Blogs

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

From Beige Books to Beige Bots  

The Fed’s November Beige Book, released yesterday, noted that economic activity had slowed since the last update, with businesses reporting that high inflation and rising interest rates dragged down their economic outlook.  Four Districts reported modest growth, two indicated conditions were flat to slightly down, and six noted marginal declines in activity.

Retail sales, including autos, remained mixed, with sales of discretionary items and durable goods, like furniture and appliances, declining with consumers showing more price sensitivity. Travel and tourism activity was generally healthy. Demand for transportation services was sluggish. Demand for labour continued to ease, however, skilled workers were still in short supply, leading to continued wage pressures in some sectors.

Manufacturing activity was mixed, however, again their outlook deteriorated. Demand for business loans decreased slightly, particularly real estate loans. Consumer credit remained largely flat, but some banks noted a slight uptick in consumer delinquencies. Commercial real estate activity continued to slow. Several Districts noted a slight decrease in residential sales and higher inventories of available homes.

Clearly, the Fed’s rating cycle is having the desired effect, whether the Fed manages to pull off a “soft landing” remains to be seen. With the Fed now at, or close to, peak rates, the market awaits the pivot.

Also, have you ever had one of those days when you really can’t be bothered to update your followers on social media, telling them what a wonderful life you are living? Well, it seems Facebook has a solution. Meta has announced it is bringing “AI post creation tools” to its platform, effectively enabling you to outsource to the social media giant the task of saying something pointless to your gullible (or uninterested) audience.

It gets better. Coders believe that Instagram will soon let users of its site create their own AI bots modelled on their own individual image, thus enabling them to create custom AI characters able to respond in their own distinct voice. In time, this could lead to bots speaking to other bots, forever, at which point we can hopefully just leave them to it and get back to the real world.

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

Andrew Lloyd DipPFS

30/11/2023

Please see the below article from EPIC Investment Partners received this morning 28/11/2023.

The Daily Update | UK Shop Inflation Falls, However Wider Inflation Becoming More Home Grown  

Inflation in UK shops has fallen to its lowest level since June 2022 as retailers fight to attract shoppers ahead of the crucial Christmas period.  

Figures out this morning from the British Retail Consortium showed inflation fell 0.9% in November to 4.3%, a 17-month low, versus the previous reading of 5.2%.  It’s the sixth-straight month that the trade association has recorded declines. Clearly the BoE’s tightening cycle is working, with inflation now less than half May 2023’s reading, of 9%.  

We maintain, however, that the hardest part is the journey from ~4% to 2% target. To this effect, the lobby group said there was no guarantee that inflation would keep falling, with higher taxes and an increase in the minimum wage pushing up costs. 

The lower shop inflation comes as the Old Lady’s Deputy Governor Dave Ramsden warned that UK inflation is becoming more “homegrown” and will be “challenging to squeeze out of the system”. Speaking to Bloomberg TV, Ramsden believes that monetary policy will need to stay “restrictive for an extended period of time” to bring inflation down from 4.6% to the BoE’s target.  

Although headline inflation is now less than half of what it was 12-months ago, this was mainly “driven down by a bigger fall in the energy component than we were expecting”. Services inflation, which makes up 45% of the consumer basket used to calculate the CPI inflation number, was “actually much stickier and higher than we were expecting at 6.6%.” 

“That’s really a sign that UK inflation is becoming much more home-grown,” Ramsden said. He added: “We think that inflation is going to be really challenging to squeeze out of the system. It’s driven by wages, where wage growth remains above 7%. The service sector in the UK is very labour-intensive. So, these factors are what’s leading us to think that inflation is going to stay stubbornly high through next year.” 

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

Charlotte Clarke

28/11/2023

Please see below, the ‘Monday Digest’ from Tatton Investment Management which briefly analyses all the key factors currently affecting global markets. Received this morning – 27/11/2023

Activity (and growth) slows down as December beckons

The US-centric nature of global markets means Thanksgiving week tends to be quiet. Things should pick up this week, but markets will likely be decreasingly busy over the next four weeks. However a decline in trading activity doesn’t necessarily mean quiet markets, particularly if a group of investors decides to move things around. If they want to buy, we can end up with a ‘Santa rally’, but if they are stressed and need to raise cash levels, we can get a nasty sell-off, such as in 2018. It can be driven by investors’ perceptions risks and opportunities shaping up for the next year, but more often December’s moves are about protecting the past year’s returns.

In the run up to year end, November remains a positive month in capital markets, although equities had a neutral week and longer bond prices fell back. Right now there are few signs of market stress. Price volatility has declined across the board, and option volatilities (a measure of expected volatility) have come down to low levels. The risk of owning market-traded assets has declined and that slow process tends to lead to a gentle rise in risk asset prices. But, as we mentioned last week, there is a potential problem with an environment where rising low-risk bond prices (and falling bond yields) are the only driver of higher risk asset prices. Falling bond yields are mostly associated with some sense of a slowing economy and it appears that, on balance, the global economy may indeed have eased back. The good news is that although growth may be slowing somewhat, this phase may prove to be better balanced. 

The AI governance dilemma

OpenAI shocked the world by firing superstar CEO Sam Altman for not being “consistently candid in his communications”. But just days later, Altman was back in charge at OpenAI and the board that had sacked him was gone. Some have cast the story as one of a daring geek entrepreneur coming up against overly cautious non-scientists, others have highlighted the “Terminator” films’ aspect. It’s all of these things but the widest ramifications concern how individual companies are not the place to balance public interest and profits. 

OpenAI began as a non-profit organisation in 2015 and, initially at least, its stated sole aim was to develop artificial intelligence (AI) “safely” for the benefit of humanity. However, the costs of developing and running cutting-edge technologies were so substantial it needed much more investment. That required extensive private capital that ultimately demanded commercialisation – and Altman was the ideal person for the job, having overseen a Silicon Valley tech incubator for years. Regardless of whether Altman’s sacking was ultimately down to those clashing incentives, there was certainly plenty of tension between revenue and promoting safe artificial intelligence (AI). 

OpenAI’s conflicting priorities were obvious and make it seem like a one-off. But they have become more common thanks to understandable wish to have the perceived need for socially conscious corporates, most commonly expressed  as ESG investing. OpenAI has shown the dilemma in a case of “reductio ad absurdum”.

The extremity of this case has further implications. One does not have to be a doomsayer to realise the risks of the unfettered proliferation of a technology that one insider described to us thus: “this isn’t just better technology – we’ve made a new kind of nuclear weapon”. If the potential consequences to society are so big, it will not be possible for competing private groups to self-regulate or govern in the public interest. 

Even with clearer and tighter regulation, we can’t be sure of a socially acceptable outcome when first-mover advantage means untold riches and near-untouchability,  and when this might be achieved in months, not years. Centralised research bodies are currently promised by various governments, and are sorely needed.

Can radical Milei bring stability to Argentina?

Economist, TV personality and self-proclaimed “anarcho-capitalist” Javier Milei won Argentina’s run-off election by a surprisingly large margin last week, beating centre-left Sergio Massa – the current economy minister – by 56% to 44%. Milei believes in unfettered market freedom and advocates substantial cuts to public spending. More radical ideas floated on the campaign trail have included loosening gun control and allowing a private market for human organs. His fierce criticisms have extended beyond the Argentine political establishment to foreign governments, and he has promised to cut all ties with China and Brazil – Argentina’s two largest trading partners. His populist leanings and maverick personality have earned him comparisons to Trump and Bolsonaro, but his message has always been more market oriented and less protectionist than either. The president-elect was defiant after the result: “the model of decadence has come to an end, there’s no going back”.

Where Argentina is going to is another matter. Milei promises swift and dramatic reforms to the economy, but he lacks legislative support after his party fell well short of a congressional majority in October’s elections. His toughest task will be quelling 143% annual inflation, while dealing with extremely high public debt and practically zero fiscal leeway. His election has been cast as a ‘roll of the dice’ by Argentines fed up with years of punishing inflation and worsening living standards, but many are predicting a difficult transition.

One of Milei’s most consequential proposals is to scrap the Argentine peso, replace it with the US dollar and close the country’s central bank (at least as a printer of money). This is designed to limit price rises and anchor people’s inflation expectations by running the economy on a more trustworthy currency. Full dollarisation has never been tried for an economy as large as Argentina though – the continent’s second biggest and a member of the G20. Economists are almost unanimous that dollarisation, if possible, would require further devaluation of the peso, but if such devaluation came suddenly, it would likely be seen as a betrayal by Milei voters. The other option is to return to the International Monetary Fund (IMF) (or possibly the US directly) with hands out.  But, if the IMF were to agree, it would amount to a doubling of Argentina’s already substantial debt pile. On its part, the IMF has expressed serious reservations about the feasibility of dollarisation.

The unfortunate truth Argentines might well discover is that, while reforms are needed and dollarisation may indeed be possible, a populist firebrand might not be the person to deliver them. It is early days, but Milei’s campaign gave little reason to think that his regime would bring stability, and he might struggle to get the results he promises.

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

Alex Kitteringham

27^th November 2023

Please see the below article from Brewin Dolphin detailing the key takeaways from the Chancellors Autumn Statement. Received 22/11/2023.

Chancellor Jeremy Hunt has delivered his autumn statement, in which he announced measures that aim to help grow the economy and reduce some tax rates for businesses and households.

Whereas Hunt’s previous autumn statement a year ago was very much about reassuring the markets and demonstrating fiscal responsibility, the focus this time around was on promoting growth while reducing taxes in a “responsible” way. Compared with a year ago – when his predecessor’s mini-budget had triggered turmoil in financial markets and a spike in borrowing costs – the economic backdrop has become more stable. Inflation has more than halved yet remains well above the Bank of England’s target and is expected to remain higher for longer than previously anticipated.  

The key announcements included reductions to National Insurance and a permanent extension of the ‘full expensing’ regime for businesses. Other measures included raising the National Living Wage from £10.42 to £11.44 per hour, freezing alcohol duty, increasing the state pension to £221.20 a week in 2024/25, and reforms to ISAs.

There were also pledges to speed up planning applications, extend financial incentives for investment zones, and invest an additional £500m in artificial intelligence. To encourage investment in UK high-growth companies, new investment vehicles will be introduced, including a ‘growth fund’ within the British Business Bank.

Here, we highlight the key announcements, before giving the views of Guy Foster, our Chief Strategist, on the implications for the UK economy and investors.

National Insurance reduced

Hunt announced that the employee National Insurance (NI) rate will fall by two percentage points from 6 January 2024. This follows a topsy-turvy couple of years for NI. In April 2022, prime minister Rishi Sunak (then chancellor) raised NI by 1.25 percentage points, but this decision was reversed by Kwasi Kwarteng in the mini-budget of September 2022. Currently, employees pay NI at 12% on earnings over £12,570 and at 2% on earnings over £50,270. Today’s announcement will see the headline rate lowered to 10%, resulting in employees saving up to £754 in NI contributions each year.

For self-employed people, flat-rate Class 2 NI contributions will be abolished, while the Class 4 NI rate will fall from 9% to 8% from April 2024. Hunt said these changes would save the average self-employed person £350 per year.

ISAs simplified

From April 2024, individuals will be allowed to open and pay into multiple ISAs of the same type in a single tax year. Someone could, for example, open two investment (stocks and shares) ISAs or two cash ISAs. This could enable them to try out different providers or open a new cash ISA as soon as a new deal becomes available. It will also be possible to make partial transfers between ISA providers, even if the money was paid into an ISA in the current tax year.

The ISA allowance will remain at £20,000 for 2024/25 and the Junior ISA allowance will remain at £9,000.00.

Workplace pension ‘pot for life’

The government will consult on allowing employees to nominate the pension scheme that their employer pays into – similar to the approach taken by countries such as Australia. Hunt said this would enable employees to have one “pension pot for life”. Currently, employers automatically enrol new staff into a pension scheme chosen by the company, which can result in people accumulating multiple different pension pots throughout their career. Having one pot may make it easier to keep track of pension savings.

Business tax rates cut

In a welcome move for businesses, Hunt announced that the three-year tax break known as ‘full expensing’, which was due to expire in March 2026, will be made permanent. Full expensing allows companies to deduct the full cost of qualifying plant or machinery from their taxable profits in the year of purchase. It is equivalent to a tax saving of up to 25p for every £1 spent.

Meanwhile, the small business multiplier will be frozen for another year, as will business rates relief for retail, hospitality and leisure businesses.

Income tax thresholds still frozen

As expected, Hunt did not make any changes to income tax thresholds. The personal allowance (the amount you can earn each year before you start paying income tax) and the higher-rate income tax threshold for those in England, Wales and Northern Ireland will therefore remain at £12,570 and £50,270, respectively. The additional-rate income tax threshold will remain at £125,140 after it was cut from £150,000 in April 2023.

The personal allowance and higher-rate income tax threshold haven’t been increased since April 20213 and are due to remain frozen until 2028. This could see more people drifting into higher tax bands because of inflation and paying a much bigger tax bill as a result. Our analysis shows that an individual who earned £50,000 in 2021, and whose income rises in line with actual and forecast consumer price index (CPI) inflation4 , could see their income tax bill rise from £7,486 to £15,094 by 2028.

One way to potentially reduce your income tax bill is to save into a pension. If your salary and/or bonus means you cross into a higher tax band, making a personal pension contribution could mean your adjusted net income falls below the threshold, potentially avoiding higher or additional-rate tax.

Inheritance tax unchanged

There was speculation that Hunt might reduce the rate of inheritance tax (IHT), increase the IHT nil-rate band, or even scrap IHT altogether. In the end, however, these rumours did not come to fruition. The rate of IHT will remain at 40%, while the IHT nil-rate band and residence nil-rate band will remain at £325,000 and £175,000, respectively. This is in line with Hunt’s previous decision to freeze IHT allowances until 2028.

The ongoing freeze means individuals can continue to pass on up to £325,000 free from IHT when they die, plus up to £175,000 if they pass on their main residence to their direct descendants (and therefore qualify for the residence nil-rate band).

The IHT nil-rate band has been set at £325,000 since 2009, which means families will have missed out on almost 20 years of inflation-linked increases by 2028. The residence nil-rate band was last increased in April 2020. Frozen allowances and rising house prices have resulted in IHT receipts more than doubling over the past decade, from just over £3bn in 2012/13 to £7.1bn in 2022/235 . This underscores the importance of planning ahead and getting financial advice.

Economic growth forecasts cut

The autumn statement was accompanied by the Office for Budget Responsibility’s (OBR) economic and fiscal outlook6 , which gave a mixed review of the UK economy.

Borrowing was £19.8bn lower than expected in the first half of the current financial year, and gross domestic product (GDP) is now forecast to expand by 0.6% this year, rather than contracting by 0.2%. The next two years are expected to be more muted, with GDP growing by 0.7% in 2024 and 1.4% in 2025, down from previous estimates of 1.8% and 2.5%, respectively. Inflation isn’t expected to return to the Bank of England’s 2% target until the second quarter of 2025 – more than a year later than previously forecast. House prices could fall by 4.7% next year as interest rates remain higher for longer.

High inflation means real household disposable income per person is forecast to be 3.5% lower in 2024/25 than their pre-pandemic level. This is half the peak-to-trough fall expected in March, but still represents the largest reduction in real living standards since comparable records began in the 1950s.

Guy Foster, our Chief Strategist, shares his views on how the announcements could affect the economy and investors

From beers to benefits, borrowing and Barbie, the chancellor’s autumn statement covered a lot – 110 measures in fact. With an election on the horizon, Hunt faced the difficult task of trying to balance the government’s objectives of stimulating the economy and cutting taxes, while keeping inflation under control.

There are two reasons to think that the cuts to National Insurance will provide a relatively small boost to consumer spending. The first is that they come against a background of ‘fiscal drag’ – the freezing of tax thresholds at a time when prices and wages are rising. The second is that people are feeling the impact of high interest rates.

Stimulating the economy over the long term requires a boost to its supply capacity and there were plenty of policies aiming to do this. The most notable was the full expensing of capital expenditure. This incentive will increase investment, although having been in place on a temporary basis and in differing forms since the pandemic, some businesses will have brought forward investment to take advantage of the tax break. There will be further increases to investment from this permanent measure, but they will accrue over many years and the benefits derived from increased investment take even longer to crystalise.

Despite falling inflation, borrowing and debt, the public finances remain in poor shape. Markets were a little disappointed that borrowing hadn’t fallen more, but compared with the high volatility caused by former prime minister Liz Truss’ policies, this is perhaps a cause for celebration this time around.

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

Alex Clare – Trainee Paraplanner

23/11/2023

Please see the below article from Brewin Dolphin which covers their views on recent events in markets:

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

Andrew Lloyd DipPFS

22/11/2023

Please see the below article from Tatton Investment Management, received this morning – 20/11/2023.

Overview: Inflation genie back in the bottle?

Last week was another good one for most investors. In sterling terms, the strongest equity markets were in Europe with the DAX up 4.5% over the week, the biggest winners being small and mid-sized firms. Risk asset markets are benefitting from the perception that central banks have reached their tightest levels in terms of interest rates and that from here, rates will move lower. That perception grew stronger last week. Yields on 10-year government bonds were down another 0.2%-0.3% in the UK, Europe and the US, and the move was even stronger for shorter-dated maturities.

Thinking we are through the worst is tempting, but is also dangerous. Indeed, central banks moving from tightening policy to easing is also a sign that economic growth is not going so well. And if growth is not going so well, profits may be under pressure. We have one more set of 2023 central bank meetings in December. Investors have been positive about prospects of dovish announcements, but we will need to hear that it’s more than okay to talk about rate cuts – which was certainly opposite to what central bankers stressed earlier in the month.

Lastly, the US dollar has weakened as the US growth exceptionalism appears to be running out. We think that this has the makings of an important shift, one which could be important for longer-term economic and investment outcomes. We will cover this in more detail in our 2024 outlook, which we will publish in mid-December.

Why fragile growth is now the key concern

One year ago, high levels of inflation were the greatest anxiety for investors and policymakers. For much of this year, the pace of price rises has declined but in order to achieve this, central banks have raised interest rates to cool down demand and so the world’s economy has slowed. That slowing has done its job, with an increasing impact on inflation. Now though, the fragility of global growth is a greater concern for investors than the possibility of another bounce in inflation.

We know that if policymakers want to guide demand in their economies, they face a very difficult task. If economies continue to drift below potential and the pace of inflation continues to move down in developed nations, ‘higher’ won’t be for ‘longer’. However, we would remind everyone that not taking monetary policymakers at their words has been a losing game all year long. Caution should particularly be taken with the US Federal Reserve (Fed). The Fed is in many ways the leader of the ‘higher for longer’ chorus, because the US economy is leading the developed world. According to JP Morgan’s nowcast, for example, US growth dipped only mildly below potential into the end of 2022, then bounced back to record a blistering 4.9% seasonally adjusted annual rate from July to September, obviously above potential. Over only a few weeks, growth has now shifted back below a 2% potential estimate. Unemployment has risen slightly to 3.9%, but is still below the Fed’s 4.5% estimate of employment balance.

So, while there is some logic to expecting rate cuts from the BoE and ECB, expecting them from the Fed – as many now are – looks riskier. Moreover, the whole picture is complicated by the fact that developed world central bankers take their cues from each – and so often particularly from the Fed. It may take yet more weakness and fragility to really change their minds.


China begins to realise its potential

For western investors, China has been the biggest disappointment of the year. A post-Covid boom looked like a sure thing 12 months ago, but economic activity has been lacklustre, held back by an ailing property sector and weak domestic demand. While most developed economies have struggled to contain sky-high inflation, China has been flirting with deflation all through 2023. Accordingly, the stock market rally into the end of last year has well and truly unravelled. A consistent slide from January leaves mainland China’s benchmark CSI 300 index barely above where it was in October 2022 – its lowest point during the entire pandemic.

However, things could be turning in the world’s second-largest economy. Chinese consumer demand and industrial activity both came in stronger than economists expected in October. Retail sales showed 7.6% year-on-year growth last month, beating expectations of 7% and comfortably above the 5.5% figure from September. Industrial production was more muted but showed marginal improvement on the month before, 4.6% for October versus 4.5% for September – and was the sector’s strongest return since April. Just as encouraging is a potentially powerful fiscal boost. According to Bloomberg, Beijing is considering giving up to RMB 1 trillion for urban village redevelopment – most likely through its pledged supplementary lending (PSL). The throwback to 2015 policy – the zenith of Beijing’s credit-growth model – is likely in part to appease those nostalgic for the good old days.

Beijing excited markets last year when it hinted at monetary and fiscal easing – supposedly aimed at stressed property developers – but actual measures were relatively moderate and a far cry from previous episodes, most notably in 2015, when Xi Jinping’s government wielded its policy ‘bazooka’ to turbocharge the economy. And yet, last week we saw the clearest signs of increased firepower as the People’s Bank of China (PBoC) gave out RMB 1.45 trillion through its medium-term lending facility, the central bank’s biggest splurge since the heady days of 2016. Repeating old policy does not guarantee the same results, of course, but it is possible that liquidity injections from the PBoC could help to enable markets to connect to an improving economy.

The government is clearly alive to how weak China’s economy has been, and will know that rebuilding confidence will take time. Chinese companies have endured a long period of selling and, in some cases, have already lost much of their foreign-linked backing. This is no doubt one of the reasons for President Xi’s conciliatory approach to the US, exemplified by meeting President Biden in San Francisco last week. While concrete policies rarely come from such high-level meetings, it is an undeniable show of China’s willingness to normalise US relations after the tensions of the last few years. What that means for the Chinese, American and global economies depends on whether Washington feels the same.

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

Charlotte Clarke

20/11/2023

Please see below, Brooks Macdonald’s ‘Daily Investment Bulletin’ which details recent economic data releases and central bank policy news. Received this morning – 17/11/2023

What has happened?

Bond and equity markets received another burst of enthusiasm yesterday after economic data painted a more challenging picture than the day prior. Oil prices continued their decline, adding to the risk on mood, with both Brent Crude and WTI falling more than -4% on the day.

Economic data

 The high frequency initial jobless claims, released weekly, spiked to their highest level since August, adding to the evidence of slowing labour market momentum. 231k people filed for unemployment benefit in the preceding week compared to expectations of just 220k. Continuing jobless claims have also hit their highest level since late 2021 and were slightly higher than the market expected. Industrial production was also weaker than expected, contracting by -0.6%. Lastly, the NAHB housing market index was also weak, recording its lowest reading since December. These data releases added to the belief that economic growth was slowing sufficiently to reduce the demand side of inflation and increased the chances of a soft landing being achieved.

Central banks

 While bond yields fell yesterday, Federal Reserve speakers did little to support the market’s view that interest rate cuts would be on the table next year. President Mester said that it was far too early to discuss interest cuts as the Fed needed confidence that inflation was on a sustained, lower path. Mester said that easing monetary policy ‘is just not part of the conversation right now.’ Governor Cook struck a similar tone, saying that recent signs of economic strength, such as the Q3 GDP release, suggests that demand remains strong and that could ‘slow the pace of disinflation.’ Neither of these speakers deterred the bond market which increased its probability of an interest rate cut as soon as the March 2024 meeting.

What does Brooks Macdonald think?

 The last fortnight has seen a resurgence in risk appetite but this week has shown that the movements are far from one-way as investors are highly aware of the risk of another ‘false pivot’. The market’s pricing of US 2024 interest rate cuts looks quite aggressive given the stickiness of core CPI readings and the rhetoric coming from Federal Reserve speakers. Given this, markets are likely to continue to swing towards bouts of optimism as pessimism as we are still some way from confirming that inflation is on a sustainable path to the Fed’s 2% target.

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

17^th November 2023