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Please see today’s daily update from EPIC Investment Partners below:

Chinese Premier Li Qiang has set the country an ambitious GDP target at “around 5%” for 2024. Moreover, Li announced steps to transform the nation’s development model, coupled with defusing the risks fuelled by bankrupt property developers and indebted cities. Li Qiang acknowledged the hurdles facing the world’s second-largest economy during his inaugural work report to the national parliament. “Realising these targets is not easy,” he said to the thousands of delegates gathered at Beijing’s Great Hall of the People. “Policy support and collective efforts from all fronts are essential”, he emphasised. Li also said that China aims to create over 12 million new urban jobs and keep the urban unemployment rate “at around 5.5%”. 

In a rare move, China will also issue CNY1tn (USD139bn) of ultra-long special treasury bonds this year and lower its deficit to 3% of GDP. The bond sale marks only the fourth of its kind in the past 26 years. The most recent sale was in 2020 when the Chinese government issued a similar special treasury bond to pay for Its pandemic response measures. Alongside the treasury bonds, local governments will be allowed to sell nearly CNY4tn of new special bonds, primarily to finance infrastructure spending. 

China’s defence spending will also grow by over 7% this year, the largest increase in five years. Defence spending is expected to rise to around CNY1.7tn ($234bn) in 2024, according to the annual Finance Ministry report. In contrast, the House of Representatives approved an USD886bn defence bill for the US towards the end of last year. 

Over to Microsoft, the largest holding in our Global Equity Fund, which released its ChatGPT AI system, seen by many as the introduction of AI to the masses, just over 300 trading days ago. Since its introduction, the Nasdaq has rallied around 46%. Following the release of Netscape, the first internet web browser in December 1994, the Nasdaq also rallied 46%, in approximately 300 days.  

What happened next? +725% for the next 5 years. 

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

Charlotte Clarke

05/03/2024

Please see the below article from Tatton Investment Management providing a brief analysis of global economic news and market data. Received this morning – 04/03/2024.

Overview: Winners and losers of stabilising yields

Last week was one of positive price action in equities, although the US mega-caps did less well, while bond markets were rather stable. Indeed, stable bond markets are one of the reasons why equity markets can continue to edge up. Interest rates and yields appear close to equilibrium levels, a state of relative steadiness which enables activity to happen. There were no big mergers or acquisitions last week but it is noticeable that companies are increasingly trying to raise equity rather than loan capital. Bloomberg pointed out that companies are finding the near-term cost of equity much more bearable now that dividend yields have fallen in relation to bond yields.

What has struck us in recent weeks is that consumer and business behaviours appear to be sensitive to quite small changes in rates. Small businesses are negatively sensitive and step up efforts to cut costs and reduce debt on any sign of a rise. Particularly in the UK, households are positively impacted by lower mortgage rates which drive a swift rise in housing activity. Currently, US rates are just about bearable for both camps. However, this also implies that the Federal Reserve (Fed) is unlikely to cut interest rates meaningfully. February data suggested US inflation was stabilising just below the 3% level –consistent with a slight Fed easing in the summer or autumn. This Thursday, the European Central Bank (ECB) conducts the first of March’s central bank meetings. We think both the Bank of England (BoE) and the ECB ought to be on the verge of rate cuts. Growth is not collapsing, but neither is it rising. By focusing on labour pricing power alone, they miss the point that it is businesses that are paying that price. It is neither being funded out of money creation nor reflected in rising prices. Unfortunately, for yet another month, we will analyse words, not actions.

February 2024 asset returns review

Despite a mid-month lull, February turned out to be yet another strong month for investors, with global stocks delivering a very healthy 4.4% in sterling terms. The US was once again one of the strongest performers, with the S&P 500 jumping 5.2% in sterling terms. February’s broad-based rally was a good sign, allaying previous concerns that too much capital was focused on the US mega-tech sector. Speculation over an artificial intelligence (AI) asset bubble grew before and after Nvidia’s stellar earnings report, with revenue up 265% and profit up over 750% for the year. Euphoria seemed to peak last week though, and trading since has been much more muted. There was also a pick-up in US mergers and acquisitions, a sign of changes in market composition, which helped bring confidence to markets. One clear sign of this is the weaker dollar, suggesting solid global growth expectations. This was also reflected in bond yields, which weakened at the start of the month but subsequently recovered to recent highs.

European stocks gained a respectable 2.9% through February in sterling terms. So far, 2024 has been a steady incline for Europe, but as we have written before, the continent stands to benefit from stronger global growth. If the ECB is able to cut rates soon (and before the Fed) and Chinese demand comes through strong, it will be a potent recipe for growth. The FTSE 100 ended February with a 0.7% gain, ensuring a slight decline in year-to-date returns at -0.6%. Smaller British companies in particular – being more closely tied to the dynamics of the domestic economy – are having a hard time, with UK small-cap equities down 1.2% last month. The disparity between the UK and other markets – particularly the US – leaves UK equities with relatively attractive valuations, at least.

Chinese equities gained an impressive 9.3% in sterling terms, making it the best-performing region for the month. Weak demand and goods prices out of China have been a decisive factor behind lower commodity prices. Accordingly, there was an upswing in oil prices last week, and the commodity index we track gained 1.3% in sterling terms through February. Growing positivity in the global economy is a welcome sign, as is the fact that returns are no longer solely focused on AI. The worry, as usual, is that this could mean returning inflation pressures and a delay in central bank easing. There is no sign of that yet, but we will keep a close eye.

Nigeria shows why reform is always difficult

When Nigeria’s President Bola Tinubu came to power last May, Western investors cheered his embrace of market-friendly policies. These included removing the currency peg with the US dollar, dealing with the consequences of a botched attempt to move Nigeria’s cash-based economy into electronic banking, and scrapping Nigeria’s nationwide fuel subsidies. The latter reform was specifically recommended by the International Monetary Fund (IMF) and Tinubu won plaudits from the World Bank. But Nigeria’s economy has only worsened since; inflation is at nearly 30% and the naira has lost more than 70% since the peg’s removal.

To cushion rapid inflation and a tanking currency, the Central Bank of Nigeria (led by Dr Olayemi Cardoso) raised interest rates last week by an outsized 4% to 22.75%, when a 2.5% lift was expected. The move leaves Nigerian rates at their highest recorded level, but it may still not be enough. The country’s highest inflation rate this millennium is now being driven by currency collapse – itself an effect of dramatic capital outflows. There seems to be a run on Nigerian assets from both foreign and domestic investors, and it is unclear what would stop the flow. The experience of other countries has been that it requires rates to be far enough above inflation to tempt investors to risk earning the ‘carry’ (yield).

Part of the problem is some very unfortunate timing. When global energy prices skyrocketed two years ago, commodity-producing nations like Nigeria benefitted greatly. But what followed, the sharpest monetary policy squeeze in a generation, combined with dramatically lower commodity prices, had the opposite effect. In the last year, when inflation has been steadily declining in Western developed countries, Nigeria and other EM nations have been under increased pressure. Nigeria’s government is thereby focusing on what it can do alone, thereby reducing its economic dependency on the big economies of the US and China.

Last year, the government allowed the regulated banks to resume trading in cryptocurrencies, given that many Nigerians are involved in this market, with some commentators even suggesting that flows from Nigeria were a factor in the recent resurgence of Bitcoin. However, the Nigerian authorities have become worried that the crypto market is part of the Naira’s current instability and so banned the use of the unregulated exchanges. Gaining control of its sliding currency is a necessary first step in stabilising the economy, always a very difficult one to take, and one which modern markets make even more difficult.

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

04/03/2024

Please see today’s daily update from EPIC Investment Partners below:

Bank of Japan Board Member, Hajime Takata, has signalled there is a growing case to end Japan’s negative interest rate policy, with the BoJ’s goal of achieving 2% inflation “finally in sight”. “With monetary easing continuing, I believe we have reached a point where attainment of the 2% price stability target is finally in sight, despite uncertainty over the Japanese economy”, Takata said, adding “It is necessary to consider shifting gears from extremely powerful monetary easing, and how we should respond nimbly and flexibly toward an exit. 

Takata’s remarks, who is seen as a neutral on the nine-member board, will fuel speculation that the Bank of Japan may be preparing for its first rate rise in 17 years. However, Takata did not provide specific timing for any such increase, meaning the next BoJ meeting in March will be even more closely watched. 

 After Takata’s remarks, the yield on the policy-sensitive 2-year notes rose 1.5bps to 0.175%, the highest level since the War Horse film was released. 

We also heard from a number of Fed members overnight, all of which continued to tow the party line, leaning towards hawkish patience.   

Collins said that January’s CPI was an example of uneven inflation progress and that she wants to see more evidence of inflation stability. However, she did say that it’s unlikely the inflation decline can be sustained without slower growth. Bostic said that he expects inflation to continue its trajectory to 2%, although he is comfortable being patient on policy.  

Lastly, Williams said that he expects this afternoon’s PCE inflation number, the Fed’s favoured inflation indicator, to be around 2-2.25% in 2024 and at 2% by 2025. He said that the Fed could think about cutting rates later this year and that three rate cuts in 2024 is a “reasonable starting point”.     

Happy 29th February. 

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

Charlotte Clarke

29/02/2024

Please see this week’s Markets in a Minute update from Brewin Dolphin, which was received late yesterday afternoon:

Guy Foster, Chief Strategist, discusses earnings results from the Magnificent Seven and how these microeconomic factors are affecting the markets.

One topic dominated markets last week: Nvidia’s earnings announcement. It was one of the most anticipated and celebrated events in the market this year.

The shares, which were cyclically depressed at the start of 2023, went to triple in value by the end of the year and have risen another 50% since then. In the week before announcing its profits, Nvidia’s shares slid by nearly 9% as some investors feared that others were expecting too much. Memories of the technology stock market bubble of a quarter of a century ago loom large.

But Nvidia is far from the profitless companies offering jam tomorrow in the late 1990s. Nvidia’s results revealed revenues rising 22% over the preceding quarter, and 200% from the same period last year, with profits up 8x.

As with all stocks, the controversy surrounds what will happen in the future. The pipeline for artificial intelligence-related sales remains very attractive, but unlike the technology bubble, those expectations are grounded in exceptional growth happening right now.

We believe semiconductors are in a cyclical upswing that forms part of a secular uptrend. Individual companies can be volatile, but the supply chain comprises a number of different types of company serving different parts of the value chain, whose long-term trajectory should be positive, even while different factors move them in the shorter term.

Last week felt like Nvidia was singlehandedly pulling the market around, but what else was going on?

Back in the real world…

The purchasing managers indices (PMIs) offered an early snapshot of economic activity in February, painting a mixed picture.

In keeping with other data released so far this year, the US continues to look economically firm. The manufacturing and services sectors both seemed to expand at an accelerating pace. It makes sense to be a little wary of extrapolating the current trend too far. With unemployment so low there is limited room to expand employment, driving increased household income and spending. However, there still seems to be at least some scope because initial jobless claims for the last week declined. This leaves them very low, at levels consistent with a strong economy, although things can change fast.

Outside the US, PMIs were more mixed. European manufacturing remains in a slump and while France showed signs of early stages of recovery, Germany seemed to regress. Outside of these core economies, the peripheral eurozone members performed better – we just won’t know how much better until the end of the month as they don’t release provisional reports like the core countries.

Inflation benign?

Perhaps worryingly, selling price pressures rose during the month. We can take some comfort from the fact that price data from PMIs don’t correlate very well with consumer price indices. However, they suggest that for the services sector at least, the tight labour market is making it difficult to hold wages down. If other data backed these up, it could be difficult to cut interest rates as fast as the market has been hoping.

Interestingly, the price pressures are quite limited to services while disinflation seems to continue within manufactured goods. This is where we would expect to see the impact of higher freight rates emanating from the Red Sea (or, more accurately, from the Cape of Good Hope, around which Red Sea freight has been diverted). The Red Sea is an important transit route for Middle Eastern oil and Southeast Asian goods en route to Europe.

Freight rates are clearly continuing to rise but in Europe’s biggest economies, impact is outweighed by weak demand. This partly reflects the fact that freight is often transported on long-term contracts, which are less vulnerable to movements in spot freight rates.

China stimulus

China and Europe have a substantial bilateral trade balance, but both are currently labouring some.

In China, decades of overinvestment in property, which had become the principal vehicle for the wealthy, has resulted in chronic oversupply. Bursting that bubble became a priority for Xi Jinping’s Chinese Communist Party, but doing so has resulted in a persistent negative wealth effect (declines in the value of property make Chinese consumers feel poorer).

In an attempt to revive fortunes, China cut the loan prime rate for terms of greater than five years. This is essentially the rate which underpins mortgages and therefore serves as a stimulus for Chinese property. This morning’s data from China’s National Bureau of Statistics showed how important that could be, as property prices have continued to decline over the last month.

The slight green shoot of recovery that might be showing is the breadth of price declines may have narrowed. In December, 62 out of 70 cities saw prices for new properties decline, whereas in January that was just 56. Prices of existing properties fell in all 70 cities in December, whereas two saw an increase in January.

There is clearly a long way to go before this becomes a positive trend, and the risk remains that policy will not be able to turn around a sector so distorted by successive stimulus rounds and captive savings over decades. But at least policy is becoming more forceful in its attempt to support the sector.

Tax cuts

Finally, some good news came from UK public finances.

After strong tax receipts, it seems the government will borrow less than had been anticipated by the Office for Budgetary Responsibility. This means we can anticipate the unveiling of tax cuts potentially up to £10bn in the forthcoming budget. This is an enormous number that is difficult to put into context. It would be around half the tax cuts that took place at the beginning of this year after the autumn statement.

Recognising how much ten billion pounds is might also help to appreciate the scale of the market’s response to Nvidia’s earnings announcement. The company’s market value rose by more than 20 times that much on the day ($277bn, which is a record daily change in value for a single company)!

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

Andrew Lloyd DipPFS

28/02/2024

Please see the below article from AJ Bell detailing their insights into the depreciation of the Yen and its potential effect on markets. Received 26/02/2024.

The world’s biggest stock market by market capitalisation, America, is making headlines as it sets new all-time highs and the second-largest arena, China, is making them for the wrong ones, as the Shanghai Composite index is no higher now than it was in 2007, thanks to a soggy economy and a spectacular property bust. But perhaps the biggest surprise to many advisers and clients will be the renaissance of the world’s third most valuable market, Japan, where the Nikkei 225 is on the verge of regaining the all-time high set all the way back in late 1989.

• The bigger the bubble, the bigger the hangover is likely to be. Japan’s debt-fuelled equity and property party in the 1980s was a whopper and it has taken the Nikkei just over 34 years to recover. By contrast it took the NASDAQ ‘only’ 15 years to get back to its 2000 peak once the technology, media and telecoms bubble burst (something fans of the Magnificent Seven may need to ponder, at some stage).
• Even the most unloved market can return to favour. Perhaps something to ponder in the context of the UK and emerging markets, which remain out in the cold.
• Valuation really does matter. Strategists regularly flagged Japan as being extremely cheap, especially on the basis of book value (where a big chunk of the net assets was made up of net cash positions) and eventually that value has attracted buyers as catalysts have emerged to crystallise it, in the shape of the Abenomics reforms, activist investors and improved corporate governance (something the UK should consider as it considers watering down some of its listing requirements).

But there are other factors at work, which may have implications for global markets and not just those in Tokyo, namely the Bank of Japan’s ongoing use of ultra-loose monetary policy and the continued decline in the yen.

With its heavy weightings toward information technology (26%) and industrials (17%), the Nikkei 225 taps into the key themes of artificial intelligence and deglobalisation, and Japanese firms may be primed to benefit from sanctions against China as a valuable alternative source. A low weighting toward financials (3%) is also noteworthy, as banking stocks in the USA and UK continue to flounder.

But Japan also has things in its favour, which may be lacking elsewhere, notably:

A central bank which remains committed to ultra-loose monetary policy, in contrast to those in the West. While the US Federal Reserve, European Central Bank and Bank of England have jacked up interest rates and started to shrink their balance sheets, the Bank of Japan has stuck with a negative interest rate since 2016 and continued to run a Qualitative and Quantitative Easing (QQE) bond-buying scheme, designed to suppress bond yields and borrowing costs and pump liquidity into Japan’s economy and financial system.

A currency that continues to slide. The yen is back down to ¥150 to the dollar, pretty much an all-time low. This helps to attract overseas buying (as the cheap currency is an added bonus on top of what may be cheap stocks) and boosts exporters at the same time (like those technology and industrial companies in which Japan specialises).

One reason for the yen’s weakness is the interest rate differential between the greenback and the Japanese counter. But another is how international investors (and particularly hedge funds) use the yen as a funding currency for other positions. It costs nothing to short the yen, given the negative interest rate that prevails in Japan, and that cheap cash can be used to generate returns elsewhere (or so the theory goes). Data from America’s Commodity Futures Trading Commission (CFTC) shows that short positions are again piling up against the yen.

It may therefore not be entirely a coincidence that global equities are surging along, buoyed by the USA, which represents some 60% of the FTSE All-World index. Other factors are helping here, too, notably Bidenomics and free-spending fiscal policy, but a plentiful supply of cheap funding might be helping, too.

This matters because the Bank of Japan is, in theory, inching its way towards a first interest rate hike, just as the western central banks are laying the groundwork for their first cuts. A reduced interest rate differential could spark buying of the yen, prompt a closure of short positions against it and turn off the tap on one important source of global liquidity. Watch this space.

Past performance is not a guide to future performance and some investments need to be held for the long term.

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

Alex Clare

27/02/2024

Please see below, Tatton Investment Management’s ‘Monday Digest’ providing a brief analysis of global economic news and markets data. Received this morning – 26/02/2024

M&A activity sets growth against value 

Equities moved higher again last week, with gains made across global markets. Even China put in another week of positive returns following the largest ever cut to the five-year housing loan prime rate (admittedly only 0.25%). Government bonds fared less well, with yields rising slightly after a small rebound in general economic growth optimism. Corporate bonds did better, with yields broadly unchanged, on the back of that optimism of credit risks likely to recede even further.

Last week, some of the data releases reinforced the previous week’s pessimism about the potential for near-term UK economic growth, with GfK’s Consumer Confidence Index falling from -19 to -26 in February. And yet… UK business confidence has been picking up. February’s interim ‘flash’ Purchasing Manager Indices (PMIs) estimates showed services doing particularly well, with manufacturing less well but still better than January. The PMIdata is definitely welcome news, with companies getting more positive on their outlooks and therefore on their hiring and business investment intentions. Overall, for the rise in optimism to be maintained, we think rate cuts in relatively short order are still needed on this side of the Atlantic. The good news is that China may well be starting to show more optimism as well. We will get its PMI data at the start of March.

Elsewhere, the talk in markets was all about merger and acquisition (M&A) activity, which tells us about a gradual shift in investment sentiment. In the UK, electricals retailer Currys received a cash bid (ultimately rejected) from activist investor Elliott Partners. Chinese retail internet platform JD.com said it would bid as well, although there are yet to be any details. Meanwhile, in the US, credit card company Capital One announced an all-share agreed offer for Discover Financial Services, another credit card and payment system company. At $35 billion, this deal would easily be the largest of the year so far.

M&A activity has interesting implications for investors. Here at Tatton, we leave the business of picking particular shares to our selected fund managers. Since the start of 2023, ‘quality growth’ companies have been the clear winners, both in revenue and profit performance and in share price valuation terms. Now though, rising M&A activity could mean that investors will start to look for value.

Into the Questverse: Is AI analysis changing market patterns?

According to JP Morgan Research’s February ‘Questverse’ report, the most central investment themes right now are artificial intelligence (AI) and inflation. This will surprise no one, but a notable thing about this observation is that it came from an AI program itself. JPM’s Questverse uses a natural language processing model along with machine learning. It does so in a rather complex way, but the basic premise is that the program tries to recognise patterns in large datasets. The program’s architecture means it is very good at recognising patterns. Therefore, it is no surprise that the Questverse system can detect investment themes and their prominence more consistently than a human.

JPM is far from being the only company applying AI to investment information or decisions. In fact, many of the AI investment programs currently in use are not that different to programs that have been around for many years – high-frequency trading (HFT) for example. But when it comes to using those themes in investment decisions, on their own they give no information about underlying value. Discerning themes and trends might give you some hint about whether an asset’s price is going to go up or down, but they give you no sense of the asset’s fundamental value. We wrote last week about asset bubbles – and ironically the current bubble talk is all about AI stocks – which are defined as instances where an asset’s price systematically deviates from its fundamental value. If everyone is looking for price patterns and not value, bubbles are more likely – and hence, so are sharp unpredictable corrections.

Of course, humans are just as susceptible to feedback loops as machines. But machines are able to process massively more amounts of information several times quicker than any human – meaning the feedback effects can be much larger and sharper. This is exactly the criticism regulators and campaigners have made against HFT programs for years – demanding that regulation be brought in to address growing problems. That brings us tothe question of what should be done. Clearly, the AI genie cannot go back in the bottle, and it would be foolish to try and stop the use of AI investment tools. What we can do – as with any investment strategy – is to better educate ourselves on the risks involved. Ideally, this would be mirrored at the regulatory level too. Without it, ever-bigger feedback loops and sharper price movements will likely be a feature of markets under the influence of AI.

Uranium prices go nuclear

Uranium is in a bull market. Triuranium octoxide – also known as ‘yellowcake’ uranium – cost $87 per pound at the start of this year, but has risen to $103 at the time of writing. If trading carries on like this, we will edge closer to the astonishing peak seen before the Global Financial Crisis of 2008.

As the only source of fuel for nuclear fission reactors, uranium is and has long been a vitalcommodity. Moreover, nuclear power’s inevitable role in the global energy transition away from fossil fuels is clearly acknowledged by politicians and, in many instances, is being backed up by strategy and investment. At last year’s COP28 summit, 22 countries, including the US and UK, pledged to triple nuclear energy capacities by 2050. This global structural push inevitably means more uranium demand, at least in the future. But perhaps there are other factors driving prices in the near term. One reason might be the strategy of ‘fast investors’ capitalising on a flaw in how utility companies structure their contracts. Utility companies often secure supplies with longer-term contracts with producers. These contracts often peg the price to the spot market at the time of delivery, plus a premium. This makes sense when utility companies expect falling – rather than rising – prices going forward. Fast investors have tightened spot market conditions and now a demand surge has put a ‘short squeeze’ on the utility companies.

Fortunately, the potential physical supply of uranium – the amount it is actually possible to mine and enrich – is not a problem in the long term. There are plenty of mines and potential deposits throughout the world. However, near-term supply and demand is tighter, and geopolitics is clearly involved. Crucially, the uranium price squeeze is likely to be short term and will not stop the transition to nuclear energy – or the broader decarbonisation strategy of which it is a part.

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

Alex Kitteringham

26^th February 2024