Pension Blogs

Please find below, an update on the new Chancellor’s progress so far, received from AJ Bell, yesterday evening – 30/10/2022

Jeremy Hunt is the fourth Chancellor of the Exchequer in four months. He is likely to measure success in terms of jobs, economic growth and ultimately opinion polls and then votes when the next General Election comes around, in 2024, if not earlier.

“Jeremy Hunt is the fourth Chancellor of the Exchequer in four months. He is likely to measure success in terms of jobs, economic growth and ultimately opinion polls and then votes when the next General Election comes around, in 2024, if not earlier. Advisers and clients will be looking to their portfolios to gauge the effect of his policies.”

Advisers and clients will be looking to their portfolios to gauge the effect of his policies. Mr Hunt’s first-day hat-trick of share prices up, sterling up and gilt yields down (17 October) was a good start, as he calmed markets with a return to something that looked like fiscal orthodoxy and promises of some numbers that would actually add up, come the launch of the Medium-Term Fiscal Plan, and the Office for Budget Responsibility’s independent analysis, on 31 October.

Gilt yields have started falling as the pound stabilises

But sterling might already be rolling over and the benchmark ten-year gilt yield is still some fifty basis points (0.50%) higher than when Mr Hunt’s predecessor Kwasi Kwarteng launched his hurried, and ultimately ill-fated, mini-Budget on 23 September. There is still work to be done before jokes about the UK turning into an emerging market stop being funny and start turning serious.

Lessons of history

Jeremy Hunt is the twentieth Chancellor of the Exchequer since the inception of the FTSE All-Share index in 1962. Whether he will match Gordon Brown for longevity remains to be seen, as the Labour Chancellor held office for 3,708 days from 1997 to 2007, but he will certainly be hopeful of outlasting his Conservative predecessor, Kwasi Kwarteng, who managed just 38 days.

Fourteen of his predecessors have been Conservative and five Labour, so the public has, so far, preferred to have the Tories in office and in charge of the nation’s finances.

At first glance, from an advisers’ and clients’ point of view, there is little in it between the two parties’ financial stewardship.

Under Conservative Chancellors, the FTSE All-Share has chalked up a total capital gain of 354%, in nominal terms. That equates to an average advance per Chancellor of 27% (and the average is dragged down by the short tenure of both Nadhim Zahawi and Kwasi Kwarteng).

Under Labour the benchmark has risen by 161% for an average gain of 32.2%.

Across 36 years of Tory Chancellorships that is a compound annual growth rate (CAGR) of 4.3% against 4.1% under 24 years of Labour in 11 Downing Street and two of the top-five best spells under a single Chancellor come under Labour, again in nominal terms.

FTSE All-Share performance by Chancellor of the Exchequer in nominal terms

“The picture changes profoundly when inflation is taken into account and capital returns from the FTSE All-Share are assessed in real (post-inflation) terms rather than nominal ones.”

However, the picture changes profoundly when inflation is taken into account and capital returns from the FTSE All-Share are assessed in real (post-inflation) terms rather than nominal ones.

FTSE All-Share performance by Chancellor of the Exchequer in real terms

Here, Conservative Chancellors come out well on top, as the withering effect of inflation upon investors’ returns from the stock market under Labour’s Healey Chancellorship of the mid-to-late 1970s comes into play, even if Labour supporters will argue his record is tarnished by the need to tackle the mess left behind by the Conservatives’ Anthony Barber’s crack-up boom and the oil price spike of the early seventies.

“The Barber boom and its legacy was one reason why the Truss-Kwarteng mini-Budget frightened markets, as inflation was already lofty before the stimulatory, tax-cutting plan, which conjured up the spectre of more inflation and faster interest rate increases, even as the economy potentially slowed.”

The Barber boom and its legacy was one reason why the Truss-Kwarteng mini-Budget frightened markets, as inflation was already lofty before the stimulatory, tax-cutting plan, which conjured up the spectre of more inflation and faster interest rate increases, even as the economy potentially slowed.

From the narrow perspective of advisers and clients, inflation also chewed up the nominal gains made by the FTSE All-Share under Mr Barber (and under one of his Conservative successors, Geoffrey Howe, for that matter).

FTSE All-Share performance by Chancellor of the Exchequer in real terms

Advisers and clients could therefore be forgiven for wishing Mr Hunt to look back to, and learn from, the experiences of both Barber and Healey, as, helped by the Bank of England, he attempts to steer the economy between the twin threats of inflation on one side and recession on the other.

Misery Index

“The economist Arthur Okun’s Misery Index could be a useful tool to measure the Chancellor’s progress.”

The economist Arthur Okun’s Misery Index could be a useful tool to measure the Chancellor’s progress. It simply adds together the prevailing rate of inflation to the prevailing rate of unemployment, to remind all that full employment is no guarantee of content if there is inflation and that low inflation is no guarantee of happiness (or political success) if unemployment is high.

The Misery index, based on the last published unemployment rate of 3.5% and the last retail price index inflation reading of 12.4%, is 15.5% (RPI is no longer an officially recognised statistic, but the dataset has a longer history that CPI).

That is the highest reading since 1991, when the UK was in a deep recession, and one that was resolved, at least in part, by the devaluation of sterling after its inglorious exit from the Exchange Rate Mechanism in 1992. If the Misery Index starts to drag Mr Hunt down, then sterling could be quick to show further strain.

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

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

David Purcell

31^st October 2022

Please find below, an update on how politics are affecting global markets, received from Tatton, this morning – 24/10/2022

Overview: markets look on as Westminster psychodrama continues

Given the volatility in UK politics last week, broader capital markets felt like a sea of calm in comparison. Markets had already priced in the upside on sterling, believing unfunded Tory tax cuts were no longer on the agenda, but not another leadership hiatus or even the possibility of an early general election. This perhaps explains that after initial cheers, sterling settled at where it had been already against the US dollar before Liz Truss tendered her resignation. Gilts have experienced a rollercoaster of wild and outsized movements during her short but turbulent reign and so the relief rally that followed her departure is understandable.

However, as noted before, the ill-advised fiscal event that triggered Truss’s political death spiral unhelpfully boosted an uptrend in bond yields that had been well underway since the beginning of the year. How yields and yield differences will fare from here will (hopefully) now only partially depend on the further political developments in the UK, but much more on where the rate of inflation is heading and with it, economic activity levels. On the so-called ‘loss of trust’ of international capital markets in the reliability of the UK and its institutions, the past week has demonstrated that while the UK is most certainly not immune from political mistakes, the system deals swiftly and reliably with failure.

UK inflation (as measured by the Consumer Prices Index) was interesting last week, with food and insurance leading the core (non-energy prices) back up to 10.1%. Both may be seeing lagged impacts from previous energy price rises – but also the shortage of available labour. Our food has become much more energy-intensive in recent years. Indeed, the lagged impacts of energy are still evident across the board. Overall, and compared to previous weeks, the market has been cheered by a lessening of the sense of crisis around Europe and the UK, even if the backward-looking economic data reports still look concerning. 

Europe’s energy struggles may be easing 

Regarding price pressures on consumers, last week offered some good news for Europe, including the UK. Gas and electricity prices for near-term delivery (over the winter) have come down, as gas storage reserves have filled to higher levels and earlier than anticipated, while industrial demand has fallen much more quickly than thought possible. There was further good news on the electricity front as Germany’s Chancellor Scholz spoke a ‘Machtwort’ (meaning word of authority) and more or less forced his coalition partners to agree a temporary extension of the life of the three remaining German nuclear reactors over the winter. 

This altogether lower temperature from the demand and the supply side in pan-European energy markets has led to a sense that the probability and extent of downside scenarios have lessened. This in turn is taking fiscal support pressure off politicians, and leaves markets anticipating less bad times ahead. Despite government-imposed price caps, there had been heightened fear of bankruptcies – which remains elevated, but the immediate danger is clearly receding, as we note from falling European high yield credit rates for those firms with the lowest credit ratings. 

Increasingly, scenario assessments like the recent one from Bloomberg’s energy analysts are raising the possibility that Europe could find itself with a gas surplus should the coming winter prove not to be particularly cold one. This would certainly be very good news for hard-pressed consumers, even though the boost to demand from the release of energy earmarked savings could fan broader inflation once again and force the hand of central banks to follow the US Federal Reserve’s push for rates that are anticipated to reach 5% at the end of Q1 next year. 

How much isolation can President Xi’s China afford?

Attention has been on Beijing over the last few days, as the Chinese Communist Party hosted its 20th national congress. Held every five years, the congress decides key party posts – which in turn decide state, military and commercial appointments – and sets the policy agenda for the next half a decade. The biggest but least surprising announcement was the inevitable reappointment of Xi Jinping as leader, with party rivals purged (including the very public ‘retirement’ of Xi’s predecessor Li Keqiang) and loyalists installed in his new leadership team. Without question, this is now Xi’s China.

It is somewhat disheartening, then, to hear Xi’s priorities are more political than economic. The biggest brake on growth is Beijing’s strict zero-COVID policy. China is still cycling through regional lockdowns every few months, while its housing market is still ailing from the slow-motion collapse of property developers such as Evergrande. Meanwhile, slowing developed world demand makes it difficult for China to export its way out of trouble. Growth was slowing even before the pandemic, thanks to Beijing’s deleveraging efforts and crackdown on the shadow banking sector. But that was at least an admirable goal – removing excessive debt and improving economic or financial stability. However, harsh crackdowns at home (both COVID- related and on corporates) and tough rhetoric against major trading partners – in the face of an economic slowdown – are a different matter.

It was easy to see why Chinese officials delayed the release of GDP data last week: people may not like what they see. Economists predict annual growth has slowed to 3.3%, the second-lowest figure in the last three decades (after 2020’s initial lockdown year). This is deeply worrying for the party. Just last week, the US announced a de facto embargo on selling high-end technology to China, pushing the rivalry between the world’s pre-eminent powers into something approaching a cold war. This hit tech stocks in the US, but had a broader impact on Chinese stocks. If sustained, the effective ban on technology intellectual property transfer could have a severely limiting effect on long-term growth.

Indeed, the longer-term picture is clouded by China’s ageing population and its increasingly isolated position. Some analysts suggest we are moving into a structurally weaker period for China, where growth may average around 3% per year instead of the incredible 7% or 8% we have grown accustomed to. Even if true, base effects would mean that growth opportunities would still be very significant. China’s estimated 2022 GDP is $18.3 trillion, meaning that 3% growth would add over $500 billion to the global economy – that is still more than China’s total growth in 2016. Zero-COVID is still the biggest hurdle, but if we see signs of that policy loosening early next year – which may well happen if vaccinations of the elderly continue and economic growth falters – then global investors could in the short term become very positive on China. 

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

David Purcell

24th October 2022

Please find below, an update on markets received from Tatton, this morning – 17/10/2022

Outlook: Bond markets 1 – UK Government 0

It is seldom that the UK alters the course of global capital markets, particularly given our domestic stock market comprises just 3.1% of global equities and 4.1% of the global government bond market. However, over the course of October, far bigger bond markets – like that of the US and Italy – have experienced significant changes in the wake of events earlier in the day in the UK.

In our view it can all be traced back to a profound misunderstanding of the UK’s relative position in the global competition for capital at just the point when central bank’s decisive anti-inflation measures have re-introduced fragility into capital markets not seen since the 2010-2012 Eurozone crisis. To this end, the US economy has been attracting huge swathes of capital and the US dollar has motored ahead, with interest rates and bond yields rising in parallel to expanding economic activity. In particular, the sharp rise in yields on US inflation-linked bonds has been at the heart of the stresses in the global economy. With the rest of the world facing massive competition for capital, it was unwise for the UK government to make a grab for more at a point when the costs have been made almost unbearable. To blame circumstances now suggests Liz Truss et al. were unaware of the situation when devising the policies. It’s no wonder the Chancellor is now a different person. Indeed, global markets have been cheered by signs the UK is unwinding its recent pronouncements. Should it reverse the bulk of policies that capital markets balked at as fiscally irresponsible, then rates and yields may still revert to the trajectory they were on before September’s fateful fiscal event. Whether they can do so fully will largely depend on how much of the reputational trust in UK institutions lost by international investors can be regained.

From the global perspective, beyond the UK’s domestic woes, the October 2022 UK bond market crisis will be remembered as the moment when central banks around the world were forced to grapple with something they have been denying for many months. Namely that their formidable efforts in forcing the inflation genie back into the bottle have unveiled fragilities in the global financial markets that may now hamper their ability to follow through with their inflation fighting strategy. The dependencies on ultra-low interest rates they had allowed to build up since the Global Financial Crisis mean that the risk that something, somewhere, in the global financial ecosystem would break – or at least seriously buckle – has now become all too apparent.

Will UK property downturn change the investment landscape?

In the wake of Kwasi Kwarteng’s ill-received fiscal event, lenders pulled swathes of mortgage products in expectation of sharply higher interest rates from the Bank of England (BoE). The potential effects on consumers and households were well-publicised – but as well as households, damage has also been done to equity markets – particularly to property funds and house builders. Both have fared substantially worse than the broader market throughout the year, and the latest drama precipitated another swipe down. The building sector has nearly halved in value since January, while real estate investment trusts (REITs) have lost around 40%.

Clearly, these problems precede the fiscal fallout – though it undoubtedly made the situation considerably worse. Both sectors fared well throughout the pandemic, buoyed by an increase in consumer savings and property deals. But the sharp contraction of monetary policy since the beginning of the year has made conditions extremely difficult.

With the UK probably already in recession, commercial property is one of the most vulnerable sectors. This would be the case even without the supply-side inflation pressures and fiscal imprudence, since house building and purchasing are extremely cyclical. We are also seeing this stress spread to banks with large property-related loans on their balance sheets – many of which have seen their share prices come under pressure. It seems that, having (somewhat) stabilised the pension fund problem in recent weeks, property is the new site of financial and economic instability.

Unfortunately for many property companies, there is little they can do about the situation. Balance sheet management has improved vastly in recent years, and property funds have made themselves much more resilient. But with the tide turning against them, some will probably fail – barring a shock turnaround in the underlying trends. However, improved balance sheets mean many of the larger players -particularly those unrelated to danger areas like inner city office space – will be able to weather the storm. When they come out the other side, they will find a significantly cheaper market ripe for plundering.

Headaches all round after the UK’s Gilt trip

The BoE’s emergency intervention three weeks ago was vital in stopping the gilt market bleed. But last week, Governor Andrew Bailey was keen to remind everyone that what the Old Lady giveth, she can taketh away. He responded to extension requests on the BoE’s bond-buying programme by firmly telling UK pension funds “you’ve got three days left”. Before giving way to optimism over the UK government’s latest U-turn, fear spread that pension funds would once again come under extreme pressure, with volatility pushing up collateral demands and making them forced sellers once more. The downturn was not limited to the UK either: US stocks fell sharply with investors concerned about global financial contagion. Bailey’s deadline was treated as an “all-time central bank gaffe” in some quarters, and sterling dropped hard and fast immediately after his comments.

But the BoE chief is in an unenviable position. His team is tasked with taming runaway inflation while avoiding a financial crisis triggered by government action that markets deemed fiscally profligate and irresponsible. In the current environment, these goals pull in opposite directions. Exceptionally high inflation requires exceptional monetary tightening, while the threat of pension fund collapse requires liquidity injections. Setting a timeline on these injections threatens to create a cliff-edge scenario, but open-ended purchases would undermine any monetary tightening done elsewhere. The BoE line was always that bond purchases were an emergency provision and would be dialled down when the immediate threat was gone.

We have grown used to near or below-zero real yields in the last decade and a half. But with the world in a sharp supply shortage (now mainly labour and fossil fuels), it is reasonable to think yields must move higher over the long-term to re-establish the balance between supply and demand. Currently, RPI-linked ten-year gilts yield 0.75% (above retail inflation). Runaway inflation necessitates some compression of activity from the BoE, meaning these real yield levels look justified. In fact, these yields arguably look attractive to global investors. That might seem bizarre, given BoE intervention seems to be the only thing keeping gilt markets intact. But the sharp sell-off had more to do with pension fund ‘fire sales’ because of a structural weak link in UK pension regulation, rather than underlying fundamentals.

The recent mayhem has caused many commentators to liken the UK to an emerging market, with fiscal imprudence and policy divergence from its central bank. But Britain is not an emerging market – it has highly functional financial and corporate structures and a highly skilled workforce. Recent bond movements bely this, but arguably suggests there are now bargains to be had. This is not to say we expect a sharp rebound (and thereby fall back in yields) – there are far too many intractable short-term problems for that – but there could be healthy returns in the future and, for the time being, yield-based return contributions we have not seen in over a decade.

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

David Purcell

17th October 2022

Please find below, an update on markets from Brooks Macdonald, received yesterday afternoon – 10/10/2022

• Equities soared early last week before being given a quick rebuke by central bank speakers
• Last Friday’s employment report showed a strong labour market but declining participation
• Thursday’s CPI release will be vital for the direction of equities and bonds over the coming weeks.

Equities soared early last week before being given a quick rebuke by central bank speakers

This week is expected to start in a quieter fashion after the volatility of last week. The US bond market is closed for Columbus Day, but equity markets remain open. The start of last week saw a rekindling of hope that the Federal Reserve (Fed) may pivot towards a more accommodative stance but by the end of the week central bank speakers convinced the market that it had been too eager to price in a change of policy. Overall equities posted reasonable gains over the course of the week however volatility remains a more consistent theme than direction.

Last Friday’s employment report showed a strong labour market but declining participation

The US employment report on Friday catalysed the latest leg lower for equities with the total number of new jobs coming broadly in line with consensus at 263,000 (255,000 consensus). The August dataset showed the labour force participation rate increase, a sign that employment conditions may have been tempting workers back into the workforce. The reading for September however, saw a reversal of some of those gains with the participation rate declining from 62.4% to 62.3%. News that jobs growth was stronger than expected but labour supply side issues remain was enough to drive equities sharply lower on the day.

Thursday’s CPI release will be vital for the direction of equities and bonds over the coming weeks

This week’s major market event will be the US Consumer Price Index (CPI) release on Thursday. The higher-than-expected US CPI release last month started a broad sell-off amongst equities and bonds. The market is expecting the CPI report for September to show Core (excluding energy and food) CPI to rise by 0.5% month-on-month and for that to lead the year-on-year rate to 6.5%  (compared to 6.3% for August). With US energy prices continuing to fall, headline CPI is expected to fall from 8.3% year-on-year to 8.1%.

Relatively few economists are expecting US CPI readings to rise dramatically from current levels, but there is still division as to whether inflation remains sticky, and will therefore plateau at an elevated level, or will begin to fall. Markets latched onto a new narrative around an accommodative Fed at the start of last week with little catalyst, we should therefore expect markets to overinterpret this week’s CPI release and extrapolate any upside or downside reading into the future. It is difficult to overstate the importance of Thursday’s US CPI release to market direction.

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

David Purcell

11th October 2022

Please find below, a market update received from Brewin Dolphin, yesterday evening – 28/09/2022

Stocks slide as central banks hike rates

Stock markets suffered another bout of steep losses last week as a series of interest rate hikes intensified fears of a global recession.

The UK’s FTSE 100 lost 3.0% as the Bank of England (BoE) lifted interest rates by 0.5 percentage points and chancellor Kwasi Kwarteng’s raft of tax cuts raised concerns of more aggressive rate hikes in the near future. The pan-European STOXX 600 slid 4.4% following interest rate increases by central banks in Sweden, Switzerland and Norway.

US indices recorded a second week of losses after the Federal Reserve indicated that short-term interest rates are likely to continue increasing sharply over the next few months. The S&P 500 fell 4.7%, the Dow lost 4.0% and the Nasdaq tumbled 5.1%.

Fears of a slowdown in global economic growth weighed on stock markets in Asia, with the Nikkei and Shanghai Composite losing 1.5% and 1.2%, respectively.

Last week’s market performance*

• FTSE 1001 : -3.01%

• S&P 500: -4.65%

• Dow: -4.00%

• Nasdaq: -5.07%

• Dax: -3.59%

• Hang Seng: -4.42%

• Shanghai Composite: -1.22%

• Nikkei1 : -1.50%

*Data from close on Friday 16 September to close of business on Friday 23 September. 1 Closed on Monday 19 September.

Pound hits record low against the dollar

The pound hit a record low of $1.033 early on Monday (26 September) as investors reacted to Kwarteng’s ‘growth plan’ for the UK economy. The so-called mini-budget included a much bigger package of tax cuts than had been expected and raised concerns about a surge in government borrowing.

Several lenders pulled mortgage deals from the market amid speculation the BoE will be forced to hike interest rates at a more aggressive pace. The Bank’s governor Andrew Bailey ruled out an emergency rate hike this week, but said it would “not hesitate to change interest rates by as much as needed”. The Treasury announced that a fiscal plan would be published on 23 November, setting out details of the government’s fiscal rules “including ensuring that debt falls as a share of [gross domestic product] in the medium term”.

In the US, the Dow slid into bear market territory on Monday, down more than 20% from its recent peak, and continued to decline on Tuesday as fears of a recession grew. The FTSE 100 slipped 0.5% on Tuesday, with housebuilders hit especially hard by interest rate concerns. The blue-chip index was 1.4% lower at the start of trading on Wednesday after the International Monetary Fund criticised the UK’s tax-cutting plans. The BoE has now said it will start a temporary programme of bond purchases from 28 September to stabilise the market.

UK interest rate reaches 2.25%

The mini-budget came the day after the Bank of England lifted interest rates by 0.5 percentage points for the second month running. The base rate now stands at 2.25%, its highest level since 2008.

Bank of England base interest rate

Source: Refinitiv Datastream

The BoE’s monetary policy committee (MPC) noted that while annual inflation fell slightly from 10.1% in July to 9.9% in August, it is still expected to near 11% when energy bills rise in October and remain above 10% over the following few months.

“The labour market is tight and domestic cost and price pressures remain elevated. While the [energy price] guarantee reduces inflation in the near term, it also means that household spending is likely to be less weak than projected in the August report over the first two years of the forecast period. All else equal, and relative to that forecast, this would add to inflationary pressures in the medium term,” the committee said.

The MPC forecast a 0.1% decline in UK gross domestic product (GDP) in the third quarter, as opposed to its previous forecast of 0.4% growth. GDP already declined by 0.1% in the second quarter and another drop in Q3 would mean the UK is in a technical recession.

Fed announces another 0.75% rate hike

Over in the US, the Federal Reserve announced its third[1]consecutive 0.75 percentage point interest rate hike in its quest to tame inflation. The federal funds rate is now in the 3.0-3.25% range, the highest since early 2008.

Fed chairman Jerome Powell said the central bank was “strongly resolved” to bring inflation down to 2% and “will keep at it until the job is done”. In comments reported by CNBC, Powell admitted that interest rate hikes could spark a recession. “No-one knows whether this process will lead to a recession or, if so, how significant that recession will be,” he said.

Fed officials expect US GDP growth to slow to 0.2% for 2022, down sharply from June’s expectation for 1.7% growth.

Eurozone economic downturn deepens

The eurozone’s economic downturn deepened in September, according to S&P Global’s flash purchasing managers’ index (PMI). The composite output index fell from 48.9 in August to 48.2 in September and has now registered below the neutral 50.0 level for three successive months.

Manufacturing led the downturn, with factory output falling for a fourth straight month. Service sector output also fell, down for a second consecutive month. The service sector decline was the sharpest since 2013 excluding the falls seen as a result of pandemic containment measures.

Chris Williamson, chief business economist at S&P Global Market Intelligence, warned that a eurozone recession was on the cards. “The early PMI readings indicate an economic contraction of 0.1% in the third quarter, with the rate of decline having accelerated through the three months to September to signal the worst economic performance since 2013, excluding pandemic lockdown months,” he said.

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

David Purcell

29th September 2022