Team No Comments

AJ Bell: What is happening to the markets’ hotshots?

Please see below for one of AJ Bell’s latest Investment Insight articles, received by us yesterday 09/05/2021:

In many ways right now, it looks like business as usual for the financial markets. Blow-out quarterly numbers from Google’s parent Alphabet, Apple and Facebook are taking their share prices to new highs and carrying the NASDAQ index along with them; the FTSE 100 is having another crack at breaking through the 7,000 barrier; and central banks seem in no rush to switch off the hose of cheap liquidity with which they are dowsing markets (unintentionally or otherwise).

And yet, as discussed last week, bonds are trying to rally, as is gold. This move in haven assets seems at odds with the prevailing optimism regarding global vaccination programmes, an economic upturn and higher corporate profits and dividends.

It can be too easy to read too much into such short-term moves, as nothing goes up (or down) in a straight line. One way to test the market mood is to check out what is going on at the periphery, as that is where advisers and clients are probably taking the most risk and therefore the asset classes and holdings they are most likely to liquidate first in the event that bullish sentiment starts to ebb.

Another is to look at the market darlings: the areas that are doing (or have done) best and are garnering the most coverage from analysts, press and commentators alike. If they are keeping on running, then all may still be well. If not, this may be the first inkling of trouble ahead, or at least a shift in the market mood.

Cryptic message

Both the Archegos hedge fund and Greensill Capital went down in March, despite the bullish market backdrop and expectations that the global economy is on the mend (see Shares, 29 March 2021). That still feels odd. Markets have so far done a good job of shrugging off those failures, however advisers and clients will remember markets kept rising after the first two Bear Stearns property funds collapsed in June 2008, but it did not take long for deeper problems to appear – so everyone must remain vigilant, especially as there are some signs that some of the hottest areas are starting to cool.

This can, for example, be seen in the fortunes of both Bitcoin and Special Purpose Acquisition Companies (SPACs), a phenomenon that has gripped the US market in particular. The Next Gen Defiance SPAC Derived Exchange-Traded Fund (ETF), which tracks a basket of over 200 SPACs, is down by more than a third from its high. This is perhaps less of a surprise when you consider the data from SPACinsider.com, which shows how 308 SPACs are looking for a target even though 263 have already floated. In the end, supply may be outstripping demand.

Setbacks in Bitcoin are nothing new and cryptocurrency supporters will be unperturbed, but the way the performance of Initial Public Offerings (IPOs) is tailing off around the world is worthy of note. Perhaps the quality of deals is going down as the prices are going up, or, again, supply is starting to catch up with demand.

Electric shock

Advisers and clients are unlikely to have the time for, or interest in, the intricacies of stock-specific issues, but there can surely be no better proxy for the current bull market than Tesla. Yet even Elon Musk’s charge is, well, losing a bit of its power to impress and that is weighing on another momentum favourite, Cathie Wood’s ARK Innovation ETF, a $22 billion actively-managed tracker which aims to deliver the performance of 58 tech and growth stocks.

Even that classic gauge of both market sentiment and economic activity small-cap stocks are pausing for breath, although America’s Russell 2000 is yet to roll over.

All of this could be healthy. Again, nothing goes up in a straight line and some of these assets and securities were looking bubbly, at least in the eyes of some. A cooling-off may be no bad thing.

Equally, it could be just a sign that markets are moving on. Frontier and emerging equity markets still look to be showing upward momentum, a trend that would fit with the narrative of a global economic recovery and bullish investor sentiment – few areas are more peripheral than frontier arenas such as Vietnam, Morocco, Kenya and Romania.

As such, we could just be seeing the next leg of the switch from defensives and growth to cyclicals and value. And if the upturn does prove inflationary, then there is a further trend to watch, one to which this column will return. This final chart shows the relative performance of commodities, as benchmarked by the Bloomberg index, against the FTSE All-World Equities index. Maybe real assets are on the verge of ending a decade’s worth of underperformance relative to paper assets, or at least paper claims on them?

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

Keep safe and well.

Paul Green DipFA

10/05/2021

Team No Comments

A.J. Bell – Exciting unquoted companies on offer through Investment Trusts

Please see below an article published by A.J. Bell yesterday (06/05) and details their views on how to gain access to unquoted companies with the potential for significant growth using Investment Trusts:

The above is a really good article and gives you an idea of how you may be able to gain exposure to unquoted companies within certain investment vehicles.

Notes on Investment Trusts:

  • Investment Trusts are higher risk in nature, they have the ability to gear (borrow) to leverage their position, this can be high risk
  • Your capital is at risk and will go down as well up in line with the underlying portfolio holdings
  • Investment Trusts should be held for a minimum period of 5 years or more
  • You can buy Investment Trusts at a premium or discount

It is also important to note that the shares and Investment Trust vehicles mentioned in this article are not recommendations and you seek Independent Financial Advice before investing.

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

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner

07/05/2021

Team No Comments

Brewin Dolphin – Markets in a Minute

Please see below this week’s Markets in a Minute update from Brewin Dolphin – received late yesterday afternoon – 05/05/2021

Stocks mixed as Fed points to ‘froth’ in equity markets

Stock markets were mixed last week as investors weighed largely positive first-quarter earnings reports against the Federal Reserve’s latest policy meeting.

US stock markets touched record highs but ended the week mostly lower, after Fed chair Jerome Powell referred to ‘froth’ in equity markets, sparking fears that economic growth would prompt a rise in interest rates. The Dow and the Nasdaq fell by 0.5% and 0.4%, respectively, while the S&P 500 was flat. Technology and healthcare stocks were weak, whereas energy stocks were boosted by an increase in oil prices.

The pan-European STOXX 500 slipped 0.4% as investors took profits and data showed the eurozone economy shrank by 0.6% in the first quarter, thereby sliding into a ‘double-dip’ recession. The UK’s FTSE 100 managed a 0.5% gain, buoyed by encouraging housing and retail sales figures.

In Asia, Japan’s Nikkei fell by 0.7% following weaker-than-expected earnings reports, and China’s Shanghai Composite declined 0.8% amid disappointing economic data and a regulatory crackdown on technology firms.

Last week’s market performance*

  • FTSE 100: +0.45%
  • S&P 500: +0.02%
  • Dow: -0.50%
  • Nasdaq: -0.39%
  • Dax: 0.94%
  • Hang Seng: -1.22%
  • Shanghai Composite: -0.79%
  • Nikkei: -0.72%

*Data from close on Friday 23 April to close of business on Friday 30 April.

Stocks tumble on interest rate fears

Fears about rising interest rates continued into Monday, sending shares in both the US and Europe tumbling. US treasury secretary Janet Yellen told The Atlantic that a ‘modest’ increase in interest rates might be needed to make sure the economy doesn’t overheat.

Market jitters were exacerbated by a shortage of computer chips, which weighed on stocks such as Volkswagen, Siemens, Microsoft, Amazon, Facebook and Alphabet.

At the end of trading on Monday, the tech-heavy Nasdaq Composite was down by 1.9%, and Germany’s Dax recorded its biggest fall of 2021 so far, slipping by 2.5%. The FTSE 100, which had started the day in the green following strong manufacturing and mortgage borrowing data, finished the session down 0.7%.

The FTSE 100 opened 0.6% higher on Tuesday, with mining companies boosted by rising commodity prices. BHP, Glencore and Rio Tinto were all up by nearly two percentage points.

US economy continues to rebound

Last week’s economic data suggests the US economy is continuing to rebound from the Covid-19 crisis. Gross domestic product (GDP) rose by 6.4% on an annualised basis in the first quarter – above the 6.1% growth forecast by economists and the quickest first-quarter growth since 1984.

US household income surged by 21.1% in March, boosted by the latest round of stimulus cheques. Meanwhile, weekly jobless claims fell to 553,000, the lowest level since the start of the pandemic, and The Conference Board’s index of US consumer confidence in April hit its highest level since February 2020.

Despite the economic rebound, the Federal Reserve voted to keep interest rates at near zero and maintain the pace of asset purchases. However, Fed chair Jerome Powell admitted in a press conference that some parts of the market “are a bit frothy, and that’s a fact.”

He added: “I won’t say it has nothing to do with monetary policy, but also it has a tremendous amount to do with vaccination, and reopening of the economy, that’s really what has been moving markets a lot in the last few months.”

UK housing market is booming

The latest research from Nationwide reveals the UK housing market boom is continuing, with the average house price in April 7.1% higher than a year ago at £238,831. On a monthly basis, prices rose by 2.1%, marking the biggest increase since February 2004. If prices are flat over the next two months, annual growth is expected to reach double digits in June.

Robert Gardner, Nationwide’s chief economist, said housing market activity is likely to remain buoyant over the next six months, thanks to the stamp duty holiday and additional support for the labour market. However, if unemployment rises sharply towards the end of the year, as most analysts expect, “there is scope for activity to slow, perhaps sharply”, Gardner added.

Elsewhere, Britain’s biggest retailers recorded the sharpest growth in sales since 2018, according to a CBI survey for the period 26 March to 15 April. For the first time in 2021, sales volumes were viewed as good for the time of year, with consumer confidence boosted by lockdown easing in England and Wales, and progress with the vaccination roll out.

Eurozone in double-dip recession

The eurozone’s economy shrank by 0.6% in the January to March period amid a renewed surge in Covid-19 infections and corresponding lockdown restrictions. This followed a 0.7% contraction in the last three months of 2020, plunging the eurozone into a technical recession.

Germany was Europe’s worst hit major economy, logging a 1.7% contraction, although this was largely owing to one-off factors such as the end of a temporary VAT cut and poor weather. France beat expectations with growth of 0.4%, helped by strong growth in construction and a slight rebound in household consumption.

The European Monetary Union’s economic sentiment indicator soared to 110.3 in April from 100.9 in March, with confidence improving in all the surveyed business sectors and among consumers, suggesting there is hope for the months ahead.

China cracks down on tech firms

Stocks in China suffered last week as the government’s crackdown on technology firms continued. Some 13 firms, including Tencent and TikTok developer ByteDance, have been ordered to adhere to tighter regulations in their financial divisions.

The People’s Bank of China said that while internet platforms are broadening access to financial services, some are running without licences and there are ‘serious rule violations’ which are damaging consumers’ interests. Firms have been told to set up financial holding companies and draft ‘business rectification’ plans to comply with regulations.

Weekly updates like this from Brewin Dolphin help us keep up to date with what is happening in the markets.

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

Charlotte Ennis

06/05/2021

Team No Comments

Legal & General’s Asset Allocation Team’s Key Beliefs

Please see the below article from Legal & General received yesterday afternoon:

Frothy markets

Froth. Nice on coffee, less nice on financial markets. While one variety can leave an embarrassing yet somewhat endearing moustache if not tackled properly, the other is a sign of late-cycle dynamics that can leave investors looking far more foolish if ignored. With stories of a New Jersey deli with $35,000 in sales over the past two years combined being valued at $100 million on the stock market and a cryptocurrency started as a joke being valued at $50 billion – Dogecoin is now the fifth-largest cryptocurrency by value – one might be forgiven for thinking that things have gone a bit too far.

Peak SPAC

One area of the market on our ‘froth watch’ has been special purpose acquisition companies, or SPACs for short. SPACs are listed companies with no commercial operations that exist to raise funds to acquire private companies, thereby making those companies public without the traditional IPO route. While by no means a new vehicle, a record 277 SPAC new issues were completed in the first quarter of 2021, with the SPAC index outperforming the S&P 500 by over 50% between July 2020 and February 2021.

Since then, SPACs’ fortunes have reversed, giving back much of that outperformance and there being only six new issues in the second quarter so far. Initially, a slowdown in retail flows was blamed. But the main factor has been a number of statements by the SEC that have created uncertainty around SPACs’ accounting treatment.

SPAC activity may well return, but SEC scrutiny and regulatory risk will remain and should serve to dampen future activity. Either way, the money raised by SPACs over the past few years is still out there looking for acquisition targets. So while one patch of froth has been blown away, temporarily at least, no doubt others are brewing, waiting to leave a stain on investors’ lips.

Take a breakeven

The gradual rise in inflation expectations (as measured by US 5y5y inflation swaps) over the past year has been a tide that has lifted most boats, not least nominal interest rates.

For inflation expectations to continue to rise, at some point there needs to be a sustained rise in realised core inflation. A near-term jump in core inflation is almost certain due to base effects from last year’s lockdowns and some additional normalisation as economies reopen. There are also other knock-on effects – such as supply-chain disruption and lean inventories – that could lead to an overshoot.

From the summer onwards, the picture is less clear. The risk for growth assets is that expectations become detached from reality, and the Federal Reserve (Fed) at some point has to step in to maintain its own credibility.

We believe the time has come for us to start leaning against the momentum in inflation expectations, and as such we have entered a short US inflation position. This is not to say that we think we are timing the peak; as discussed above, we expect a pick-up in US inflation and labour-market data from here. But we also expect the Fed to cap inflation expectations in the not-too-distant future, and are waiting patiently for the central bank to reveal its hand. We’d rather be too early than too late given that the recovery in inflation expectations has gone hand in hand with rallying credit and equity markets.

Data Minecraft

A new joiner in our team, who has a background in data science, recently voiced some confusion having heard from several team members about the need to ‘avoid data mining’. From a data scientist’s perspective, the confusion is warranted: data mining is a key component of machine learning, and refers to extracting information from patterns in large datasets. Why, then, does the term have a negative connotation when used in our team?

In an investment context, data mining means ‘finding relationships in historical data that appear causal, and building a model that assumes a continuation of that causation, where in reality that relationship was coincidental and unlikely to persist’. It is relatively easy to over-parameterise a model and to endlessly tweak it to get the best possible backtest; it is almost certain that such a model will underperform in the future when those specific circumstances do not repeat themselves.

The distinction we make between Alternative Risk Premia (ARP) strategies and the much broader universe of quantitative strategies is that for ARPs there must be either a behavioural or structural rationale as to why the strategy should work in the future, rather than being just a combination of signals that happen to have worked well together in the past and might work in the future. There are all sorts of reasons why that might not play out (e.g. crowding of the strategy, or a regime change that causes a structural shift and a breakdown of some prior imbalance), but where possible we try to rule out data mining as the cause of future failure by intentionally keeping the testing/design process as simple as possible.

For many applications of machine learning this is not an issue; data mining is appropriate where the output, rather than the model process, is the only thing that matters (e.g. improved cancer diagnosis) and the inputs are relatively stationary and unlikely to see a structural break (e.g. a large sample of humans). Financial time-series data are rarely as well behaved, and so we have to be extremely careful about how we make inferences.

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

Andrew Lloyd

05/05/2021

Team No Comments

J.P.Morgan – It’s getting hot in here: Growth and inflation are heating up

Please see article below from J.P. Morgan received early this morning – 04/05/2021

It’s getting hot in here: Growth and inflation are heating up

The great unlock is underway and economic activity is surging back in major developed economies. Successful vaccine rollouts have paved the way to what looks like a sustainable reopening for the UK and US economies. In continental Europe, the vaccine rollout has proved more challenging, but vaccinations are now accelerating and Covid-19 cases are falling. This sets the scene for a stellar second half of the year for global growth, with two key sources of fuel: excess household savings and US fiscal stimulus. 

Excess savings accumulated during the pandemic are vast. While the hardship that the pandemic has brought to many should not be understated, the swift and forceful action of policymakers to support businesses and consumers has successfully limited the damage to household incomes. With restrictions limiting households’ ability to spend, monthly savings soared to levels far above those observed in a “normal” recession. Totting up the excess household savings for 2020 – the amount saved last year above what consumers normally put away – the numbers are extraordinary (Exhibit 1). 

Exhibit 1: 2020 excess household savings

% of nominal GDP

Source: BEA, Bloomberg, Eurostat, ONS, Refinitiv Datastream, J.P. Morgan Asset Management. Excess household savings are defined as the aggregate amount that the consumer saved in 2020, in excess of typical annual savings for a given economy. Data as of 30 April 2021.

On top of the excess savings accumulated in 2020, US consumers also benefit from the recently announced USD 1.9 trillion stimulus package, which is extraordinary in four ways. First, its size: it is worth about 9% of US GDP. Second, its speed. About 5% of GDP will be doled out before the end of September. Third, its timing. The stimulus is being delivered when the economy is recovering, rather than contracting. And finally, its nature. USD 400 billion of the stimulus is in the form of cheques in the post. For example, a family of five with a total income of under USD 150,000 will receive a combined USD 7,000 in stimulus cheques. The package will boost household incomes enormously in the first half of this year (Exhibit 2).

Exhibit 2: Selected US government benefits

% of nominal GDP

Source: BEA, Congressional Budget Office, Joint Committee on Taxation, Refinitiv Datastream, J.P. Morgan Asset Management. JPMAM forecast from Q1 2021 onwards.
Data as of 31 March 2021.

Roaring growth and the risks

Disagreement among forecasters about whether these pots of excess household savings will be spent is leading to significant dispersion in forecasts (Exhibit 3). 

Exhibit 3a: US real GDP quarterly growth forecasts

% change quarter on quarter (annualised)

Exhibit 3b: US headline CPI forecasts

% change year on year, quarterly average

Source: Bloomberg. J.P. Morgan Asset Management. CPI is consumer price index. Data as of 30 April 2021.

The unique nature of this crisis and the policy support that followed means that history provides little precedent. Some argue savings won’t be spent because they are concentrated in higher income groups, where the marginal propensity to spend is less. But this is a highly unusual situation in which consumers have been forced to save rather than choosing to save, so normal propensities to consume may not hold. We suspect the outcome will be towards the top end of estimates. 

Is this a US or a global story? The US will almost certainly see more spectacular growth than its developed world peers this year. However, we expect it to be a global story by the end of the year. Not only are other regions reopening with considerable pent-up domestic savings, but some of the US fiscal stimulus will boost growth elsewhere. 

As the saying goes, when the US sneezes the rest of the world catches a cold. But it is also true that when the US has a party the rest of the world gets an invite, so we expect this US spending to help fuel growth in regions where stimulus has not been so generous. European and Asian economies are both major beneficiaries of a pickup in US growth, accounting for over a fifth and over a third of total US goods imports, respectively.

Investment implications

How will markets react to roaring growth? It depends whether the bounce back is even more spectacular than the market already expects. 

Consensus expects S&P 500 earnings to grow nearly 30% this year, and a further 14% next year. The fact that the S&P 500 sits on a forward price-to-earnings ratio of 22 may suggest that investors are more optimistic about the prospect for earnings than the analysts who provide estimates of forward earnings. Should 12-month forward earnings continue to rise as we expect, the market could climb higher. Declining valuations would moderate some of that upside, leading us to expect a more gradual pace of gains than we have seen so far this year.

The bond market is potentially more vulnerable to repricing, particularly if the bounce back is in inflation as much as growth. 

The Federal Reserve (Fed) has already said it will tolerate what it expects will be “transient” inflation, but indications of a more persistent pickup would test its resolve. Under its new average inflation targeting scheme, the Fed has said it will not raise rates until three conditions are met: inflation has risen to 2%; is on track to moderately exceed 2% for some time; and the labour market has reached maximum employment. While the first condition is clearly objective, the other two contain a good deal of ambiguity.

Rising yields may generate broader asset market volatility and can also drive the equity market leadership. Periods of rising yields tend to occur when cyclical sectors outperform the broader index, while the more defensive sectors are prone to struggle. In particular, rising yields help financials that benefit from increased economic activity and improving net interest margins (Exhibit 4). However, areas of the market that have benefited most from low bond yields may struggle. 

Exhibit 4: Correlation of S&P 500 sectors to us 10-year Treasury yield

10y correlation of sector rel. performance with US 10y Treasury yield

Source: Refinitiv Datastream, Standard & Poor’s, J.P. Morgan Asset Management. Correlation is calculated between the six-month change in US 10-year Treasury yield, and the six-month relative performance of each sector to the S&P 500. Past performance is not a reliable indicator of current and future results. Data as of 31 March 2021.

In summary, we believe the stage is set for a spectacular growth recovery in the second half of the year. This might suggest some caution about duration in fixed income. Within equity markets, we would expect to see an ongoing rotation towards cyclical sectors and value stocks. 

A good input from J.P. Morgan, these regular market updates help us stay informed as to what is happening within the markets. 

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

Charlotte Ennis

04/05/2021

Team No Comments

How can I spot someone trying to scam me?

Please see below article received from AJ Bell yesterday afternoon, which provides useful tips on how to avoid scams and illegitimate investments. As scammers become increasingly more cunning and commonplace, this article is certainly a must-read.

Financial scams are depressingly common and often target people’s hard-earned pensions. This has particularly been the case since 2015, when government reforms gave savers total freedom and choice over what they do with their retirement pot from age 55.

Official estimates from the Pension Scams Industry Group suggest £10 billion has been stolen from pensions in the past six years.

Scam activity has increased during the coronavirus pandemic, with fraudsters aiming to take advantage of increased vulnerability among UK savers.

And while efforts are being made by the authorities to protect people from financial crime – including banning pensions cold-calling and giving providers more power to reject suspicious transfers – the onus remains on individual investors to protect themselves.

Here are five things you can do:

  1. Be suspicious of unsolicited calls, texts or emails about
    your pension:     Scams often start with a call, text or email out of the blue offering ‘help with’ or perhaps a ‘review of’ your pension arrangements. To be safe, if someone you don’t know contacts you about your pension – or indeed your finances in general – do not engage with them. If you believe someone is trying to scam you, report them to Action Fraud to help protect other investors.
  2. Be extremely wary of anyone promising large, guaranteed returns: Another tell-tale sign of a scam is the promise of huge, guaranteed investment returns, often over relatively short spaces of time. These investment ‘offers’ take many weird and wonderful forms, while the rise in popularity of cryptocurrencies has also been an obvious target for financial fraudsters.
  3. Only deal with regulated companies and individuals: At the heart of scams are often unregulated ‘introducers’ peddling unregulated investments. While there is nothing wrong with investing in unregulated assets, where fraud occurs these often turn out be vastly overhyped or entirely fictitious. Even where an unregulated investment is real, if you suffer losses through misselling you will not qualify for FSCS protection worth up to £85,000.
  4. Do your due diligence: Scammers’ tactics have become more sophisticated in recent years, with ‘clone’ scams – where fraudsters impersonate a real firm to con you out of your cash – increasingly common. You can cross-check the phone number or email address provided by someone who contacts you with the FCA register to make sure they are who they say they are.
  5. Don’t be rushed and if in doubt, speak to a regulated financial adviser: High-pressure sales tactics – such as telling someone they need to invest by a set deadline – are a classic scam tactic and should immediately set off alarm bells. Do not under any circumstances be rushed into a decision you aren’t completely happy with. If you want help with your options or are unsure what to do, consider speaking to a regulated financial adviser or visit Government-backed retirement guidance service www.pensionwise.gov.uk.

We will continue to publish articles that are relevant and useful to our clients. Please check in with us again soon.

Stay safe.

Chloe

30/04/2021

Team No Comments

Invesco – Markets contend with a week of surprises

Please see below an article from Invesco which was published on Tuesday and received yesterday afternoon:

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

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner

29/04/2021

Team No Comments

Equities slide on rising Covid-19 infections

Please see below for Brewin Dolphin’s latest markets in a minute article, received by us yesterday evening 27/04/2021:

Most major stock markets declined last week on fears that rising Covid-19 infections could hinder economic recovery.

With Europe firmly in the grip of the so-called ‘third wave’, the pan-European STOXX 600 ended the week down 0.8%, while Germany’s Dax fell 1.2% and France’s CAC 40 declined 0.5%. The UK’s FTSE 100 slid 1.2%, with positive economic data failing to lift investors’ spirits.

Rising infections also weighed on Japan’s Nikkei, which dropped 2.2% after the country reported nationwide daily infections of more than 5,000 for the first time in three months. This led to another state of emergency being declared in several prefectures.

US stock markets posted small declines last week after President Joe Biden announced proposals to nearly double taxes on capital gains for those earning more than $1m a year. In contrast, Chinese stock markets posted solid gains following strong inflows from Hong Kong via the Stock Connect trading programme.

Last week’s markets performance*

  • FTSE 100: -1.2%
  • S&P 500: -0.1%
  • Dow: -0.5%
  • Nasdaq: -0.3%
  • Dax: -1.2%
  • Hang Seng: +0.4%
  • Shanghai Composite: +1.4%
  • Nikkei: -2.2%

* Data from close on Friday 16 April to close of business on Friday 23 April.

European stocks gain on travel plans

UK and European stocks rose on Monday after European Commission president Ursula von der Leyen told the New York Times that inoculated Americans will be able to visit the EU in the summer. The STOXX 600 added 0.3% and the FTSE rose 0.4%, with shares in easyJet, Ryanair and TUI all posting strong gains.

In the US, the Dow slipped 0.2% whereas the S&P 500 and the Nasdaq rose 0.2% and 0.9%, respectively. Tesla started a busy week of corporate earnings statements, reporting a 74% surge in quarterly revenues. Apple, Microsoft, Amazon, Alphabet, Boeing and Ford are all due to release first quarter results this week.

HSBC and BP were in focus at the start of trading on Tuesday, with the former posting a 79% rise in first quarter pre-tax profit, and the latter receiving an earnings bump from higher oil prices and a surge in revenue from natural gas trading. The FTSE 100 opened flat ahead of the US Federal Reserve’s two-day policy meeting.

UK economy shows signs of rebound

Last week saw the release of several pieces of economic data that suggest the UK economy is starting to rebound from the Covid-19 crisis. Friday’s IHS Markit/CIPS flash composite PMI showed a strong revival in private sector output following the downturn seen at the start of 2021. The index rose to 60.0 in April from 56.4 in March – the strongest overall rise in private sector output since November 2013.

For the first time since the pandemic began, service activity growth outperformed manufacturing production growth. The service sub-index rose from 56.3 to 60.1, marking the fastest pace of expansion for more than sixand-a-half years. The manufacturing sub-index increased from 58.9 to 60.7, the highest since July 1994.

Separate data from the Office for National Statistics (ONS) showed UK retail sales volumes continued to recover in March, increasing by 5.4% from the previous month. This reflected the easing of Covid-19 restrictions on consumer spending. Sales were 1.6% higher than in February 2020 – the month before the pandemic struck.

UK retail sales surge 5.4% in March

Non-food stores provided the largest positive contribution to the monthly growth, with increases of 17.5% and 13.4% in clothing stores and other non-food stores, respectively. Fuel retailers reported monthly growth of 11.1%.

However, the ONS said retail sales for the quarter were subdued overall. In the three months to March, sales fell by 5.8% when compared with the previous three months because of tighter lockdown restrictions.

US economy moving to post-pandemic state

Last week’s flurry of US corporate earnings reports suggest the economy is starting to transition to life after the pandemic. Most notably, Netflix announced it had added just under four million subscribers in the first quarter – missing its forecast of six million. The company said it expected one million paid net additions for the second quarter – versus ten million in the second quarter of 2020, when it benefitted from a surge in demand at the beginning of the crisis.

Elsewhere, figures showed US weekly jobless claims fell to their lowest level since the onset of the pandemic, declining by 39,000 to 547,000 in the week ending 17 April. This was far better than the 617,000 figure. forecast by analysts.

US existing home sales declined by 3.7% between February and March to a seven-month low, largely because of the acute shortage of houses on the market. Compared with a year ago, when home sales first started to fall when the pandemic hit, sales were 12.3% higher. Limited supply and strong demand pushed the median existing home sales price by a record-breaking annual pace of 17.2% to an historic high of $329,100, the National Association of Realtors said.

Eurozone manufacturing enjoys record boom

Over in the eurozone, business activity in April experienced its fastest rate of increase since July 2020, thanks to record expansion in manufacturing output and a return to growth in the service sector. The composite PMI rose from 53.2 in March to 53.7 in April, according to IHS Markit’s preliminary ‘flash’ reading, which is based on around 85% of final responses to the survey.

Manufacturing output grew for a tenth straight month, expanding at a rate unsurpassed in more than two decades of survey history. The service sector continued to lag because of Covid-19 restrictions in many member states, but still reported the first expansion of activity since August 2020, rising from 49.6 in March to 50.3 in April.

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

Keep safe and well.

Paul Green DipFA

28/04/2021

Team No Comments

Sustainable fashion: Why it matters, and how to identify the winners

Please see the below article from JP Morgan received yesterday, 26/04/2021:

The concept of sustainability is rapidly rising up the agenda within the fashion industry. Yet while consumers are increasingly interested in sustainable fashion, they are not willing to pay a premium for it. Still, sustainability can be a competitive advantage. We have seen companies delivering a sustainable message, but identifying the true leaders from the potential greenwashing takes research.

Consumers care about sustainabilty, but not at any price

As the global population grows, the negative environmental impacts of our demand for fashion are becoming more apparent. The industry is responsible for 10% of global carbon emissions and 20% of global wastewater, as well as producing significant amounts of waste. The equivalent of one garbage truck of textiles is dumped in landfill or burned every second.

75% of consumers view sustainability as ‘extremely’ or ‘very important’ in their fashion purchasing decision. And over 50% of consumers would switch for a brand that acts in a more environmentally and socially friendly way. But in practice, are consumers really willing to pay? Not yet, it seems. Only 7% of consumers say sustainability is the most important factor in their decision making.

Exhibit 1: Consumers care about sustainabilty, but not at any price – most important factors in decision making

Consumers continue to rate ‘high quality’ and ‘good value for money’ as the most important factors in their decisions. This is backed up by our engagements with fashion companies, who claim that consumers are not willing to pay a premium for sustainability, although at the same price point they would choose the more sustainable offering.

To us, this signals that consumers have a preference for sustainability and it can be a competitive advantage for retailers. But companies need to see it as a way to maintain or grow their market share rather than a way to increase prices. Sustainable leaders should be investing in innovation and scale for sustainable solutions to bring prices down and maintain their brand position.

Case study 1

Re:NewCell: Driving down costs for sustainability in fashion

Re:NewCell is a Swedish company driving down the costs of sustainable materials through innovation. The company has developed and patented Circulose, a high quality material made from recycled clothes. We expect Circulose – which has already been adopted by the likes of H&M and Levi’s – to see increasing uptake within the fashion industry, helping to lower the cost of sustainable materials and improve the industry’s environmental footprint.

Case study 2

Adidas: Leading the charge on sustainability

Adidas, the well-known sportswear brand, is at the forefront of sustainability within the fashion industry. The company particularly stands out on circularity, which is embedded in its strategic priorities: by 2024, Adidas has committed to replace virgin polyester with recycled polyester. The company already partners with the environmental organisation Parley for the Oceans to use recycled polyester made out of plastic collected from the coastline. All of Adidas’s cotton is sustainably sourced via the Better Cotton Initiative, earning Adidas the top spot in a 2020 independent ranking on sustainable cotton sourcing. Adidas has committed to reducing greenhouse emissions across its entire value chain by 30% between 2017 and 2030, and then achieving climate neutrality by 2050. As a further validation of Adidas’s sustainability efforts, these goals were submitted for external verification by the Science Based Target initiative in February 2020.

Sources: Adidas and the Sustainable Cotton Ranking 2020 (77 companies).

The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.

Distinguishing the real from the fake

The fashion industry is highly fragmented, and sustainability standards are still in their infancy. More and more companies are reporting on both their environmental and social impacts. But with different companies focusing on different disclosures, metrics and measurement methodologies, how can we identify the best? For us, fundamental research and company engagement are key, allowing us to assess whether fashion brands are paying lip service to sustainability or whether they are truly committed to it.

What do we look for in a sustainable fashion leader? 

  • Has the company signed up to measurable targets to reduce its negative environmental footprint?
  • Is the company abiding by external certifications to demonstrate the sustainability of its products?
  • Is the company accurately measuring and reporting its entire carbon footprint?

The last of these requires particular research focus as only about 5% of a fashion retailer’s carbon footprint comes directly from its own operations (scope 1 emissions) or indirectly from generating the energy used by the company (scope 2). The vast majority of carbon emissions occur in the company’s value chain (scope 3). This includes production, processing and transportation of fibres and fabrics, transportation of the end product to its final destination, and emissions related to use, care and disposal. Unsurprisingly, this complexity means that emissions are currently underreported, with many companies only reporting on transportation of the end product. Fundamental research is therefore key to understand the supply chain picture and determine what companies are really doing to reduce their total emissions.

Conclusion

While price sensitivity remains key for consumers in the fashion industry, evidence points to sustainability becoming more important in purchasing decisions and ultimately to long-term brand value. This implies a material opportunity for sustainable leaders to stand out while unsustainable fashion brands lose out. Yet the potential for greenwashing is rife in the industry, making it difficult to distinguish between leaders and laggards in the transition to sustainable fashion. Company research and engagement is key.

Our Comments

This is another example of sustainability and ESG themes filtering down to everyday life.

The fashion industry, particularly the problematic ‘fast fashion’ companies seem to hit the headlines on a regular basis for all sorts of issues, from waste to poor working conditions so the sustainability of the fashion industry is starting to be questioned more often.

With fund managers now also becoming increasingly more concerned with ESG and sustainability issues, the fashion industry will have to also adapt to these changes in the way consumers and investors are thinking and what it is they are looking for when investing or purchasing their products.

Shopping for items such as clothes became pretty much an online only occurrence for a large proportion of the past 13 months, I have myself noticed that sustainability is being used a selling point, whether it be statements on the companies website or even noted in the products description. Some companies plant a tree for every item of clothing purchased.

As this article highlights, a lot of people would consider switching to more environmentally and socially friendly brands, but they may not be willing to pay an extra premium for it. Personally, I don’t think it will be long until paying extra won’t be an issue, as the world changes and now has ESG principles under a microscope, these companies will have to adapt to remain competitive in the marketplace.

From a personal experience perspective, I recently purchased an item of clothing having no idea it was part of a ‘sustainable’ line until I was checking the label for the washing instructions only to find out that the item was made out of 100% recycled plastic bottles and textile waste that had been processed and melted down into new fibres in an effort to save water, energy and reduce greenhouses gases.

The item was no more expensive than a ‘non sustainable’ item and the quality was probably better than products that use ‘virgin’ or non-recycled materials.

As consumers, if you don’t have to compromise on cost or quality, then why wouldn’t you choose more sustainable options?

Andrew Lloyd

27/04/2021

Team No Comments

Where are we in the market cycle?

Please see below article received from AJ Bell yesterday morning, which provides analysis of the current market landscape and discusses potential investment opportunities.

As regular readers will know, one of this column’s favourite market sayings comes from fund management legend Sir John Templeton, who once asserted that: ‘Bull markets are founded on pessimism, grow on scepticism, mature on optimism and die on euphoria.’

Applying this test can potentially help investors spot where value and future upside opportunities can be found. It can also help avoid areas which are so popular they could be overvalued and capable of doing damage to portfolios.

It is hard to avoid investments everyone is talking about with great excitement and resist ‘fear of missing out’. Yet history suggests looking at assets, stocks or funds no one is interested in is the best way to make premium long-term returns.

The last 12 months are a fine example of how some careful, but not wilful, contrarian research could have yielded rich rewards. As the pandemic began to make its presence felt, share prices plunged, oil collapsed into negative territory and government bonds’ haven status meant their prices rose and yields fell. Cryptocurrencies were tossed aside amid the general panic, too.

Yet wind on a year, and equities have beaten bonds hands down, with commodities not far behind. Technology is no longer the leading equity sector and defensive areas such as healthcare are relatively out of favour. Commodities (with the notable exception of precious metals) are doing well and cryptocurrencies are going bananas, as evidenced by the flotation of America’s leading crypto exchange just last week, namely Coinbase.

Studious analysis of these trends may therefore help investors to spot value and dodge the traps that the coming 12 months and beyond may offer.

UP, UP AND AWAY

Incredible as this would have seemed a year ago, ‘risk’ assets are showing the best total returns in sterling-denominated terms over the 12 months, as equities and commodities easily outpace bonds. Within fixed income, the riskiest option – high-yield corporate paper – continues to lead government and investment-grade corporate debt.

Within equities, Asia and Japan are doing best, perhaps owing to the relatively limited impact of Covid-19 upon their populations’ health and their economy.

Emerging markets overall are coming in from the cold (in another win for contrarians), and America’s dominance of the geographic performance tables is waning a little, too.

By equity sector, it felt like technology was the only game in town a year ago, with defensive areas like healthcare also proving popular. Yet cyclical, turnaround sectors now lead the way, with defensives and income-generating bond proxies lagging badly.

All of this fits the prevailing narrative that the combination of vaccination programmes, government fiscal stimulus and ultra-loose monetary policy from central banks will see the economy through the pandemic and provide a firm base for a robust economic recovery.

So too do the losses on long-duration government bonds and the outperformance of high yield debt. The latter tends to correlate more closely to equities than it does fixed income. A strong economic recovery would help to bring financially stretched firms back from the brink and leave them better placed to meet their obligations.

NEXT STEPS

Analysis of those performance statistics means this column currently sees the major asset classes like this as we head into summer 2021, using Sir John Templeton’s four phases as a framework.

Euphoria – and optimism – are a lot easier to find than they were a year ago. This is not to say that markets are primed for a collapse, but it may not take much to shake them up a bit as a result.

Scepticism pervades fixed income and government debt, so anyone who fears disinflation or deflation more than inflation could take this as a cue to top up allocations.

Conversely, anyone who sees the world returning to normal pretty quickly could seek out value on commercial property stocks or funds, especially those with exposure to office space, while those portfolio builders who are wary of a market wobble – and suspect that central banks will respond with every greater monetary largesse – may note with interest the underperformance of gold and miners of precious metals.

Please check in with us again soon for further updates and news.

Stay safe.

Chloe

26/04/2021