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Please see the below daily update article from EPIC Investment Partners received this morning 28/11/2024:

Moody’s recently upgraded Saudi Arabia’s rating to Aa3. This was the first such upgrade by the rating agency since it assigned the Kingdom an A1 rating in 2016. This new rating places Saudi Arabia on par with Hong Kong and Belgium and is higher than S&P Global’s A and Fitch’s A+ ratings. 

The upgrade reflects the Kingdom’s progress in economic diversification through its Vision 2030 plan. Despite challenges from lower oil prices and regional conflicts, Saudi Arabia is strategically investing to attract foreign investment and restructure its economy. Moody’s anticipates continued growth in the non-hydrocarbon sector, projecting 4-5% expansion in the coming years. 

However, the positive rating is tempered by ongoing fiscal challenges. The country faces consecutive quarterly budget deficits and is expected to see its debt-to-GDP ratio rise to 35% by 2030; though hardly eyewatering when compared with some AAA rated Western nations. Moody’s also highlighted potential risks from global economic uncertainties, oil market fluctuations, and regional instability that could impact the Kingdom’s fiscal stability. According to our Net Foreign Asset Model Saudi Arabia ranks as a 6 star nation with net foreign assets above 50% of GDP. 

The Saudi Public Investment Fund (PIF) received a corresponding upgrade. Managing nearly USD1tn in assets, the PIF is a key driver of economic diversification. Through its special purpose vehicle, GACI First Investment Company, The Saudi sovereign wealth fund has issued green bonds funding renewable energy, clean transport, and sustainable water management projects. The Aa3, rated 5.125% bond maturing in 2053 looks attractive, with an expected return and yield of just under 19% over 4 notches of credit cushion.  

Separately, the 39th annual American Farm Bureau Federation Thanksgiving dinner survey revealed interesting economic trends. The classic meal for 10 now costs $58.08, a 5% decrease from last year. A 16lb Turkey represents around 43% of the total cost and costs 6% less than last year. It is a great example of simple demand/supply economics. Prices should rise, as farmers raised 6% less turkeys this year (205m), the lowest number since 1985, partly due to avian flu. However, overall demand per head fell almost a pound this year contributing to a falling price instead. 

While the meal costs 20% more than five years ago, wage increases have offset this rise. A turkey’s price may have doubled since 1986, but the work hours required for a blue-collar worker to purchase it have dropped from 3.2 to 1.9 hours. 

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

Charlotte Clarke

28/11/2024

Please see below, an article from EPIC Investment Partners detailing their view on Donald Trump’s proposed import tariffs and the possible effects on global economies. Received today – 26/11/2024

President-elect Donald Trump has effectively pledged to unilaterally withdraw from the United States-Mexico-Canada Agreement (USMCA) – a trade deal he had negotiated – by threatening to impose a 25% tariff on key trading partners. In a provocative post on Truth Social, he also promised an additional 10% levy on Chinese imports, framing the tariffs as a necessary measure to combat illegal immigration and drug trafficking, particularly fentanyl.

If enacted, the economic implications could be profound. China, Mexico, and Canada collectively represent 40% of US imports, valued at USD 3.2 trillion annually. The announcement immediately unsettled global markets, with the Canadian dollar plummeting to a four-year low and the Mexican peso approaching its weakest level since 2022.

Trump’s plan to bypass Congress and enact these sweeping measures through executive action on his first day back in office has sparked widespread constitutional and economic concerns. The US Constitution mandates Senate approval for treaty creation but remains ambiguous about their termination. Historically, treaty withdrawals have involved both legislative and executive branches, with congressional backing viewed as a critical safeguard for significant trade policy decisions.

Regular readers will recall our views on tariffs and the potential dire economic consequences. This sentiment is echoed by research conducted by the National Bureau of Economic Research which reveals that prior tariff measures failed to deliver economic benefits, often triggering retaliatory actions, job losses, and rising costs for American consumers—disproportionately impacting low-income households.

The stakes are particularly high with Mexico, now America’s largest trading partner, accounting for around USD800bn in annual trade. Disrupting established supply chains with such tariffs risks undermining North American economic integration and inflating costs across industries, threatening to derail the very objectives these proposals aim to address.

This approach is characteristic of Trump’s negotiating strategy: making bold threats to create pressure points and leverage concessions. During his first term, tariffs on items like washing machines raised inflation concerns, though manufacturers ultimately adapted by relocating production. While such tactics frequently failed to yield desired outcomes, they became a defining feature of his presidency.

As Trump positions himself for his second term, these tariff threats may well function more as a negotiation tactic than a definitive policy—a familiar playbook that continues to unsettle global economic dynamics.

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Alex Kitteringham

26^th November 2024

Please see below, an article from Tatton Investment Management analysing the key factors currently affecting global investment markets. Received this morning – 25/11/2024

More and more loose ends

As we formulate our 2025 market outlook, the medium-term scenario looks increasingly uncertain. Cracks are appearing in the ‘Trump trade’ for US stocks. Investors hoped Trump II would pick a consistent, business-friendly cabinet, but it’s increasingly looking like a medieval court – competing influences leading to erratic policy. Elon Musk wants to slash spending in his “government efficiency” drive, but that will hurt growth if it happens before Trump’s expansionary promises. Investors were even disappointed by Nvidia’s earnings – which were good, but below the previously stellar standard.

UK inflation was higher than expected, but the Bank of England calmed bond markets with dovish signals. The autumn budget probably led to this dovishness: commentators bemoan that national insurance increases will hurt jobs, but that could actually help the BoE’s efforts to curtail wage inflation. UK bond yields fell, also due to weaker-than-expected retail sales and business sentiment. Sterling dropped, but that actually boosted sterling-denominated UK stock prices.

European stocks had the same currency boost after similarly weak data. Markets expect Trump’s policies to widen the US-EU growth gap, and the difference in business sentiment surveys backs up that expectation. Still, European businesses might be overly pessimistic, if tariff threats turn out to be negotiating tactics and the Ukraine escalation proves to be the darkness before the dawn. A stimulus-led rebound in Chinese demand would be a huge boost, too, and Chinese data is already improving. For Chinese assets themselves, the key question now seems to be whether the US will freeze them out of the global economy. 

Back to Trump, then. The potential impacts of his policies cover the whole range from disastrous to very bullish, and no one really knows where on that spectrum we might land. But, investors shouldn’t hide from this uncertainty, as de-risking could easily lead to missing out on a significant rally. Diversification and staying level-headed is key. That’s what we always try to do, and it’s more important now than ever.  

Will the US be able to “drill baby drill”?

It was assumed that Donald Trump’s “drill, baby, drill” policies would benefit US oil companies, but the opposite might be true. The global oil market is oversupplied, which has consistently weighed down crude prices this year despite geopolitical fears. The fundamental problem is weak Chinese demand, which has a lot of ground to make up even if Beijing’s stimulus packages work. The IEA predicts an oversupply of one million barrels per day in 2025, and OPEC+ is maintaining its production cap. US oil magnates backed Trump in the election, but growth in shale oil is weak and expected to slow further. 

Oil producers need a demand boost, not a supply boost. China’s consumption stimulus might help, but shale producers will struggle to take advantage while Trump wages trade wars. His tariffs will also increase costs for US refineries that buy foreign crude. The idea is to make them buy American, but many don’t have the infrastructure to refine the grades of crude most commonly produced in the US. Trump’s geopolitics might also indirectly boost foreign oil production – through Russia finding it easier to sell its oil, for example.

Supply-side reforms take a long time, and oil analysts expect that Trump’s boost to US production might only be felt after his term ends. But if “drill baby drill” is a long-term strategy, it will come up against the long-term headwind of a global renewable energy transition. Renewables will likely get cheaper over the long-term regardless of what Trump does. He may also have a harder time slashing green investments than anticipated, given that many Republican areas have benefitted from them. 

The short-term price outlook is weak, and it is hard to be bullish about the long-term. US oil companies might get fare relatively better than non-US producers because of Trump’s preferential treatment, but demand is still the fundamental problem.

The slow death of the WTO

Nothing symbolises Trump’s disruptive effects on global trade better than the slow demise of the World Trade Organization (WTO). It was a symbol of US-led globalisation since its 1995 inception, but its most historic moment – China joining in 2001 – might have ironically been the beginning of its end. China’s industrial growth has since fuelled the American discontent that first propelled Trump to the White House. He then effectively crippled the WTO’s rule enforcement by refusing to appoint judges to its board. 

As with Chinese tariffs, Biden maintained his predecessor’s indifference to the WTO. The mood in Washington had changed, and had his own economically nationalist plans for green investment. Other world leaders – most notably Europeans – want to salvage the organisation and are worried Trump might now finish the WTO off. That misses the point: Trump doesn’t have to kill the WTO, because Washington already considers it irrelevant. Trump’s promised tariffs flagrantly violate WTO rules, but barely anyone brings that up. Foreign leaders appeal to inflation and US self-interest to to curtail Trump’s tariff-setting; trade rules don’t get a mention.

The post-WTO world will likely have more regionalisation than old-school economic nationalism. You would normally expect European leaders to side with Washington, but they notably refused to do so on Chinese tariffs during the last two administrations. An openly hostile Trump could push the EU and China closer together, and possibly lead to retaliatory tariffs on US goods or services. The “or services” part is interesting, because they include huge tech revenues which are hard to tax. The WTO has nothing to say about this: it was built for cars and crude, not cloud computing. It will be interesting to see how global trade develops in the next four years.

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Andrew Lloyd

25^th November 2024

Please see the below article from EPIC Investment Partners detailing their thoughts on the potential implications of Trump tariffs on the Renminbi. Received this afternoon 22/11/2024.

The broad consensus seems to assume that the renminbi is set to weaken on the back of expected tariffs. However, the widely shared narrative of an inevitable renminbi decline in the face of trade tensions might be missing the bigger picture.  

While tariffs are often seen as damaging to exporters, as we mentioned last week in the context of a coming global slowdown, research by Amiti et al. (2019) suggests they can backfire on the imposing nation. Their study found that nearly 100% of the tariffs imposed on Chinese goods were passed on to US consumers, not absorbed by Chinese businesses.  

Tariffs across the board could potentially strengthen the RMB as trade partners seek alternatives, a dynamic already evident in the soybean market where US tariffs led to China shifting its sourcing to Brazil, impacting US farmers and benefiting Brazilian producers.  

Beyond the direct impact of tariffs, the RMB appears undervalued on several key metrics. China’s trade surplus is on track for a record $930 billion this year, and it’s predicted to exceed $1 trillion next year. The Big Mac Index, a light-hearted but telling measure of purchasing power parity, suggests the RMB is undervalued by roughly 38%. Part of the reason is substantially higher inflation in the US compared to China in recent years. 

Adding another layer of weakness for the US dollar is the potential for faster than expected US interest rate cuts. With US national debt soaring, the Federal Reserve may be forced to lower interest rates to manage debt-servicing costs which already accounts for the third largest expenditure item, having recently surpassed US defence spending.  

Academic studies have extensively examined the relationship between high debt-to-GDP ratios and economic growth. In their seminal work, “Growth in a Time of Debt,” Rogoff and Carmen Reinhart analysed historical data spanning several centuries and numerous countries to investigate how public debt levels impact economic performance. Their research identified a critical threshold: when a country’s debt surpasses 90% of its Gross Domestic Product (GDP), economic growth tends to decelerate significantly. The US is way beyond that threshold, with excessive budget deficits artificially boosting US growth, something that is not sustainable in the long term. 

So, the future for the RMB might be brighter than many anticipate. While uncertainty always lingers in currency markets, the potential decline of the use of the US dollar in the event of an expanded global trade war leaves the floor open for the renminbi to fill the vacuum. Whilst the consensus narrative of an inevitable decline in the renminbi seems to be widespread, economics and political necessity to “Make America Great Again” suggests the opposite, with US dollar weakness and renminbi strength the most politically acceptable outcome for both sides.  

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

Alex Clare

22/11/2024

Please see this week’s Markets in a Minute update below from Brewin Dolphin, received yesterday afternoon – 19/11/2024.

Global equities reached a new high last Monday, before consolidating a little throughout the week.

This is an appropriate time for the post-election euphoria to cool and for some details of the new regime to emerge, despite President-elect Donald Trump not taking office until 20 January.

Last week saw confirmation that both houses of the U.S. Congress (the Senate and the House of Representatives) will be controlled by the Republicans. However, ’controlled’ may turn out to be something of an exaggeration, as the thin Republican majority of eight seats out of 435 will make the House difficult to manage. The new Congress will meet for the first time on 3 January.

Trump nominates key officials

The period between the election and the inauguration is for transition and to enable the president-elect to nominate his key officials. Many of these will need to be confirmed by the new Senate, such as Floridian Senator Marco Rubio, who has been nominated as secretary of state (equivalent of the UK’s foreign secretary). Rubio’s nomination should be relatively straightforward.

More controversial are the nominations of Matt Gaetz and Pete Hegseth. Gaetz, who has been nominated as attorney general, resigned from the House on Wednesday while an ethics committee investigation into allegations of sexual misconduct against him was underway. Hegseth, a Fox News presenter, was nominated as secretary of defence.

A couple of appointees who will not need confirmation are Elon Musk and Vivek Ramaswamy, who will lead the temporary Department of Government Efficiency (DOGE), a title that’s more of an in-joke than an accurate descriptor.

A trillion-dollar budget cut?

Musk has claimed he will strip $2 trillion from the federal budget. His track record suggests this won’t happen, but something will. He has a history of overpromising in his commercial ventures; however, he also has a history of achieving extraordinary things, which stretches from building businesses to cutting costs. Musk’s acquisition of Twitter (now called X) saw him cut the workforce by 80% within a year, with half laid off within days.

Of course, there is a difference in what you can do as the owner of a private entity like X, or even as chief executive of a stock market-listed entity like Tesla, which has an almost entirely non-unionised staff, and what you can do with the power you hold as an adviser to a government with a largely unionised workforce.

Historically, the challenge of cutting public spending has been driven by Congress. Cuts to spending mean cuts to benefits or services and seeming complicit in that process can decimate re-election chances. The legislative branch therefore tends to be a stumbling block.

Musk is eyeing a process called impoundment as a way to take the responsibility out of Congress’ hands. Impoundment allows the government to not spend money Congress has appropriated for it. Strictly speaking, impoundment is not allowed anymore, so it will be interesting to see how Musk navigates that.

The executive branch of the U.S. government does lend itself better to radical action than, for example, the cabinet of the UK government. The UK cabinet tends to be made up of members of parliament who, at the very least, will need to seek re-election and may have aspirations to be prime minister. The U.S. cabinet may be drawn from politics or industry. They will be focused on delivering the president’s agenda and less concerned about being popular while doing so.

Government borrowing costs have risen since the election, a sure sign that the market sees the impact of this new regime as inflationary. The most obvious inflationary impact is through tariffs, which Trump can impose – however, this one-time change in import prices won’t necessarily cause a lasting impact on inflation.

Another likely consequence of the new regime is a cut in regulation, which should support growth. With limited spare capacity in the economy, that would normally be inflationary. However, cutting regulation can help create spare capacity too.

UK economic growth disappoints

In fact, this was a theme of Chancellor Rachel Reeves’ Mansion House speech last week. She sees financial services as the possible engine of growth and took aim at the Financial Conduct Authority’s Senior Managers and Certification Regime and the bonus deferral arrangements in the UK. She also issued growth-focused remit letters to several key regulatory entities. Exactly how much benefit this will bring remains to be seen.

The speech was held on Thursday evening, but by Friday morning reality had reasserted itself. The first estimate of UK economic growth during the third quarter was downbeat.

An unexpected contraction during September means that, for the whole quarter, the economy grew by just 0.1% in real terms. It’s a disappointing figure that probably makes the economy seem weaker than it really is. Consumer spending is still growing, as you would expect given the successive cuts to National Insurance contributions, increases in the National Living Wage, and public sector pay settlements.

Inventories dragged on growth, which should reverse over time. The IT sector, which tends to be a volatile sector, was weak. Some sectors, such as housing, are seeing a bounce-back and will benefit from the interest rate cuts already announced. Nevertheless, the UK’s economic momentum has slowed a little.

Where next for interest rates?

Interest rate cut expectations have tempered significantly since the UK budget and U.S. election.

Although both the UK and the U.S. cut rates on 7 October, the Bank of England’s now expected to stay on hold until February or March. It’s a coin flip whether the Federal Reserve (the Fed) cuts rates in December. Fed Chair Jay Powell suggested on Thursday that the U.S. economy’s resilience made cutting rates less of a priority. That followed an inflation print during the week that was very nuanced – however, core inflation remains stubbornly above target.

China sees first effects of stimulus measures

China has been suffering from the opposite problem with many prices falling, causing it to embark on a range of stimulus measures. The first of these seemed to register in retail sales growth data during October. Chinese families are encouraged to upgrade old and environmentally inefficient appliances and vehicles through generous tax incentives.

Is this enough to pull China out of its current economic slump? It doesn’t seem so, as demand in sectors not directly affected by the stimulus measures remains sluggish and credit growth is tepid. Further fiscal stimulus announcements are required, but a series of press conferences have failed to provide the detail investors are craving.

This week’s economic highlights include the provisional purchasing managers indices (PMIs), which will be released on Thursday, and UK inflation data, which will be released on Wednesday. The most anticipated event will likely be Nvidia’s earnings results, which will be released on Wednesday after the U.S. market closes.

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

Charlotte Clarke

20/11/2024

Please see below, an article from Tatton Investment Management analysing the key factors currently affecting global investment markets. Received this morning – 18/11/2024

Reading Trump’s tea leaves

Stocks were up and down last week. Investors bought into Donald Trump’s tax cut and deregulation agenda, then soured on Federal Reserve chair Jay Powell’s suggestion that interest rate cuts might be gradual. It was hoped that Trump would boost profit growth while the Fed would keep cutting, but Powell warned that the central bank isn’t “in a hurry” to slash rates. The data justifies this, but it was a bold statement ahead of a politically volatile Trump presidency, and sets up a fight over Fed independence. That pushed US bond yields to 4.5% and hurt stocks on Friday. 

Tariffs and deportations are also on Trump’s docket, which markets traditionally dislike but are currently seen as worse for non-US regions – thereby reinforcing markets’ belief in US exceptionalism. 

We have argued that Trump’s tax cuts will worsen US debt, as can be seen in the widening gap between US treasury yields and interbank swap rates. Interestingly, this measure of government debt risk has increased in Europe too. We suspect this is because markets think Trump tariffs will force European governments to spend more. UK bonds, meanwhile, have improved – especially after Rachel Reeves’ well received Mansion House speech. She suggested that pension funds could invest in private companies, which would support growth. Notably, the difference between US and UK bonds decreased last week.

We worry that parts of the Trump trade narrative don’t hang together. Markets expect growth, but comparatively little change to rate cuts; they think tariffs will hurt non-US regions, but that other governments won’t retaliate enough to hurt US growth. We think China will be more likely to respond with its own tariffs or by withholding key exports (China dominates global cobalt production) during Trump’s second term, for example. The pro-US story makes sense, but Trump’s effect on global markets is more uncertain than investors seem to realise. Company data releases – like Nvidia’s earnings report this coming week – will be crucial to watch.
 
Politics fogs European markets

Europe is in a tough spot. Germany and France look economically weak and politically unstable – after Macron’s electoral defeat in the summer and Germany’s governmental collapse last week. German Chancellor Scholz is likely to lose January’s election, and the (unlikely) risk is that the far-right AfD gains enough to enter a coalition. Germany’s export-led economy is squeezed on the one side by higher energy prices and on the other by a global manufacturing recession that was made in China. Trump’s likely tariffs on European goods will compound the problem, so his victory was seen as a hammer blow for European assets. Meanwhile, European governments seem to weak to address the growth problems.

The ECB is expected to cut interest rates more sharply in response, but investors see little upside from this steeper rate path. Stock are valued much cheaper in Europe than the US, which, together with lower rates, should make European stocks more attractive. But for that to turn around European equities, investors need to see some positivity around growth, which they can’t right now.

We think there are signs of hope ahead. China is now stimulating its demand, which will likely benefit European exporters, and a cessation of Ukrainian hostilities (one way or the other) would loosen the energy squeeze. Europe isn’t just Germany and France either: combined, Greece, Italy, Portugal and Spain equal German GDP, and growth in that region has been much better than the north. 

This a reversal of the classic pre-pandemic problem, when Germany powered ahead and the southern periphery faltered. Critics have long suggested that Germany’s fiscal prudence has been to the detriment of the Eurozone overall, but now Germany is likely to loosen fiscal policy while southern Europe is in a relatively stronger position. Europe’s economic problems are undeniable, but markets are arguably ignoring potential opportunities.

The crypto-president

Cryptocurrencies are surging after Donald Trump’s election win. Binance’s CEO thinks the president-elect will usher in a “golden era” for the sector, after four years of hostility from the Biden administration. Crypto enthusiast Elon Musk will head up a new “department of government efficiency” – nicknamed “DOGE” in a not-so-subtle signal to traders of Musk’s favourite memecoin dogecoin. ‘Meme-ification’ should make long-term investors wary of crypto. Dogecoin, for example, has a history of swinging up or down based on Musk’s actions, and it isn’t clear why naming a department after the currency should alter its fundamental value. 

It’s not just speculators that are buying crypto, though. Institutional investors are more accepting of crypto because of expected regulatory tailwinds. Our argument against is more nuanced: it’s not that cryptocurrencies won’t go up, but that we have no way of judging their underlying value in a way that is consistent with other assets in a sustainable investment portfolio. Maybe we just need a new way of valuing them, but even if we could it would be hard to reconcile this with valuation metrics for traditional assets.

You could get exposure to an expected crypto boom through shares in exchanges or Bitcoin miners, but we worry that newer, unregulated industries are often playgrounds for bad actors who want to disguise their leverage (as we already saw with the fraudulent crypto exchange FTX). That being said, the underlying technologies can still benefit economies more broadly, and at the moment these technologies are being funded by crypto traders. Trump’s crypto push could therefore boost long-term productivity, but we worry it could also pose risks to the financial system that are hard to gauge. Crypto’s “golden era” will have far-reaching implications that all investors should consider, even if they are not directly invested in cryptocurrencies.

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Alex Kitteringham

18^th November 2024

Please see the below article from Brooks Macdonald, analysing the key factors currently affecting global investment markets, received this morning 14/11/2024:

What has happened

Equity markets saw little price movement overall on Wednesday. The US S&P500 equity index ended the day marginally up at +0.02%, while the pan-European STOXX600 equity index finished down at -0.13%, both in local currency price return terms. A timely reminder perhaps that investor expectations matter, while yesterday’s US consumer inflation data saw some underlying annualised stubbornness, markets seemed to be more relieved that it wasn’t worse.

US consumer inflation

The rate of US annual core Consumer Price Index inflation (core CPI, which excludes energy and food prices) came in at +3.3% for the second month running and in line with expectations. However, looking at the core CPI Month-on-Month (MoM) rate, that held at +0.3% for the third month in a row. That left core CPI three-month annualised inflation tracking at a rate of +3.6%, which is likely to be a lingering concern for the US Federal Reserve (Fed) as it strives to get inflation down to its 2% target.

A US Republican clean sweep

Following last week’s US election, we have finally got confirmation that the Republican party has held on to control of the House of Representatives (House). The latest House votes according to the Associated Press show Republicans have secured 218 of the 435 seats in the House (where 218 is the minimum for a majority), versus the Democrats on 208 seats, with 9 seats still left to be formally decided. That gives US president-elect Donald Trump and the Republican party a clean sweep control of the presidency as well as both chambers of Congress (the House and the Senate).

What does Brooks Macdonald think

Consumer inflation is unlikely to enjoy a smooth ride going forwards. Fed Chair Jerome Powell said as much last week – that inflation rates will probably have a “bumpy path over the next couple of years” before closing in on the Fed’s 2% target. However, with a new US economic policy agenda under Trump to look forward to, the risk is that inflation could be even more unpredictable which is not what policymakers or markets would like.

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Andrew Lloyd

14^th November 2024