HM Treasury and HMRC quietly launched additional proposals on 11/02/2021 with the potential to have a much greater effect on retirement planning over the coming years.
The proposals
The main proposal is this: anyone who was a member of a registered pension scheme on 11 February 2021 (the date of the consultation) and had a right to take pension benefits before age 57 on that date, would keep that right as a protected pension age. That protected pension age (which in most cases would be 55) would be scheme specific and work similarly to existing protected pension ages. This would mean:
Anyone joining a new pension scheme from 12 February 2021 onwards would have an NMPA of 57 from 2028 for that scheme, although they may have other pensions that they could still access before age 57.
From 12 February 2021, anyone who transfers to a new scheme would lose the right to take benefits from that pension before age 57 (assuming the original scheme offered that right), unless they completed a block transfer.
One key difference highlighted between the rules for existing protected pension ages and these proposals, is that clients would not need to crystallise all the benefits within a scheme on the same date in order to keep their protected pension age.
Next steps
The timing of proposals like these is always difficult. The consultation doesn’t close until 22 April, and we don’t expect to see draft legislation from the Treasury until the summer. However, if the proposals do go ahead as they stand, transfers that take place from today could affect when clients are able to take benefits. While many people may not expect to retire at 55 or 56 (and until yesterday might have assumed it simply wouldn’t be an option), it still adds an additional consideration into people’s pension planning.
It’s still early days, and I’m sure you’ll see more about the industry’s thoughts about the proposals over the coming weeks. What seemed like a very straight forward upcoming pension change has suddenly become something to keep a keen eye on.
Our Comment
We need to see what the outcome is in the summer, but this is one to watch for those who are considering retiring early at age 55 or if you thought you might access your pension benefits, typically tax free cash, early at age 55 from 2028.
In real terms this will only be a few people, most in the UK haven’t got the pension assets they need for early retirement and shouldn’t access their pension funds too early either.
However, if you are one of the few that may have a plan to retire early or access your pension benefits early, at age 55, from 2028 you now need to be careful about any pension switching or consolidation. Let’s see what we get at the end of the consultation, hopefully draft legislation in the summer. Watch this space.
Steve Speed
03/03/2021
Technical content cut and pasted from Curtis Banks Technical Update.
Please see below article received from AJ Bell yesterday afternoon, which provides a global review of bond markets and offers recommendations for potential future investment winners.
Zambia, Venezuela, Tajikistan and Armenia do not make a habit of featuring in this column, not least as they are a bit off the beaten track, even for the most intrepid adviser or client. But they catch the eye because each member of this quartet has seen an increase in interest rates this year, to take the total for 2021 so far to five increases and two cuts from global central banks (Mozambique is the fifth for those who are interested).
Five central banks have raised rates so far in 2021
“Many advisers and clients are unlikely to be stirred by events in Zambia, Venezuela, Tajikistan and Armenia but they may need to pay attention for three reasons.”
Those who are not interested will ponder the relevance of this possible trend, but they may need to pay attention for three reasons.
It could be an early ‘risk-off’ sign in financial markets. When markets become incrementally more cautious, they tend to cut their riskiest positions first. Frontier markets such as these, or even more generally, would fit that bill. Their central banks may be raising rates to try and lure capital back or at least reaffirm their credibility with overseas lenders.
It could be a sign that markets are, at the periphery, starting to deleverage or at least balk at the tidal wave of debt that continues to build – Bloomberg data shows that the total of global bonds in issue now stands at a record-high $67.6 trillion. And, generally speaking, when markets turn cautious, it is the peripheral markets that show distress first, rather than the core ones, as it is in the latter that the bulls always have the greatest faith and thus where they make their final stand before they capitulate and make way for the bears.
It could be a sign that inflationary worries are seeping into Government bond markets the world over (see this column, SHARES, 11 February 2021). Bloomberg research reveals that the value of global bonds with negative yields has dropped by $3 trillion this year so far, although that still leaves a total of some $14 trillion.
None of these things may come to pass. It could be that the deflationary force of interest payments, demographic trends and central bank intervention keep fixed-income investors in clover as they combine to keep interest rates and inflation well and truly anchored, to the benefit of the bond portion of any portfolio, especially the long-duration segment. Yet if any of the above three trends keeps running, then the meagre coupons offered by most fixed-instruments would leave them looking like return-free risk and speak in favour of short-duration exposure for anyone seeking bond-like ballast in their asset allocation plan.
“If any of the above three trends comes to pass, then the meagre coupons offered by most fixed-instruments would leave them looking like return-free risk and speak in favour of short-duration exposure for anyone seeking bond-like ballast in their asset allocation plan.”
Turning tide
A quick look at the benchmark 10-year bonds of key emerging markets might suggest that investors are taking risk off the table. Selling bonds here means yields are creeping up and prices creeping down. They might not look like big moves, but the very right-hand side of those lines show an upward shift in bond yields – to 6.59% from 6.15% in the last month alone in Russia.
Emerging market bond yields are moving higher
A look at developed market bonds suggests concerns over gathering debt. In Europe, for example, benchmark 10-year bond yields are creeping higher, despite the European Central Bank’s quantitative easing (QE) scheme. No wonder, when advisers and clients consider that the world’s debt pile soared by $24 trillion to a record $281 trillion in 2020, according to the Institute of International Finance. That was an extra 35 percentage points of GDP to take the debt/GDP ratio to 355%. Remember that the Global Financial Crisis started in 2008 when the global debt was ‘just’ $187 trillion.
Developed market bond yield are going up
Even the yield on 10-year Japanese Government Bonds (JGBs) stands at 0.10%, the top of the Bank of Japan’s target range and no different from late January 2016. Perhaps even loyal holders of JGBs are contemplating the return of inflation after 30 years.
10-year JGB yield sits at top of BoJ’s target range
China syndrome
“In a worst-case scenario, central banks may want to raise rates to curb inflation, if it really does run hot, but struggle to do so, because of the immediate impact this would have on economic growth – and financial asset prices.”
Again, all of these trends could yet fizzle out. In a worst-case scenario, they become more pronounced. Central banks may want to raise rates to curb inflation, if it really does run hot, but struggle to do so, because of the immediate impact this would have on economic growth – and financial asset prices. In this context, China is an interesting test case.
China did not hike overnight lending rates for long
The People’s Bank of China jacked up overnight borrowing costs in late January but quickly backed off as the Shanghai Composite index wobbled. As soon as policy was eased, share prices rose. The monetary authorities have a delicate balancing act ahead of them.
We will continue to publish market analysis and thought-provoking financial news, so please check in again with us soon.
Please see below article received from AJ Bell yesterday afternoon, which explains how the events of the past 12 months have had major implications for consumers and companies, and how we now move forward.
Despite all the upheaval of the past year, anyone glancing at the financial markets today might find it hard to believe investors were in the throes of despair 12 months ago.
Following the global markets crash in February 2020, the recovery has been spectacular. The US Nasdaq 100 and S&P 500 indices are at all-time highs, Japan’s Nikkei index is at a multi-decade high, China’s Shanghai index is at a multi-year high and the MSCI All Countries World Index is at a record high.
In the UK the FTSE 100 and FTSE 250 are still in negative territory since February 2020 although the losses aren’t nearly as extreme as they were when the pandemic first took hold.
Markets have been fuelled by support from central bank and government stimulus measures, low interest rates and optimism over the pace of economic recovery thanks to the creation of Covid vaccines.
Risk appetite is alive and well as shown by the surge in crypto currencies, the volume of investment grade bonds now trading with negative yields (bond yields fall when prices rise), herd behaviour on social networks regarding stocks, the deluge of cash shells to acquire businesses, the warm reception for new stock market listings and the race by private equity firms to deploy their mountains of cash through acquisitions.
Later in this article we look for cheap stocks that have still to play catch-up.
First, we explore what’s changed in terms of how companies do business and how we manage our money.
STRUCTURAL CHANGES
It almost seems as though nothing has changed; in fact, everything has changed. Much of what might be called ‘new’ isn’t new at all – many of the biggest trends to emerge in 2020 had been waiting in the wings for several years, the pandemic just brought them centre stage much earlier than expected.
The greatest change has been the shift to remote working (see When will we return to the office – if at all?), which had always existed on the fringe but had never been considered viable on a large scale. The surprise for many business owners was how off-the-shelf technology enabled them to quickly move to remote working without a hitch.
Moreover, remote working has brought benefits to many firms including cost savings, and it has improved the work/life balance for their employees. The flip side is that it is bad news for owners of city centre offices, transport companies and anyone who relies on either – or worse, both.
Companies with large central offices are mostly looking to downsize while those which were planning to expand have realised they can increase their staff numbers while staying in the same office and rotating their teams.
Those with several smaller regional offices may look to do away with them altogether and concentrate on making the working from home experience more fulfilling for their staff.
Bus and rail firms, which will have budgeted for a given level of revenue before the pandemic, now have to go back to the drawing board and rethink their plans, not least for capital spending, given they are likely to see far fewer passengers using their services in the future.
PERSONAL FINANCIAL HABITS HAVE CHANGED
The pandemic has brought behavioural changes, too. Ian Mattioli, co-founder and chief executive of wealth manager Mattioli Woods (MTW:AIM), says his firm has found that many people who, prior to last year, thought nothing of spending their disposable income on two or three holidays a year, are now saving the bulk of their surplus wages to give themselves a buffer in case they lose their jobs.
Recent announcements by holiday companies such as TUI (TUI) confirm that holidaymakers are being more selective. The ‘return to normal’ has failed to happen so far, with TUI reporting a 44% reduction in summer bookings compared with pre-pandemic (2019) levels, well short of its earlier expectation for a 20% drop.
WHEN WILL WE RETURN TO THE OFFICE (IF AT ALL)?
The latest AlphaWise survey from investment bank Morgan Stanley makes sobering reading for those hoping for a reopening of the economy by Easter.
According to the bank’s monthly telephone survey of 12,500 European office workers, despite the rollout of vaccines since its previous survey, employees’ expectations of when they can return to work have slipped from April to June.
As the survey says, ‘Clearly, this will not only impact office utilisation in 2021, but also leisure and retail property that depends upon the return to normal commuting patterns.’
Across Europe, 73% of office workers have been working remotely compared with half that proportion pre-Covid. Of these, 80% would like to work from home more in the future, with 51% happy to work out of the office one or two days a week, 29% three to four days a week and 14% every day of the week.
Chris Herd, founder and chief executive of remote infrastructure firm Firstbase, says remote work is ‘the biggest workplace revolution in history, and nothing will deliver a higher quality of life increase in the next decade than this’.
Herd believes new companies will be ‘remote first’, without the need for a corporate headquarters. Aside from the obvious cost savings, this allows them to hire the best people wherever they are in the world, not just within a certain radius. At the same time, companies which want to retain their staff will have to offer remote working as an option or risk losing them.
We are also becoming more discerning when it comes to shopping online for fashion. Gone it seems is the habit of picking six dresses for an event and sending five back, with retailers such as ASOS (ASC:AIM) noting a steady decline in the volume of returns throughout the past year.
If we aren’t getting dressed up and going out, or planning several trips to foreign climes, what are we spending our money on?
The latest Barclaycard study shows overall UK consumer spending fell 16% between 25 December and 22 January. Spending on essentials was up roughly 4%, with supermarket spending up 17% and online grocery spending up 127%, which is positive news for companies such as Ocado (OCDO).
Spending on non-essentials fell almost 25%, with health and beauty sales down 27% and clothing sales down 25%. With restaurants closed, takeaway and delivery sales jumped 33%, the highest growth on record for the category.
Total online spending was up 73% on the same period a year earlier and now accounts for a remarkable 55% of all retail sales, a genuine paradigm shift for the retail sector which has struggled to keep up with changing demand.
Moreover, most consumers believe they will stick with online shopping once vaccinations are commonplace as they now prefer the experience of ordering via their phone or computer and having their items delivered rather than schlepping to the shops in all weathers.
A SHRINKING HIGH STREET
Sadly, the flip side of this shift to online shopping is the high street as we knew it becoming a thing of the past. Footfall in January 2021 was down a staggering 77%, according to the British Retail Consortium, and the outlook for February is not particularly encouraging.
Few chains look to have the right financial strength and proposition to sustain a town centre presence long-term, with the list of likely survivors (among companies whose shares trade on the UK market) more or less measurable in single figures, principally Greggs (GRG), JD Sports (JD.), JD Wetherspoon (JDW), Marks & Spencer (MKS), Next (NXT), Primark-owner Associated British Foods (ABF), Sports Direct-owner Fraser (FRAS) and WH Smith (SMWH).
And, where previously an empty shop might have been turned into a café, bar or restaurant, the decimation of the hospitality industry means there are few players with the financial wherewithal to step in and take up the space, especially if footfall is permanently reduced.
According to the Coffer Peach Business Tracker survey, turnover for the hospitality industry was down 54% last year from £133.5 billion to just £61.7 billion. If anything, the fourth quarter trend was worse than the annual average, down 57% from £33 billion to just £14.3 billion.
All of this bodes poorly for commercial property companies for the next few years. Strong retailers will have their pick of the best sites and will likely demand low rents with much of the responsibility for upkeep passed onto the property owners.
STOCK MARKET WINNERS AND LOSERS
When sifting through what worked and what didn’t work over the past year in stock market terms, we have looked at both the broader FTSE 350 sector indices and individual stocks.
Unusually, industrial metals, mining, industrial transportation and industrial engineering have been the leaders in terms of performance, even though the global economy took an enormous hit during the pandemic and by most estimates it will take three to five years for world output to return to ‘trend’.
On the other hand, considering the devastation wrought on the hospitality industry, it’s somewhat surprising travel and leisure or pubs, restaurants and hotels weren’t among the worst FTSE 350 sector performers.
Instead, the worst sectors have been aerospace and defence, banks, fixed-line telecommunications, oil and gas producers, and oil and gas equipment and services, the last two despite a sharp rally in crude oil prices since the start of 2021.
STOCK-LEVEL ANALYSIS
It won’t be a surprise to investors that companies which were either already largely online or shifted their business model to online were among the biggest winners. The top performing FTSE 350 stock since the start of the Covid sell-off is AO World (AO.), up 307%. The online retailer of unglamorous items such as freezers, microwaves and washing machines became a stock market darling as domestic appliances became hot property during lockdown.
Spread betting firms like CMC Markets (CMCX) and Plus500 (PLUS) as well as gambling firms like 888 (888) and Flutter (FLTR) posted exceptional gains thanks to a surge in new account openings as those cooped up at home found new ways to entertain themselves by betting.
Savvy investors played the strong performance of overseas markets through collective investments, especially those with a US/technology bias, with Baillie Gifford US Growth Trust (USA) and Scottish Mortgage (SMT) clocking up gains of more than 100%.
Asia-focused trusts also found favour with Fidelity China Special Situations (FCSS) almost doubling and JPMorgan Japanese (JFJ) rising by two thirds.
Interestingly, less than half the constituents of the FTSE 350 index trade above their February highs today, and a third are still lagging the benchmark with losses of more than 10%.
The list of big losers is littered with travel and leisure, aerospace, financial and industrial stocks, along with real estate investment trusts (REITs). Curiously, many of the housebuilders are still heavily in negative territory with losses of 30% or more despite the continued strength of demand in the housing market – as shown by their recent results – and a clutch of technology stocks are also nursing heavy losses which seems counter-intuitive.
It is worth noting that since 9 November when Covid-19 vaccines started to be confirmed, recovery plays have been in fashion, with travel and leisure stocks such as Cineworld (CINE) picking up, and more defensives such as Unilever (ULVR) lagging the wider UK indices.
3 STOCKS TO BUY NOW
We have chosen three stocks which we think have been overlooked, with varying degrees of risk attached.
Shares in Lloyd’s market insurer Beazley (BEZ) are trading 38% below their pre-pandemic levels, which seems to us as though the market is driving with the rear-view mirror.
he firm may have posted a $50m loss for last year due to claims for cancelled events and other Covid effects, but this was half the amount analysts were expecting.
What excites us is the 15% increase in renewal rates as the insurance market tightened conditions in response to the pandemic. Chief executive Andrew Horton described himself as ‘very positive about the year ahead’, as having raised capital in May the firm is well placed to capture the strong rate tailwind.
With its strong underwriting discipline and focus on capital returns, Beazley can cover the same risks this year with a much greater profit margin which should lead to earnings upgrades and a sharp rerating of the shares.
Mid-market housebuilder Bellway (BWY) posted a record build volume for the six months to the end of January, and what it called a robust forward sales book with orders for almost 5,900 new homes or 28% more than the same period a year earlier.
It also pointed to full year completions of 9,800 homes, an increase of 30%, and an improvement in its underlying operating profit margin of ‘at least 200 basis points’ (2%) over last year’s 14.5% margin.
Given how much brighter the outlook appears, it seems odd that the shares are still some 30% below their February 2020 level. Moreover, the valuation gap between Bellway and the rest of the sector seems abnormally wide.
We can only assume that investors are worried the end of Help to Buy and/or the stamp duty holiday will lead to disappointment, yet the valuation offers a healthy margin of safety in our view.
Infrastructure software supplier Micro Focus (MCRO) divides opinion like few other stocks. ‘Cheap for a reason’ is a typical response, which given its debt level and a surprise $2.8 billion writedown of goodwill in the 2020 results doesn’t seem unjustified.
The firm began its three-year turnaround plan in January last year, which was unfortunate timing, but if anything, the pandemic has forced it to grasp the nettle and cut down on unnecessary spending while focusing on key areas of opportunity.
The firm’s new guidance is for revenues to stabilise in the 2023 financial year, while its in-house IT infrastructure plan starting this year will generate further operational improvements and efficiencies.
For us, with the shares down 40% since last February, it’s a binary bet. Either the firm does what it promised which means the shares rerate, or it keeps disappointing and gets taken over by a private equity firm. This is a high-risk investment and investors should only get involved if they have money they can afford to lose.
Please check in again with us soon for further market analysis and news.
Please see below article received from AJ Bell yesterday which explains what rising prices could mean for different asset classes.
There is a general rule that the most vituperative arguments are those that take place between academics, because the stakes (and the implications for the real world) are so small.
Usually, such debates can be watched with detached amusement, but there is one current spat which does command attention, especially from an investment perspective.
Larry Summers – former US Treasury secretary under president Bill Clinton and former economic adviser to Barack Obama – is involved in a fierce set-to with current Treasury secretary and former US Federal Reserve chair Janet Yellen. To add spice to proceedings, Summers was reportedly an unsuccessful candidate when Yellen got the post at the US central bank in 2013.
Yellen is actively endorsing the Biden administration’s fiscal stimulus plans, arguing that spending too little could do more harm than spending too much.
Judging by his columns in The Washington Post, Summers seems to disagree, in the view that too much stimulus could unleash inflation.
Yellen, perhaps conveniently ignoring how her four years as Fed chair employing ultra-loose policies employed by both her predecessor, Ben Bernanke, and her successor, Jay Powell, cannot point to any sustained progress in stoking inflation. She asserts that any such threat is being monitored and can be swiftly contained.
Cue much eye-rolling from Summers, whose antipathy to the quantitative easing (QE) policies used as ‘temporary’ measures by the Fed since 2008 is also well known.
If Yellen is right, then investment portfolios can stay slanted toward momentum and growth strategies and long-duration assets such as government bonds with a decade or more to maturity and technology and biotechnology stocks – in other words, what has a great track record over the last decade will keep delivering, if history is any guide.
But if Summers is right, then the whole game changes. If inflation pops higher and stays that way, then history suggests investors need to be exposed to short-duration assets such as ‘value’ equities (cyclical growth and recovery stocks), emerging markets and ‘real’ assets such as commodities and precious metals.
BASE EFFECT OR BOUNCE?
Again, the headline inflation numbers are benign. There will be a base effect for the rest of 2021, as the pandemic-induced recession comes up as a comparator.
Doubtless central banks will dismiss that as transitory rather than signs of a fundamental cost pressures, even if the price of vital raw materials from oil to metals and crops is on the march if the Bloomberg Commodity index and shipping’s Baltic Dry benchmark are any guide.
If there is any good news here is might be that the Shanghai Containerised Freight index is maybe topping out after a stunning run, but all these trends are indicators of cost pressures building in the pipeline.
Companies are already paying attention – because they must. Input costs and output prices are showing some momentum in the UK, while American firms are flagging a sharp increase in their costs in the latest purchasing managers’ indices.
Muted demand, owing to the pandemic, lockdowns and increased unemployment, could keep a lid on this trend but a strong bounce back at a time when supply is crimped by company closures and supply chain disruption remains a possibility, too.
FRETFUL FIXED INCOME
Fixed-income investors are paying attention because government bond yields are rising. They still stand at what are historically low levels, so it would be wrong to say bond investors are in a tizzy.
They still seem to believe the Yellen narrative that inflation can be managed and that central banks can just keep throwing money at fixed-income markets via QE to put a lid on bond yields. That would keep bond prices high but gilts’ and treasuries’ skinny yields would offer holders little or no protection if the inflation genie finally pops out of the bottle.
Please check in again with us soon for further analysis and related market content.
The below thought-provoking article, published by Royal London, reveals the results of a survey conducted with over 4,000 customers to find out how financial advice has a positive impact on their finances, their well-being, and their futures.
‘It’s no secret, there’s always been a link between emotional and financial wellbeing. For those receiving financial advice, it’s always been more than just the practical and financial benefits. But how does financial advice improve emotional wellbeing?
Our research into how customers with an adviser could be better off financially also showed a number of ways talking to an adviser helps financial welling. We were also able to dispel a money myth and prove better knowledge of financial matters can play an important role in feeling good about your money.
Financial advice improves emotional wellbeing and financially security.
The control you have over your money and how you continue to manage it will change over time. Our findings show that talking to a financial adviser makes people feel more confident and financially resilient, especially in times of crisis. Those receiving advice have a greater feeling of being in control and have peace of mind. Our customers told us:
34% – Having access to financial expertise makes me feel more confident in my financial plans.
34% – Receiving professional financial advice helps me feel in control of my finances.
32% – Having contact with a financial adviser gives me peace of mind.
Myth busting: financial wellbeing is for the wealthy
The more money you have, the better you feel about money, right? Not so. From our research results we can see wellbeing and happiness isn’t based on how much money you have. While confidence increases in line with income, there’s still a difference between customers who are advised and those that aren’t advised. Even those surveyed on a lower household income, receiving advice, still feel more confident than those who don’t receive advice.
Does cost affect the emotional benefits of advice?
No. In balancing the cost and the benefit of advice, our customers are telling us that what they pay their adviser doesn’t diminish the emotional benefits. We found that customers with an ongoing relationship with their adviser are twice as likely to agree that the emotional and financial benefits of having an adviser outweigh any costs (38% compared to 16% of advised customers).
Having an adviser also helps boost knowledge
In our research, we found that customers with an adviser feel they have a much better understanding of financial matters, compared with people who don’t have an adviser. A greater understanding of the unknown or complicated leads to feeling more in control.
Customers without an adviser are 3 times more likely not to know where to start when it comes to saving for retirement and nearly twice as likely not to understand inheritance planning.
Feeling good about the future
Customers who receive financial advice trust their adviser and are happy with the advice they get. Satisfaction also increases over time, where there is an ongoing relationship in place. Customers who receive financial advice feel more confident about their future, and feel more financially resilient. Advised customers enjoy psychological and emotional benefits – not just any financial gains.
However you’re managing your money, our research shows how financial advice could go some way to pave the way for a happier financial and overall outlook. You’ll find more help with feeling good about your money and prepared for what might lie ahead in our financial wellbeing section.’
Over the past year, the challenges brought by the Covid-19 pandemic have highlighted the importance of mental health. The year of 2020 sparked a realisation; that we never know what’s coming around the corner, so it makes sense for us to financially prepare for life’s future potential trials. This study confirms that quality financial advice and effective financial planning improves emotional wellbeing and financial security over the long-term. If you are ready to organise your finances and improve your outlook on life, please feel free to get in touch with us here at People & Business IFA Limited.
Please see below commentary received from Invesco this morning, which provides analysis on the UK economy and global markets.
The challenges posed by the current raft of virus containment measures were all plain to see last week, with EZ Q4 GDP down -0.9%qoq and a second consecutive disappointing US Non-Farm Payrolls report (while headline unemployment actually fell from 6.7% to 6.3%, the lowest level since the pandemic started, the fall in the participation rate means that unemployment could realistically be much closer to 10%). However, liquidity remains plentiful, fiscal/monetary support is still robust, with more on the way, the vaccine rollout continues to accelerate and the current earnings reporting season has come through better than expected, heralding a much better year ahead on the earnings front. Barring any hiccups on the vaccination front, an easing of lockdown measures as the current wave of the pandemic dissipates should open the door to a gradual return to normality and the likelihood of a strong economic recovery in the second half. That’s certainly what economists are forecasting and financial markets are discounting.
After the worst week since late October, equity markets rebounded strongly with the MSCI ACWI rising 4.5% – its best week since US election week in early November. This rapid swing in performance was reflected in volatility declining sharply, with the VIX index of implied volatility falling from an elevated 37 last week back down to 21, almost back at its post-bear markets lows. EM (4.9%) led the rally, marginally outperforming DM (4.5%), where the US was at the forefront, closely followed by Japan. Small caps outperformed, led by DM markets and are well ahead on a YTD basis, now up 98% from their late-March low, nearly 20% ahead of large caps. Other than a strong performance from Financials the sector leadership board was led by tech-related sectors, with Communication Services (7.1%) at the forefront. Growth defensives (Consumer Staples and HealthCare) were the main laggards, both returning under 2%. That left Cyclicals over 3% ahead of Defensives. Growth’s margin of outperformance versus Value was far less (1%) and it is now nearly 2% ahead YTD. The UK was the major DM regional laggard, as large caps (FTSE 100 1.3%) underperformed mid and small caps materially (both over +4% for the week), held back by their exposure to commodity sectors and defensive growth, which underperformed their global peers.
Government bond markets had a mixed week. At one extreme Italian BTPs benefitted from the prospects of a Draghi-led government, removing recent political uncertainty with the 10yr yield falling 11bp and almost back to its all-time low. Gilts, on the other hand, were hurt by the removal of near-term negative rate risk following last week’s MPC meeting. The 10yr yield rose 16bp and at 0.48% is at its highest level since March. USTs and Bunds also saw modest rises with the former at its highest level since February last year. Rising government yields weighed on the closely correlated IG credit market. Sterling markets were hit hardest where, despite spreads declining, yields rose 10bp. HY, where correlations are much closer with equity markets, fared much better. Consequently, the Global HY index hit new all-time highs as yields hit record lows (4.67%).
The US$ made further small gains, with the US$ Index increasing 0.5%, as it rose against both the Euro and Yen. It was flat against £. A rising $ didn’t prevent economically sensitive commodities from appreciating. Oil was the standout as supply continues to tighten and demand increases and at $59 is back to where it was last February. Gold has fared less well and recent declines means that it is now back at late-November levels and down nearly 5% YTD. $ strength and recovery optimism aren’t helping.
Past performance is not a guide to future returns. Sources: Datastream as at 7 February 2021. See important information for details of the indices used.1
Past performance is not a guide to future returns. Sources: Datastream as at 7 February 2021. See important information for details of the indices used.1
Past performance is not a guide to future returns. Source Bank of England Monetary Policy Report February 2021. Rebased 0 = 31 December 2019. Dashed lines are forecasts.
Last Thursday, in conjunction with the MPC meeting, the Bank of England published its latest forecasts for the UK economy in its Monetary Policy Report. The chart shows the current forecast alongside the forecast from November, both rebased to 0 at Q4 2019.
The COVID restrictions in place at present and the new trading arrangements with the EU will mean that activity will likely be impacted more in Q1 than in Q4, with GDP forecast to decline by 4%qoq, weaker than the current Bloomberg consensus expectation of -2.4%qoq and a very different profile to that expected in November. But in subsequent quarters GDP is projected to recover rapidly over 2021 towards pre-COVID levels on the assumption that a successful rollout of the vaccination programme will lead to an easing of virus-related restrictions and a normalisation of economic activity (by the end of Q3). Rising consumption and business investment alongside continued substantial fiscal and monetary support will all underpin this recovery. On the former the Bank estimate that £125bn+ of “excess” household savings have already been built up over the past year, although their (rather pessimistic?) forecast only sees 5% of that being spent. So for 2021 the forecast overall is weaker near term, but with a stronger recovery thereafter, leaving growth back at pre-pandemic levels by around the end of the year. Further out, the pace of GDP growth slows as the boost from these factors is expected to fade. Despite the strong recovery, unemployment is still expected to rise to a peak of almost 8% (current 5%) in Q3 before falling to 4.5% by the end of 2022.
On the inflation front, CPI is expected to rise sharply towards the 2% target in the spring on the back of the reduction in VAT for certain services coming to an end and rising energy prices. With spare capacity forecast to be eliminated by the end of the year CPI is projected to be close to 2% over the remainder of the forecast period, with fading cost pressures and policy stimulus keeping a lid on any upside risk.
Against this backdrop the MPC, as expected, kept their policy stance unchanged (Base Rate at 0.1% and QE at £895bn). For now at least no further easing would appear necessary. Consequently, while the use of negative rates remains in the policy toolbox (the Bank has told financial firms to start preparing so that they could “implement a negative rate at any point after 6 months”), the potential for its deployment in the near term has been removed. In terms of when monetary accommodation is removed there appears little risk of that happening anytime soon either and certainly not until the Bank is “achieving the 2% inflation target sustainably”. Currently the market is not pricing in a rate hike for a number of years, while the current £150bn round of QE is expected to run until the end of the year.
Key economic data in the week ahead
A quiet week ahead on the data front with UK GDP and US inflation the main highlights.
In the US Inflation data for January is published on Wednesday. Headline CPI is expected to remain at 0.4%mom, while Core is expected marginally higher at 0.2%mom. That would leave them both at 1.5%yoy. Last week’s Initial Jobless Claims improved to 779k, the lowest level since the end of November. Thursday’s release is forecast to remain largely similar on Thursday at 775k. On the consumer confidence front the preliminary University of Michigan Sentiment data for February is published on Friday and expected to be slightly higher at 80.5 from 79, comparable to October levels, but well below the 100+ levels seen pre-pandemic.
The UK sees the Q4 and December monthly GDP numbers published on Friday. An easing of lockdown measures for part of the month will see the economy grow 1%mom in December, compared to -2.6%mom in November. Services is forecast to have risen 1.1%mom with Industrial Production at 0.5%mom and Construction at 0.2%mom. This would leave Q4 GDP at 0.5%qoq and -8.1%yoy. With a negative quarter forecast in Q1 this outturn would ensure that the UK economy does not suffer the ignominy of a double-dip recession, something that their neighbour, the EZ, is unlikely to avoid after Q4’s -0.9%qoq. Stronger imports, driven by stockpiling prior to the ending of the Brexit transition period with the EU, mean December’s Trade Balance is expected to have weakened to -£6bn from -£5bn previously. Sentiment in the housing market will be reflected in Tuesday’s RICS House Price Balance for January. It is expected to remain elevated at 60%, just below its recent high of 65%.
In China January’s Inflation data on Wednesday is forecast to show a setback following increased movement restrictions due to an increase in coronavirus cases. A fall of 0.1%yoy is expected following the 0.2%yoy increase in December.
Nothing of major significance this week from either the EZ or Japan.
We will continue to publish relevant market content and news, so please check in again with us soon.
Please see below Daily Investment Bulletin received from Brooks Macdonald earlier this afternoon. The commentary provides analysis of the markets following a promising start to the mass-vaccination rollout in the UK.
What has happened
Equities continued their positive start to the week as critical earnings beats justified another leg higher in valuations. Alphabet (Google) and Amazon both beat market expectations with the latter rising in after-market trading despite CEO Jeff Bezos announcing that he will step down to become executive chairman. Even Exxon, which had its first annual loss in 40 years, saw its shares rise as it recommitted to its dividend pay-out in a yield hungry world.
Italian twist
The market’s base case was that former Italian Prime Minister Conte would be able to form a new Italian government by utilising a range of independents and a myriad of smaller parties. In fact, the former ECB President Mario Draghi is reportedly in line for the role and is meeting President Mattarella to discuss the formation of a new government. Betting odds have also shifted with Draghi now the front runner. Draghi’s tenure at the ECB is most famous for embarking the ECB on its quantitative easing programme as he pledged to do ‘whatever it takes’ to save the Euro during the European sovereign debt crisis. As a result, markets have taken this news quite positively as it suggests a maintenance of the political status quo between Italy and the EU, a perpetual tail risk for European politics.
Vaccine news
There were two big unknowns around the vaccine rollouts, would the vaccine be effective after one dose and would the vaccine slow transmission rates. A study yesterday showed positive news on both of these points. The study showed that the Oxford/AstraZeneca vaccine had 76% efficacy after a single dose (day 22-90 after vaccination) and that the level of protection was fairly constant. This builds the narrative for a quicker reopening of national economies even as the rollout is still continuing. Secondly, test results showed a 67% reduction in positive COVID-19 PCR tests amongst those vaccinated addressing a key concern that the vaccination might not slow the speed of transmission.
What does Brooks Macdonald think
Yesterday’s report on the ongoing efficacy of the AstraZeneca vaccine provides some comfort to markets that are struggling to effectively price in the risks of the new variants. We expect this tug of war to continue however if the variants are emerging within the context of higher vaccination levels (the vaccine still being effective against the South African variant of the virus, but less so) and continued COVID restrictions, the probabilities of a more normal state by the summer rise.
Source: Bloomberg as at 03/02/2021
Please check in again with us soon for further market analysis and news.
• The International Monetary Fund (IMF) downgraded its forecasts for the UK economy for 2021, revising its previous prediction of 5.9% to 4.5%. This follows the contraction of 10% in 2020, the biggest fall of any G7 economy. • According to the Office for National Statistics (ONS), the unemployment rate in the three months to November 2020 was estimated at 5.0%, 1.2 percentage points higher than one year ago and 0.6 higher than the previous quarter. Over the same period, the redundancy rate hit a record high of 14.2 per thousand. • The Prime Minister said there is “not enough data to know when it will be safe to reopen our society and economy”. MPs will set out a plan to exit lockdown when they return from the half-term break on 22nd February, based on the number of infections and vaccinations. As a result, children in England are not expected to return to the classroom until 8th March. • Footfall at UK retail locations recovered, up 9% on the previous week. Data revealed that footfall over the whole of 2020 was down 39.1% on 2019. • The UK Government introduced its ‘red list’ for mandatory hotel quarantine, which will mostly affect UK citizens and residents, since nationals from most high-risk countries are not allowed to enter Britain. It will apply to inbound travellers from 22 countries including South Africa, several countries in South America and also Portugal, because of its ties with Brazil.
US COMMENTARY
• Market commentators relished a widely publicised battle between multi-billion-dollar hedge funds and a group of retail traders from a Reddit chat room. The latter have been pumping the price of GameStop (and others), which some hedge funds had heavily shorted. The result was a ‘short squeeze’ resulting in extraordinary moves in share prices. • US lawmakers continue to debate the $1.9 trillion stimulus plan put forward by President Biden. • The declining trend rate of COVID-19 cases remains steady, with cases falling by about 22% per week. The seven-day average has fallen 32% from its 8th January peak, and is now below its pre-Thanksgiving level. • GDP data showed the US economy grew 4% in the fourth quarter, but shrank 3.5% for the whole of 2020, its worst annual performance since 1946.
EUROPE COMMENTARY
• The European Union (EU) warned it will tighten exports of COVID-19 vaccines to non-member countries, such as the UK. The warning came after AstraZeneca, which was due to provide 80 million vaccine doses to EU member countries in the first quarter of 2021, announced it would only be able to deliver around half of the agreed quantities. The row comes amid a fall in supplies of the Pfizer/BioNTech vaccine, which is also slowing down the European rollout. • France and Germany announced their fourth quarter GDP flash readings. The French estimate showed a contraction of 1.3% on a quarterly basis, but economists were expecting a decline of 4.0%, a drop from the 18.5% growth registered in the third quarter of 2020. Over the same period, the German economy expanded 0.1%, just topping the 0.0% consensus estimate. This was also a fall from the 8.5% growth posted in the third quarter.
GLOBAL COMMENTARY
• The IMF revised its 2021 global growth forecast to 5.5%, up from its 5.2% prediction in October, but cautioned that new variants of the virus are a concern for 2021’s outlook.
COVID-19 COMMENTARY
• Johnson & Johnson announced its vaccine candidate was 66% effective in preventing moderate to severe COVID-19, 28 days after vaccination. Although it falls short of its competitors in terms of efficacy, the Johnson & Johnson vaccine only needs to be administered with one shot, making its rollout easier. • The row between AstraZeneca and the EU over COVID-19 vaccines culminated in approval on Friday afternoon as the European Medicines Agency recommended granting conditional marketing authorisation for use in adults aged 18 or over. It is the third COVID-19 jab approved in the bloc.
A good input from Blackfinch, providing a summary of global events over the past week. These updates are useful for keeping up to speed with developments in the markets.
Please continue to check back for our latest blog posts and updates.
Please see below articles received yesterday afternoon, written by the Head of Sustainable Investing at Jupiter and Head of Strategy at UK Alpha. The first commentary offers tips on investment opportunities for the year ahead and the second provides an update on the UK’s economic recovery.
Abbie Llewellyn-Waters, Head of Sustainable Investing, noted that in recent months the largest impact on sustainable investing, including her own strategy, was the value rotation. Abbie believes that the most attractive sustainability investment opportunities are to be found in high quality stocks. Reporting season is starting soon, and that will provide more context about how these quality stocks are navigating this environment.
From a broader perspective, Abbie doesn’t share the optimism in the market based on an economic reopening, which has been in full swing since the first vaccine announcements in November last year. She’s concerned that a normalisation is further away than the market is currently pricing in. In recent discussions with a world-leading company in the field of viral vaccines, they pointed to more prolonged timeframes, with normalisation closer to years rather than months away.
As such, Abbie believes it is important for investors to be disciplined and focused on businesses that can survive and prosper through this period and into the longer term, especially in defensive sectors such as healthcare and consumer goods. Among the more cyclical parts of the market, Abbie continues to see strong sustainable investing opportunities within the digitalisation theme.
Fundamentally, however, Abbie sees sustainable investing as a structural theme and many of the drivers that emerged in 2020 (including addressing climate change, where Biden’s appointment of John Kerry as special climate envoy shouldn’t be underestimated, in her view) will continue throughout 2021 and beyond.
Market whipsaws as recovery optimism weakens
At the start of the year, the market trusted in the post-vaccine recovery trade and expected that by the summer the economy would be getting back to normal, noted Richard Buxton, Head of Strategy, UK Alpha. That view has been undermined by a complicated pandemic with new virus variants and data suggesting some people are reluctant to be vaccinated, he said.
Now the market is whipsawing daily, he said. He cited a company that operates concessions in airports and train stations that said two weeks ago it was expecting a strong summer of trading as consumers rush back to travel after the lockdown. That outlook now seems overly optimistic, he said, noting that testing requirements would complicate a family of four’s holiday to Spain, for example.
Richard said he is following closely the debate about reopening UK schools. The government will be forced to make a political judgement about when to ease the lockdown and let students return to the classroom in order to end potential long-term damage to young people, especially those in disadvantaged areas, whose education has been disrupted, he said.
While a return to normal will take longer, it makes sense on a 2-year view to invest in companies that will benefit from the economy reopening, Richard said. In the meantime, his investment team is looking at adding to defensive holdings, such as including pharmaceutical companies, he said.
The recovery will happen, but like in comedy, it’s all about the timing, Richard said.
It will be interesting to see where opportunity presents itself as we make positive strides to achieve mass vaccination in the UK and worldwide.
Please see below the latest ‘Markets in a Minute’ article from Brewin Dolphin received yesterday – 26/01/2021
US equities strengthen on stimulus plans
Global equities performed relatively strongly last week, as fresh hopes of US stimulus outweighed concerns about extended lockdowns in Europe.
The Nasdaq was the strongest performer among the main markets, rising by an impressive 4.19% thanks to a comeback from the FAANGs. The S&P 500 and the Dow also recorded gains, with investors celebrating Joe Biden’s inauguration and Janet Yellen’s call for Congress to ‘act big’ on stimulus measures.
Renewed coronavirus concerns weighed on the UK’s FTSE 100 as well as several European indices. Over in Asia, hopes of better relations between China and the US boosted the Shanghai Composite by 1.13%, while the Nikkei remained relatively flat.
Last week’s markets performance*
FTSE100: -0.60%
S&P500: +1.94%
Dow: +0.59%
Nasdaq: +4.19%
Dax: +0.63%
Hang Seng: +3.06%
Shanghai Composite: +1.13%
Nikkei: +0.39%
*Data from close on Friday 15 January to close of business on Friday 22 January.
Merck abandons vaccine
News that pharmaceutical giant Merck is abandoning its vaccine development efforts have dampened last week’s gains. The FTSE 100 slipped a further 0.8% yesterday amid fears that Merck’s decision could delay the global rebound from the pandemic. Airlines, who could face severe travel restrictions, struggled the most, with shares in International Consolidated Airlines 7.2% lower.
In the US, the S&P 500 and the Nasdaq briefly turned negative yesterday, but the Nasdaq ended up closing at a record high, gaining 0.69% ahead of quarterly results from Apple, Microsoft and Facebook this week. The Dow, in which Merck is a component, ended yesterday 0.12% lower.
US celebrates Biden and the FAANGs
Following his inauguration last Wednesday, Joe Biden wasted no time in unveiling details of how he intends to support the US through the pandemic. His proposed $1.9 trillion Covid-19 fiscal package includes another round of direct payments, an increase in the federal weekly unemployment insurance benefit and, somewhat controversially, a hike in the national minimum wage to $15 per hour.
Biden also repeated his goal of one million vaccinations a day for the first 100 days of his presidency, and reversed Trump’s decision to withdraw from the World Health Organization and Paris Agreement on climate change.
The fact that Biden’s inauguration took place without any significant violence helped to calm nerves, as did strong provisional services PMI and better-than-expected housing data.
Although Biden’s election has brought some comfort to investors, it is worth noting that his Cabinet appointments are less market-friendly than Trump’s were. His appointments for the head of the Securities and Exchange Commission, the Consumer Financial Protection Bureau and the Senate Banking Committee could result in tougher regulations for the financial sector.
Last week also saw the return of big mega-caps in the US, which helped to drive up the Nasdaq and S&P 500. Netflix, which reported robust earnings, gained 13.5%, while Apple, Google and Facebook all rose 9%. A strong start to the US reporting season added to investor optimism for the new president.
Lockdowns extended in Europe
Over in Europe, investor sentiment was more subdued as renewed coronavirus concerns took hold. Germany’s Xetra DAX Index edged up by 0.63%, whereas France’s CAC 40 and Italy’s FTSE MIB both declined by 0.93% and 1.31%, respectively. The UK’s FTSE 100 Index fell 0.60%.
There are growing concerns that social distancing restrictions in the UK could last until the middle of the year, after Boris Johnson announced it is ‘too early’ to say when the national lockdown will end. Germany extended its restrictions until 14 February, and The Netherlands introduced its first nationwide curfew since World War II.
Disappointing economic data did not help matters. A Purchasing Managers’ Index revealed business activity in the eurozone contracted at a faster rate in January, while the UK’s quarterly CBI business optimism index plunged from 0 to -22, largely driven by fears about the impact of Covid-19 on British businesses.
Q1 is shaping up to be a bad quarter for the UK economy
In contrast, gilt yields increased after Bank of England governor Andrew Bailey said he anticipated a pronounced economic recovery in the UK later in the year as vaccines are rolled out.
Japan trims GDP forecast
In Japan, the Nikkei rose 0.39% following the country’s first positive exports data since November 2018. The government also announced it has agreed to buy additional vaccines for 12 million people, meaning it will have enough to vaccinate more than half of the country’s population.
On the flipside, Japan’s monetary policy committee lowered its gross domestic product (GDP) growth forecast for the current fiscal year from -5.5% to -5.6%. Although it increased its growth target for 2021 from 3.6% to 3.9%, it warned that the outlook was highly uncertain.
In China, where stocks rallied following Biden’s election, forecasts revealed the economy grew by 2.3% in 2020 – a clear sign that, unlike much of the rest of the world, it has largely recovered from coronavirus lockdowns. Fourth quarter real GDP growth increased to 6.5%.
Markets show impressive resilience
Overall, global stock markets are showing remarkable resilience during the pandemic, underscoring the case for exposure to risk assets. Markets are on course for a third consecutive month of gains, and more stocks are hitting their 52-week highs.
Now, all eyes are on this week’s raft of US corporate earnings figures. Investors will be looking for insight into whether tech stocks can continue their strong growth trajectory over the coming year.
Please continue to check back for our regular blog posts and updates.
