Blogs

Please see the below article from Tatton Investment Management detailing their thoughts on markets over the past week, received this morning:

Focus returns to stock market fundamentals

Markets were quieter last week. The lack of bad news meant investors could focus on concrete details, like stronger US growth, and looser European and UK monetary policy. The ECB cut interest rates as fully expected, and markets expect another cut in December after inflation dropped below the 2% target. UK inflation was also below 2%, bolstering market expectations of another Bank of England rate cut. Central banks are helped by disinflation from China, but new Chinese stimulus could change things. Despite UK bond yields dropping faster than others last week, the treasury is still worried yields are too high ahead of a difficult autumn budget.

UK yields are mainly high because of the US, though. US growth outperformance is back after a soft patch in the summer, exemplified by surprisingly strong retail sales data. That pushed up US yields and interest rate expectations. The Federal Reserve will still ease policy, but not as much as markets previously hoped – which has hurt smaller companies somewhat. Markets are awaiting the election outcome, which is evenly balanced. Sentiment has been helped recently by both candidates pulling back on the rhetoric markets don’t like – most notably Trump on tariffs.  

Sentiment was also helped by Israel’s decision not to target Iranian oil facilities, sending oil prices lower. With oil and election anxieties easing, investors switched focus to third quarter corporate profits. Tech stocks sold off after disappointing results from ASML, the Dutch producer of chipmaking equipment, but markets soon realised this was about past over-ordering and not future demand, once TSMC’s good results came out.

Results have been mixed overall, but that’s somewhat to be expected after a soft patch for US growth. What happens next is more important, and the outlook is still good. Lastly, we note that gold is breaking new highs, at a pace not seen since 1979. The current situation feels very different to that episode, so we will talk more about it next week.
 
Ishiba won’t reverse Abenomics

Markets are unsure of new Japanese prime minister Shigeru Ishiba. A monetary and fiscal hawk in the past, stocks sold off when he came into office, but he since suggested a change of heart.

We are positive on Japanese growth and assets, thanks to a combination of corporate reforms and the yen’s relative cheapness. These reforms were the third arrow of late prime minister Shinzo Abe’s ‘Abenomics’ and it has hit the target. The yen’s weakness has helped, and even though it strengthened in the past month it never looked expensive against the dollar. The Bank of Japan’s promise to not raise interest rates in times of market stress has put a ceiling on the currency. That has helped exporter profits, which is feeding back into corporate structural improvement. The best example is the reduction in strategic shareholdings – where companies would often own slices of each other, creating conflicts of interest and stifling progress.

Ishiba’s victory complicates the long-term story, but doesn’t undermine it. He was critical of Abenomics in the past, calling for higher interest rates and corporate taxes, but he has reversed those stances ahead of the 27 October election. That could just be an election ploy, but it’s also plausible that being leader has just pushed him closer to Abenomics.

Even if Ishiba eventually raises taxes, the reform process probably can’t be stopped. The Tokyo Stock Exchange now think that strategic shareholdings will fall to an acceptable level in four-five years, for example, reduced from a 15-year timeline. Interest rates are set to gradually rise,  but you could argue normalisation is needed to get Japan out of decades of stagnation. That was precisely Ishiba’s argument, but it must be gradual. If it’s too quick, we would probably see short-term volatility. Even then, the long-term positive case would remain.
 
Beijing doesn’t know how to stoke markets

Since the Chinese government announced monetary and fiscal stimulus last month, its stock market has been extremely volatile. The finance minister announced financial support for banks and local governments earlier this month, and on Friday the People’s Bank of China (PBoC) announced further interest rate and reserve requirement rate cuts. Some of these have boosted stocks, while others have disappointed market expectations. Investors were pleased on Friday that words of encouragement came from president Xi Jinping himself (he was rumoured to be hesitant about economic support) but his speech still focussed on the supply-side, when what China needs is support for consumer demand.

Markets have been underwhelmed at times, but the policy shift since September is genuine and Beijing clearly wants to stop the growth slowdown. Notably, the shift occurred right after one major coastal province warned it might miss this year’s growth target. Analysts, Alpine Macro, suggest that deflationary signals finally crossed Beijing’s “pain threshold”, and Xi’s intervention supports that narrative. We might wonder why support hasn’t been full-throated, but we suspect Chinese policymakers are waiting to see what happens with the US election. New Trump tariffs would probably require a policy rethink.

The question now isn’t so much Beijing’s willingness, but its ability. The back and forth suggests policymakers might not understand how their announcements affect markets and financial conditions. The stimulus shift came right after a disappointing PBoC conference, for example, and officials seemed to be surprised by the market reaction. Enough stimulus has already been announced to make a cyclically rebound likely, but anything beyond that requires a more stable policy framework. It’s not clear that Beijing knows how to make that framework. Stimulus will boost Chinese stocks in the short-term but, without a stable demand-side framework, those gains could be short-lived.

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

21/10/2024

Please see todays daily update from EPIC Investment Partners:

Back in 2001, Robert McTeer, then head of the Federal Reserve Bank of Dallas, offered a refreshingly straightforward approach to monetary policy. “When capacity utilisation hits X and the unemployment rate hits Y, come and talk to me about rate cuts,” he declared, eschewing the arcane models beloved by his peers. Two decades on, his focus on tangible economic indicators remains as pertinent as ever.  

Inspired by McTeer’s pragmatism, we developed a Fed Funds model based on three real-world metrics: capacity utilisation, industrial production, and inflation. This trinity has proved remarkably prescient, even anticipating seismic shifts like the advent of Quantitative Easing. Yesterday’s release of industrial production and capacity utilisation data, therefore, merits close scrutiny. 

Capacity utilisation is a key barometer of economic health. High rates often presage inflationary pressures as businesses raise prices in response to surging demand. Conversely, low rates typically signal muted inflation. Unsurprisingly then, US inflation peaked in June 2022, just two months after the peak in capacity utilisation. However, yesterday’s data showed capacity utilisation at 77.5%, languishing some 2.2 percentage points below its long-term average, suggesting subdued inflationary forces. 

Industrial production, meanwhile, offers a concrete measure of economic output. Here, the picture is less rosy. Despite overall economic expansion, industrial production has stagnated since 2007, betraying a structural shift away from manufacturing. Yesterday’s figures showed a mere 0.4% increase from the level of December 2007, underlining this trend. Not all service sector activities contribute to wealth creation as manufacturing does, and the sector remains a vital engine of innovation and productivity growth. 

Moreover, much of America’s post-2008 growth has been fuelled by government borrowing, raising questions about its sustainability. When viewed alongside declining capacity utilisation and weak industrial production, it appears that inflationary pressures are likely to remain muted. 

McTeer’s insight retains its relevance. By closely monitoring capacity utilisation and industrial production, we can apply our model to make predictions of potential monetary policy shifts. Current readings suggest that inflationary pressures are easing and that the American economy has room to expand without triggering a resurgence in prices. 

For now, the Federal Reserve’s steady-as-she-goes approach to interest rates seems justified. But the reliance on debt-fuelled growth casts a long shadow over the economic horizon. As McTeer might say, when the debt-to-GDP ratio hits Z, come and talk to me about sustainable growth. 

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

Andrew Lloyd

18/10/2024

Please see the below article from Brooks Macdonald, analysing the key factors currently affecting global investment markets. Received this morning – 17/10/2024

What has happened?

Markets had a decent day on Wednesday, as headline inflation pressures this week have broadly appeared to ease on both sides of the Atlantic – both UK (yesterday) and Canada (Tuesday) have this week seen their latest annual ‘all-items’ consumer inflation prints come in weaker than expected. That helped buoy equity markets yesterday as well as sending government bond prices up as their corresponding bond yields fell. Within equity markets, that theme of lower inflation lifted hopes for interest rate cuts, which in turn helped drive some rotation away from larger capitalised companies towards smaller peers, where the later are seen as more sensitive to interest rate expectations.

Chinese equities fall into correction territory

Earlier this morning, the Chinese CSI300 equity index ended down for the third day in a row, falling -1.13% in local currency price return terms, and tipping into correction territory (defined as a fall of -10% or more versus a previous high), falling -11% from its 8th October high. The latest disappointment came as a China Housing Ministry briefing earlier today underwhelmed investors – plans to increase loans for unfinished residential projects was seen as largely just reiterating previous announcements. For Chinese domestic investors, the recent stock market falls have been a reminder that extreme market moves can cut both ways: according to a Bloomberg news story, on one day last week, the phrase “close securities account” cropped up 56 million times on social media platform WeChat.

ECB meets with an interest rate cut on the cards

The European Central Bank (ECB) concludes its latest meeting today and is widely expected to cut interest rates by 25 basis points (bps), which would be their third-such-sized cut this year. If they do cut by 25bps, that would take the ECB deposit rate to 3.25%. Supporting rate cut hopes, the region’s economic background remains relatively soft – the Euro Area composite Purchasing Managers’ Index (PMI) recently dipped into economic month-on-month contractionary territory for the first time in seven months, while annual inflation rates have continued to fall, with the provisional Euro Area year-on-year headline inflation published earlier this month coming in at +1.8% for September, below the ECB’s 2% target.

What does Brooks Macdonald think?

Yesterday’s weaker than expected UK consumer inflation print has led to markets to price in a greater cumulative amount of rate cuts over the coming year. Indeed, by the close of trading yesterday UK derivative markets were pricing in 114bps of cumulative interest rate cuts by the Bank of England (BoE)’s June 2025 meeting, up some +9.8ps on the previous day. The BoE are next due to meet to decide on interest rates on Thursday 7th November.

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

Alex Kitteringham

17^th October 2024

Please see the below article from EPIC Investment Partners detailing their insights into Institutions, Development and Market Opportunities in global markets. Received this morning 15/10/2024.

In a world where economic fortunes seem as capricious as a game of Monopoly, the Royal Swedish Academy of Sciences has rolled the dice and awarded the Nobel Memorial Prize in Economic Sciences to Daron Acemoglu, Simon Johnson, and James A. Robinson for their groundbreaking studies on how institutions are formed and affect prosperity. 

Their research provides valuable insights into the role of institutions in economic development, offering food for thought for investors eyeing opportunities in emerging markets. The laureates’ work emphasises that countries with inclusive institutions that protect property rights, enforce the rule of law, and promote broad-based economic participation are more likely to achieve sustained economic growth.

This framework offers a new lens through which to evaluate potential opportunities in developing markets. Some Middle Eastern countries, such as the United Arab Emirates, Saudi Arabia, and Egypt, have been making strides in institutional reform, potentially setting the stage for robust economic growth. While recent unrest in the region may give investors pause in the short term, these institutional improvements suggest attractive investment opportunities for those with a patient outlook. 

In contrast, China presents a fascinating counterpoint to the laureates’ thesis. Despite lacking some of the inclusive institutions emphasised in their research, China has achieved remarkable growth due to factors such as gradual institutional reform, state-led development, a vast domestic market, and an export-oriented growth model. China’s unique model suggests significant growth potential, even if its institutions do not fully align with the theoretical ideal.

While recent market volatility in China may give investors reason for caution in the near term, the long-term growth story remains compelling for those who can stomach the bumps along the way. While the Nobel-winning research highlights the importance of inclusive institutions for long-term economic success, it also reminds us that the path to development can take different forms. A nuanced understanding opens up a world of opportunities, whether it is the reforming Middle Eastern economies or China’s unique growth model.

As always, thorough due diligence and a keen understanding of local contexts remain crucial when considering investments in emerging markets. But today’s Nobel announcement serves as a timely reminder that in the grand game of global economics, sometimes the most valuable properties are the institutions on which they are built. 

For investors playing the long game, building a portfolio on a solid institutional foundation may be the key to rolling a double six.

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

15/10/2024

Please see the below article from Tatton Investment Management detailing their thoughts on markets over the past week, received this morning:

Buy the rumour, sell the fact

Despite competing market narratives, stock markets were generally stable last week. China was the only exception; it managed to fit a boom-bust cycle into the space of a few days. There are plenty of uncertainties, but we’re still confident about the long-term outlook.

Bond yields climbed after surprisingly high US inflation. Markets’ implied path for US interest rates flattened; the expected trough in rates (coming early 2026) is now half a percentage point higher than what markets predicted in early October – as we said might happen. But this isn’t about the Fed turning hawkish. Inflation-linked bond yields rose quicker than nominals, meaning higher inflation expectations. The summer soft patch for US growth is over, but risk markets are still pretty happy about the growth-rates balance. The hurricane damage might strangely boost near-term growth, because of rebuilding efforts.

Higher US yields and a stronger dollar hurt UK bonds, which in turn bruised UK stocks. That is a problem for the government heading into a tough autumn budget. The treasury’s mixed messages haven’t helped. Chancellor Reeves warned about tax rises one day then backed off the next. Foreign investor flows need more certainty, which will only come after the budget.

China’s government is still the biggest flip-flopper, though. Investors were excited about ‘bazooka’ stimulus, but a much anticipated conference last week promised a measly amount of spending. Chinese stocks lost 13% from Tuesday to Friday, as investors worried that Beijing’s was just a paper bazooka. Incredibly, stocks were still up overall last week – showing just how wild China’s swings have been.

The biggest shock risk is still the Israel-Iran conflict, but there were signs of possible de-escalation last week. Iran’s leadership appears very week, and gulf states are pressuring the US to prevent an Israeli strike on Iranian oil fields. Oil prices fell in the early part of the week, and only rebounded after US growth and inflation data. The threat remains, but the underlying global growth picture is strong despite disturbances.

What to expect this earnings season

Markets await the US’ third quarter corporate earnings season. US earnings get more attention than other regions – partly because its equity market dominates global market cap, but also because American companies have to report every quarter. Profit results always move markets, but they are particularly important in an uncertain US economic outlook. Markets want a ‘soft landing’ (interest rate cuts without recession) which would need resilient earnings. The good news is that analysts expect a fifth straight quarter of profit growth from S&P 500 companies. There will inevitably be ‘surprises’ through the season, but reporting tends to follow a pattern.

With Q3 only just over, we are getting a drip feed of results and will see the bulk of reports in late October and early November. Cyclically sensitive financials tend to report first, since they always need up to date books. Tech companies tend to report later. Since these are such a huge part of the stock market, the biggest earnings reactions can also come later. This is epitomised by ‘Nvidia day’; the chipmaker’s reports have become massive market-moving events in recent years. The ‘surprises’ (how results fare against projections) are key, but companies have become adept at managing expectations so they can ‘beat’ them and get a share price bump.

S&P earnings growth is projected between 4-5%, but company forecasts always get strategically weakened heading into the season, so the actual figure will probably be higher. The only concern is that earnings forecasts have been revised down more than usual this time – which could just be more companies getting wise to the ‘beat’ strategy or a sign of actual decline. We think an actual earnings growth disappointment is unlikely, but this is a warning sign. It’s a risk which could mean volatility into the year end.

A new kind of antitrust

The US Department of Justice (DoJ) wants to break up Google, according to last week’s court filing. It comes after a US judge ruled the company a “monopolist” in August, for practices like paying to be the default search engine and charging rent on in-app purchases. A breakup could be even bigger for markets than Microsoft’s ordered breakup (which was overturned) 24 years ago. Parent company Alphabet is worth $2tn, and global market cap is much more concentrated on tech giants these days. But Alphabet’s shares barely moved on the news. Investors seem to think the actual result (after appeals) will be kicked down the road and ultimately diluted.

This might be overconfidence, based on old assumptions about antitrust law. The Biden administration has made clear it’s focussed on potential structural harms rather than the classic price gouging issues that antitrust regimes were originally built to tackle. The political understanding of monopoly has shifted to think that big is bad, even if there’s no direct evidence of consumer harm. Federal Trade Commission (FTC) head Lina Khan is the symbol of this approach. While the FTC isn’t involved in the Google case, it has brought many tech-busting cases during Khan’s tenure.

Khan is an interesting point for the future of US antitrust law. She was hired to reinvigorate antitrust regulation, but few of her high-profile cases have succeeded. She might not be reappointed under the next administration even if Kamala Harris wins, considering Harris donors dislike her aggressive approach. But whether that would mean a softer approach is harder to say. Donald Trump is assumed to be softer on tech, but his voter base dislikes big tech. Harris is assumed to be tougher, but her corporate donations far exceed Trump’s. Google’s outlook is uncertain, but investors might be complacent in thinking the problem will go away.

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

14/10/2024

Please see the below daily update article from EPIC Investment Partners:

According to data from the Investment Company Institute, money market funds experienced an inflow of $11 billion during the week ending October 9, bringing the year-to-date total to over half a trillion dollars. Historically, during phases of monetary easing, money market funds have attracted substantial cash inflows due to their liquidity and perceived safety. As of October 9, 2024, total assets in money market funds reached $6.47 trillion, a new record.

The Federal Reserve’s September 2024 ‘dot plot’ projections indicate further reductions in the federal funds rate, with expectations for rates to decline to 3.4% by 2025 and 2.9% by 2026. With the Fed’s dual mandate now seemingly focused on employment, yesterday’s rise in initial jobless claims to 258,000—the highest in a year—will likely reinforce the rate cut agenda. 

Almost unnoticed, bond funds have also begun to attract investor interest. Over the past 12 months, the Bloomberg Global Aggregate Index has risen by nearly 10%, easily surpassing returns on money market funds or cash. Historically, bond funds have shown notable gains during periods of declining interest rates. During previous rate-cutting cycles, such as those in 2001 and 2008, initial cash flows into money market funds were often followed by reallocations to bond funds as investors sought higher yields.

Money market funds often serve as an interim repository for liquidity injected by Federal Reserve easing measures. As conditions stabilise and uncertainty diminishes, investors typically shift from low-risk assets like money market funds to higher-return investments such as bond funds. Despite recent rate cuts, money market funds continue to offer yields superior to bank deposits due to slower rate adjustments. Additionally, the inverted yield curve, where short-term yields exceed long-term ones, supports the attractiveness of money market funds as a short-term option.

However, as rate cuts continue, bond funds are likely to become more attractive. Declining short rates generally lead to rising bond prices, enhancing potential returns. Investment-grade bonds, including government, corporate, and emerging market debt, are expected to offer higher yields than cash-equivalent instruments. Investors often focus too heavily on current yields, missing potential capital gains from bonds in a declining rate environment.

Drawing from recent cricket events, the record-breaking partnership between Harry Brook and Joe Root, which took England to 823 for seven declared, underscores the importance of timing. Just like the perfect brew of PG Tips, where timing is key to get the right flavour, investors must be mindful of when to transition from cash reserves in money market funds to bond funds. In cricket, hesitation can be the difference between scoring a boundary or losing a wicket. Similarly, investors must act decisively when transitioning from cash reserves in money market funds to bond funds. Hesitation could mean missing out on favourable conditions presented by declining interest rates.

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

Andrew Lloyd

11/10/2024

Please see the below article from EPIC Investment Partners, analysing the latest economic data releases in China and discussing their implications for policy making and investment decisions. Received this afternoon – 10/10/2024

Chinese household savings (measured as the annual increase in household deposits) have ballooned in recent years. In the ten years to 2017 household savings averaged Rmb4.75tr annually. This climbed to Rmb9.53tr over the next four years to 2021 and then doubled again to Rmb17.3tr in the last two years. Indications are that 2024 will show a similar number.

The flip side of this is, of course, household debt. Chinese household debt (as a % of GDP) has also risen steadily over the past two decades:19% in 2004, 29.8% in 2012, 55.8% in 2019 and 66.5% in 2023 according to Bloomberg economics. This is low by comparison with the United States and the United Kingdom where household debt (as a % of GDI) stands at 97.7% and 137.6% respectively according to OECD data, but it does make the point that Chinese households are willing to take on debt, primarily for property purchases.

For the statistical geeks, GDI (gross domestic income) is comparable to GDP (gross domestic product). 

Surveys of Chinese household intentions over the last ten years have consistently suggested that circa 75% of households want to save or invest more and only circa 25% want to increase consumption. This is a cultural issue, and it is difficult to change long held intentions or preferences. ‘Get rich before you get old’ seems an appropriate adage.

The collapse in the residential property sector is not the cause of excessive savings but it has aggravated a pre-existing ‘condition’. Outstanding individual residential mortgages have declined 3% from their 1Q 2023 high.

We are reminded of the long-held view of our old friend Doctor Jim Walker that trade surpluses are a sign of economic weakness and not a sign of strength. China last posted a (tiny – $1.7bn) trade deficit in 1996. The trade surplus in the first half of 2024 reached $156bn, completely blowing away the previously record annual trade surplus of $98bn in 2021.

Recent policy announcements are cyclical in nature, not structural. China needs inflation not deflation and a trade deficit not a trade surplus. Can the authorities ever get their heads around this proposition?

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

Alex Kitteringham

10^th October 2024