News

Please see below article received from EPIC Investment Partners this morning, which provides an insight into economic theory.

The traditional Phillips curve has long been a cornerstone of macroeconomic theory, suggesting a straightforward relationship between unemployment and inflation. The underlying theory posits that as unemployment falls, increased economic demand leads to higher wages, which in turn drives up prices and inflation. However, researchers have historically struggled to consistently demonstrate this relationship in real-world data.  

Groundbreaking new research now reveals that the relationship is far more nuanced and distinctly non-linear, with firms responding to economic changes in surprisingly asymmetric ways. The most striking finding is how firms respond asymmetrically to economic shifts. When facing positive economic changes, companies are much more likely to raise prices than to lower them during negative shifts. This “convexity” in pricing behaviour helps explain why inflation can be sticky and unpredictable.  

The OECD’s recent warning about persistent services inflation provides crucial context. With services price inflation at a median of 4 percent across rich nations, the non-linearity becomes especially relevant. The research uncovered that this non-linear pricing behaviour is most pronounced during periods of high inflation with firms becoming more responsive to economic signals and creating a potentially self-reinforcing cycle. 

Interestingly, the study found that the convexity varies across different economic contexts. Firms with average price growth above 4 percent exhibit a strongly non-linear response to positive versus negative shocks. In contrast, firms with lower price growth show a more linear pricing pattern.  

The implications extend beyond simple economic theory. The non-linear relationship suggests that monetary policy tools may be less effective than previously thought, with firms’ pricing strategies creating economic momentum that could push the economy towards unexpected trajectories. For policymakers, this research highlights the importance of understanding firm-level pricing dynamics. During periods of high inflation, prices can become much more responsive to positive economic shocks, creating potential risks for economic stability.  

This research fundamentally challenges traditional macroeconomic models, revealing that economic systems are far more complex and adaptive than previously understood. The non-linear pricing dynamics demonstrate that firms are strategic actors who actively interpret and respond to market signals, not passive recipients of economic conditions. These insights have significant implications for investment managers and policymakers alike, highlighting the need for more sophisticated approaches to understanding and modelling economic scenarios and resilience and designing targeted strategies in an increasingly nuanced economic landscape. 

Like a dance, economic relationships are about rhythm, timing, and unexpected moves, not just simple steps forward or backward.  

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

Chloe

10/12/2024

Please see below article received from EPIC Investment Partners this morning, which provides an update on India’s thriving economy.

In the four years to the end of November 2024 the Indian stock market returned 77.2%, a compound annual growth rate of 15.4% (USD). This compares to the -0.8% and -0.3% compound rate of return of Asia ex Japan and emerging markets respectively. In Asia, only Taiwan (+13.3% CAGR) comes close.

PM Modi’s business friendly approach with a focus on infrastructure development and the country’s relatively favourable demographics have all played their part. More recently the focus is turning to building out India’s manufacturing capabilities which looks likely to be a significant contributor to future growth. Perhaps more an accident than a design, India’s geopolitical position has improved markedly in recent years. 

In short, India’s stars are aligned. 

Domestic retail flows into equities have played an increasingly significant role. In round numbers, monthly net flows into mutual funds have risen threefold or more over the same four year period. However, for the prospective investor this comes at a price. On both a price earnings ratio or price to book measure, India is roughly twice as expensive as the Asian or emerging equity universes.  

Some lingering disappointment in the BJP’s performance in the national elections earlier this year has been followed by a number of underwhelming corporate results and a weaker than expected third quarter GDP print. The market has consolidated. 

Step forward Maharashtra, India’s second most populous state and largest state measured by GDP, accounting for just over one eighth of Indian GDP. The state assembly elections held late last month saw the BJP and Allies win a thumping victory. The BJP won 132 seats (up from circa 100) and the BJP alliance won 235 out of the 288 seats. 

The Economic Advisory Council for Maharashtra has laid out a vision for the state economy to grow to US$1tr before the end of decade with manufacturing rising from 16% to 21% of GDP. There have been large transformative infrastructure projects for Mumbai over the past decade (trans-harbour link, new airport, 300km metro, coastal roads etc) which are now maturing. The target over the next decade will be further expansion of coastal roads and metros and using the new airport as a development hub and progressing a high speed rail project to completion. 

India may not be cheap but it knows where it is going. 

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

Chloe

05/12/2024

Please see below ‘Markets in a Minute’ article received from Brewin Dolphin yesterday evening, which provides a global market update for your perusal.  

Global equity markets were a mixed bag last week. U.S. stocks ended a pullback (a temporary dip in price) after their sharp post-election rally, while UK stocks were a relative bright spot. The rest of Europe lagged.

It’s always right to think of the equity market in terms of the stocks it contains. However, in this instance, the weakness of the equity market does seem to be reflecting some downbeat economic prospects for continental Europe.

The ongoing conflict in Ukraine and the upcoming presidential transition in the U.S. have created a sense of uncertainty. Investors are watching closely for any developments that may impact the global economy.

Bitcoin rallies towards milestone high

Data released last week on U.S. Treasury sales showed Japan and China reduced their exposure to U.S. bonds over the last quarter. Efforts to reduce America’s trade deficit with other countries can also lessen the need for those countries to hold as many dollars as they had previously. This can in turn lead to decreased demand for U.S. bonds. At a time when the U.S. is running a substantial budget deficit and may be considering further tax cuts, any reduction in foreign demand for U.S. Treasuries would be unhelpful.

These kinds of concerns have prompted investors to look at investments that protect their holders from the perils of government fiscal largesse. Two obvious examples are gold and Bitcoin, which both benefit from a limited supply. These two assets, which share many features, have diverged sharply in performance since the election; gold sank back while Bitcoin has marched onwards towards the milestone of $100,000 per coin!

Strictly speaking, the supply of Bitcoin is more limited than the supply of gold, as there’s a finite limit to the number of coins that can eventually be released (only another 5% are able to be mined). In contrast, gold reserves already account for 25% of existing circulation, and it’s possible more could be discovered.

But the reason for the difference in performance has been President-elect Donald Trump’s perspective on Bitcoin. Trump’s stance has changed from regarding Bitcoin as a scam that facilitates crime and requires heavy regulation to an apparent willingness to entertain a U.S. strategic cryptocurrency reserve.

The environmental impact of Bitcoin mining is a concern, as it generally requires much more power than gold mining, leading to the disposal of obsolete tech equipment. Bitcoin mining also consumes a lot of water.

Perhaps the biggest challenge for cryptocurrencies is that while the supply of one of them, like Bitcoin, may be finite, there are huge and growing arrays of other cryptocurrencies with no real limit on how many could be created. Some of these have been better designed, with more use cases and less environmental impact than Bitcoin. Bitcoin holding the top spot among crypto peers relies on its status of being the first cryptocurrency.

Gold and Bitcoin are traditionally priced in dollars, so they’ll rise if the dollar falls. Introducing new stores of value as alternatives to the dollar might not be in America’s interests – this would diminish the ‘exorbitant privilege’ enjoyed by the U.S. for being the issuer of the world’s reserve currency.

Earnings season draws to an end

The draw of the U.S. equity market remains as we approach the end of the third quarter earnings season.

Nvidia’s third quarter results have become something of a highlight. This quarter, its revenue beat expectations, and guidance for the next quarter is strong. The company’s Blackwell architecture is expected to drive growth, although margins may be impacted in the short term.

The stock’s valuation is a topic of vigorous debate. Its recent growth would easily justify its current multiple – but semiconductors are a cyclical industry, which makes estimating the length of the current upturn, as well as the depth of the next downturn, very challenging. This remains the main controversy around the current market darling.

What’s next for UK interest rates?

A flurry of UK data last week has poured more doubt on forecasters’ expectations for UK interest rates. This is partly reflected in the market already, as interest rates, which spent a year at 5.25%, have already fallen to 4.75%, with a limited number of further rate cuts expected in the short term.

The markets currently expect rates to fall to 4% by the end of 2025. The consensus of economists is 3.6%, but we expect those forecasts will edge upwards.

UK inflation high during October

In recent weeks, we’ve discussed how the government is drawing a lot of tax revenue from the economy, but despite this, it’s increasing borrowing to fund spending – specifically over the next two years.

Pound for pound, government spending is assumed to boost the economy by more than taxes reduce it. This is because when measuring economic activity, everything the government spends will be included, while anything the government gives away in terms of tax cuts may be partly saved by those benefitting from the cuts.

The upshot is that there will be a big fiscal boost over the next couple of years, at a time when the economy has limited spare capacity (in other words, when unemployment’s low). The risk is that this spending is inflationary, meaning that market interest rates need to rise to keep attracting bond buyers.

Inflation was indeed relatively high during October. Although some of this strength came from volatile air fares rebounding after a weak September, and a monthly increase in utility bills, these inflation numbers remain too high for us.

The annual rate of price growth rose above target at a time when energy prices (despite being higher this month) are still dragging inflation down compared to the year before. The persistence of inflation in core services should be worrying the Bank of England as it considers when it can afford to cut interest rates again.

The other consequences of inflation are higher expenditure and higher interest rate costs. Combined, these outweighed the consequent higher tax revenue and led to an overall increase in borrowing during October, which makes the current fiscal plans of the government look tenuous.

European services trend downwards

Finally, at the end of the week, we saw the early window into the current performance of many economies. The news is that Europe has seen no real progress. In fact, it seems European services are being dragged down towards the region’s struggling manufacturing sector.

As earnings season winds up, there will be a lack of material economic or corporate news this week. And with Thanksgiving approaching, the focus will switch from Wall Street to the high street and one of the big retail weekends of the year.

However, we can probably expect the flow of news about the shape of President-elect Trump’s new government to continue.

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

Chloe

27/11/2024

Please see below article received from Brooks Macdonald this morning, which provides a global market update for your perusal.

What has happened

At an aggregate equity markets level, there wasn’t a big catalyst for moves in either direction yesterday. By the close on Monday, the US S&P500 equity index was up +0.39%, while the pan-European STOXX600 equity index was down marginally at -0.06%, both in local currency price return terms. Elsewhere, a fade in recent US dollar strength coupled with a reminder of geopolitical risk around Russia-Ukraine helped buoy the Brent crude oil price, which gained +3.18% to US$73.30 per barrel yesterday.

Tesla has a very good US election

Tesla’s share price has so far had a very good US election. From the close on the day of the election on 5th November through to yesterday’s close the stock is up almost +35%, and in the process adding around US$280bn to Tesla’s market capitalisation – a gain alone that is slightly bigger than the total market size of Toyota (at around US$276bn equivalent), the world’s second largest auto company after Tesla. That Tesla gain includes a sizeable +5.62% surge in the Telsa share price yesterday and came on the back of a Bloomberg report that US president-elect Donald Trump’s upcoming administration is planning to make a US federal framework for self-driving cars a priority.

Chinese ETF investor outflows

Exchange Traded Funds (ETFs) that buy Chinese stocks have seen continued outflows according to a Bloomberg report yesterday. As an example, the US$8.2bn iShares China Large-Cap ETF saw US$984 million in outflows last week, its largest weekly outflow on record, and extending a five-week streak of withdrawals for that ETF. Chinese equity investor sentiment has been under continued pressure in recent weeks on two counts: (1) investors harbouring lingering concerns that Beijing’s stimulus will not prove to be enough to lift consumer spending; and (2) the impact on Chinese businesses from the risk of materially higher US tariffs under Trump.

What does Brooks Macdonald think

It must be a very frustrating time for those in the market who continue to be bearish on the US economy. Even excluding the current enthusiasm around the prospect of tax cuts, deregulation and greater fiscal deficits under Trump, the US economy appears to be doing just fine currently. According to the Federal Reserve Bank of Atlanta’s ‘GDPnow’ forecast model yesterday, US real (constant prices) Gross Domestic Product (GDP) growth is expected to be running at +2.5% annualised for the current calendar 4Q of 2024 – if that turns out to be the actual number, that would be above the US Federal Reserve’s longer-run GDP annual growth assumption for the US economy of +1.8%.

Bloomberg as at 19/11/2024. TR denotes Net Total Return.

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

Chloe

19/11/2024

Please see below article received from EPIC Investment Partners this morning, which provides advice to investors in the current market climate.  

The notion that increased government borrowing always drives up Treasury yields is deeply ingrained in financial markets, often treated as an indisputable truth. Yet, as Charles Mackay cautioned in his 1841 classic, “Extraordinary Popular Delusions and the Madness of Crowds”, markets have a peculiar tendency to cling to assumptions that crumble under scrutiny. Could this seemingly self-evident relationship between debt and yields be another “popular delusion”? 

Conventional wisdom suggests that higher government debt issuance floods the market with bonds, forcing yields higher. But this view is overly simplistic, especially when the Federal Reserve is actively managing monetary policy. Large-scale U.S. Treasury issuance does increase the supply of bonds, but it also drains liquidity from the financial system. When investors purchase these bonds, they do so with cash, effectively reducing the amount of money circulating for other investments. This “cash drain” acts much like a tightening of financial conditions, making it more costly for businesses and individuals to borrow. 

This liquidity reduction can lead to “crowding out,” but not in the traditional sense. Rather than directly competing with the private sector for loanable funds, government borrowing reduces overall liquidity. This can push investors away from riskier assets and toward the relative safety of government bonds, stabilising or even lowering yields rather than pushing them up. 

The Fed’s actions add another layer to this dynamic. When the central bank eases policy, it typically lowers short-term interest rates by buying bonds on the open market. These actions inject liquidity back into the system, offsetting the drain caused by Treasury issuance. This creates a nuanced effect on supply: while Treasury issuance drains liquidity, Fed purchases restore some or all of it, creating conditions that can contribute to a flatter yield curve rather than the anticipated steepening. 

These dynamics challenge the belief that “more debt equals higher yields.” In fact, empirical data reveals that budget deficits have minimal predictive impact on Treasury yields. Instead, Treasury issuance and Fed easing together are more likely to contribute to curve flattening than to any significant yield increase. This is evident in the sharply flattening yield curve observed recently, as investors position themselves for the reality that safe-haven demand, liquidity flows, and central bank interventions are often stronger influences on yield dynamics than raw debt levels. 

For a clearer view of how the yield curve is truly shaped, investors would do well to consider the broader forces at play—liquidity, central bank policy, and demand for safety—rather than blindly following the crowd. While challenging conventional wisdom can be daunting, making independent, well-informed decisions is often far more effective than succumbing to the “madness of crowds.” 

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

Chloe

12/11/2024

Please see below article received from Brooks Macdonald this morning, which reviews yesterday’s Budget in more detail.

Chancellor Rachel Reeves has unveiled the much-anticipated Autumn Budget, outlining the government’s plans to address the nation’s financial challenges. As expected, the budget includes several significant changes. Here, we break down the key announcements and what they may mean for your wealth.

Major budget announcements that may affect your wealth

Capital gains tax reforms

Significant capital gains tax (CGT) reforms have been introduced. The lower rate of CGT will increase from 10% to 18%, and the higher rate from 20% to 24%, while the rate for residential property remains unchanged. The tax treatment of carried interest will increase to 32% from April 2025, up from 28%. The Business Asset Disposal Relief will remain at 10% this year, before rising to 14% in April 2025.

What it means for you: Investors will face higher tax bills on their gains, while business owners will see a phased increase in the CGT rate on the sale of their businesses, losing the benefit of the current reduced rate over the next few years.

Inheritance tax updates

The inheritance tax threshold is frozen until 2030 remaining at £325,000, with an additional residence nil-rate band of £175,000 for those passing on their home to direct descendants. The government is also removing the opportunity for individuals to use pensions as a vehicle for inheritance tax planning by bringing unspent pots into the scope of inheritance tax from April 2027, which will affect around 8% of estates each year.

What it means for you: If you are planning your estate, the unchanged thresholds provide some stability. However, the announcement that inherited pension pots will now be subject to inheritance tax will significantly impact estate planning strategies, especially for those with larger pension pots.

Income tax changes

The government has announced the freeze on income tax thresholds will not be extended beyond the 2028-2029 tax year and from this point, personal tax thresholds will be uprated in line with inflation.

What it means for you: The removal of a freeze will prevent more people from being pushed into higher tax brackets due to wage increases. This has the effect of reducing the tax burden on working individuals and preserving more of their income.

National Insurance rises

As expected there were big changes to employer National Insurance (NI) contributions, the UK’s second largest revenue stream after income tax. Effective immediately, the Employer’s National Insurance rate has increased by 1.2% to 15% raising £25 billion and the threshold at which companies pay the tax has been lowered. Employee and self-employed NI rates remain unchanged.

What it means for you: Employers will face higher NI contributions, while employees and the self employed have escaped any rises. This adjustment is expected to be the biggest revenue generator in the Budget.

Surprises on the day

Outside of the more anticipated moves, there were a few more surprising measures.

Windfall tax on energy companies

The latest budget includes significant changes to the taxation of energy companies. The Energy Profits Levy (EPL), initially introduced in May 2022, has been increased from 25% to 38% and will remain until March 2030.

Green investment incentives

New incentives for green investments have been introduced, including tax breaks for companies investing in renewable energy projects and electric vehicle infrastructure. This also includes a climate action mandate for the Bank of England, support for green technologies, and training programmes for green jobs.

AIM market changes

Under much scrutiny in the run up to the Budget, Reeves announced a 50% relief on Alternative Investment Market (AIM) shares for inheritance tax. This means the effective tax rate on AIM-traded shares is now 20%.

Stamp duty adjustments

The government has introduced new additional stamp duty rates, on top of the stamp duty paid for a first home, for second homes and buy-to-let properties by 2% to 5% from effect 31 October, to cool the housing market and make it easier for first-time buyers to enter the market.

Fuel duty freeze

Despite speculation, the government has decided to freeze fuel duty for another year, providing relief to motorists amid high fuel prices. What it means for you: These changes may impact your investments if you are an investor in the energy sector or investing in the AIM market. Prospective homebuyers may find it easier to purchase their first home due to the new stamp duty rates. Motorists will see no increase in fuel duty, maintaining current fuel prices.

Investing implications

UK markets have shown a mixed response to the Budget, with investors carefully analysing the key announcements on tax policies, public spending, and economic growth measures. UK government bond markets initially appeared to react positively to the Budget announcement. Although, through the course of Wednesday, the day’s gains in gilt prices unwound.

That fluidity in bond market price action underscores the sensitivity with which markets are judging government efforts to manage the public finances. The key takeaway is that there remains a degree of concern around the potential effects of government borrowing and its implications for inflation and interest rates going forwards.

Meanwhile, in equity markets, perhaps the most notable moves today have been centered around smaller companies. Specifically, the UK’s Alternative Investment Market (AIM) equity index saw strong gains following the Budget, as the Chancellor’s move to apply a 50% relief from inheritance tax for AIM shares is better than some expectations had feared.

Businesses to shoulder the majority of the £40 billion tax rises

The sweeping tax reforms, aimed at supporting wealth creation for working people and fostering economic growth, mark the largest tax increases in decades at £40 billion of tax rises. Key measures affecting businesses include a 6.7% rise in the minimum wage and raising an expected £25 billion from an increase in employers’ National Insurance contributions.

The increased National Insurance rates are expected to hit small businesses hard, potentially leading to reduced staff, shorter operating hours, or even closures due to their limited ability to absorb increased costs.

However, in a measure to help small businesses Reeves unveiled an increase to the Employment Allowance from £5,000 to £10,500, which allows eligible employers to reduce their national insurance liability. This means 865,000 employers won’t pay any national insurance at all next year, and over one million will pay the same or less as they did previously.

Comment

I’ve read a lot of content and just spent 1.5 hours on a post-Budget technical webinar, the first of four over the next few days.

Now I understand more of the detail, and the proposed changes being consulted on, I’ve got a better view. This is a fairly typical ‘tax and spend’ Labour Budget. That is as anticipated, I’m just disappointed that growing the UK economy was not their main focus.  Forecast growth is minimal. We really do need to grow our economy, this is the only viable option.

With regards to the changes on pensions and inheritance tax, we need more detail. This legislation won’t be implemented until April 2027. We will have time to consider it and alter course, change strategies.

For now, we need to wait for more information.

Steve Speed

31/10/2024

Firstly, I need to explain that we haven’t got the detail yet.  But based on what we have heard, and a little written input, these are my initial thoughts:

The good news:

It is good news that we haven’t heard about any reduction in tax relief for personal pension contributions and no reduction in what you can contribute into pensions.

In addition, your tax-free cash drawn from pensions remains unchanged at 25% of fund value with a limit for most of us of £268,275.00 for tax free cash.

No mention was made to the removal of the Lifetime Allowance for pensions either.  The Lifetime Allowance remains abolished leaving us with no cap on pension fund values in the UK generally.  New rules applied from 06/04/2024.

No increase to fuel duty.  We maintain the current status quo.

Electric Vehicle drivers will have better road tax charges, lower than other cars.

The bad news:

Again, without much detail, it looks like pensions could form part of your estate for inheritance tax from April 2027.  Technically this could be difficult to do, hence the timeframe.

At least we will have time to plan, to change strategy.

The reduction in the inheritance tax efficiency of AIM shares is also a concern.  If you held Business Relief qualifying AIM shares for more than two years, you would not pay inheritance tax on them.  It now looks like you will pay 20% inheritance tax on AIM shares.

Bad news for employers too, employer National Insurance set to increase by 1.2% to 15% in April 2025.  The employer NI threshold will be lowered from £9,100.00 to £5,000.00 per annum for employees too.    But to protect smaller businesses, the Employment Allowance will increase from £5,000.00 to £10,500.00.

Again, for employers, the National Minimum Wage is set to increase to £12.21 an hour from next April.  This has a knock-on effect on other pay scales too.

Vehicles that aren’t fully electric will pay more road tax.

Summary

We haven’t got the detail yet, and the devil is always in the detail.  My initial thoughts are that although Labour say they want to grow our economy here in the UK, some of the measures outlined above, particularly those that impact on employers, do not help businesses grow.

In addition, taxing invested assets, AIM shares and pensions, is not necessarily the right messaging for making long-term saving provision to take the burden off the State and our benefits system.  We need incentives to invest for the long term.

I re-iterate, we need to see more detail now.  I’m booked on four post Budget technical webinars over the next few days, and I’ll have all of the available detail shortly.  Some of the legislative change, bringing pensions into inheritance tax for example, is complex.  We won’t know this detail for a while.

Look out for further blogs on the Budget.

Steve Speed

30/10/2024

Please see below article received from EPIC Investment Partners this morning, which discusses the upcoming US presidential election.

With less than two weeks before US voters head to the polls, European policymakers are increasingly anxious about the economic consequences of either outcome.  

A potential return of Donald Trump to the White House is particularly concerning, as his campaign has pledged to impose sweeping tariffs—up to 60% on Chinese goods and possibly 20% on all other imports. Such measures could trigger a trade shock that would dwarf his previous policies, severely impacting Europe’s already fragile economy. 

The timing for these potential tariffs is far from ideal. Unlike Trump’s first term in 2017, when the eurozone experienced its strongest growth in a decade, Europe now faces significant challenges. Germany is enduring its second consecutive year of economic contraction, while France is enacting EUR 60bn in spending cuts and tax increases. With business confidence plummeting, the European Central Bank has accelerated plans to cut interest rates. Economists warn that even a modest 10% tariff could reduce eurozone exports to the US by a third, cutting output by 1.5% over three years, comparable to the impact of the recent energy crisis. 

Europe’s vulnerability lies in its heavy reliance on trade, which accounts for half of its economic output, compared to just a quarter in the US. With 30 million manufacturing jobs at stake, the region is particularly exposed to any restrictions on global commerce. Complicating matters further, both US candidates share a bipartisan consensus on tougher measures against China, threatening key European industries such as microchip manufacturing. Additionally, both Trump and Harris are expected to press Europe to take on more of NATO’s security costs. 

The situation is further complicated by Europe’s limited capacity to respond to economic shocks. Following pandemic-related spending and the energy crisis, key nations like France carry substantially higher debt loads than during Trump’s first term, constraining their ability to provide fiscal support if needed. 

European nations face what many view as a “lesser evil” scenario in the upcoming US presidential election, where both potential outcomes present distinct challenges for the continent’s economic stability. A Harris presidency promises continuity, maintaining Biden’s established policies including Chinese trade restrictions—a path that, while not ideal, offers predictability for European markets and policymakers. In contrast, a second Trump term threatens more severe economic disruption through proposed sweeping tariffs and creates heightened uncertainty around crucial issues like Ukraine support. While Harris’s approach might preserve current challenges, Trump’s presidency poses risks that could fundamentally reshape Europe’s economic and geopolitical landscape, leaving the continent to navigate an increasingly unpredictable future. 

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

Chloe

25/10/2024