Investment Blogs

Please see the below update from Legal and General Investment Management’s (LGIM) Asset Allocation Team:

Investors often think that whatever happens in financial markets is the most important thing in everyone’s lives. Last week, with COP26, it was easy to wake up from that distortion. World leaders and captains of industry, including our own CEO, Michelle Scrimgeour, gathered for the United Nations climate change conference. It looks like they made good progress, though much still needs to be made concrete.

Back in the world of macro minutiae, central bankers mostly indicated that monetary tightening will take longer than investors expect. Both equities and bonds liked that message.

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

It might be a COP out, but…

We use a cyclical framework (a sort of investment clock) to drive our medium-term risk taking. Our confidence in our assessment of the current position of the cycle is lower than normal — due to the pandemic, the extraordinary policy response and the unique nature of the supply disruptions.

We see the risk that the US and some other economies are later in the cycle than realised, and that the currently high rate of inflation will act as a catalyst for more persistent inflation.

Even though uncertainty is increasing, our research shows that even a late-cycle view isn’t necessarily bad for risk assets as long as the recession risk remains low. We think the 12-month recession risk is increasing, but from a low base. We are wary of taking risk off too soon, especially as we see the majority of possible outcomes for now as equity-positive with above-trend growth. So, despite the challenges to our framework, we are sticking to our bullish medium-term view and remaining long equities.

VIX and MOVE: Good COP bad COP

There’s a growing gap between bond and equity volatility. While the VIX index – a summary measure of US equity implied volatility – has revisited post-Covid lows, the MOVE index – a roughly equivalent measure for US Treasury bond implied volatility – was busy making new post-Covid highs.

Bond volatility has broadly risen in line with yields over the past year. The positive correlation between the two makes sense: assuming the existence of some implied lower bound to interest rates, large yield movements are less likely to occur at low levels. As yields rise, so too then should market-implied volatility.

The relatively gradual increase in the MOVE index masks a pretty dramatic increase in volatility at the shorter end of that spectrum over the past month. One-month two-year swaption volatility rose threefold from mid-October to the start of last week, as short-term rates reflected a more hawkish Fed.

While the low level of equity implied volatility may be an attractive entry point for a long position – in strategies that allow it, we currently hold VIX calendar spread positions to take advantage of the sort of short-term spikes in volatility that become more likely as we move from mid- to late-cycle – we don’t see the rise in bond implied volatility as an opportunity to go short. To the contrary: with rising yields and uncertainty around inflation expectations, two-way risk is ever more present, so we are holding on to our long interest rate volatility positions for now.

Calling the COPs on the currency manipulators

In the easing cycle, we saw some central banks resorting to currency intervention as the zero-bound in interest rates kept them from cutting rates further. We believe that with the tide turning, the first thing those central banks will do is step away from currency intervention and allow their currencies to strengthen. It could be argued that currency strength is more effective than rate hikes in managing inflationary pressures resulting from supply-side constraints.

Switzerland and Israel are clear examples where central banks had intervened to stop their currencies from appreciating, but now the franc and shekel have resumed strengthening. Some central banks are more explicit about their goals than others, but our emerging market economists have done some interesting work to unmask the “currency manipulators” by scrutinising foreign exchange reserves.

This is important, as we believe we may see more strength from such currencies. Based on this work, we have increased our exposure to the Indian rupee. In the latest US Treasury Department’s semi-annual report, India is on the list of countries that merit close attention to their currency practices and macroeconomic policies.

If it’s not inflationary pressure that convinces India’s central bank to stop currency intervention and let the rupee appreciate, political pressure may do the trick.

Please continue to check back for a range of blog content from us and from some of the world’s leading fund management houses.

Andrew Lloyd DipPFS

09/11/2021

Please see below an article from The AIC, which was received yesterday (04/11/2021) covering their views on ESG discussions:

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

Independent Financial Adviser

05/11/2021

Please see article below from Prudential, which covers the common misconceptions about investing for good, received yesterday afternoon – 02/11/2021

Common misconceptions about investing for good

Mythbusters

In today’s world of social media and the web, it’s often hard to separate the facts from the fiction. Just because we hear something often doesn’t necessarily make it true. For example, have you ever heard a goldfish only has a 3-second memory span or that lightning never strikes twice? Both these things have been scientifically proven as untrue and yet people still believe them.

When it comes to investing, there are many misconceptions out there. One of the areas that are often misunderstood is investing to help people and the planet. There are ways to give your money a chance to work harder whilst also helping to create a better world. We want to address some of the common questions and confusion about this. It may be for you, it may not, but to make that decision – it’s important to know the facts.

Does investing for good only help the environment?

While the environment plays a huge part in ‘investing for good’ it is not the only focus. Firstly when we say environment it covers a wide spectrum from climate change, finding environmental solutions to tackling the huge amount of waste in today’s world with a circular economy. Secondly investing for good aims to tackle some of the most pressing issues facing society. This ranges from diversity and inclusion within society and workplaces, better work and education and better health which saves lives.

Investing for good looks to invest in companies proactively finding solutions to these challenges whether that is advancements in medical treatments or bringing education to smaller communities in remote locations.

It goes way beyond ‘just the environment’.

Does investing for good give poorer returns?

A survey by the Global Impact Investing Network (GIIN)* shows that an overwhelming majority of people who took part reported their impact investments as meeting or exceeding their financial expectations.

The same survey also goes on to show that over half of the impact investments looked at resulted in competitive returns.

The idea that you can’t make money whilst doing good is simply wrong.

Of course, as with any investment, it can go down as well as up and you might not get back what you put in. It’s also important to know that past performance Is not a guide to the future.

Is it too risky? 

All investments have a level of risk, but there’s no reason why investing to help create a better world would mean your money was at greater risk than investing in something else. A common misconception could for example be that all companies with big dreams about saving the world are risky startups with no profits. This simply isn’t true. In fact to the contrary often it can be large industry-leading companies – that can have positive outcomes on society and the planet.

An adviser will always talk to you about the level of risk you are willing and comfortable taking as well as how much money you can afford to lose.

Is ‘investing for good’ a fad?

The ideas behind investing for good are not new, but there has been a surge in demand for funds that invest to help the planet. Based on data from the Global Sustainable Investment Alliance, the amount invested in sustainable investments globally is more than US$30 trillion.

Sustainable investing is becoming more popular with societal shifts such as the mass rejection of single-use plastic and climate change warnings.

The importance of looking after our planet and society is becoming a movement with the younger generation and is only set to continue.

*GIIN Annual Impact Investor Survey, 2020

Please continue to check back for more ESG related insights along with our usual market updates and blog posts.

Charlotte Clarke

03/11/2021

Please see below an article from J.P. Morgan which was received yesterday (01/11) and covers their views on the Property sector and going carbon neutral:

As you can see from the above, Property, both Commercial and Residential, account for a high proportion of total green house gases. This means that a lot of investment is needed in this sector in an effort to move towards becoming carbon neutral.

There also seems to be a focus on trying to get employees back into the office, which could help a full recovery on Commercial Property investment.

Property is a key focus of COP 26 and we believe it still has a vital role to play in an investors portfolio. It is a great diversifier and normally provides some inflation proofing as it is backed by a real asset that generally has upward only rent reviews in the commercial sector.

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

Independent Financial Adviser

02/11/2021

Please see the below blog article taken from this weeks Tatton Weekly, a weekly update from Tatton Investment Management:

The 2021 United Nations Climate Change Conference, known as COP26, begins on Sunday. Current weather forecasts for Glasgow are perhaps a little too literal, with visitors to the city braced for torrential rain and flooding. Along with the precipitation there is also an air of – if not downright pessimism – ahead of the summit. Last month, Boris Johnson told world leaders at the UN that “it is easy being green” and referenced Kermit the Frog to reinforce his point. But on Monday, he was downplaying expectations by telling schoolchildren and reporters in Downing Street that it was “touch and go” whether COP26 would deliver any sort of climate change breakthrough.

The mood darkened further this during the week after it was announced that the $100 billion of climate finance promised by developed countries in 2005 – pledged to help developing countries adapt to climate change – had not been met by the original deadline of 2020, and would most likely not be reached until 2023.

Next came another stark warning from the UN, ratcheting up the pressure on COP26 attendees. It declared climate goals are off track and emissions rise could lead to 2.7°C warming. Some countries, notably China and India, have not updated their emissions reduction pledges ahead of the summit. Other nations, including Brazil, have submitted weaker pledges than were outlined in their original commitments. As one of the UN delegates succinctly put it: “Unless more progress is made in the next fortnight, we will all be in trouble.”

We don’t have a crystal ball of course, so it’s impossible to make any predictions of what progress will indeed be made over the next couple of weeks, if any. That said, news flow this week has presented a few ideas on what to look out for.

For example, COP26 could deliver what’s being labelled a “methane moment”, after another 25 countries joined the US and EU-led initiative to drastically cut global methane emissions by 30% from their 2020 levels by 2030. That takes the total number of countries backing the pledge to 34, although again, Brazil, India and China are conspicuous by their absence. This is a positive development. While carbon dioxide (CO2 ) is the biggest contributor towards human-made global warming, methane runs a significant second. According to the International Panel on Climate Change, methane contributed to about 0.5°C of warming between 2010 and 2019 relative to 1850- 1900 levels, whereas carbon dioxide produced about 0.7°C of warming over the same period/

Although carbon dioxide gas stays in the atmosphere for longer, methane is considered some 28 times more potent in global warming terms, as its properties trap more heat.

Another initiative to look out for over the next fortnight could be further developments made on carbon pricing. Carbon pricing programmes usually involve countries taxing polluters’ carbon emissions, or ‘cap and trade’ systems that effectively limit a company’s level of emissions before costs become prohibitive.

International business groups are pushing for an international carbon price strategy to be unveiled at COP26, to prevent the bewildering patchwork collection of local policies they are struggling to contend with now. The World Bank recently identified 64 different carbon pricing initiatives across 45 countries. Disappointingly, the World Bank says these initiatives cover less than 22% of global carbon emissions, and most schemes use carbon prices too low to incentivise heavy emitters to change their business models.

Carbon trading schemes rely on private market mechanisms to attach a price to a tonne of CO2. Usually, governments set an economy-wide allowance (or per sector) and issue permits. If a company needs more permits, it has to purchase them in the CO2 market. It is a highly effective set-up (first applied in the early 1990s to reduce US sulphur emissions in the most cost-effective way), provided it comes equipped with a functioning framework. Recurring issues are that too many permits are issued, and hence the trading price drops close to zero. Remedies to this include issuing fewer permits or, as California has decided, introducing a floor, which is then a carbon tax that the government levies. Besides poorly set-up trading mechanisms, control and enforcement mechanisms also tend to be too weak. What really seems to be lacking, on top of it, is international co-ordination on such schemes, which renders them currently to be somewhat akin (and globally ineffective) as domestic stock markets that operate under capital controls.

Getting a majority of countries to agree to some sort of carbon pricing framework looks like a tall order. A carbon price that is high enough to limit rising temperatures to no more than 2°C from pre-industrial times is considered unworkable by the likes of the US, China and India. The EU, however, has been more forward-thinking, adopting its own ‘carbon-border adjustment mechanism’. This would mean companies importing goods – such as steel, aluminium, fertiliser, cement or electricity – into the EU would have to buy carbon certificates that reflect the same carbon prices faced by European producers under the EU’s emissions trading system. However, even this scheme has been criticised, with detractors suggesting it could lead producers from developing nations to sell into other markets with lower standards, hindering climate action.

The UK is not a member of the EU’s mechanism, which is perhaps another example of the somewhat muddled response from the UK government. At COP26, Boris Johnson will plead with the international community to make significant pledges to cut carbon emissions. Yet on Thursday, Rishi Sunak’s Autumn Budget drew criticism for measures that would make it cheaper to take domestic flights. Sunak also continued the time-honoured practice of freezing fuel duty (a freeze that has remained firmly in place since 2010), which has the net result of making car travel less expensive than more environmentally sustainable alternatives. According to the Office for Budget Responsibility, this year’s fuel duty freeze alone will mean an additional 450 million litres of fossil fuels purchased over the next five years. Such mixed messages certainly make alignment difficult.

When it comes to tackling climate change, every action has a reaction, and risks creating losers as well as winners. Which leads us to another key theme that has emerged this week: divestment. On Tuesday, Europe’s biggest pension fund, ABP of the Netherlands, announced plans to divest €15 billion worth of fossil fuel assets by early 2023. The fund said it doesn’t expect the decision to hurt long-term returns and added that the move will allow it to unveil a more ambitious CO2 reduction goal next year. Also on Tuesday, several UK faith institutions, announced an en masse $4.2 billion divestment from coal, oil and gas companies. Six cities, including host city Glasgow, have also said they will sign formal commitments to dispose of their fossil fuel assets in the future. According to the DivestInvest lobby group, that helps to bring the totals committed to be divested by asset managers on behalf of their investors to a stunning £39 trillion in the next few years.

Unsurprisingly, fossil fuel producers have spoken out against the hidden dangers of divestment. Coal producer Glencore argued that the movement was counterproductive, as it would force them to dispose of their assets and place them in the hands of less responsible owners (‘brownwashing’). Other producers have pointed out that it is better to allow these assets to run down, and that companies that demonstrate engagement on addressing the climate agenda should still be deemed worthy of investment. They do have a point. After all, divestment arguably just means gains are being pushed elsewhere and perhaps towards investors without CO2 reduction aims at all, and that will most likely have unforeseen and unintended consequences. Unceremoniously dumping fossil fuels might well be a ‘quick win’ for funds that are keen to decarbonise their portfolios – although whether this has a net positive effect on the environment – as discussed above – is another matter entirely. It changes the dynamics of capital markets, certainly, but without addressing the underlying problem. After all, selling the stocks themselves doesn’t reduce the demand – or use – of fossil fuels. Instead, it’s likely to just make stocks more volatile, and therefore tradeable. Without government action, and policy on a global scale, that discourages the use of fossil fuels, there will always be a demand for ‘dirty fuels’ to be met by someone.

The markets will always look towards global leaders to provide them with the framework in which they can successfully operate. If we think green investment is still the missing piece of the puzzle, and we want the market to help solve this problem, we need a framework that is clear, transparent and can be relied on to be here to stay to provide the planning certainty that is so crucial for successful longer-term investments. At the same time, from an investment point of view, it’s important to recognise that climate change is not a sector-by-sector issue. The whole of the economy has to ‘green up’, while accepting the risk of stranded assets and that there will be losers as well as winners.

Climate change is a global problem that requires a truly global approach. The key point regarding COP26 is that big events like these can – and must – be used to create common frameworks. So far, governments have been walking a political tightrope in terms of making the right noises about dealing with climate change, but without making the hard choices that a genuine commitment demands, or without being honest about what a fully transitioned global economy would look like – for better or worse. We can’t keep having it both ways.

What is COP26 and why is it happening?

COP 26 is the 2021 United Nations Climate Change Conference which is currently being held in Glasgow from 31^st October – 12^th November.

The world is warming because of fossil fuel emissions caused by humans.

Extreme weather events linked to climate change – including heatwaves, floods and forest fires – are intensifying. The past decade was the warmest on record, and governments agree urgent collective action is needed.

For this conference, 200 countries are being asked for their plans to cut emissions by 2030.

They all agreed in 2015 to make changes to keep global warming “well below” 2°C above pre-industrial levels – and to try aim for 1.5°C – so that we avoid a climate catastrophe.

This is what’s known as the Paris Agreement, and it means countries have to keep making bigger emissions cuts until reaching net zero in 2050.

Keep checking back, we will be posted regular updates and articles as the conference takes place and announcements are made.

Andrew Lloyd DipPFS

01/11/2021

Information Source: Tatton Weekly and BBC News

Please see below Brewin Dolphin’s latest market summary, which was received late yesterday (26/10/2021) afternoon:

Please continue to check back for a range of blog content from us and from some of the world’s leading fund management houses.

Andrew Lloyd DipPFS

27/10/2021

Please see below this week’s market commentary from Brooks Macdonald received yesterday afternoon – 25/10/2021

Weekly Market Commentary | Equities perform well ahead of bumper week for US earnings

25 October 2021

Read detailed economic and market news from our in-house research team.

By Edward Park

• US earnings season continues to show strong momentum with a bumper week ahead
• Inflation expectations surged last week which set a rocky backdrop for the sovereign bond market
• The UK Budget and Spending Review is likely to contain few carrots, given the outdated fiscal data the government has chosen to use

US earnings season continues to show strong momentum with a bumper week ahead

Last week saw inflation expectations surge across the US and Europe but this was counterbalanced by continued strength in US earnings numbers. Spurred by the earnings season, equities performed strongly with around one quarter of US companies having now reported and another bumper week, which includes many of the heavyweight US technology companies, ahead.

Inflation expectations surged last week which set a rocky backdrop for the sovereign bond market

Last week saw US 5-year inflation breakevens (a proxy for inflation expectations) increase to 2.9% and 10-year breakevens move to 2.64%, setting post financial crisis records¹. European expectations also rose with the ‘5-year, 5-year’ inflation expectations (5-year inflation starting in 5 years’ time, used to assess medium term expectations), rising to 2% for the euro area². 2% may seem mild but against the context of an European Central Bank that has struggled to reach 2% in recent history, despite negative interest rates, this is impressive movement. With higher inflation expectations now incorporated into the medium-term figures, this suggests a bond market that is moving away from its pure focus on the transitory inflation narrative to a more balanced position.

The UK Budget and Spending Review is likely to contain few carrots, given the outdated fiscal data the government has chosen to use

Next week sees the Bank of England’s November policy meeting and it is widely expected that it will contain the first hike since the summer of 2018. Whilest the Bank of England have made it clear that they want to reduce some of their monetary support, there are many question marks over the future for UK fiscal impulse. This week’s 2021 Spending Review will be the Chancellor’s opportunity to set the path of government spending for this parliament and perhaps more importantly for markets, determine the balance between near-term fiscal restraint and promised spending. This week’s budget is likely to focus on the updated economic forecasts as well as the pre-announced national insurance increase and dividend tax rate hike. There are a few areas that the Chancellor could consider in order to increase the government’s tax take but most of them, such as pension reform or Capital Gains Tax hikes, would have political ramifications.

It is likely that this will be a UK budget with few sweeteners given the Chancellor has chosen to use September fiscal numbers which paint a slightly weaker picture for the UK economy. This serves three purposes, political validation for what is expected to be a tighter budget, justification for setting new fiscal rules to achieve fiscal balance, but also setting a lower bar for future performance.

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

Charlotte Clarke

26/10/2021