Team No Comments

Evelyn Partners Update – Labour wants Bidenomics for Britain

Please see the below article from Evelyn Partners detailing their insights on the recently called general election on 4th July. Received yesterday.

So, how do the parties compare? According to opinion polls, the Labour Party is set to form the next UK government with a comfortable majority. The poor showing of the Conservatives in the May local elections also adds weight to the argument that opposition leader, Keir Starmer, is set to become the seventh Labour Prime Minister, a century after James Ramsay MacDonald became the first Labour Prime Minister on 22 January 1924.

No doubt, investors will be trying to figure out what a Labour government might mean for UK financial markets. Politics matters when it comes to valuing UK equities. For instance, UK stocks suffered a material de-rating in the lead up to and after Brexit, including the political paralysis in the Commons under Prime Minister Theresa May‘s minority Conservative government. During that time, the UK’s stock market’s limited exposure to the rallying technology sector has also contributed to its unloved status with investors.

To get an idea of the potential impact from a prospective Labour government we need to understand the party’s economic agenda. A good starting point is Shadow Chancellor Rachel Reeves’ speech at the annual Mais lecture in March. It largely focused on delivering “broad-based and resilient growth” through greater state involvement in the economy and has some differences from the approach taken under the current Conservative government. The bottom line is that the Labour party wants to raise the growth potential of the UK economy through its economic agenda, which can be largely summarised in two key parts:

Stability and investment: Reeves argues that businesses need economic and political stability to create the conditions to invest with confidence through a policy she’s coined as “Securonomics”. Labour believes that by improving the information flow to firms through “partnership” with the government, as well as providing strategic direction and selective policy intervention, firms will be encouraged to invest their capital. This tailored economic approach for Britain is similar to “Bidenomics” – the flagship policies of President Joe Biden’s administration.

In short, Labour wants to direct business investment to areas where it believes the UK will have a strategic competitive advantage (e.g., green technology); commonly known as modern supply side economics. This is different to the traditional supply side economics championed by former Prime Minister Margaret Thatcher more than 40 years ago where regulations were cut to allow free markets to determine where private investment goes (think of the privatisations of British Telecom and British Gas in the 1980s).

Reforms: Reeves also made clear “the single greatest obstacle to our economic success” is the planning system. She argues that it creates barriers for opportunity, growth and home ownership and Labour will put “planning reform at the very centre of our economic and our political argument.”

Labour intends to address planning obstacles by streamlining applications with off-the-peg processes. Importantly, to address local opposition to planning proposals, Labour wants to devolve power away from the central government. The idea is that regions and local governments are assumed to have better knowledge of their respective areas and are better placed to fast-track high-value applications. While Labour’s policy is akin to the current government’s approach, Reeves wants to make even more progress on devolution. For instance, on planning reform, Labour intends to reintroduce mandatary local housing targets, employ more people to tackle backlogs and bring forward the next generation of “New Towns.”

Labour also wants to reform the labour market by strengthening workers’ rights. This includes banning zero hours contacts, repealing anti-union laws and ending “fire and rehire”. This will be unveiled in an employment bill within the Labour administration’s first 100 days. At this stage, it is unclear what impact labour reforms will have on the employment outlook.

Translating Labour’s policies into economic growth

A new Labour government would face a vastly different backdrop compared to the last one under Prime Minister Tony Blair in 1997 when government debt and the budget deficit were much lower. It’s likely that a Labour government will need to make spending cuts and/or raise tax over the next parliament to stay within current fiscal rules.

Certainly, Labour will be wary that breaking fiscal rules could lead to financial market turmoil: the short premiership of Liz Truss in 2022, when gilt yields soared to leave her economic agenda in tatters is a case in point. So, this will mean that fiscal policy could be a drag on growth and impact the independent Office for Budget Responsibility’s average real GDP growth expectation of 1.6% per annum over the next five years.

Labour aims to raise economic growth to offset the downside to output from bringing in the deficit. This will largely be dependent on encouraging firms to invest their shareholder’s funds in government-directed strategic areas by providing a favourable and stable environment through “Securonomics”.

Labour also expects its planning reforms and decentralisation to help raise workers’ productivity. However, this will be difficult to do when whole economy productivity (defined as output per hour worked) is already so low. It has increased by just 0.6% since 2009, after the end of the Global Financial Crisis (GFC). Austerity, financial sector deleveraging, competition from imports affecting the manufacturing sector and the rising proportion of the workforce on long-term sickness leave are already contributing factors to the UK’s poor productivity. For comparison, productivity rose at an annualised pace of 2.3% from 1971 (when the data starts) to the end of 2006, the year before the GFC started.

How would a Labour government affect the UK stock market?

There is plenty of uncertainty over whether a Labour government delivers on its rhetoric and whether their policies work to support growth, company earnings and valuations. So, we use scenario analysis to assess the impact on our expectations for the long-term returns of UK equities.

Our Head of Quantitative Strategy, Krishna Nehra, estimates a base case of 5.6% (nominal, annualised returns) for UK equities over the next 10 years. This is based on future real GDP growth, valuations and dividend yields. Under a bullish scenario, where Labour lift the UK’s potential growth rate and valuations expand, that would rise to 7%, while a bear case would produce returns of 4.9% per year.

Ultimately, what will probably drive UK equity returns is whether a Labour government can improve the investment landscape for UK companies.  In the Mais lecture, Reeves recognised that unlocking private investment requires institutional reform to encourage UK financial companies to invest in productive assets domestically. This will be crucial, as the scrapping of the dividend tax credit by Chancellor Gordon Brown in 1997 led to the share of UK equities owned by pension and insurance companies to fall from around 46% to just 4% currently.

If Labour wins the election, only time will tell if their policies succeed in lifting the economy’s growth rate. However, given the poor state of the UK government’s finances and subdued productivity, it will be a hard task for the next government to achieve.

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

24/05/2024

Team No Comments

EPIC Investment Partners: The Daily Update | Nvidia – Pricing in the Future of AI and Innovation

Please see today’s daily update from EPIC Investment Partners Received this morning:

Nvidia’s stock elicits polarised opinions, as its exponential revenue growth trajectory creates ambiguity between hype and value. Sceptics cite the company’s lofty price multiples as indications of overvaluation and price bubbles while advocates contend that conventional metrics inadequately assess the potential of transformative technologies to drive growth.

Nvidia epitomises the conflict between traditional valuation methods and the disruptive potential of innovation. As investors navigate this landscape, they must balance scepticism with recognition of the potential for genuine paradigm shifts.

The Fourth Industrial Revolution is currently underway, characterised by the rapid integration and advancement of groundbreaking technologies across various sectors marking a pivotal moment in human history. As innovations in artificial intelligence, robotics, the Internet of Things, 3D printing, nanotechnology, biotechnology, and quantum computing continue to unfold, they are reshaping industries, economies, and societies worldwide.

Nvidia is a core holding in the EPIC global equity strategy because it is positioned at the epicentre of this digital transformation, uniquely poised to reap the economic benefits of this revolutionary era.

In the first quarter ended April 28th, revenue surged 262% year-on-year and crushed guidance figures. Pricing power was also exceptionally strong as adjusted gross margins increased 220bps sequentially to 78.9% ahead of guidance of 77%.

Nvidia’s CEO Jensen Huan stated that demand for both its current Hopper AI platform and its more advanced incoming Blackwell system will both outstrip supply well into next year.

We see further upside ahead.

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

Andrew Lloyd DipPFS

23rd May 2024

Team No Comments

The Daily Update – Sticky UK Inflation & US Supply Woes Linger

Please see below article received from EPIC Investment Partners this morning, which provides a global market update.

This morning, we heard that UK inflation fell to 2.3% in April, the lowest level in nearly three years, as easing energy and food costs provided relief to households. However, the smaller-than-expected decline dampened hopes of an imminent interest rate cut by the Bank of England. Analysts had forecast a sharper drop to 2.1%, leading markets to trim predictions of a 25bp rate reduction as early as next month. 

The drop in the headline CPI from 3.2% in March was driven by falling energy bills (a sharp fall in the energy price cap), coupled with the cost of goods declining by 0.8%. Nonetheless, services inflation, a key measure watched by the BoE, came in hot, rising 5.9%, indicating the inflationary bug has spread through the economy. With wage growth also robust, economists warn the BoE may exercise caution at its upcoming meeting, as elevated services inflation poses an upward risk to inflationary pressures in the second half of the year.  

Ahead of the figures, the IMF upgraded its UK growth forecast to 0.7% for this year, from 0.5%, estimating a 1.5% expansion in 2025. The organisation expects inflation to near 2% in the coming months, predicting that the BoE will cut rates by as much as 75bps this year and 100bps in 2025, taking rates to 3.5% by the end of next year. The IMF also explicitly warned of further national insurance contribution cuts “given their significant cost.” The Fund also warned that the UK government is not on track to meet its main fiscal rule, i.e., reducing national debt in five years’ time, predicting net debt will continue to rise to 97% of GDP, instead of falling to 93% of GDP as forecast by the UK.  

Across the pond, supply chain disruptions continue to plague businesses across the United States, according to a recent survey conducted by the New York Fed. The survey, a follow-up to a similar poll in October 2021, revealed that about a third of service companies and nearly half of manufacturers are still struggling to obtain necessary supplies. This has hampered production, with many firms reducing output and raising prices in response – a troubling development as the Fed battles stubbornly high inflation. 

The survey results align with the New York Fed’s Global Supply Chain Pressure Index, which has tracked supply availability since 2021. However, there has been a slight divergence in the past few months, potentially indicating that inflationary pressures tied to stronger demand are building again. This is evident in the rising container shipping rates, with the spot rate for a 40-foot container from Asia to the US West Coast now more than double the level a year ago and nearly triple the pre-pandemic average. 

Lastly, for those of you in need of a giggle, the winner of the Beano’s Britain’s Funniest Class competition went to the Year 6 class at Northside Primary School in North Finchley, London:  

What’s the hottest area in the classroom? The corner – because it’s 90 degrees. 

In response, Mike Stirling, director of mischief at The Beano, said: “Year Six, Northside Primary School found the funniest angle overall and are deservedly now immortalised in Beanotown”. 

Please check in again with us soon for further relevant content and market news.

Chloe

22/05/2024

Team No Comments

Brewin Dolphin – Markets in a Minute

Please see below article received from Brewin Dolphin yesterday evening, which discusses new developments in the Middle East and fresh US inflation data.

Overall, last week saw stocks pause for breath. They’ve recovered well after some modest declines in April and bonds have made modest gains too.

Markets have had to digest the news of the death of the president of Iran, Ebrahim Raisi, in a helicopter crash, which follows the ongoing tension with Israel, but markets are doing so with few signs of stress. Whilst tragic, the circumstances around the crash do not seem suspicious. Visibility was poor in a mountainous area. The president is not the commander-inchief; that honour goes to the supreme leader, Ali Khamenei.

The president’s role will now be filled by Vice President Mohammad Mokhber, with elections held within 50 days. As with President Raisi’s election, the candidate list will be heavily filtered. All eventual candidates will have ideological views that maintain the current stance of isolation from the West and favour China.

Meanwhile, from a macroeconomic perspective, last week’s U.S. inflation data was the main focus. As inflation continues to normalise the case for lower interest rates becomes stronger, that in turn supports equities and bonds. The complication with this narrative is that inflation hasn’t necessarily been normalising, it has in fact remained abnormally high.

In a previous weekly round-up, we discussed the assertion that the current level of interest rates is restrictive. While it is likely this is the case, they aren’t clearly or substantially restrictive as some members of the Federal Reserve seem to believe. If that were true, then it would mean inflation would be coming down slowly rather than overshooting, as it has tended to in the past.

A small step in the right direction for inflation

Has last week’s data reinforced or undermined that narrative?

There have certainly been suggestions that the inflation picture is improving. One such suggestion is the fact that the monthly increase in prices has slowed. This is the important core measure of inflation (stripping out volatile prices of items the central bank can’t do anything about), and this was the slowest pace of price increase in four months, and the first time in seven months that the core monthly price move has not been more than forecast. Sometimes, though, movements can be skewed by dramatic movements in individual components.

So, what did the detail of this report tell us?

Following on from some anxiety over growing tensions between Israel and Iran, the oil price had been strong. To see headline inflation slowing when there is a positive contribution from energy is quite unusual. The oil price has since eased off a bit, so unless it recovers it’ll likely be a drag on inflation next month.

The category weighing on prices is durable goods. Durable goods prices have declined every month for almost the last year, and for most of the last two years. This represents the hangover from a massive overspend on durable goods which took place during the lockdown when U.S. consumers had ample cash and time but had relatively few alternative consumption options. Second-hand cars have weighed heavily on this subcategory.

Services are still hot

Beyond goods though the picture is less encouraging.

Services prices are more directly affected by the labour market and fall more squarely in the category of things the central bank can influence. If services prices are rising, then raising interest rates should limit the amount consumers are able to spend.

Services consumption should decline, and services prices should slow or fall.

Alas, services prices are not slowing as much as had been hoped. The special category of core services excluding shelter, which policymakers and investors use to gauge this, rose 0.4% in April. That’s the slowest rate so far in 2024, but it’s more than double the target rate, so some improvement is needed to make policymakers believe inflation is on a sustainable path towards target.

We do assume this will happen though. One of the reasons consumers have been able to keep on spending on services is because of their accumulated savings, but according to estimates by the San Francisco Federal Reserve, these are now fully depleted.

The market cheered this release, which may seem odd given the ambiguous readings on services. But it came at precisely the same moment as a set of downbeat retail sales reports, so for investors hoping to see lower interest rates in the future, there was at least some evidence (although still mainly focused on goods rather than services).

And then there are other signs that interest rates may not be restrictive.

For one, we’ve seen a lot of corporate bond issuance in the early part of 2024. Issuers believing interest rates are going to fall might wait until their borrowing would be cheaper, but more importantly the ease with which the market absorbed this issuance suggests that financial conditions are quite loose.

Move over Lion King, ‘Roaring Kitty’ is back

We then have the bizarre return of the meme stock craze.

Meme stocks were a late 2020 and early 2021 phenomenon which saw a couple of relatively small companies experience incredible levels of price volatility driven by the actions of retail investors, aided by the widespread availability of leveraged investments.

YouTuber Keith Gill, known as Roaring Kitty, identified a situation in which hedge funds (one in particular) were speculating on declines in the shares of a particular company whose fundamentals were probably not as bad as they believed.

By investing on a leveraged basis and commenting on what he was doing, and thereby attracting fellow investors, he drove the price upwards.

This was not good news for anyone who had speculated on them declining. They were in a situation where they’d borrowed the shares to sell and were now needing to buy them in order to return them to the lender.

Eventually, for a variety of reasons, the speculation in both directions ebbed away and the prices of both stocks, Gamestop and AMC, declined.

But last week has seen the craziness resume. GameStop was at one time 200% higher, whereas AMC rose 300%, but both have since fallen sharply.

It might be surprising that meme stock mania has returned given the number of investors who were tempted into the speculation last time, only to suffer significant losses. But what is more surprising is what sparked the latest rise and fall.

It was prompted by Keith Gill posting an image on his social media of a video game player, leaning forwards. This single post added billions of pounds of implied value to the shares of this company, despite not really containing anything approximating an endorsement.

The original meme stock wave was partly ascribed to people having lots of time and money during lockdowns, but the economy has reopened and consumers are supposed to be tightening their belts. Perhaps this wave of apparent stock market speculation is consistent with an environment of restrictive interest rates?

China struggles on

Finally, it’s worth mentioning Friday’s economic data out of China.

Chinese shares have been terrible performers for the past six years, with only the occasional short-term rallies. Their most recent low was in mid-January and since then they have rallied 35%. But why is this?

It’s not because of the strong Chinese economy. In fact, it’s likely the opposite.

Friday’s data continues to show China struggling. Retail sales are slumping and a modest recovery in industrial production was driven by overseas demand. Consumers are suffering because the value of their principal wealth, their houses, has fallen by an average of 7% over the last year. The main concern is that because so many properties are empty, prices are likely to continue to significantly decline.

To date, property support measures have come via demand support mechanisms – directing more credit to developers to finance the completion of existing projects (good for economic activity but intensifying oversupply) and stimulating demand by cutting mortgage rates and relaxing purchase controls.

However, banks still don’t want to finance the new developments which would normally attract a lot of funds from pre-sales. Households understandably don’t want to purchase unfinished homes from developers, even at lower prices.

China’s Politburo has suggested it’ll address oversupply by taking properties out of the market. Media reports suggest that officials are considering “having local governments across the country buy millions of unsold homes,” and policymakers are considering creating a national real estate investment vehicle to acquire and revitalise unfinished properties across the country.

These proposals are promising, but a lot will depend on how forcefully they are implemented and how purchases will be financed. The size of the property overhang is enormous, and any purchased units would need to be maintained or see their value diminish.

Investors are betting that based upon these challenges, monetary policy will be loosened, and local savers will see the equity market as a better home for their wealth than the struggling property market.

Please check in again with us soon for further relevant content and market news.

Chloe

22/05/2024

Team No Comments

EPIC Investment Partners – The Daily Update: AI’s Role in Halting Amazon Deforestation

Please see the below article from EPIC Investment Partners detailing the impact AI has had on the deforestation of the Amazon.

The Amazon is the world’s largest rainforest, in an area so vast it encompasses nine countries, including Colombia and Brazil. According to NASA’s Earth Observatory, it covers around 650 million hectares. The Amazon’s importance to the overall health of the planet can’t be understated.

Yet, deforestation remains an urgent problem. According to research by Amazon Conservation, nearly 2 million hectares of the Amazon were subject to deforestation in 2022, a 21 percent increase from the year before. If deforestation remains unchecked, it could permanently skew the planet’s ecosystem, according to international environmental experts.

So how does anyone tackle a problem so large and complex as trying to reverse deforestation on a major scale? Enter AI. Thanks to the power of data science, machine learning, and cloud technology, experts are developing innovative, collaborative programs that will make recognising deforestation patterns easier and provide tools for policymakers to use that could stop deforestation in its tracks.

A collaborative project called Guacamaya, led by organizations such as the Alexander von Humboldt Institute in Colombia, Universidad de los Andes, and Microsoft AI for Good Lab, is using AI technology to monitor deforestation in the Amazon rainforest. The project employs a three-pronged approach that combines satellite data, camera traps, and bioacoustics analysis to map the amazon. The databases are stored in the cloud and the group is using computational power of Microsoft Azure to design and train the models.

The first phase begins from high above, as satellites from the technology partner Planet Labs PBC provide daily high-resolution images of every single point on Earth. Project Guacamaya is developing AI models to quickly track these images over time, spotlighting areas of illegal deforestation or mining, for which a telltale sign is the presence of unauthorised roads. These models are 80-90% accurate and authorities can be alerted in minutes rather than weeks.

The second phase is AI camera recognition software to track the movement of wildlife through the rainforest. MegaDetector is an AI technology that streamlines a process that used to take days into minutes by identifying and classifying the findings. The last is through sound. Using bioacoustics, researchers can capture sound from the Amazon and use an audio AI model to classify bird and animal species. If a species suddenly appears in a different environment, it could be a sign of deforestation elsewhere.

The result of this project and others in the region is a live, interactive map of the Amazon, highlighting the high-risk areas. The hope is all of the region’s major leaders will come to the table to help build and act on the information for the good of the rainforest.

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

21/05/2024

Team No Comments

Tatton Investment Management: Monday Digest

Please see below, the ‘Monday Digest’ from Tatton Investment Management which analyses global macroeconomic issues currently affecting investment markets. Received this morning – 20/05/2024

Pluses and minuses

Global stocks edged higher last week, led by the US. The S&P 500’s slight gain was enough to push it to all-time highs, making a fairly average week seem like a great one. US equities were propelled by April’s 3.4% inflation figure –the first time CPI didn’t come in higher than expected this year. Markets have become so used to the US economy beating expectations that it feels like an achievement when things are as predicted.

We shouldn’t get too excited about US inflation. Producer prices beat expectations again, suggesting further inflation might be in store. This matches signals from consumer demand and strong corporate profits too. It is a conundrum for markets and the Federal Reserve, which is still signalling interest rate cuts despite continued strength.

Cuts look a sure thing this side of the Atlantic, with lower inflation and weaker growth prospects. But it remains to be seen how deep or fast the Bank of England and European Central Bank’s cuts will be. ECB board member Schnabel warned on Friday that, if the ECBslashes next month as expected, back-to-back moves are unlikely.

BoE dovishness has helped support a strong period for UK stocks, even though the US and Europe still have the upper hand year-to-date. UK investors should bear in mind that portfolio values don’t exactly track the FTSE 100 – which has undeniably been a good thing over the long-term. UK stocks used to be a fairly good barometer of global equity, but have become extremely focused on a few sectors in recent years, so are no longer a great yardstick.

The US’ tariff increase on Chinese electric vehicles and solar panels was one of the week’s most prominent stories. The actual economic effect will probably be small, but it shows continued tension between the world’s two largest economies. EU policymakers are currently staying out of it, but that could change if US tariffs lead to more Chinese‘dumping’ on the global market.

Markets’ middling week reflects these mixed signals. At least portfolio values are at new all-time highs too.

Inflation targeting: why 2%?

Markets were excited about lower US inflation last week, but headline and core numbers remain comfortably above the Federal Reserve’s official 2% target. But the Fed seems keen to press ahead with interest rate cuts regardless. 

This has made people question whether the 2% inflation target – adopted by nearly 60 countries – is even the right one. Many think that 2% medium-term inflation is unrealistic, given global macroeconomic trends of deglobalisation, decarbonisation and hangover from the pandemic. Even if it is achievable, is 2% inflation desirable?

In truth, the 2% target is a bit arbitrary. It started from an offhand comment by NewZealand’s finance minister in 1988, from which the central bank crunched a few numbers and started targeting 2% inflation. It seemed to work, so Canada adopted the same target a few years later. The Bank of England adopted an official 1-4% target range after leaving the ERM, which got shifted to 2% and legally enshrined after BoE independence. The BoE governor has to write to the chancellor if inflation strays 1% or more from the target, but the bank’s only explanation for the 2% target is that the government says so. The Fed didn’t even officially adopt a 2% inflation target until 2012.

Some argue that central banks don’t need a specific target. Paul Volcker famously crushed an inflation crisis in the 1980s without a specific target in mind, and the Fed, ECB and BoE have already loosened their own interpretations of a 2% target, with talk of long-term averages and “symmetric” targets. And even if we think inflation should have a target, there is little evidence to say 2% is the right one. IMF chief economist Olivier Blanchard thinks 3-4% is more appropriate, for example.

That being said, the worry is that changing the target now would undermine central banks’ credibility. They are already accused of being ‘behind the curve’ for the current inflation crisis, and changing the target now might look like throwing in the towel. The 2% target might be loosened when this is all over, but don’t expect pronouncements yet.

China building a new world order, but still living in this one

Vladimir Putin was in China this week, strengthening the “no limits” Russian-Chinese friendship. Economic ties between the two nations are now huge, totalling $240bn in bilateral trade last year. China’s trade with the US – an economy nearly 14 times as big as Russia – was $575bn in 2023. In an interview with Xinhua news, Putin beamed: “Today, Russia-China relations have reached the highest level ever, and despite the difficult global situation continue to get stronger.”

Both Putin and President Xi want to challenge US international supremacy, and China now claims to be the largest trading partner of over 120 countries. The country’s drive to create a multipolar world has accelerated in recent years out of necessity, with President Biden expanding the US-China trade wars launched by Donald Trump. On Tuesday, the White House quadrupled tariffs on Chinese electric vehicles, the latest move in a tit-for-tat that has knocked China from the top spot among US trading partners.

But China’s new world order doesn’t mean it has given up on the current one. Beijing launched a case against the US at the WTO in March and has unveiled multiple measures to lure western investors and businesses over the last year. Much of this is out of necessity, with the economy still ailing from domestic demand weakness and Beijing unveiling support measures to turn it around.

Interestingly, currency devaluation has not been one of those measures, despite historical precedence. Keeping the renminbi stable is necessary for attracting foreign investment, but it remains to be seen how much longer the People’s Bank of China can support its currency.

Beijing wants to create a new world order, but it has to live in this one. That is why we will probably see more policy signals that might look inconsistent – like buddying with Russia while trying to appease western investors. It makes China a curious investment proposition. The recent stock market rally shows that Chinese assets can be good for diversification, but politics pose unique risks.

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

Alex Kitteringham

20th May 2024

Team No Comments

EPIC Investment Partners: The Daily Update | A Game Changer in the EV Industry

Please see today’s daily update from EPIC Investment Partners Received this morning:

China’s Guangzhou Automotive Group (GAC) announced in mid-April that it had “broken through” several obstacles regarding the durability and safety of all solid-state batteries (ASSB), best described as the next generation of EV (electric vehicle) batteries. GAC has opted for a solid electrolyte system. This sets it apart from Toyota, a long-term partner of GAC, who are the world’s leading holder of ASSBs patents by some margin. 

It is widely recognised that China leads the way in EV adoption. In 2023 EVs market share reached 24%, almost double the market share in 2021. However, over the same period PHEV’s (hybrids) market share has almost quadrupled from 3% to 11%. The biggest advantage of PHEVs over EVs? Range and ease of ‘recharging’. 

This is about to change. GAC expects to roll out its ASSB in 2026 offering a range of over 1,000km (620 miles). Toyota and CATL are aiming to roll out their ASSBs in 2027 while Nissan and BMW are aiming for 2028 and 2030 respectively. All are expected to have a similar range. 

Crucially Toyota’s ASSB will have a charging time of just ten minutes – not substantially different from the time taken to refuel a vehicle with fossil fuel! This is likely to be a real game changer. 

We read about oversupply in solar panels, batteries and indeed EVs as China ramps up its goal of reducing dependence on (largely imported) oil and gas by increasing renewable energy production. China’s ability to develop at scale and reduce costs across a variety of industries is well documented. As the US and Europe complain about subsidies and other Government support, EV customers worldwide are enjoying better products at lower prices. 

We have the impression, rightly or wrongly, that the EVs currently available with a range of perhaps 250-300 miles suit an urban population much better than a rural dweller. This is a global opinion, not just China. 

An EV that will match an ICE (Internal Combustion Engine) on range and refuelling time suddenly looks like a very smart option for everyone, urban or rural. The real question is whether countries will invest sufficiently fast in their electricity infrastructure to cater for the increased demand for high-speed charging. There is no doubt that China will react to this challenge positively. The one ESG caveat is that the majority of China’s electricity (circa 56%) is still produced by coal fired power plants. 

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

Andrew Lloyd DipPFS

17th May 2024

Team No Comments

Brooks Macdonald Daily Investment Bulletin

Please see below today’s Daily Investment Bulletin from Brooks Macdonald, which was received this morning, 16/05/2024:

What has happened

Markets enjoyed a reignited rally yesterday following a warmly-received US Consumer Price Index (CPI) report which for once avoided any nasty surprises. Hopes for US interest rate cuts later this year were also buoyed by the latest US retail sales data for April, where the annual rate dropped to +3.0%, and weaker than expected. On both sides of the Atlantic yesterday, the US S&P500 and the pan-European STOXX600 equity indices both hit fresh all-time highs.

Latest US consumer inflation data lands

The latest (April) monthly US CPI report landed yesterday. The annual all-items CPI rate came in at +3.4% for April, down from +3.5% back in March. The core (excluding energy and food) CPI annual rate came in at 3.6% for April, down from 3.8% back in March. For both the all-items and the core rates of annual inflation, these were in-line with market expectations. Importantly, the annual core rate of inflation was the lowest reading in 2 years.

Market expectations for US Federal Reserve cuts up to two this year

On the back of the US CPI data, yesterday saw markets raise their expectations for Fed rate cuts later this year. For calendar 2024 as a whole, yesterday saw markets price in a cumulative -0.52% of cuts by the Fed’s December meeting, up +9 basis points, so once again pricing in a full two quarter-percentage-point cuts. For context, markets have had quite the ‘expectations journey’ so far this year. At the start of 2024, markets were pricing in more than 6 cuts each of -0.25% from the Fed. Lately this had dropped to less than 2 such-cuts. As for when the first Fed cut might come, markets yesterday raised the probability of a rate cut by the Fed’s September meeting to 61%, up from 50% the day before.

What does Brooks Macdonald think

As is so often the case, the devil is in the detail. Digging into yesterday’s US CPI report, the Month-on-Month (MoM) data gave investors some grounds for cautious optimism. Core services inflation slowed from +0.5% in March to +0.4% MoM in April, while core goods inflation remained negative at -0.1% MoM. Importantly, there was also a deceleration in shelter rents, which fell from +0.5% in March to +0.4% in April MoM. All in all, the US CPI data yesterday was a step in the right direction, and especially so following the previous four monthly CPI reports which had all been a bit hotter-than-expected. That said, further progress on inflation is likely going to be needed over the coming months in order to win over the US Federal Reserve and give them the confidence they need to finally start cutting interest rates.

Bloomberg as at 16/05/2024. TR denotes Net Total Return.

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

16/05/2024

Team No Comments

Brewin Dolphin – Markets in a Minute

Please see the below article from Brewin Dolphin detailing their key takeaways from recent market data. Received yesterday.

Markets were kind last week, marrying with the sentiment of the previous week’s round-up, where we discussed how the U.S. employment report added credibility to a dovish tone from Federal Reserve Chairman, Jay Powell.

We’ve seen a bit of push and pull with investors of late. At the start of the year, there were expectations of deep interest rate cuts (which seemed excessive), but some investors have now reached the point where they are entertaining the possibility of an interest rate increase.

However, markets now seem more realistic about the future trajectory of interest rates and the yield curve implies that rates will gradually fall over the next few years. Assuming that we see a recession within that period, bonds may outperform, but a repeat of the post-financial crisis bull market for bonds seems unlikely.

A quick recap of earnings season

The very recent stabilisation of interest rate expectations has been a supportive feature for equity investors, who’d started to become much more concerned about possible rate increases than economic growth. However, they’ve also had a raft of earnings results to sift through over the last few weeks.

Regular readers will know that some oft-quoted statistics regarding earnings season are meaningless. It’s of no consequence that 80% of companies beat estimates for earnings and 50% beat estimates for sales, because this happens every quarter. Generally, the important thing is the guidance companies give to inform these estimates, and how they evolve over time.

Usually, estimates are set and are influenced by whatever guidance companies offer, after which they gradually decline as the year progresses. My colleague Kelly Bogdanova from our RBC Wealth Management U.S. team has observed this phenomenon over time and notes that full-year estimates for 2024 company profits are holding up well, where usually they tend to slide downwards over the year (around 5% by this stage).

No change from the Bank of England

In the UK, the Bank of England (BoE) announced its latest monetary policy decision. Unsurprisingly, there was no change to the actual policy rates, but this was a meeting in which the BoE updates its forecasts.

It raised its growth forecast, albeit marginally, and reduced its inflation forecasts, even more marginally. The significance of this is that the BoE makes its forecasts based upon the path of interest rates implied by the markets. So, despite markets expecting fewer interest rate cuts, the BoE still expects growth to be a touch better.

To me, the most striking comments from Governor Andrew Bailey were that the committee would likely “need to cut bank rates over the coming quarters and make monetary policy somewhat less restrictive over the forecast period, possibly more so than currently priced into market rates.” That last phrase signals that he’s happy to guide interest rate expectations downwards. Doing so is effectively changing monetary policy, because the interest rate expectations he guides downwards will feed into mortgage rates. Those mortgage rates will then trigger housing market activity, support house prices and will likely make homeowners feel wealthier as a result.

This is also important because Bailey’s comments were couched in language which made clear that incoming data will need to support the idea of inflation moderating. Goods inflation is quite subdued at the moment, but services inflation remains high. A big part of high services inflation is housing and particularly high rental inflation. Expectations are for rental inflation to slow over the year. According to some studies, rents forming a record level of household earnings would seem likely to restrain the pace of rent increases to some extent.

The UK economic recovery arrives

I’ve talked about the signs of a cyclical recovery in the UK economy for the past few months, bouncing back from the “technical recession” of last year. Well, last week’s Q1 GDP report seemed to reflect that, with the economy expanding 0.6%. This was much stronger than expected.

The strength was across a broad range of sectors, but services consumption was a key area of strength. Any further recovery in house prices would likely drive more growth in consumption now that households have rebuilt their savings and are beginning to acclimatise to the higher prices.

So, the recovery of growth should be able to continue, particularly if the BoE is right and inflation continues to moderate, but there are some things to watch out for.

In the UK, the labour market seems to have slackened off from the post-pandemic labour shortage. The question is how much further will it weaken?

Provisional data has suggested that April saw the sharpest drop in employment outside of the pandemic period (records only go back ten years or so). These data are quite erratic and usually substantially revised (similar estimated declines from last month have been largely wiped out by revisions) so we shouldn’t be too hasty to extrapolate them into a sharp recession, they’re more likely to reflect a gradual ebbing of labour demand. In fact, the more worrying trend data, from the BoE’s perspective, would be the apparent resumed pick up in wages that is evident in the official figures and also some survey data.

Despite all the emphasis on the UK last week, it’s also worth mentioning that initial jobless claims ticked higher in the U.S., which will add to the softer labour market data from last week and give fuel to the argument that interest rates will indeed be cut this year.

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

15/05/2024

Team No Comments

Brooks Macdonald Daily Investment Bulletin

Please see below today’s Daily Investment Bulletin from Brooks Macdonald, which was received this morning:

What has happened

Markets looked to be in a holding pattern on Monday, ahead of key US Consumer Price Index (CPI) inflation data due out tomorrow. Helping to dampen the mood a little, was some caution from US Federal Reserve (Fed) Vice-Chair Philip Jefferson. Jefferson said yesterday that the Fed should keep interest rates in “restrictive territory” until it has “additional evidence” that inflation is moving toward target. Staying with the US, later today we have retailer Home Depot’s earnings results – along with fellow retailer Walmart due on Thursday, these are two of the most important corporate barometers for the US consumer, so it should provide us with a lot of information about how the US consumer is doing ‘at the coalface’. Finally, earlier this morning, UK labour market data just published has shown wage growth remaining strong. UK annual (nominal) regular pay in the 3-months-to-March is up +6.0%, unchanged from an upwardly revised 3-months-to-February, and above expectations looking for +5.9%. At the edges, this wage data will likely push back a little on the chances of seeing a June rate cut from the Bank of England.

European banking consolidation gets a possible green light

It’s been busy in the European banking sector lately. Last week, we saw a hostile Eur11.5bn all-share offer surface between two Spanish banks, with BBVA seeking to acquire its smaller rival Sabadell. But while the Spanish government has been quick to criticise BBVA’s approach, it is interesting that other European governments might take a different view to possible banking deal activity in their own markets. In a Bloomberg interview yesterday, French President Emmanuel Macron said he would be open to seeing a major French bank being taken over by a European Union rival because “dealing as Europeans means you need consolidation as Europeans”. According to Bloomberg, Macron’s logic is that such a move would spur the deeper financial integration which he sees as critical for the European bloc’s future prosperity. While European banks have seen good relative-market performance lately, valuations, at meaningful discounts to book value for the sector in aggregate, arguably still offer upside potential.

New York Federal Reserve survey sees inflation expectations pick-up

A survey out yesterday has seen a pick-up in consumer inflation 1-year-ahead expectations. The survey, from the New York Federal Reserve, on Monday, showed consumer prices are expected to be up +3.3% over the next year. That’s a pick-up from around the +3.0% mark over the previous four months and is the highest reading since November last year. Later today, the US inflation ‘news-train’ continues with US Producer Price Index (PPI) inflation due, before the all-important US CPI data lands tomorrow.

What does Brooks Macdonald think

Fed officials have been clear that they want to see more evidence that inflation is falling before they cut rates. Not only this but, in particular, they want to see evidence that inflation is moving sustainably towards their 2% target. If that’s the hurdle to get over, yesterday’s pick-up in surveyed consumer inflation expectations is not helpful. Meanwhile, the number of 0.25% cuts from the Fed expected by markets this year is currently stable at between 1-to-2, though this is a long way south of the 6-to-7 cuts that were priced in at the start of this year. With markets having already moved a long way already this year to discount the Fed’s current caution, interestingly, it could leave upside risk for Fed interest rate cut-hopes should US inflation data come in lower-than-expected over the next 2 days.

Bloomberg as at 14/05/2024. TR denotes Net Total Return.

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 DipPFS

14/05/2024