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EPIC Investment Partners: The Daily Update | Qatar’s Upgrade

Please see below, an article from EPIC Investment Partners which focuses on the economic strength of Qatar and the potential investment opportunities. Received this morning – 31/01/2024

 We have often mentioned to clients that we believe the rating agencies are behind the curve, so we were pleased to hear that Moody’s Investor Service recently upgraded its long-term rating for Qatar by one notch, from Aa3 to Aa2, its first upgrade since 2007. The already high rating for the wealthy nation now sits on par with the UAE, South Korea and France, and is now in-line with S&P Global’s AA rating. Fitch rates Qatar one notch lower, at AA-, with a positive outlook, signalling a potential upgrade.   

Moody’s analysts attribute the upgrade to Qatar’s improved fiscal metrics, which have been “achieved during 2021-2023”, and are expected to be “sustained in the medium term”. The government’s commitment to fiscal prudence (the IMF estimates the nation’s debt to GDP is ~40%, from 73% in 2022), including the gradual reduction of infrastructure spending (linked to preparations for the 2022 FIFA World Cup), is seen as a contributing factor to the upgrade.  

The rating agency further recognises Qatar’s major investments in liquefied natural gas (LNG) production capacity as credit positive. Qatar, the world’s third-largest LNG exporter, is investing substantially to boost its output by about 60% over the next three years, in a move to meet rising global demand growth, particularly given the significant role the fuel plays in the transition to cleaner, more sustainable power sources.   

Given the rising frictions in the Red Sea and Qatar’s dependence on the export route, S&P Global recently commented that diverting LNG carriers away from the Red Sea would minimally affect Qatari oil and gas entities, since most of their customers are located in Asia. The agency went on to add that barring risks of regional war, the impact of tensions on rated Qatari energy firms like Nakilat, and QatarEnergy’s LNG project is manageable. 

Away from hydrocarbons, Qatar has made impressive strides in diversifying its economy, driven by the Vision 2030. Thanks to sustained investments and policy support, Qatar’s non-oil sectors now comprise over 50% of real GDP. Thriving industries such as financial services, tourism, and manufacturing are fast emerging as new engines of economic growth. Qatar is also expanding output in high value sectors like chemicals and technology, which leverage its natural gas resources. With huge investments allocated to transport infrastructure and private sector stimulation, Qatar’s economic base is rapidly broadening. Prudent economic management has translated this diversification into solid GDP growth rates despite hydrocarbon price volatility. 

We also remain cognisant of Qatar’s diplomatic mediation initiatives. Driven by a desire to establish itself as an independent and progressive player on the world stage, Qatar has embraced diplomatic mediation as a cornerstone of its foreign policy. 

We have long favoured Qatar’s sovereign and quasi-sovereign bonds. Through our investment process, we have identified Qatar as having a 7-star NFA score, defined as a “wealthy nation”. Then, using our proprietary relative value model, we have identified undervalued bonds issued by the government and government-owned entities. A good example of a bond we favour is the Qatar 6.4% 2040s. This bond is currently trading ~45 bps wider than similarly rated bonds with a ~10-year duration and offers a risk-adjusted return and yield of ~10%.   

Qatar has not issued international bonds in around four years, simply because it does not need to. So, its first green bond offering, which is coming “soon” according to the nation’s finance minister, Ali Al-Kuwari, will attract much attention, and will further demonstrate its commitment to sustainability funding.  

We continue to believe Qatar’s economy will maintain its positive trajectory, supported by rising LNG exports and diversification efforts, and through its mediation efforts will continue to bring it to the fore as a global ally. Therefore, as long as the bonds offer attractive risk-adjusted returns, or alpha, Qatar will remain a high conviction investment in our Next Generation Bond Strategy.

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

31st January 2024

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Brooks Macdonald – Weekly Market Commentary

Please see below this week’s Weekly Market Commentary from Brooks Macdonald, which was received yesterday afternoon – 29/01/2024:

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

Carl Mitchell – DipPFS

Independent Financial Adviser

30/01/2024

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Tatton Investment Management – Monday Digest

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 29/01/2024.

Overview: Positive growth sentiment returns

After January’s bumpy start, and the volatile two weeks that followed, it looks like investors are finding their feet again. Almost entirely across the board, regional equity markets are up another healthy amount, with even China managing another positive week. And as suspected, bond markets are having an extremely busy January.

Government debt yields have declined by around 1%, but for riskier corporate borrowers, the turn in sentiment in both markets and economies has resulted in reduced fears of defaults – which has additionally driven down the risk premium (spread), they have to pay above the government. In the US dollar bond market, the US government was paying 10-year interest of just less than 3% in September 2018. Now the yield is about 4.1%. A borrower with a credit rating just below investment grade (BB-rated) was paying just over 6% in September 2018, and now will pay interest of around 6.5%, according to Bloomberg. Only three months ago, that BB-rated borrower was looking at paying over 8%. Perhaps it is no wonder corporate borrowers feel current yield levels are reasonably attractive enough to replenish their loan capital side. The story is similar in the Eurobond market, which has already seen record issuance for January.

It is a good sign for markets and economies that more companies think this is a good time to borrow money. This rise in spirits is getting some backing from moves in the commodities markets (which we write about below) and from business sentiment surveys like the ‘flash’ purchasing managers’ index (PMI) surveys from across the world, released last week. Perhaps sentiment is not racing ahead, but the broad composite measures – which include both manufacturing and service sector companies – are now generally heading above the 50 level, which signals the difference between companies thinking they are in growth or decline. Indeed, the US, UK and even China are at or above the 52 level (which aligns with activity at a normal level and optimum capacity usage).

So, markets have returned to the frame of mind where optimism is slight and risks have been high but are falling. The European Central Bank (ECB) did its bit to keep confidence stable last week. Nobody expected a rate cut (and none was forthcoming) but President Christine Lagarde said there was “stabilisation” in some wage indicators and that companies were currently absorbing wage hikes, reducing the risk of second-round effects on prices. She also gave little pushback when asked about a spring rather than summer start to cutting rates. Next week is the turn of the US Federal Reserve and then the Bank of England. Again, nobody is expecting rate cuts, it will be all about the comments.

Will Xi allow China to profit?

Last year’s prolonged decline in Chinese stocks continued well into January, but last week, Hong Kong’s Hang Seng index rose more than 6% during midweek trading, after news that the Chinese government would step in to stop the rout. On Tuesday, Premier Li Qiang called for “more forceful and effective measures to stabilise the market and boost confidence”. On Wednesday, the People’s Bank of China (PBoC) cut bank reserve requirements, thereby unleashing a trillion Yuan of lending headroom into the banking system. Both the Hang Seng and the CSI 300 – mainland China’s benchmark stock index – rallied in response.

Perhaps Beijing is willing to put its money where its mouth is and – crucially – wants markets to know it. Its words and actions are certainly a step in the right direction and, coming so soon after Premier Li’s speech, will soothe some investor concerns. Ultimately, though, attempts to support short-term confidence in the economy or financial system do not address the core reason for why businesses and investors lack confidence to begin with.

During the crackdowns of the last few years, there has been a growing sense that President Xi Jinping is against not just excesses but private sector profit altogether. He has made it clear that private power cannot be allowed to rival the state (as in the case of Alibaba founder Jack Ma) but this seems to have filtered through to profit-making in general. People are willing to take advantage of the short-term market opportunities the Party hands out, but to truly invest in long-term private sector growth investors need to know they will be allowed to profit without negative comeback. This needs consistent messaging, ideally from Xi himself. Without that, the decline will be hard to stop.

Commodities and growth

The Dow Jones Commodity Index has been virtually flat since the beginning of the year. That is either a good or bad sign, depending on how you look at it. Considering the intentional slowdown in global growth recently, a stable if unspectacular patch should be welcomed. On the other hand, this comes after a protracted downturn for the commodity sector. Dow Jones commodities have lost nearly 9% on a one-year basis at the time of writing. Staying flat is less impressive if the level is already low

Of course, much of that downturn was about oil, but oil is no longer a great indicator of general economic conditions. Metals, in particular industrial metals, are arguably a better signal. The S&P Industrial Metal index has been flat for some time, currently at the same level it was in May last year and with only a narrow trading range since then. But metals became detached from energy prices last year, and that detachment is ongoing. Again, stable metals prices are encouraging, all things considered. Global manufacturing has been struggling for a long time, and despite improvement across the board, manufacturing PMIs still point toward contraction in the UK and Eurozone. The only exception is the US, where the manufacturing PMI unexpectedly jumped to 50.3 in January. US resilience and outperformance is nothing new, though, and is offset by weakness elsewhere – particularly the disappointing China.

The problem for metals is that they cannot sustainably rise on hope alone. Like all commodities, metals futures are subject to short-term speculation but are ultimately physical materials that need to be financed, stored, transported and used. The cost of storage has risen dramatically in recent years thanks to the massive step-up in developed market interest rates which led to a big increase in the cost of the tied-up capital. That means inventories are generally lower, which means prices are much more sensitive to final demand. As such, we are unlikely to see a sustained pick-up in metals prices until growth and demand actually come through.

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

Alex Clare

29/01/2024

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Invesco Quarter 4 2023 – The big headlines

Please see below article received from Invesco this morning, which summarises the market-moving events from Q4 2023.

Oil slick

SF: “After a yearlong decline, oil prices enjoyed an impressive recovery from June 2023, to reach highs for the year in September at low to mid $90s for both WTI and Brent. Subsequently, however, and despite the terrifying developments in the Middle East, sentiment turned relatively bearish through the end of December. Though there are many important variables driving the oil price, our analysis informs that price weakness likely stemmed from the market’s reassessment of US supply strength, coinciding with seemingly slowing demand growth.

“Perhaps more positive for US geopolitical clout, yet evidently a headwind for global oil prices, was the upward revisions to US second half 2023 supply, driven by improved drilling efficiencies and oil well productivity in shale. Indeed, according to the International Energy Agency December 2023 Oil Market Report, the US will have been accountable for 2/3rds of the non-OPEC (Organization of the Petroleum Exporting Countries) expansion (Canada, China, Brazil and Russia are other notable names). Simultaneously, OPEC’s output is expected to decline, reducing its global market share to 51% in 2023 – the lowest since the bloc’s creation in 2016.

“A subdued macro outlook heading into 2024 is driving downward revision to global oil consumption forecasts. This will likely be seen most acutely in Europe, whose economy is looking relatively weaker as the old continent suffers the strain of a broad industrial and manufacturing slump.

“Overall, the first three quarters of 2023 saw relative strength for oil as the Russia/Ukraine conflict continued into its second year, delivering ongoing disruption to the supply status quo. However, given the impressive supply response from the US, along with the apparent slowing in demand, the oil price has fallen back.

Moving forward, we would conclude that bold oil price forecasts have a tendency to take reputations to an early grave, so better to take hedges in either direction. To the upside UK equities and their preponderance of oil majors look a sound option. To the downside we would expect the disinflationary narrative to grow more certain, leaving bonds well placed to perform.”

Interest rates reach a summit

DA: “Our central case is that most monetary policymakers have reached the end of their tightening cycles, with the next step likely to be easing across major developed market economies. However, we are mindful that the path towards lower rates will likely be a choppy one. While the recent re-assessment of the market’s rate cut expectations will drive short term volatility, a peak in rates environment has generally been a good one for investors provided that a recession is avoided.

“In terms of what this means for asset allocation, we believe 2024 will be a good year for bonds. While painful, the string of aggressive rate hikes from central banks over the last two years have put the “income” back in “fixed income”. At these levels, it makes sense for investors to increase the maturity of their portfolios to lock in the current high-income levels. Absent a recession, equity markets have also generally done well in the run-up to, and after, the first rate cut. With this said, keeping a close eye on fundamentals and being selective about geographical and sectoral exposures will be key. The BoJ is the exception. We expect a gradual normalising of policy here and yields in Japan to edge higher in 2024.”

Recession fears fade

DA: “Given the more supportive inflation/interest rate backdrop in Q4, fears of recession have faded among market participants, providing another tailwind for financial market performance.

“In our view, any economic slowdown is more likely to be relatively brief and shallow (as opposed to pronounced and prolonged) as inflation continues to moderate and monetary policy tightening eases. Households and corporates are, in aggregate, in good shape having strong balance sheets and are less rate sensitive than they have been in the past. The US will likely continue to engage in fiscal spending as the election approaches further supporting growth. There will continue to be some economic damage, with some sectors and firms feeling the pain of higher rates as they refinance this year. However, we stress that different markets and sectors are at different points in the cycle and will have varying degrees of weaker or stronger activity. An official recession therefore may not occur in most regions, but some sectors and countries will go through technical recessions.”

Return of the Magnificent 7

DA: “The final quarter of 2023 delivered a welcome Christmas present for investors with exposures to Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – the so-called ‘Magnificent 7’. They accounted for c. 80% of the gains of the S&P 500 index in 2023. Excluding these names, the remaining S&P 493 was up only c. 7%, struggling with sharp interest rate rises, cost inflation and weakening economies. In contrast, the Magnificent 7 were up 96% (total returns in GBP). Although these moves were certainly extreme, they need to be viewed in context. In many ways, the Magnificent 7’s stellar performance is a rebound from the large declines of 2022, when they were collectively down c. 40%. They accounted for almost as much of the S&P 500’s decline in 2022 as they did the gains in 2023.

“While returns have been strong, the sheer size of the Magnificent 7 demands special consideration. Collectively, these tech stocks make up almost 30% of the S&P 500 index, the highest index concentration level in years. Apple and Microsoft alone, boast market valuations greater than the entire UK stock market. To evaluate the sustainability of their performance, investors should eschew reliance on charts of share price performance and focus instead on business fundamentals and valuations. While not unassailable these companies have large moats, very strong balance sheets, and many have revenue streams that are far less cyclical than tech companies of the past. They are however trading at lofty valuations which increases risk.”

UK – don’t call it a comeback

BG: “Whether it was the release of a stunning new Beatles’ track, David Tennant’s reprisal of The Doctor, or David Cameron’s return to cabinet, it’s fair to say the final quarter was brimming with UK comeback stories. Though less culturally significant, it was a similar story for investors, as after a tricky late summer selloff, and an equally weak October, UK stocks enjoyed a smart recovery, rounding out a rewarding year for the UK bourse. Despite delivering cash beating returns, however, those close to investment markets will know it has been another year of relative disappointment for the UK stock market. Unfortunately, for our domestic bourse, performance woe stems from a dual narrative, relating just as much to what is ‘not’ in the index, as to what is.

“As is well understood, a key determinant of global market strength this year has been the outsized returns of the mega cap US Technology names (known as the Magnificent 7), particularly given their association with the Artificial Intelligence growth engine. For the UK, however, at first blush there is very little Technology to get excited about, which seems to have contributed to a general disinterest from asset allocators. But beyond a headline categorisation level, such analysis looks a little misguided. Just a modest research effort would reveal several domestic businesses utilising A.I. technology extremely successfully within their businesses, improving the client offering and experience along with. Specific areas of success include high profile names within online retail, online education, and retail financial services. Antipathy towards the UK as ‘Non-Tech Player’ looks misplaced, therefore, rendering the valuation mismatch a little too stretched and representing an opportunity for the patient investor.”

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

Chloe

26/01/2024

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EPIC Investment Partners – The Daily Update – AI’s Threat to Global Workforce

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

Earlier this month the IMF issued a report warning that almost 40% of jobs globally could be lost due to the rise of artificial intelligence (AI), adding that the technological revolution could have a greater detrimental effect on developed countries than emerging ones.  

Along with the release, the IMF’s managing director Kristalina Georgieva, said: “We are on the brink of a technological revolution that could jump-start productivity, boost global growth, and raise incomes around the world. Yet it could also replace jobs and deepen inequality”. 

The report explored the effect AI could have on the global job market. While there have been numerous reports warning AI will replace jobs, the IMF’s findings are notable: unlike previous automation trends that primarily affected routine tasks, AI will also influence high-skill jobs, posing greater risks and opportunities in advanced economies compared to emerging nations. 

In developed countries, about 60% of jobs could be impacted by AI, with half potentially benefiting from AI integration to boost productivity, while the rest might face job replacement.  

The IMF also warns that AI’s influence could lead to an increased polarisation of income and wealth within countries. Workers that are adept at utilising AI will see improved productivity and income, while others lag behind. AI can accelerate productivity for less experienced workers, offering opportunities particularly to younger workers, while older workers may find adaptation challenging. 

The impact on income will largely hinge on AI’s role in augmenting high-income workers. If AI substantially enhances the output of these workers, it could lead to an uneven increase in labour income. Additionally, firms adopting AI are likely to see higher capital returns, favouring wealthier individuals. Again, intensifying both national and global inequality. 

As the report states: “In most scenarios, AI will likely worsen overall inequality, a troubling trend that policymakers must proactively address to prevent the technology from further stoking social tensions. It is crucial for countries to establish comprehensive social safety nets and offer retraining programs for vulnerable workers. In doing so, we can make the AI transition more inclusive, protecting livelihoods and curbing inequality.” 

We have long felt here at EPIC that the advent of AI could lead to a new industrial revolution. We wrote recently about Microsoft announcing it would be adding a button to its Windows keyboard to activate its AI Copilot service.  

This is just the beginning. At the moment, many see AI as just a “thing”, however, as it is embraced by the masses, AI will reshape societies, economies, and the future of work, driving a seismic shift in how society approaches technology as a whole and its impact on our daily lives. 

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

Charlotte Clarke

25/01/2024

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Brewin Dolphin Markets in a Minute

Please see below article received from Brewin Dolphin, which discusses global market performance following the S&P 500 surpassing its previous all-time high.

Last week was a tumultuous week for investors but it ended on a bright note. Markets saw a slight pickup in volatility and a mixed performance over the week. There was plenty of news flow, enough that you might ordinarily have expected a more adverse reaction. Investor sentiment is a complex beast. There are gauges which suggest bullish sentiment amongst some shorter-term investors, but in general, institutions are gradually overcoming their risk aversion. Often when markets climb, we describe them as climbing the wall of worry, rising as investors anxiety dissipates.

One of the longstanding risks for the market is that of China invading Taiwan. The stakes would be high due to China’s 13% share of world trade, but the chances are low. The challenges faced by Russia when invading Ukraine, with which it shares a land border, would pale in comparison to an amphibious assault across the Taiwan strait, landing on largely mountainous terrain with only a handful of viable landing sites. There are more challenges too. Russia’s military was exposed as being underprepared despite having seen action over recent years. China’s military has grown but remains untested, and is perceived to be riddled with corruption and vested interests which are symptomatic of the party-controlled state. Recent months have seen evidence of a purge of the Chinese military as president Xi Jinping has found it to be unfit for purpose despite billions having been spent on modernisation.

The restructuring is believed to push back the potential date of any viable intervention in Taiwan.

Last week also marked China’s failure to make progress on the diplomatic front, with Taiwan’s incumbent president strolling to re-election, albeit with a plurality that was well down on the majority achieved by his predecessor. The Democratic Progressive Party (DPP) is a Taiwanese nationalist and anti-communist party that is opposed to stronger links with China. This year’s election was seen as an opportunity to break the DPP’s rule, but infighting amongst the opposition allowed the DPP a relatively clear path to re-election.

Chinese economy

It was an inauspicious start to last week, which contained little cheer for China. Internationally traded Chinese stocks underperformed. A release of Chinese economic data provided mixed news. An eye-catching headline was the decline in the population growth rate. This was broadly expected and simply a continuation of a trend of slowing, and now reversing, population growth, which has been in place for a decade and was accelerated by COVID. The Chinese population contracted by two million people (or just 0.15%) last year. That contraction will accelerate over the coming years.

The more timely measures of Chinese activity were reasonable, but property prices declined for the seventh straight month, and with most Chinese wealth tied up in property assets, declines in property prices have a big impact on consumer balance sheets.

The likely result is that China will step up economic stimulus after a year in which it took many piecemeal measures that failed to address weak demand. Leaks from policymakers’ deliberations suggest that China is expecting to increase the budget deficit to try and recover growth momentum.

Inflation

For the rest of the world, the very well-ingrained hopes are for monetary stimulus during 2024. But the start of the year has suggested that it might be premature to expect rate cuts. Inflation has generally been higher than forecast in December (as seen in numbers released in January).

There are explanations of course; in the UK, many forecasters failed to account for an increase in tobacco duties. We find it useful to look at a measure of the median price level, looking further than the normal weighted average price level. On this basis, UK inflation has been between 0.2% and 0.3% each month for the last seven months. That’s much more stable than the official core inflation metric, although still slightly higher than the Bank of England (BoE) would want it.

So, inflation is a little too high and the housing market showed signs of life. Rightmove’s house prices improved nationally, and the RICS (Royal Institution of Chartered Surveyors) house price balance also ticked higher. House prices will reflect the declines in expected interest rates, which have dragged five-year swap rates down and led to lower rates on mortgages. The fly in the ointment for the UK is the labour market, where the latest payrolls numbers suggest a net decline in employment. These data are volatile and subject to revision, so should be treated sceptically, but wouldn’t seem out of place with the longer trend of declining UK employment growth.

It provides a dilemma for the BoE’s Monetary Policy Committee (MPC), which is replicated around the world. If inflation is currently still too high, can it respond to tentative signs of a slowing economy?

The Red Sea

It is particularly hard to do so when inflationary pressures are rising. Shipping costs continue to rise as the Yemeni Houthi rebels attack freights navigating the Red Sea. Conflict has intensified but remains a series of proxy wars rather than a hot Middle Eastern war, which might disrupt oil supply. But there seems a reduced path of free navigation of the Suez Canal now that the US and UK launched airstrikes against the Houthis. Far from discouraging them, the rebels now see US shipping as legitimate targets. Freight rates continue to rise.

Houthis activity is facilitated by Iranian weapons supplies. The Iranians themselves launched attacks on militants in Iran and Pakistan, as well as what they claimed was a Mossad facility in Syria.

With the prospect of ongoing Houthi disruption, and a complex web of proxy conflicts taking place within the Middle East, foreign policy is likely to become a topic of the upcoming US election.

Interest rates

Around most of the world, expected interest rate cuts have been pushed back with economic news still seeming to be reasonably upbeat and inflation slightly higher than expected. A couple of weeks ago, we referenced JP Morgan CEO Jamie Dimon’s comments, which he had just made when delivering the company’s Q4 results. He said, “The US economy continues to be resilient, with consumers still spending, and markets currently expect a soft landing. It is important to note that the economy is being fuelled by large amounts of government spending and past stimulus. There is also an ongoing need for increased spending due to the green economy, the restructuring of global supply chains, higher military spending and rising healthcare costs.”

These factors would suggest that inflation and real interest rates should be higher than they have been previously, as we have discussed in the past.

Earnings season

Finally, we can check in on the US earnings season. Although only 45 companies have reported at the time of writing, the earnings season has already settled into a ratio of 80% positive earnings surprises. Regular readers will know that this is normal and not as bullish as it might seem. With the banks sounding upbeat on economic activity, it will take another view to be able to draw more meaningful conclusions from a good spread of non-bank companies.

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

Chloe

24/01/2024

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Brooks Macdonald: Daily Investment Bulletin

Please see today’s Daily Investment Bulletin from Brooks Macdonald which provides a brief analysis of the key factors currently affecting global markets:

What has happened

The US equity market managed a small gain yesterday, setting another all-time high as Europe played catch up, recording a larger gain. The smaller cap US equity market outperformed the Magnificent Seven yesterday helping to close some of the considerable year to date performance gap between the two. With the Federal Reserve in communication blackout, there was relative calm within the US Treasury market with 10-year US Treasury yields stable around 4.1%.

Bank of Japan

Overnight the Bank of Japan, the first major central bank to have its meeting ahead of a packed fortnight, kept its monetary policy unchanged. The bank revised its core inflation forecast, expecting inflation to be lower in the upcoming fiscal year. Maintaining interest rates, and monetary policy more broadly, at ultra-accommodative levels meant that 10-year Japanese government bond yields fell slightly.

Chinese assets

Hong Kong listed Chinese equities received a boost this morning after reports circulated that Chinese authorities were considering a 2 trillion yuan stimulus measure. The package is designed to provide momentum within the stock market which has had a very tough 2024 so far. The news helped Hong Kong equities more than mainland China itself which has seen more muted gains. The market has largely shrugged off previous attempts at stimulus, fearing that the regulatory backdrop still remains hawkish towards industries targeted in 2021 and 2022 such as real estate and educational technology.

What does Brooks Macdonald think

Looking ahead to today, the ECB’s Bank Lending Survey will be released for Q4 2023. The report will help investors understand the appetite for debt in the Euro Area as well as the availability of debt supply. The Q3 report suggested that banks expected a far more buoyant Q4, investors will be looking closely to see whether this has materialised.

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

23/01/2024

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Tatton Investment Management – Monday Digest

Please see the below Tatton Investment Management Monday Digest article received this morning – 22/01/2024:

Overview: ‘Lower, slower’ replaces ‘Higher for longer’

Positive sentiment, driven by expectations of an imminent and significant onset of rate cuts, began to wane last week, and global capital markets resumed their volatile path of last year. The combination of a distinct slowing in the downward trajectory of inflation, paired with increasing confirmation that economic conditions are more on the up than down (at least in the US), have made it even less probable that rates will be cut soon and fast. As a result, some investors are facing up to the very distinct possibility that rates may only begin to be cut later and then more slowly. In other words ‘lower, slower’ seems to be replacing last October’s ‘higher for longer’ narrative. 

Consequentially, bond yields rose again last week, led by more rises in the US Treasury market. In the US, mega-caps were notable performers and the Nasdaq Composite regained the 15,000 level. However, equities overall generally drifted downwards with smaller caps under pressure. Non-US markets also declined.

Global companies are reporting lacklustre results for the last quarter of 2023 and giving similarly tepid forward guidance. It’s still the early stages of the reporting cycle, with just 6% of S&P 500, companies having reported, mostly banks, consumer and industrials. Bank results have been mixed, while consumer names are seeing less US spending power as households’ cash savings decrease. Revenue ‘beats’ may be not as positive as hoped, but broadly speaking, expectations for US companies’ earnings growth are still strong, driven mostly by US domestic demand.

Last week’s return of seemingly indecisive markets suggests a creeping realisation that the inherent impatience of markets has once again led to unrealistic expectations over the potential rates ‘reward’ on falling inflation. Does that mean market sentiment has reversed and investors are no longer optimistic? No, not at all from what we can see. A dose of realism into how long it may actually take for economic and market fortunes to be sustainably positive again may well offer up some short term investment opportunities, particularly while markets have re-entered range-bound terrain.

Just how sustainable are European and US deficits? 

At the moment, fiscal deficits are high by historical standards and rising over the long-term. This is not the short-term funding gap we saw in the pandemic, but a sustained push toward looser fiscal policy, and it is happening across virtually all major economies. With bonds currently in limbo, understanding countries’ fiscal positions – and whether they might lead to instability – is key. Even though rising deficits can be seen across the world, the outlook varies by region – most consequentially between the US and Europe.

In the US, deficit spending has continued and grown under President Biden. Some of this is a hangover from pandemic-era policies, but even after those have faded there has been a substantial increase in the gap between federal tax receipts and spending. The US government is running a cumulative deficit of $509 billion for the 2024 fiscal year so far, $94 billion more than in the same period in the prior fiscal year. Tax receipts are growing, thanks to the enduring strength of the underlying economy, but outlays are growing faster. Sustained fiscal expansion is one of the main reasons why US growth remained surprisingly strong last year. It is almost inevitable that this impetus will reverse but a sharp change in outlays could make things extremely difficult. Some analysts have argued on this basis that the US economy will struggle in 2024. The flipside of this, though, is that the Federal Reserve (Fed) has made clear its intention to cut rates, bringing down short-term yields and lowering immediate borrowing costs. That would constitute a substantial relief in terms of interest expense for the Treasury, since it has done a lot of its borrowing through short-term markets.

Heading into election season, the fiscal deficit will likely be an avenue of attack against Biden. This will probably happen regardless of which Republican candidate ends up on the ballot, even though Trump’s own fiscal record is clearly questionable. Fiscally conservative rhetoric will be heard – even perhaps from the more centrist Democrats – but that does not guarantee fiscally conservative policy.

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

Carl Mitchell – Dip PFS

Independent Financial Adviser

22/01/2024

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Brooks Macdonald: Daily Investment Bulletin

Please see below, Brooks Macdonald’s ‘Daily Investment Bulletin’ which provides a brief analysis of the key factors currently affecting global markets. Received this morning – 19/01/2024

What has happened?

Equities saw a rebound yesterday as technology shares rallied in light of a positive 2024 outlook from chipmaker heavyweight, TSMC. The American Depository Receipts, which seek to track the share price of foreign listed companies, of TSMC rose by almost 10% yesterday. European equities also participated in this rally, rising over half a percentage point. This stock specific news helped buoy equity markets but the overall tone in bond markets remained downbeat as the interest rate cut narrative wilted in the face of further strong US economic data.

US economic data

The weekly initial jobless claims, which continue to help drive week-by-week sentiment, were stronger than expected with just 187k unemployment filings, versus the 205k expected. The 4-week average, which smooths out some of the larger moves, fell to the lowest level since February 2023 so it appears that labour market tightness is still a feature of the economy. After this data, the US 10-year Treasury yield continued to rise, hitting a one-month high of 4.14%. Longer dated bonds also moved in sympathy with the US 30-year Treasury up to 4.37%, the highest level in 6 weeks. Europe was not immune, with 10-year bund yields also rising on the day.

ECB

With the next ECB meeting less than a week away, the market has been focusing on the path of European interest rates. Yesterday saw the release of the December minutes which echoed the recent concern from ECB speakers that the de facto loosening of conditions caused by market interest rate cut expectations, is premature. The minutes that said ‘concern was expressed that the sharp market repricing threatened to loosen financial conditions excessively, which could derail the disinflationary process.’ The ECB appear to be committed to seeing disinflation embedded before endorsing the market’s pivot.

What does Brooks Macdonald think?

US political risk will start coming into the frame as the year continues and the US Presidential race hots up. Yesterday saw the US government avoid a partial government shutdown after a stopgap bill was approved. The can has been kicked down the road until March in order to allow lawmakers to agree to a politically contentious long term funding bill. Congressional leaders will be hoping to avoid several short-term bills as it increases the risk of a long-term bill being negotiated during the Q3 where the political pressure will be greatly heightened.

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

19th January 2024

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Evelyn Partners Update – UK December 2023 CPI Inflation

Please see the below article from Evelyn Partners detailing their thoughts on this morning’s UK inflation announcement for December 2023. Received yesterday.

What happened?

UK annual headline CPI inflation for December was reported at 4.0% (consensus: 3.8%), which was marginally higher than November’s reading of 3.9%. In monthly terms, CPI was up 0.4% (consensus: +0.2%), compared to a decrease of 0.2% in November.

Core inflation (excluding food, energy, alcohol, and tobacco) was 5.1% (consensus: 4.9%), which was consistent with the prior reading.

What does it mean?

UK CPI in December came in hotter than expected, marking a blip in inflation’s downward trajectory. The biggest concern right now is the services category, which was up 6.4% vs the expectation of 6.1%. The Bank of England will want to see some deceleration in this category before they can be confident in easing policy.

But looking forward, we expect CPI to continue to decelerate for two main reasons. First, the base effects look favourable in the coming months. Second, energy prices are likely to fall — Cornwall Insights, an energy research firm, forecast that the Ofgem price cap will fall by 14% in April.

The largest upward contribution to the monthly change in the December CPI annual rate came from alcohol and tobacco division, with prices rising by 12.8% in the year to December 2023. This increase was largely due to an increase in tobacco duty, after the government announced higher taxes in their autumn statement.

The largest downward contribution came from food and non-alcoholic beverages. Meanwhile, the gas and electricity category also continued to pull down the headline figure following the October change to the Ofgem energy price cap.

Traders now expect around five interest rates cuts in 2024, with the first coming in May. Although they have rowed back on their expectations at the start of the year when they priced in six cuts for the year.

Sterling rallied on the data release, and we could see some pressure on front-end gilts when the bond market opens this morning.

Bottom Line

This was a disappointing inflation print for the Bank of England, but it likely marks a bump in the road to lower inflation. With energy prices set to continue falling, it’s looking like inflation could be back at the 2% target by the middle of 2024, giving the Bank room to cut interest rates.

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

Alex Clare

18/01/2024