Team No Comments

Flexibility will be key in 2022

Please see below article received from Jupiter yesterday afternoon, which reviews a tumultuous period for markets and looks ahead to 2022, where flexibility will be essential in a volatile investing environment.

“Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.” – Ferris Bueller, Ferris Bueller’s Day Off (1986)

We leave it to the readers’ imagination why a film about a high school slacker resonates with the Multi-Asset team. But the post-pandemic period has been one of the most intense of our careers – it’s all too easy for investors to get caught up in the market narrative. Our job is to take a “day off” from the hyperbole and make sense of what’s happening. We predicted back in April 2020 that the sugar rush of pandemic stimulus would kickstart a warp-speed business cycle, and it did. After the fastest recession there was the fastest recovery in history, and now markets are worried things are moving too fast. The market narrative has flipped from deflation to reflation to stagflation to inflation in a matter of weeks.

Don’t rely on inflation fading next year

The Federal Reserve (Fed) has allowed monetary policy to run looser for longer, as we expected after the structural shift of its 2020 framework review1. There has been an even faster rebound in demand than the Fed expected, driven by vaccines, rising household wealth, and stimulus cheques. Demand has outstripped supply resulting in inflation levels we haven’t seen for nearly 40 years.

The Fed is banking on inflation fading next year, but it may be more persistent . We analyse current inflation across four key buckets: reopening-related sectors, housing, wages, and expectations. All are moving higher. Inflation in rents is sticky and can contribute to higher inflation expectations, which reinforce longer term inflationary dynamics. Central bank policy is running a risk of going too slowly now, and having to move at a faster pace further down the line, choking the recovery.

Heading into 2022, we think growth can be sustained and support markets. Supply bottlenecks have left inventories low, and restocking can sustain industrial production. Accumulated savings (of around 10% of GDP in the US) can continue to support consumption. As we head towards the middle of next year, restocked inventories, slowing consumer demand, tighter policy and stretched valuations will make life more difficult. Conclusion: one can continue to ride the wave in equities and hold fewer bonds for now, but the likelihood is the flexibility to cut risk and add duration later next year will be needed.

Job openings are outstripping the supply of unemployed workers, putting upward pressure on wages

Looking beyond the horizon

Looking out into the more distant future, structural shifts point to a modestly stronger growth and inflation environment. Pandemic stimulus cheques and asset price rises allowed an increase in retirements, reducing labour supply, but lifting wages. The pandemic and trade wars exposed global supply chains, leading to a structural shift from “just in time” to “just in case”. We have seen increased capital expenditure and in particular increased spending on research and development since the pandemic, which can drive productivity and growth. Last but not least, the need to fund climate transition can unlock additional fiscal spending and potentially forms of ‘green’ stimulus. There seems to be little chance of a return to the austerity of the previous decade.

These factors will take some time to play out, but the sum of their impact is likely to be a modestly higher growth and higher inflation environment over the next decade, particularly compared to the previous one. Shifting policy is also likely to lead to higher volatility, and more frequent, sharper crises. Simple balanced portfolios of higher quality equities and longer duration bonds are unlikely to work as well as they have.

This doesn’t necessarily mean investors can’t make decent returns, but it will call for different approaches. As Ferris said, “you’re not dying: you just can’t think of anything good to do”. We think this sentiment applies to investing: you can still perform, but you will need more flexibility and a wider range of return sources.

Please check in again with us soon for further relevant content and news as we continue through the festive season.

Stay safe.



Team No Comments

Omicron and Markets – Our Asset Allocation team’s key beliefs

Please find below a insight into the impact of the Omicron variant on world markets, received from Legal & General yesterday afternoon.

 The COVID-19 situation had not been looking good across Europe anyway, but at least there was the hope that the shift into an endemic scenario was not far away, especially with a re-acceleration in vaccinations, boosters and the availability of antiviral drugs. This may well still be the case, but the emergence of a new variant of concern has added to the tail risk that it won’t be.
Déjà vu all over again

We are neither virologists nor epidemiologists. But from a market perspective, there are a few things we can say about the virus without their expertise.

It’s still very early and there is little data about B.1.1.529, now known as ‘Omicron’, but it appears to be spreading faster than the Delta variant did in South Africa. It has many mutations that in other variants have been associated with greater transmissibility and evading immunity.

The variables we will be watching most closely are:
Is it more transmissible?
Is it more likely to lead to hospitalisation and is it more lethal?
Do vaccines and antivirals still work against it, and how well?

We must also consider the response of policymakers. It’s relatively easy for major central banks to do nothing for the time being, should market worries intensify. Rates are already at zero with some tapering underway. It’s a bit trickier for the Bank of England, given expectations of a December hike, but the Federal Reserve (Fed) does not have to speed up tapering in December.

Fiscal support, if needed, should be no different than in previous waves. In Europe, the past few weeks have shown that countries increasing restrictions are just as willing to renew fiscal support measures as previously. In the US, Democrats being in control of both the House and Senate – and with an election coming up next November – should make building consensus to support the economy easier than in 2020.

Restrictions have already been ramping up in Europe in response to the winter wave. New variant concerns could accelerate this dynamic. The US faces a different situation, as a new variant would require a greater shift from the status quo. China’s zero-COVID strategy would be more difficult to maintain with a more transmissible variant.

Mandatory vaccination has already become more likely in several European countries, and a new variant could push more towards this step. This would have little immediate impact on markets, but could potentially be positive for 2022.

Markets will clearly remain sensitive to news on the variables mentioned above. But our initial line of thinking is that, should market weakness around a new variant intensify, similar to geopolitics, it could create an opportunity to increase risk in portfolios.            

M&A: here to stay?  

Until Omicron, the most interesting financial story in late November was merger and acquisition (M&A) activity, sparked by KKR’s* bid for Telecom Italia*.

From an equity perspective, we see M&A as a coincident indicator rather than a leading indicator in the market cycle. It’s more the case that M&A is up because markets are up, rather than markets rallying because of M&A, in our view. Business confidence has typically been the main driver of corporate M&A. Of course, cheap financing also helps, especially for private-equity transactions. Interestingly, M&A activity tends to be highest when share prices are highest. M&A happens not when it’s cheapest to buy, but when management teams feel confident about the future.

We therefore agree with our colleagues’ argument that headline-grabbing M&A can be a late-cycle indicator, but is not necessarily a leading indicator of the end of the cycle. We expect the M&A theme to be with us for the duration of this cycle and bull market, even if financing conditions become less favourable as the cycle matures. One precedent is the Fed rate-hiking cycle from 2004 to 2006, when M&A activity accelerated and kept going until the economic cycle and bull market ended.

Another macro factor that could become less favourable, but seems unlikely to derail overall activity, is US regulation. The Department of Justice and Federal Trade Commission, under new leadership, are trying to enforce antitrust rules more strictly than in the past. This is probably mostly targeted at big tech, but might also put off some other acquisitions that are borderline on antitrust and industry concentration. Aon* and WTW* was one recent example.

For equities, actual deals don’t typically have a positive first-round effect. The shares of the acquirer typically trade down, and the shares of the target trade up, but the target is usually smaller. So, if anything, it’s generally better for small-caps than large-caps. We had a good example in the telecoms sector last week. Telecom Italia was obviously up significantly following the KKR bid. But on the same day, Ericsson’s shares fell 5% on its planned acquisition of Vonage in the US.

Private equity aside, there is another incentive for corporate buyers to consider M&A. For most of this year, companies that have undertaken cash or debt-financed M&A have outperformed companies using cash for buybacks and capex. So, for management whose compensation is linked to the share price, M&A has a definite appeal.    

Earnings 2022  

Of course economic data matter. Of course COVID-19 matters. But for equities, the main reason they matter is because of what they tell us about corporate earnings.

Coming out of a solid third-quarter 2021 earnings season and heading into year-end, it’s a good time to think about what earnings will look like in 2022. The obvious caveat to all of the below is that a dangerous variant would change everything.

Our economics team’s roadmap is consistent with US earnings growth in the high single digits, more specifically around 9% by the end of 2022. That would be a slowdown from the post-recession extremes, but solidly positive and a bit above trend.

The 9% estimate is unusually close to the bottom-up consensus of 8.5%. Bottom-up forecasts were too pessimistic about the post-recession rebound, but our own analysis suggests that the big upward revisions to analyst expectations should soon come to an end. It’s too early to tell for sure, but the top-down numbers from sell-side outlooks also appear to sit in the high single-digit area.

The biggest swing factors to next year’s earnings, COVID-19 aside, are US corporate taxes. Assuming about half of the initial proposals from the Biden administration become law, that would take around 5% off earnings growth estimates. The latest proposals, however, have come in a bit smaller than previously. It’s possible the statutory tax rate could stay unchanged, with reforms focusing instead on foreign income, a minimum tax rate and a buyback tax. So the hit to US profits could end up being smaller than 5%.

Another factor to consider is slower economic growth in China, given that we are at the bearish end of forecasts for the country’s GDP. However, the first-order impact on US profits should be manageable. We estimate that 1% off Chinese GDP growth takes a bit less than 1% off S&P 500 profits. Given the other uncertainties around earnings growth, this should not be a dominant driver of the US earnings debate next year.

*For illustrative purposes only. Reference to a particular security is on a historical basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.    

Please continue to check back for a range of blog content from us and from some of the world’s leading fund management houses.

David Purcell

30th November 2021

Team No Comments

Myth Takes – Legal & General

Please see below article written by Legal & General’s Asset Allocation team, whose research suggests that the current rise of inflation is due to a mixture of positive demand shocks as well as negative supply shocks. Please read on for full details.

The unwinding of negative supply shocks should temporarily lower inflation next year, while some rotation away from goods back to services might help reduce inflation too – but not as much as central banks expect, in our view, as we see less labour market slack.

Some of the demand shocks are expected to prove longer-lasting as well, aided by excess saving and wealth, easy financial conditions and stronger wage growth and pricing power. So, despite uncertainty around the output gap, we see the risks as skewed towards inflation being positive in 2022 – which will be inflationary in itself.

Icarus’ flight may go higher this time

If the above thesis holds, the Federal Reserve (Fed) is behind the curve. Rates should be at neutral as the economy reaches full capacity, but it is still doing quantitative easing (QE).

The Fed will need to move faster, we believe, and to a higher peak than the market expects. The ultimate peak will be a function of how neutral rates have changed since the last cycle. The market seems confident that they have not risen much – and may have even fallen since 2019. Given the change in fiscal policy, we’re less convinced that will prove to be the case.

Of course, the market is likely to price in a lower path because of the asymmetry of the Fed’s reaction function: a negative demand shock could be met by sharp rate cuts (back to zero), while the Fed will likely be slow to react to further negative supply shocks, arguing they are temporary. In the medium term, we expect the Fed to learn from its mistakes and raise rates sufficiently to prevent a prolonged and serious inflation outbreak.

This implies we want to keep a negative duration bias, but with positioning still short, we don’t think it’s sensible to be holding short tactical views during periods in which there is no catalyst for repricing.

Clash between currency titans

In currency markets, the US dollar and the euro are the titans. Movements in their exchange rate are important, as the euro and dollar are the centres of gravity for the euro-bloc and dollar-bloc currencies.

The US dollar has been strengthening across the board in 2021 (the DXY dollar index is up 6.6%), with many market observers expecting further appreciation. With US inflation on the rise, rate hikes by the Fed are likely to be brought forward into 2022. That’s reflected in the short end of the interest rate curve, while in the long end, the gap with the Eurozone is widening too. Purely looking at nominal rates, US dollar strength seems obvious.

Today, not many investors are worried about a lack of inflation anywhere – not even in the Eurozone – so without much inflation, differentiation between nominal rates is in the driving seat. Over shorter time periods, we agree that nominal rates are a better predictor for currencies than real rates, at least for developed currencies, but over longer time periods this is not true and real rates form the better anchor.

With expectations for rate hikes by the Fed brought forward, while rate hikes by the European Central Bank remain much more conservatively priced, we believe the bar for surprises has been lowered. This will make it harder for nominal rates to continue pushing the US dollar stronger, while it gives more confidence that currencies cannot de-anchor from real rate moves much longer.

Given this outlook, recent euro weakness appears overdone, in our view. We’re turning more positive on the euro versus the US dollar and are ideally looking for negative sentiment and positioning as a potential opportunity.

We’re not there yet, but as the pandemic rears its ugly head again in Europe with the Austrian lockdown, it may not take long. A period of speculation about who is next feels inevitable. Given how unpredictable COVID-19’s trajectory has been, we have no idea where a new round of lockdowns might end, but rates and currency markets have proven to be quite sensitive to coronavirus waves over the last 12 months.

Minotaur’s labyrinth

There is a light election calendar in emerging markets for 2022, with fewer pivotal votes than we will see the year after. There are general elections in Hungary and Poland early next year, followed by a presidential election in South Korea, and then general and presidential elections in the Philippines, Colombia and Brazil.

Will we see an end to Orban’s rule in Hungary? Despite a competitive opposition candidate putting Fidesz on the back foot, an Orban victory remains the base case. In Poland, the Law and Justice party might try to rebuild its majority with a snap election. The outcome depends on the opposition uniting. The task is hard, but not impossible. This matters more broadly as the current government’s spat with the EU is getting more serious.

In South Korea we could see a conservative turn in politics that would result in closer relations with the US and Japan against China, and could lead to a greater risk of miscalculation with North Korea or China. The geopolitical consequences will be the most significant for markets. A generationally divided electorate in South Korea could signal instability and political turbulence in the years ahead.

In the Philippines, the election will be a test for dynastic political machines and the winning president will get substantial powers. This is important for the relationship with China and the US in the Pacific, but we only see limited market impact as most candidates favour broad policy continuity. In Colombia, fiscal constraints are starting to bite, so if the new president is uninterested in fiscal discipline or economic reform, markets are likely to panic.

In Brazil, the current right-wing president Bolsonaro is under strain, increasing the likelihood of a turn to the left with the return of former president Lula. Either way, the constitutionally enforced spending gap, the country’s only fiscal anchor, is under threat. That’s keeping financial markets on their toes. Another key threat comes from the potential inflating away of outstanding public sector debt. Volatility is likely to be high in the runup to the election, and potentially afterwards if institutions are tested. This will be reflected principally in the real, in our view, but also in domestic bond yields and equities.

Please check in again with us soon for further relevant content and market updates as we approach the final month of 2021.

Stay safe.



Team No Comments

Five reasons not to be fearful of inflation

We don’t normally do two blogs in a day but this one came in this morning from Invesco and I thought it was an important one for you to understand on Inflation

Everywhere I go, every channel I turn to — it seems all I hear is the “i” word. Yes, inflation. And the data is ugly right now:

  • The headline US Consumer Price Index (CPI) rose 0.9% for October, while core CPI (which excludes food and energy) rose 0.6% for the month. For the first 10 months of the year, headline CPI was up 6.2% versus the same 2020 period — well over expectations of 5.8% — and core CPI was up 4.6%.
  • China’s Producer Price Index (PPI) for October rose 13.5% year over year, which is well above expectations. This is up from 10.7% year over year in September and represents the fastest pace in 26 years. (China’s PPI measures the cost of goods as they leave the factory gate, before transportation or other costs are factored in.)

The data and the media attention around inflation has altered market-based inflation expectations:

  • The 5-year breakeven inflation rate finished the week above 3% for the first time in more than 10 years.
  • Even the 10-year breakeven inflation rate has been impacted. As of Nov.12, it was 2.73%. That’s up from 2.33% two months ago (as of Sept. 14).

It is also having an impact on shorter-term consumer inflation expectations:

  • Last week, the Federal Reserve Bank of New York released its Survey of Consumer Inflation Expectations for October. Median inflation expectations increased to 5.7% for one year ahead, which is a series high (although keep in mind the inception of the survey only goes back to June 2013) and the 12th consecutive increase. The survey had some positive takeaways: After increasing for three consecutive months, median inflation expectations for three years ahead stayed the same for October (4.2%).
  • The University of Michigan released its preliminary survey results for November on Nov. 12, and the findings are very similar to that of the New York Fed. US inflation expectations for the year ahead edged up to 4.9% in early November of 2021 from 4.8% in October, the highest since July 2008.However, five-year inflation expectations are unchanged since the previous reading at 2.9%.

Reasons to remain calm about inflation

Most of the questions we are receiving from clients are on the topic of inflation. Financial advisors are sharing with me that most questions they are receiving from clients are on the topic of inflation. Older clients in particular are fearful that this is the 1970s all over again.

So why shouldn’t investors be fearful of inflation? I see five reasons to remain calm.

  1. Inflation is a necessary evil as countries emerge from the pandemic, especially for the many countries, such as the United States, that provided adequate fiscal stimulus this time around (as opposed to during the Global Financial Crisis). Household savings is elevated, there is pent-up demand, there are labour shortages and there are supply chain disruptions. We’re facing a perfect storm — but it’s better than still being in the depths of the pandemic. As I say each birthday, as I grimace about the growing candles on my cake, “This is better than the alternative.” And so it is with high inflation.
  2. While the tunnel may be a bit longer than first expected, I do see light at the end of it. The public has come to realize that inflation likely won’t be over in a few months — but I believe it is likely to peak in mid-2022 and then start to recede. There are multiple reasons for elevated inflation, and some factors, such as pent-up demand, will dissipate sooner than others, but the general trend should improve in the back half of 2022.
  3. Tolerant central banks. The Federal Reserve will not overreact to the inflation data, in my view. The Fed recognizes that the factors causing high inflation will not easily be remedied through aggressive rate hikes. Raising the fed funds rate will not force more people back into the workforce or get ships unloaded in the port of Long Beach any faster. Under the leadership of Chair Jay Powell, the Fed seems hyper-aware of not making a policy error. And I think the Fed would only get more dovish if Lael Brainerd were appointed the new Fed Chair. (Brainerd, a member of the Federal Reserve Board of Governors, recently interviewed for the post.) While other developed central banks may feel more pressure to tighten, I don’t expect overly aggressive tightening. It is also worth noting that the People’s Bank of China is actually in easing mode. And so, all in all, the environment should remain supportive of risk assets given positive economic fundamentals
  4. Longer-term inflation expectations remain relatively well-anchored. Consumers seem to understand that while inflation might be very elevated in the shorter term, it will come down. We saw this in both the Michigan and New York Fed surveys released last week. This helps provide the rationale the Fed needs to avoid a hastening of its rate hikes.
  5. Inflation is not making much of a dent in profit margins. Yes, companies are talking a lot about inflation on their earnings calls, but it hasn’t had much of an impact on earnings. The earnings season in Europe has been better than expected. And thus far, the net profit margin for S&P 500 Index companies in the third quarter is 12.9%, which is near a record-high. And the fourth quarter net profit margin is estimated to be 11.8%, which is still robust.In this quarter’s earnings calls, a number of companies reported being able to pass increased costs onto customers, which helps explain the very healthy profit margins. And while this is not positive for consumers, it should be positive for equity investors.

So what’s the bottom line? I believe we need to expect inflation to remain high — and likely move higher — as we head into 2022. However, I am confident that inflation will peak by mid-2022 and that the Fed will not make a policy error — and that’s the real fear for investors with regard to inflation. I believe investors should remain well-diversified and focused on longer-term goals. I favour maintaining exposure to equities, including dividend-paying equities, inflation-protected securities, and other asset classes that have historically performed well during inflationary periods, including real estate and commodities.

I have just been listening to Brooks Macdonald on Inflation too, amongst other market input. Wage inflation is an area of concern and to precis, Brooks Macdonald say that whilst we might have some Job Movers inflation, for example HGV Drivers, we don’t see much inflation on Job Stayers, the majority of the working population in the UK.

Steve Speed

19th November 2021

Team No Comments

Does Wall Street fail the Gordon Gekko test?

Please find below, an update on markets received from AJ Bell yesterday afternoon – 18/11/2021

The factors which could knock a 10-year trend of developed markets outpacing emerging markets off course.

Gordon Gekko, the insider-trading corporate raider of 1987’s Oliver Stone film Wall Street, may have been a villain but that did not stop him talking a degree of sense. Quite what he would have made of Rivian’s $100 billion-plus market value after its first day of trading we will never know, but we can probably guess, given his comment that: ‘The mother of all evil is speculation.’

After all, that price tag values Rivian more highly than rival (and backer) Ford, even though Ford is forecast by analysts to generate more than $120 billion in sales and $6 billion in net profits. By contrast, Rivian is going to be in loss this year, not least as it only began to ship its first vehicles in September.

Whatever you think of Rivian’s potential, its valuation now prices in an awful lot of good news and not much bad. This is not to say anything bad will happen. But if it does, well, watch out as the valuation offers little or no downside protection.

By contrast, investors can protect their downside, and leave scope for upside, by looking at assets which may be out of favour and could therefore be undervalued as a result. The danger is that something is underperforming and cheap for a perfectly good reason, so careful research is needed. But one trend which catches this author’s eye is the 10-year underperformance of emerging equity markets relative to developed ones.


This can be seen by simply dividing the value of the FTSE Emerging index by that of the FTSE Developed index. If the line rises, emerging markets are outperforming and if it falls then developed arenas are doing better.

Developed markets ended the 1990s on a high as the Asian and Russian currency and debt crises hammered emerging markets, only for them to recover just in time for the technology bubble bust to hobble the developed ones for the best part of a decade. It has been one-way traffic since 2010, however, as developed markets have proved to be the better portfolio pick by far.

The questions to ask now, therefore are ‘why?’ and ‘what could change’?

One good guess as to the reason for the performance disparity would be the sector mix of the indices. But they are not as different as you might think. There is a similar representation in technology and the percentage weighting toward cyclical sectors such as financials, industrials and consumer discretionary. Emerging markets’ greater weighting toward financials in a margin-crushing, zero-interest-rate environment may not help, and nor may the higher weighting toward energy and basic materials (mining) during a low-growth, low-inflation decade, but neither looks conclusive.


A more convincing explanation comes in the form of geographic exposures. The runaway US equity market represents two-thirds of developed market capitalisation and China more than one third of emerging markets.

This is not the only reason – China’s weightings have increased over time as overseas listings and the domestically-traded stocks have entered global indices – but the S&P 500 is up by more than 300% since January 2010 and the Shanghai Composite by just 7%.

After a long and loud clamour for their inclusion, index compilers are now busily excluding Chinese stocks owing to US sanctions, governance issues and more besides. That may appeal to contrarians, who will also baulk at the valuation attributed to US stocks.

The Case-Shiller cyclically adjusted price earnings ratio – also known as CAPE – is no use at all as a near-term timing tool. But the two previous occasions when the CAPE exceeded 30 times, and the four prior times when 10-year historic compound returns from the S&P 500 have exceeded double-digits in percentage terms, have all seen the next decade’s returns from US equities tail off very badly indeed.


Some investors will be happy to stick to the maxim that ‘the trend is your friend’ and row in with the US and developed markets over China and their emerging counterparts. Others will keep the combination of Gekko and Shiller’s CAPE in mind.

China is trying to support its economy while managing a huge debt mountain and attempting to stop financial speculation from derailing its economy through poor capital allocation. But you can argue the US faces the same challenge, even if it comes with far superior corporate governance and investor protection.

China is acting and could be running monetary policy that is too tight as a result. That leaves it room to loosen. The Federal Reserve might just be ducking the challenge and running policy that is too loose, with the result it will have to tighten in time whether it likes it or not in a reversal of fortune that could, one day, break a 10-year-plus trend in relative share price performance.

Please continue to check back for a range of blog content from us and from some of the world’s leading fund management houses.

David Purcell

19th November 2021

Team No Comments

Numbers Game

Please see below article received from Legal & General yesterday afternoon, which provides an update on China’s high-yield bond market and Chinese equities, and how they may affect currency, commodity, and Western equity markets.

Four is the magic number

Throughout the rout, our emerging-market economists have maintained a very consistent line of argument: the consensus is underestimating the likely hit to growth associated with this squeeze on property developers, and the government’s threshold for intervention is further away than the market thinks.

That changed last week. The consensus seems to have finally capitulated, with a number of high-profile downgrades to growth outlooks. We think that we are now nearing the 4% line in the sand for the government: growth below that level puts long-term prosperity goals at risk, and is not consistent with the need to maintain a robust jobs market.

With the market having finally adjusted enough, we are also seeing the first signs of a policy response in relaxed restrictions for homebuyers’ access to mortgage finance and a dilution of the “three red lines” policy that has constrained highly leveraged developers.

On Wednesday, the People’s Bank of China took the unusual step of publishing monthly mortgage lending data for the first time, seemingly to highlight the nascent recovery at the start of the fourth quarter. The state-owned Securities Times opined that “for real-estate developers, the feeling of the recovery of the financing environment will become more and more obvious” going forwards.

For us, that all adds up to a signal that we are hitting a policy inflection point. That encourages us to dial up exposure to the theme: either directly through China’s high-yield bond market, or indirectly through Chinese equities. We might find the intentions of the authorities hard to understand at times, but we don’t think it’s sensible to doubt their ability to underwrite the near-term growth outlook when they see fit.

At sixes and sevens over US inflation

We learnt last week that US inflation hit 6.2% in October. That’s the highest rate since November 1990, the month “Home Alone” was released in cinemas. However you choose to slice and dice the data (core, median, trimmed mean, etc), inflation pressures look to be broadening.

On the Atlanta Fed’s underlying inflation dashboard, there are now a lot of red lights flashing and there are growing warnings of a peak at or above 7% in the months ahead.

But the bond market has been a fickle friend to the vigilantes this year. Anyone who sold out of the longest-maturity bonds in the spring in anticipation of the string of upside inflation surprises has been disappointed, with 30-year futures rallying over 10% since March. The financial media have been full of anecdotes in recent weeks of storied macro hedge funds suffering gut-wrenching losses on bond trades gone awry. Recent price action suggests that, in the wake of those losses, there has been considerable forced liquidation of positions.

For us, that “cleaning up” of the market makes it interesting to sell duration again. Last week, we did exactly that in both the US and Europe across dynamically managed portfolios.

When Kevin McCallister was busy defending his home against the Wet Bandits in 1990, 10-year US Treasury yields were above 8.5%. The contrast with today could barely be more different, with yields now at the dizzy heights of 1.5%.

In the US, we think that some sterner words from the Federal Reserve await in the weeks ahead. In Europe, bond scarcity has driven the short end of the German curve below money-market rates. Risks are never entirely one-sided, but we’re happy to run with tactical duration shorts against that backdrop.

Can a stitch in time save nine?

The University of Michigan survey of consumer sentiment has tumbled to levels rarely seen outside recessions. The survey’s chief economist noted: “Consumer sentiment fell in early November to its lowest level in a decade due to an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.”

And it’s not just US consumers feeling the pinch. In the face of tumbling approval ratings, Joe Biden has suddenly propelled inflation-fighting to the top of his economic agenda, arguing that “reversing this trend is a top priority for me”.

It’s unclear what that means. Throwing federal money around like confetti is a strange way to fight inflation, but the administration continues to insist that the recently signed Infrastructure Bill and the larger “Build Back Better” agenda have nothing to do with the price pressures in the economy. They even have the chutzpah to argue that these programmes – aimed at tackling a host of other pressing challenges – will help pull down inflation by bolstering the supply side of the economy.

Perhaps the most obvious inflation-fighting tools in the administration’s arsenal are releasing oil from the Strategic Petroleum Reserve (SPR) and cutting tariffs on Chinese imports. The SPR contains the equivalent of 600 million barrels of oil in underground tanks in Louisiana and Texas. It was used to lean against oil prices in 2011 under the Obama administration (with Joe Biden in the Vice President’s office) and has been under discussion by the administration over the past month. This obviously wouldn’t be a long-term fix to cool oil prices, but it would represent a short-term supply boost of up to 4.5 million barrels per day.

Tariffs have been frozen since the Trump presidency at an average rate of just above 19% (up from 3% before the trade war started). It would have seemed unthinkable a few months ago that Biden would consider rolling back tariffs given the political danger of being outflanked by the Republicans on this issue.

However, maybe that calculus is changing with the growing inflation concerns. Tariff reduction would offer marginal relief on the outlook for both US inflation and Chinese growth. It would be very warmly welcomed by financial markets as a result. A virtual summit between Presidents Xi and Biden is scheduled for this week. We’ll be watching closely for any hints of a thaw in relations.

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



Team No Comments

Can ethical investing help narrow the gender investment gap?

Please see below article received from AJ Bell yesterday, whose research team have found that women are more inclined to invest in green policies when looking for investment opportunities.

Women invest less than men, that’s a fact. A new study* commissioned by AJ Bell suggests the average level of savings and investments held by women is less than half the amount held by their male counterparts.

To put a number on it, if you extrapolate the average difference in savings and investments between the men and women questioned and factor in the UK population then the gender investment gap comes in at a staggering £1.65 trillion.

There are many reasons for the gap from pay differences to maternity leave and the fact women simply think differently to men, but there could be one change that might start to make a difference.


Chatting to two first time investors during research for our new Money Matters campaign it emerged that while both women had different reasons for starting their investment journeys both had really focused on the ability to have their money work for positive change.

31-year-old Dee told me: ‘When I first started investing… I was just happy to give it a go to see if it was for me. As I got more experienced it very much became a conscious decision of what company I invested in and any organisations that I would like to support.

‘I started reading an organisation’s green policies… and it actually did become an emotional decision and it still is. Now I will only invest in a company that I believe will do good for the planet or at least has a green initiative.’

Similarly, Georgia, who is 28, said, ‘I think the first time I looked at (investing) I was getting a sense of how it worked. I invested a small amount, but I got to grips with what all the different words meant. Now I’ve been able to use that information to make more ethical decisions about where I put money and decide the best options for me that fit my values as well.’


That’s not to say women are the only ones putting their money where their ethics are. Two thirds of fund inflows in September went into products that invest specifically according to ESG (environmental, social and governance) principles and over the past year most months saw around £1 billion of funds being invested in ‘responsible’ funds.

But as Dee says, at least among her friends, investing means different things to different people. ‘I’ve got a small circle of friends that invest. Some are female, some are male. Most of my female friends only invest in companies they believe in. Most of my male friends, in fact all of them, invest in the company they think will get them the most money or most reward. In return they very rarely look at the company as a whole.’

Ethics isn’t a barrier to rewards and when you look at AJ Bell’s most traded lists for this year and compare it with five years ago you can see change is coming, albeit slowly.


Several high carbon emitters have slipped out of the top 10 most traded stocks, but BPremains a popular choice and its ESG credentials come with great big caveats.

Pre-packaged funds which tell investors exactly what’s ‘in the tin’ have become more popular, and making sure that investors have easy access to clear information might be the most significant thing to emerge from COP26, the Glasgow-based climate change summit of world leaders.

From April next year over 1,000 of the largest UK registered businesses will be required to disclose mandated climate-related financial information, and investment products will also come under the spotlight with the FCA, the financial regulator, due to consult on criteria for ESG labels.

It’s often said knowledge is power but there have been many complaints that ESG reporting has lacked clarity and a mechanism for judging whether all those net-zero promises are more than just lip service.

In this case the knowledge might make a double impact, helping make the UK and the world a cleaner, greener place and giving more women the impetus and the confidence to seek out investing for the first time. Helping the planet and helping themselves.

Please check in again with us soon for more relevant content and news as we approach the festive season.

Stay safe.



Team No Comments

Daily Investment Bulletin – Brooks Macdonald.

Please find below, a “Daily Investment Bulletin” received from Brooks Macdonald yesterday afternoon – 10/11/2021.

What has happened

Equities finally broke their winning streak yesterday with the US market down a third of a percent. Tesla dragged discretionary stocks lower as fallout continue from founder Elon Musk’s twitter poll proposing a partial sale of his Tesla stake.


Today sees the long-awaited publication of the latest US CPI number. Whilst the headline number will drive the news flow, the true devil will be in the detail with the subcomponents scrutinised for signs of transitory versus persistent forces. Supply shock areas such as used cars and new cars are expected to show inflationary pressure given the ongoing global issues over semiconductor shortages. COVID reopening areas such as travel and hotel accommodation continue to be skewed by base effects from the pandemic last year and as such can be volatile. Finally, housing subcomponents will be a test of whether inflation is broadening. Housing, like all the sub-indices will be distorted by last year’s readings but given its importance in the basket it will be closely watched. Earlier today China’s Producer Price Inflation came in at 13.5%, the highest level in over 25 years which acts as a good indicator that upstream supply side issues are still rife. In better news for the transitory inflation camp, natural gas prices fell by over 8% in both the US and Europe yesterday.

Interest rates

Yesterday saw yields fall in the US and Europe and the yield curve flatten. One of the drivers of this is the expectation that any change at the Federal Reserve would likely favour a more dovish position. Fed Governor Brainard is being considered for the Fed Chair position alongside incumbent Powell, Brainard is considered to be more dovish so this offers the choice to markets of either the status quo or lower for longer. With additional Fed seats now vacant there is also more scope for the White House to propose more dovish candidates for the vacancies.

What does Brooks Macdonald think

Whilst the US market ended its extensive winning streak there was no clear catalyst to the change in mood so this likely reflects some gain fatigue rather than anything more concerning.

Please check back in again soon for a range of blog content from us and from some of the world’s leading fund management houses.

Alex Kitteringham

10th November 2021.

Team No Comments

Stocks rally as central banks maintain dovish stance

Please find below, a ‘Markets in a Minute’ update received from Brewin Dolphin late Tuesday afternoon – 09/11/2021

Global equities rose last week as major central banks struck a dovish tone on interest rates and US jobs data proved far stronger than expected.

 The FTSE 100 added 0.9% after the Bank of England surprised the markets by voting to keep interest rates unchanged. Germany’s Dax also rallied 2.3% as the European Central Bank (ECB) indicated that interest rates would stay low for some time.

In the US, the S&P 500, Dow and Nasdaq added 2.0%, 1.4% and 3.1%, respectively, as the Federal Reserve stuck to its view that high inflation would prove transitory and would not necessitate an immediate rise in interest rates.

Over in Asia, the Liberal Democratic Party’s solid win in Japan’s general election boosted the Nikkei 225 by 2.5%. In contrast, China’s Shanghai Composite lost 1.6% amid renewed Covid-19 restrictions and ongoing concerns about the country’s property sector.

Last week’s market performance*

• FTSE 100: +0.92%

• S&P 500: +2.00%

• Dow: +1.42%

• Nasdaq: +3.05%

• Dax: +2.33%

• Hang Seng: -2.00%

• Shanghai Composite: -1.57%

• Nikkei: +2.49%

* Data from close on Friday 29 October to close of business on Friday 5 November.

US stocks rise on passing of infrastructure bill

Wall Street stocks started this week on a strong footing, with Congress’ approval of President Joe Biden’s infrastructure spending package leading to gains across the industrial and material sectors on Monday (8 November). The $1trn package, which was passed by the House of Representatives late on Friday, will provide new funding for transport, utilities and broadband, among other infrastructure projects.

UK and European equities started the week on a more subdued note following a mixed session in Asia overnight. The FTSE 100 slipped 0.1% on Monday after a survey showed UK consumer confidence in October fell to its lowest level since March. However, the upbeat mood in the US boosted sentiment at the start of trading on Tuesday, with the blue-chip index managing a 0.1% gain.

 BoE holds rates at record low

The Bank of England surprised investors last week by voting to hold the base interest rate at its historic low of 0.1% despite surging inflation.

Andrew Bailey, the Bank’s governor, said he was ‘very sorry’ that households were feeling the impact of rising prices, but that the Bank wanted to see what impact domestic and global issues were having on the cost of living before deciding on whether to raise rates. He told the BBC that current conditions were different because inflation was being driven by global supply shocks rather than demand pressure in the UK economy.

The Bank signalled that the base rate could rise in the coming months amid forecasts that inflation is likely to hit 5% next year. Nevertheless, the pound fell against the dollar by 1.5% following the decision.

ECB rate hike ‘very unlikely’ in 2022

Investors were also speculating that the ECB would raise interest rates next year amid a 13-year high in the rate of inflation. However, ECB president Christine Lagarde said a rate increase would be ‘very unlikely’ to take place in 2022. She was quoted by Reuters as saying that despite the current surge in prices, the outlook for inflation over the medium term remains subdued, and therefore the ECB’s three conditions for a rate hike are unlikely to be satisfied next year.

Lagarde also pushed back on expectations of a tightening in monetary policy, saying the ECB would continue to use emergency asset purchases to keep borrowing costs down. “An undue tightening of financing conditions is not desirable at a time when purchasing power is already being squeezed by higher energy and fuel bills, and it would represent an unwarranted headwind for the recovery,” she stated.

Fed holds rates near zero

The Federal Reserve also announced it would keep its main policy rate near zero for now, but said it would begin scaling back its $120bn monthly bond-buying programme this month. The Federal Open Market Committee said it could start withdrawing stimulus because it had achieved ‘substantial further progress’ towards its twin goals of maximum employment and inflation that averages 2%. Fed chair Jerome Powell added that the bar for raising interest rates was higher than that for tapering.

“It is time to taper, we think, because the economy has achieved substantial further progress toward our goals,” Powell was quoted by the FT as saying. “We don’t think it’s time yet to raise interest rates. There is still ground to cover to reach maximum employment, both in terms of employment and in terms of participation.”

Economic data stronger than expected

The policy meeting came a couple of days before the latest US nonfarm payrolls report showed the jobs market bounced back in October. Nonfarm payrolls increased by 531,000 from the previous month, according to the Labor Department, compared with the Dow Jones estimate of 450,000.

US non-farm payrolls

Private payrolls showed even stronger growth, rising by 604,000. This was far higher than 312,000 gain seen in September – a figure that was revised up from the Labor Department’s previous estimate of 194,000. Leisure and hospitality drove gains as the number of Covid-19 infections declined. Meanwhile, the unemployment rate fell to 4.6%, marking a new pandemic low. Elsewhere, figures showed US factory orders unexpectedly rose in September by 0.2% from the previous month. Economists polled by Reuters had forecast orders to remain unchanged. On a year-on-year basis, orders were up by 17.6%. However, manufacturing is still constrained by shortages of labour and materials, with manufacturing activity slowing in October, according to the latest survey from the Institute for Supply Management.

Please continue to check back for a range of blog content from us and from some of the world’s leading fund management houses.

David Purcell

10th November 2021

Team No Comments

Daily Investment Bulletin

Please see below article received from Brooks Macdonald yesterday, which provides an update on the markets as world leaders reconvene for a fifth day at the United Nations Climate Change Conference in Glasgow.

What has happened

Global equities continued their series of fresh highs yesterday with mild gains across the US and Europe. Earnings continue to be a driver of these gains, even if they look slightly less bountiful than at the start of the season, with c. 90% of US companies reporting yesterday beating their earnings estimates.

Central Banks

After the RBA decision yesterday we saw a rally in sovereign bonds as bond markets priced in the possibility of central banks’ bark being worse than their bite. The major event today will be the Federal Reserve decision which is widely expected to contain a reduction in the monthly asset purchases by the US central bank. It’s worth noting that this is tapering the pandemic quantitative programme i.e. until the middle of next year there is still pandemic era net stimulus being provided by the Fed, just every month it’s slightly less. The distinction between a withdrawal of pandemic era stimulus narrative versus the beginning of a tightening cycle will be a tightrope all central banks will need to walk. Meanwhile President Biden yesterday said that we would make an announcement ‘fairly quickly’ on whether Fed Chair Powell would continue in his post for another term.

US Politics

Voters have gone to the polls in Virginia and New Jersey to elect their new governors. Several news outlets have called Virginia for the Republicans and rumours are abound that New Jersey will follow the same path. Virginia saw a 10 point margin of victory for Biden in the Presidential Election so a defeat here will be politically difficult for the President and bode badly for the mid-terms next year. Whilst a year is a long time, the probability of legislative gridlock in the US after the midterms seems to be increasing.

What does Brooks Macdonald think

A tapering announcement at the Fed’s meeting today is very much in line with the market’s expectation, however what will be of more interest is whether the Fed push back against the interest rate pricing for 2022. The difficulty for Fed Chair Powell is the highly uncertain path of near term inflation, should the inflation issues prove transitory a 2023 rate rise is probably still the base case, should pressures continue into the middle of next year a 2022 rate hike (or two?) is on the cards.

The Fed did as expected yesterday and reduced asset purchases. It will be interesting to see what the Bank of England do today on interest rates.

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

Stay safe.