Blogs

Please see the below article from EPIC Investment Partners discussing the current situation with US Household Debt. Received this afternoon 09/02/2024.

Credit card debt among American households has climbed to record highs, topping USD1.13tn in Q4 2023, according to new data from the Federal Reserve Bank of New York. This USD50bn increase reflects financial struggles, particularly for younger and lower-income consumers, as inflation and interest rate hikes drive up the cost of credit card balances. Nearly half of cardholders now carry debt month-to-month, compared to 39% in 2021 and 47% in July 2023.

At the same time, delinquencies on credit card payments have jumped over 50% in the past year. About 6.4% of credit card accounts are 90 days overdue, versus just 4.0% at the end of 2022. This signals that many consumers are finding it difficult to keep up with minimum payments as debt compounds. Mortgages and auto loans have also grown significantly. Overall household debt now sits at a record USD17.5tn (up USD212bn in Q4 2023).

While higher-income households with investments have largely weathered inflation, lower- and middle-income groups, especially renters, have been hit hard. These consumers tend to carry more credit card and other non-mortgage debt, without assets to help offset rising prices. As interest costs climb, their financial stress has forced delinquency rates upwards. Tighter budgets have left little room for savings among much of mainstream America.

The ballooning credit card debt and delinquency rates cited in this report foreshadow trouble for the broader US economy. As the Federal Reserve maintains its higher-for-longer rates to fight inflation, it risks tipping many households into default or bankruptcy. Combine this with potential housing market declines and additional inflationary pressures, and the report paints an ominous picture of some foundational weaknesses in the US economic landscape. Unless these consumer debt and inflation trends reverse, they could spiral into even greater problems for economic growth and stability going forward. The report suggests the US recovery remains highly uneven and vulnerable to shocks that could disproportionately impact poorer Americans who are already barely staying afloat.

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

Alex Clare

09/02/2024

Please see the below article from Brewin Dolphin providing their insight into what the next 12 months could have in store for China. Received yesterday.

Chinese stocks struggled last year amid the country’s turbulent property sector and deflation concerns. Janet Mui, our Head of Market Analysis and a regular commentator on Chinese markets with BBC News, explores what the next 12 months could have in store.

2024 is the year of the dragon in the Chinese zodiac – a magnificent and mystical creature symbolising supernatural power, strength, and prosperity. As the most auspicious of all zodiac signs in Chinese culture, could the year of the dragon bring a change of fortune for China? In short, 2024 is likely to remain an uphill battle for the Chinese economy and its markets. But before we look at why, it’s important to reflect on the context that brought us to where we are today.

Year of the flop

2023 may have been the year of the rabbit, but for investors in China, there was nothing cute and fluffy about it. Instead of roaring back after the end of its strict zero-Covid-19 strategy, China was plagued by the unfolding of a property crisis that saw two of its top property developers, Evergrande and Country Garden, go bankrupt. And despite the “around 5%” GDP growth target being met after significant government stimulus, it’s important to remember that 2022 provided a low comparison base.

The pessimism around China is reflected in the performance of its stock markets. The Hang Seng China Enterprises Index slumped 14.0% compared to a gain of 21.8% in the MSCI World Index. Putting how grim Chinese stocks are into perspective, at the end of January 2024 the Hang Seng Index to S&P 500 ratio had slumped to its lowest level since 1975.

Firing up the dragon

To avoid being overwhelmingly pessimistic on China, let’s take a step back and think about the potential positive developments in 2024.

The authorities have stepped up stimulus measures and they are increasingly pre-emptive and targeted in nature. At some point, they may well develop a “whatever it takes” attitude.

For example, in January in an unprecedented move, China’s central bank announced an impending cut in the reserve requirement ratio ahead of its official meeting date. There is also a clear signal of further monetary and fiscal easing measures to come in 2024. Consideration of a stock market stabilisation fund worth around two trillion yuan ($278 billion) shows the authorities will not turn a blind eye to the haemorrhage in Chinese stocks.

China has also backtracked on measures aimed to deter online gaming companies (after the evaporation of billions of market capitalisation for the affected businesses) which shows increased consideration for how regulatory changes can impact market sentiment. Of course, the risks of a broader regulatory crackdown (the main driver of the stock market downturn in 2021) remain, but the worst is probably behind us.

The external demand picture for China may look brighter too, with interest rates likely to be cut and an increased probability of a soft landing in major economies in 2024.

Low Chinese asset valuations as a result of the depressed sentiment around China could also pique investors’ interest – could one of Warren Buffet’s many investment maxims, “be greedy only when others are fearful,” apply to how investors view China in 2024?

A market like no other

The problem with investment philosophy widely celebrated in the West is that it’s not always applicable to investing in China. The reason why? China is still a centrally directed economy and the state has tightened its grip on private companies in recent years.

For example, being a shareholder may not equate to participation in the future success of a company. Instead, shareholder capital may be used to serve the policy goals of the Chinese government and underwrite the risk in the process. In practice, Chinese authorities may order banks to increase lending to qualified real estate developers without collateral – is that in the best interest of the shareholders of the bank?

True, there are some sectoral bright spots in China in relation to industrial upgrade, artificial intelligence (AI) and de-carbonisation. Electric vehicle (EV) and solar panel production are booming, and China will be a key player in the world’s transition to renewable energy. Progress has been swift, perhaps best seen in BYD (Build Your Dreams) overtaking Tesla as the world’s biggest EV producer in 2023.

However, investors exposed to a broad equity index in China may find it difficult to benefit from these themes. The top ten constituents of the CSI 300 Index are dominated by state-owned banks and insurance companies, whereas the Hang Seng China Enterprises Index has a heavy weighting to Chinese technology giants, which remain under scrutiny in the name of national security.

Even if you target the companies that may benefit from secular tailwinds, many Chinese companies producing and supplying the world’s renewable energy infrastructure are heavily state-subsidised and are not necessarily profitable. These industries may also be challenged by the increasingly protectionist stance of the West, which may become a focal issue for the China hawks in the upcoming US election. During the US-China trade war under Donald Trump’s presidency, 2017-21, Chinese equities significantly underperformed those in the US.

The stakes are high in the beleaguered property sector

Simply put, economic confidence in China will be steered by the property sector in 2024.

The crisis is still unfolding. There is no sign of a turnaround in home sales, which means reduced cash generation and heightened stress in meeting debt obligations. This creates a downward spiral for the economy; lower property investments could lead to lower economic growth which could lead to lower home sales.

The liquidation order of Evergrande, a once leading Chinese developer, will be complicated and investors will have to wait years to retrieve assets. Crucial to sentiment recovering will be whether unfinished residential units are completed and delivered to homebuyers who have already paid. Chinese authorities and Evergrande have made this a priority but it’s worth watching how this one unfolds.

From the government’s perspective, rather than rescuing individual companies, it is trying to make aggregate financial conditions easier for both developers and homebuyers. While there are macro goals to channel more funding to the property sector, it is hard to anticipate a major recovery in 2024 as banks have remained cautious and selective in their lending. Not helping matters is the expectation that refinancing pressures will remain high for property developers in 2024 and 2025, according to Moody’s.

While stimuli such as lower mortgage rates, reduced downpayment ratios, and relaxed home purchase restrictions are helpful, the boost in actual home sales following the introduction of these measures was short-lived. Lower-tier cities which represent the bulk of national home sales, may not react much given weak macro conditions, confidence, and demographics.

So, what’s the verdict? Well, unless there is a revival in the property market, consumers’ appetite to spend may be limited, especially given around 70% of Chinese household wealth is tied to property. The property crisis also highlights the wider difficulty in rebalancing China’s economy from one driven by fixed investments such as infrastructure, construction, and manufacturing, to an economy deriving growth from services and consumption.

Will the dragon take to the skies in 2024

The transition to the year of the dragon is exciting, and for those who are superstitious, it may bring about new energy and fortune.

However, practically speaking, the profound issues in the property sector will take years to resolve. Neither is the relationship between the state and private companies likely to change anytime soon, whichever zodiac year we are in. The domestic policy environment remains unpredictable and the upcoming US election may bring about more protectionist threats against China’s technology and industrial sectors.

On the positive side, the authorities are likely to manage and contain the financial risks in the economy. There may be more forceful easing rolled out, foreign reserves are ample to counter any shocks, technology progress continues, and external demand could recover in 2024 if developed economies achieve a soft-landing scenario.

With this turbulent backdrop, it’s unsurprising that Chinese equities have become very cheap. After falling in seven of the past 10 years, it’s unlikely to see further big drawdowns in 2024. That being said, for markets, it’s going to take a lot more than the prospect of easing and better economic data to turn their entrenched negativity around. China could really do with the year of the dragon living up to its name.

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

Alex Clare

09/02/2024

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

Swati Dhingra, the most dovish member of the Old Lady’s Monetary Policy Committee (MPC) has warned that the central bank may be “underplaying the downside risks” in the economy, highlighting the declining headline inflation and continued weak consumer spending. In an interview in the FT, Dhingra, who voted for a 25bp reduction in the bank rate last week, the only member to do so, believes there is little danger of a resurgence in inflation, given weak household demand. 

She stated that she was “not fully convinced there’s some kind of really sharp excess demand in the economy coming from the consumption side”. She is “More concerned that we might be underplaying the downside risks”. With pandemic savings drying up and the jobs market loosening, she thinks the “buffers” in the economy will also fade. 

“You might see the real economy start to get negatively hit in a more profound way and I don’t see why we should be risking that”, Dhingra said, adding that given weak consumption it was hard “to imagine how that will get reversed so sharply that you will see a resurgence of inflation driven by demand pressure”. 

Dhingra’s interview comes after Huw Pill, the bank’s Chief Economist said that the drop in interest rates is now not a question of “if, but when” with rates dropping as a “reward” for the economy. The remark, in a webcast Q&A, cemented the view that the outlook for the BoE for monetary policy has shifted. Pill said that although it was premature to talk about rate cuts, underlaying domestic inflationary pressures had started to wane, meaning that “as that process works through, we can begin to reduce the bank rate”. 

Also, in a study published in the Proceedings of the National Academy of Sciences, scientists said that hurricanes are now getting so powerful due to climate change that the upper limit of the Saffir-Simpson Hurricane Wind scale, which, as most of us know is Category 5, needs another level. They propose adding a Category 6 label to any hurricane with sustained winds of “at least” 192 mph.  

The scientists found that of the five storms that would have been in the hypothetical Category 6, they’ve all occurred since the year Tom Hanks’ Captain Phillips was released.

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

Charlotte Clarke

08/02/2024

Please see below, Brewin Dolphin’s ‘Markets in a Minute’ which discusses the effect of central bank policy and earnings results on global investment markets. Received yesterday afternoon – 06/02/2024

We had two big central bank meetings last week, with the Federal Reserve announcing policy on Wednesday evening and the Bank of England doing so on Thursday lunchtime. As expected, neither made any changes, but it was an opportunity to hear the tone being used and to determine the likelihood of an interest rate cut, possibly as soon as (late) March.

The Federal Reserve chairman, Jay Powell, took the first opportunity to set that tone. Data had been supportive of a continuation of economic growth momentum, alongside weakening inflation. Although job openings increased slightly, suggesting the labour market was tight, fewer people had been quitting their jobs, suggesting diminished confidence amongst workers. That matters because wage growth tends to be faster amongst those switching jobs than those staying within the same job.

Blowout jobs growth

On Friday afternoon, more light was shed on the employment position with the monthly non-farm payroll report, which gets pulses racing across the investment world despite a tendency to be heavily revised in the following months.

The Bureau of Labor Statistics estimates that a huge 353,000 new jobs were taken in January, which was almost double the average forecasted figure, and well above even the highest of those forecasts. Not only that, but previous healthy jobs growth numbers were revised higher. Now, an important caveat here is that the headline jobs growth number comes from surveying companies and asking how many jobs they have filled. An alternative measure of ostensibly the same thing surveys households and asks how many of them are in work. This second measure sometimes (often) conflicts with the first and did so again on Friday. But it is accepted that this household survey is not as reliable as the main non-farm payroll report, so this data suggests the labour market is strong.

The second most shocking part of the report was the wage data. In recent weeks, we have seen some more lagged but better-quality data indicating a slowdown in wage growth, but January’s wage gains seem, provisionally, to have also exceeded any forecaster’s expectations. Wage growth accelerated to 4.5% per annum. Stronger jobs and wage growth is a potent combination which will imply strong growth in consumer spending as well as more money flowing into pensions, and, by implication, into the stock market.

At the same time, though, stronger wage growth will suggest higher costs for firms and therefore higher prices being charged for their goods and services.

Interest rates

This obviously has serious implications for the Federal Reserve. On Wednesday evening, chairman Powell disappointed some investors, saying he doesn’t expect to have sufficient confidence that he could cut interest rates by March.

There was clear disappointment reflected in the equity and bond markets, with investors at some stage thinking there was a 60% chance of a rate cut; this dropped to less than 40% after Powell spoke. And now, following the release of this strong employment report, at the time of writing, the chances of a rate cut seem to have fallen to around 20% (although, chances are still higher than this for subsequent meetings).

Powell’s comments felt like they were designed to calm investors down after he struck a decidedly dovish tone in December. The Bank of England (BoE) was expected to do the opposite.

The BoE has been keen to avoid declaring victory in the battle against inflation. At this meeting, the most obvious relaxation of that stance was evident in the voting. In December, three members had voted for a further increase. In January, that was just two, while one had even started by voting for an interest rate cut.

Economic forecasts for the UK have been downbeat and inflation has been high. The elevated level of inflation has weighed on growth (which tends to be measured after adjusting for price increases). However, consumer confidence has improved, the housing market has stabilised, and business surveys show growing confidence.

Unlike the US, there is clear evidence of the UK labour market weakening, which ought to be enough to keep the two hawks on the BoE’s Monetary Policy Committee in the minority. It doesn’t currently seem sufficient to trigger the cuts the market is expecting.

Earnings season

Earnings season continues with the oh-so-predictable beatsto-misses ratio of 80%. So far, around 40% of companies have reported, but that understates the progression through this earnings season as Tesla, Apple, Alphabet, Microsoft, Amazon and Meta have all reported. So, that just leaves Nvidia to complete the so-called ‘Magnificent Seven’ when it reports on 21 February.

Of these big companies, Amazon and Meta dazzled, Microsoft was mixed, Google and Apple underwhelmed, and Tesla was received particularly badly by the market when the numbers landed last week. Any disgruntled investors may have felt relieved to know that last week, a judge ruled that Musk’s extraordinary record-breaking $56bn compensation should be cancelled.

US stocks seemed set to finish the week little changed overall, after mixed performance from the Magnificent Seven stocks. Despite their size, they contributed an even greater share of the market’s earnings growth. But the rest of the US market, while growing more slowly, did at least seem to surprise analysts more favourably when their earnings were released.

One of the major controversies within the market at the moment is whether, after a strong year of outperformance by the Magnificent Seven, expectations could have become difficult to meet. In the short term some companies showed signs of that, but we still see some of these exceptional stocks as offering tremendous value.

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

Alex Kitteringham

7^th February 2024

Please see the below article from Tatton Investment Management providing a brief analysis of markets and the key news from global economies over the past week. Received this morning 05/02/2024.

Overview: Central banks challenge goldilocks assumptions

Surprisingly decent monthly returns were soured on the last day of January when the US Federal Reserve dampened the mood by repeating the message that rate cuts will begin later than markets anticipate. That this reiteration led to a sell-off was surprising, because markets seemed to have already grudgingly accepted later rate cuts than hoped at the end of 2023, thanks to surprisingly resilient  US Q4 growth. It is therefore reasonable to assume that last week’s stock and bond market falls were about more than central bank press conferences. We turn to the usual suspects: China, banking fears and uninspiring corporate earnings reports.

The liquidation of faltering Chinese property giant Evergrande could spell further short-term trouble for the property-heavy Chinese economy, even if it may spur the Chinese regime to properly address the property crisis. Beijing’s procrastination is an issue we need to watch. More pressing is the return of American banking woes, following New York Community Bancorp’s 40% share price drop. This was compounded by uninspiring corporate earnings outlooks at the start of the week.

Much better than expected results from US mega tech companies and international oil majors changed the tone, as did a report on Friday showing that the US added 353,000 extra jobs in December. Markets initially only traded sideways on the news, bringing us back to the Fed. The strength of the US labour market means there is little incentive to cut rates in the near-term, but renewed banking pressures challenge the narrative that economic strength will overcome high rates. This could mean less vibrant markets and a longer wait for interest rate normalization, which will put pressure on valuations and corporate financing costs. Until the timing of rate cuts is clear, we have to expect more of the same: China is out, US powers ahead, with its Mega Tech market darlings in focus, while the rest of the economy is hoping for more sympathetic central bank rates sooner rather than later.

January asset returns review

After the hangover from December’s Santa Rally, January turned into a half-decent month for investors. Coming into the new year, capital markets were anxious that they had got ahead of themselves, but these fears dissipated as the month went on. Global stocks gained 0.7% in sterling terms, which is much more impressive when considering the rally that came the month before. US stocks gained 1.8%, thanks to expectations of a goldilocks environment – with earnings remaining strong but rates lowering nonetheless. Returns would have been higher if not for the Fed pouring cold water on a March rate cut on the last day of the month. American stocks still rose to all-time highs, making valuations look stretched.

Japan’s stock market was the best regional performer, gaining 4.7% in sterling terms. Short-term factors like continued negative interest rates and a weaker yen (boosting exports) were the immediate factors behind the rally, but improvements in Japan’s corporate structure means there is still plenty room to grow. UK stocks were negative by contrast, losing 1.3%, while eurozone equities gained a mild 0.3%.

These mild returns mean that both regions held on to most of the gains seen in November and December, and are up over the last three months. Europe stands to gain from rate cuts, expected in the spring, and any pickup in global demand. Lower valuations than in the US could help on that front.

Emerging markets lagged other major regions, losing 4.5% in sterling terms. The biggest drag on EM assets remains China, whose economic weakness is still being felt. The support measures being pursued now are significant, but the lack of private sector confidence runs deep. For wider EMs, they should at least be able to look forward to looser Fed policy and, eventually, a pickup in global demand. Overall, January turned out better than expected for global investors. Gains from November and December were not just solidified, but in most instances extended.

Central banks confirm ‘lower, slower’

The Fed, the BoE and the ECB all held monetary policy meetings in the last couple of weeks, and all three left interest rates unchanged. Virtually all acknowledge that rate cuts are a question of when not if – but the when is complicated by central bankers’ fear of once again being caught out by inflation. The Fed exemplifies this push and pull. Earlier this month, a senior official said the central bank was within “striking distance” of its 2% inflation mandate, but at its meeting last week, Fed chair Powell poured cold water on the idea of a March rate cut.

As a result, markets expect rates to be 0.5% lower by June. That is extraordinary, considering the enduring strength of the US economy and its resultant inflation pressures. Core US inflation (removing volatile elements like food and energy) has eased but is still around 4%, and the labour market remains extremely strong. The US economy added 353,000 new jobs in January – when only 170,000 had been widely expected. There is no immediate need for support, hence the Fed forgoing a March rate cut. This is also true for the Fed’s balance sheet reduction, which some observers thought would slow in response to banking troubles. The bank’s recent increase in its repo rate for the extraordinary liquidity facility (which was set up in March last year to facilitate and ease regional bank funding pressures) is signalling the opposite.

The BoE, meanwhile, remains planted on the fence. At its meeting last Thursday, the Monetary Policy Committee was split three ways for a hike, on hold, and a cut. Structural supply-side problems mean wages and core inflation are still too high, despite continued weakness in the UK economy. The ECB is similarly cautious. The Eurozone economy is stagnant and contracting in some areas but its central bank left rates unchanged and urged for patience in cutting rates, because of labour market tightness and continued inflation in services. Economic realities should mean European rate cuts come sooner than American ones, but policymakers seem to have different preferences either side of the Atlantic.

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

Alex Clare

05/02/2024

Please see the below update from EPIC Investment Partners about the current movements with the US Economy received earlier today:

As expected, the Fed left its policy rate unchanged at the 23-year high range of 5.25%-5.5%. However, the accompanying statement did acknowledge the more balanced risks to inflation, and the suggestion that whilst further rate hikes are off the table, the committee was not ready to cut yet. The statement said that the FOMC “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%”. 

Fed Chair Jerome Powell acknowledged that whilst progress has been made in reducing inflation, a March cut is unlikely. “Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that. But that’s to be seen,” Powell said. He added: “We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialling back policy restraint at some point this year”. “We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate”, he said. 

However, the FOMC’s rate decision was overshadowed by renewed concerns in the US banking system. New York Community Bancorp, one of the big winners after the collapse of Silicon Valley Bank and First Republic Bank last year, saw its stock fall a record 46% after it cut its dividend, and massively increased its provision for loan losses to over USD550m due to its exposure to US commercial real estate.

Within hours a second lender announced huge losses due to its exposure to the sector.  Aozora Bank Ltd, Japan’s 16th biggest bank by market value, said it expects to post a net loss of USD191m for the fiscal year, compared with its previous forecast of profit. Shares sank more than 20% (limit down) in Tokyo.

According to a report from the University of Southern California, Northwestern University, Columbia University and Stanford University, as of Q3 last year, US banks alone held about USD2.7tn in commercial real estate debt. Green Street, a real estate analytics company reported commercial property values have fallen over 20% since Q1 2022, with office prices down a massive 35% as demand for desk space weakened following the wide adoption of remote working. 

So, the question now is whether New York Community Bancorp and Aozora Bank are canaries in the coalmine?

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

01/02/2024

Please see this weeks Markets in Minute update from Brewin Dolphin below, received late yesterday afternoon:

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

Andrew Lloyd DipPFS

01/02/2024