That means if you are roughly aged 50 or younger today, the earliest you can access your pension in most circumstances will be 57.

The NMPA is then expected to remain 10 years lower than the state pension age, meaning it should increase again to 58 in April 2046 (when the state pension age is due to rise to 68).

If you have a defined benefit scheme, the age at which you receive your retirement income – and any tax-free lump sum entitlement you choose to take – will usually be determined by your scheme’s ‘normal pension age’ (NPA). Some schemes will allow you to take your income early, usually at a lower rate.

It is not possible to take your state pension early, although you can defer taking it if you want to.

The Government has created a complex set of rules to manage the transition to an NMPA of 57. Rather than apply the increase across the board, it has proposed creating a ‘protection’ regime so savers in a scheme which gave an ‘unqualified right’ to a NMPA below age 57 on 11 February 2021 can retain that earlier pension access age. This will be known as a ‘protected pension age’.

If people with this protection subsequently make an individual transfer to another (non-protected) scheme, the transferred funds will be able to keep the lower NMPA – although any benefits held in the receiving scheme before the transfer, or new contributions, will have a NMPA of 57 from April 2028.

People with a protected pension age who transfer as part of a ‘block’ with at least one other member of the same old pension scheme to the same new scheme at the same time will be able to retain the lower NMPA for all their funds in the new scheme, including any new contributions in.

Think carefully about what you are going to do with the money if you do access it early (such as in your late 50s), and how making the withdrawal today could impact the future sustainability of your retirement plan. If you are unsure, speak to a regulated financial adviser to better understand your options.

Comment

This could be a complex area but it’s not likely to impact on too many people in the UK, the majority can’t afford to retire earlier than age 65 or even State Pension age.

With regards to State Pension age we know that we are getting age 67 from April 2028 but age 68 is less clear in terms of timing.  I’ve read that this being looked at for 2044 and that this is under review.  Apparently, the State Pension age could be age 68 as early as 2038.

The key message for me here is that if you want to retire early take control and build enough of your own pension and investment assets so that the State Pension age does not impact on your early retirement plans.

Why are the government increasing State Pension age on a regular basis?  To try and counter the increasing cost of the ageing demographics in this country.  To increase State Pension age is a win/win for the State.  They save money paying out State Pensions later on, and it is likely more people will remain in work paying tax etc.

Steve Speed

16/02/2023