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Brooks Macdonald Daily Investment Bulletin

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

What has happened

Markets on Thursday looked to be a little softer on balance, as investors held their breath ahead of an arguably pivotal US jobs report due later today. Remember that the last monthly US payrolls data was one of the principal catalysts for an economic growth scare, putting markets in a brief but violent tailspin in early August. Otherwise, Thursday saw a slightly better-than-expected US Institute for Supply Manufacturing (ISM) Services Purchasing Manager Index (PMI) for August, coming in a 51.5, where 50 is the dividing line between month-on-month economic expansion versus contraction. Given services makes up around three-quarters share of the US economy, it puts the recent weaker manufacturing print earlier this week in some perspective.

Looking for a better set of US payrolls

Later today, we get the latest (August) monthly US employment ‘non-farm payrolls’ report. After the weaker than expected print last month, markets are hoping for a better showing this time around. According to the median estimate of a Bloomberg survey of economists, payrolls are expected to have risen by +165,000 in August, following July’s +114,000 increase. As for the unemployment rate, that is expected to have edged down to 4.2%, versus the 4.3% print last month. As an aside, it is worth keeping in mind that, as we saw last month, it is quite possible for the payrolls to show net gains, and still see the unemployment rate higher – rather than a sign of weakness, it can actually be a positive, as the unemployment rate ticks up to reflect more people coming back into the workforce available to work, but while looking for a job, are initially classified as being out of work. 

Oil price having a difficult week

In commodity markets, the oil price, at one point down nearly -8% for the week earlier today, looks to be on track for its worst weekly loss in almost a year. With the Brent crude oil price down at around US$ 73 per barrel currently, its lowest level since late last year, the driver for the price weakness appears to be a difficult softer-demand versus ample-supply outlook. That outlook is despite the latest announcement from the OPEC+ oil producing group yesterday (denoting the Organization of the Petroleum Exporting Countries, plus certain non-OPEC countries, including Russia), where following a virtual meeting, the group announced that it would delay planned longer-term production increases (as part of unwinding their previous production curbs) by two months.

What does Brooks Macdonald think

There is an awful lot riding on the US employment report later today. Last month’s weaker than expected print could arguably be put down, in part, to the extreme weather disruption caused by hurricane Beryl. For context, readers will remember that this hurricane was the earliest-in-the-year maximum category-5 hurricane to ever be recorded in the Atlantic basin. There is no such weather excuse this time around. Instead, markets will want to see some reassurance that after some mixed jobs reports data of late, that the US economy is still doing relatively okay. In terms of what is currently being priced in for US interest rate cuts later this month (at the US Federal Reserve meeting decision due 18 September), markets are pricing in around 35 basis points of cuts, so still between either a 0.25% cut or a larger 0.50% cut.

Bloomberg as at 06/09/2024. TR denotes Net Total Return.

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

Chloe

06/09/2024

Team No Comments

Tatton Monday Digest – Balancing acts

Please see below Monday Digest article received from Tatton Investment Management this morning, which provides a global market update as we begin September.

US stocks were weighed by tech last week, but the UK and Europe were reasonable. Britons suspect a capital gains tax (CGT) hike in autumn – which is keeping advisers busy but hasn’t had any effect on UK stocks, and we expect that non-reaction to continue. Yields seem to be trending down to pre-pandemic levels – despite being up last week.

Nvidia’s profit results were even better than expected – but apparently not good enough for investors, with shares dropping 6% on Thursday. This seems to be more about souring AI sentiment in general, following an accounting fraud allegation against Super Micro Computer – sending the AI darling’s stock down 19%. SMC is Nvidia’s third biggest customer, so the timing was awful. Broader US stocks thankfully didn’t follow Nvidia’s lead, gaining on some positive economic data.

Economic positivity begs the question of whether rates need to fall, though. Fed char Powell was very dovish in his speech last weekend, and we suspect it is 50/50 whether the Fed cuts by 25 or 50 basis points in September. But the US has solid consumption and no credit stress, so some think this is unnecessary. The point isn’t that the US is weak, but that it’s in a delicate position – particularly with regards to unemployment. Cutting now pre-emptively makes sense. Growth is steadier in the UK and Europe – because it wasn’t as strong before – but rates should still fall.

Markets seem to be treating the US election as irrelevant. It clearly isn’t, but we think it makes sense to act like it is because things are so uncertain. Not only is the outcome itself on a knife-edge, but nobody can work out whose policies would be better or worse for the US or global economies. Trump will cut taxes and boost short-term growth, at the expense of global trade and fiscal stability. Harris might raise taxes, but maintain the status quo and boost investment. Markets aren’t excited about either and, since investors are notoriously bad at reacting to elections, ignoring this one feels reasonable.

Why investors look so much to the US

We are UK based, but we write more about US markets than the UK – and we are not alone. The simple reason is that US stocks account for 61% of global market

cap, compared to just over 3% for the UK. Less obvious is why the US market is so big. It’s the world’s largest economy in nominal terms, but its 26% share of global GDP is well below its stock market share, and it trades less with the world than China. Its market cap share has soared over the last decade, but its GDP share has been virtually flat.

US economic activity matters more to global stock values than anywhere else, though. The biggest companies in the world are US tech firms – due to American corporate and economic structures, and the dollar’s global reserve status. Those firms are disproportionately sensitive to the US economy: Amazon gets more than two thirds of its revenue from the US. The US economy largely dictates what happens to the world’s biggest stocks, and those stocks largely dictate what happens to global capital markets.

There is a limit to how US-centric global markets can become, but the party doesn’t have to end anytime soon if US firms can continue their profit leadership (by leading AI innovation, for example). The problem is that this requires a continual flow of capital into the US – and we have argued that this could be under threat from isolationist or tech-busting policies. Huge government debt – which both presidential candidates seem eager to expand – also requires capital, which might have to come out of stock markets. That could temper international investors’ American enthusiasm. 

We talk so much about the US because it’s as great as it’s ever been in capital market terms. That dominance isn’t immediately threatened, but nor is it inevitable.

Easing liquidity tightness made in China?

The Chinese renminbi (RMB) has strengthened against the dollar, in stark contrast to the previous stasis. This could be a sign that the currency’s headwinds are fading, giving the People’s Bank of China room to ease policy – to the benefit of the Chinese and global economies.

Domestic demand has been weak for a while and exporters have been struggling. The textbook response would be to weaken the currency and export out of trouble, but the PBoC kept the dollar rate stable. In the context of a stronger dollar and much weaker yen that effectively meant restricting financial conditions and hampering growth. The rationale, it seems, was that devaluing the RMB would incur US and European tariffs, and undermine confidence in the currency domestically and abroad. 

Recent RMB strength is a sign that those pressures are fading: it actually depreciated against the yen, euro and Vietnamese dong, and Chinese industrial profits have improved. It also helps build confidence among Chinese citizens, who were previously buying gold to avoid holding their own currency. Chinese citizens notably aren’t using this patch of RMB strength as a gold-buying opportunity.

This doesn’t mean the RMB will strengthen further – and in fact we expect the PBoC to try and weaken a little to previous levels, as they already seem to be doing. This means the bank can effectively loosen financial conditions without fear of undermining currency stability. That could be a huge boost for domestic demand and, therefore, global growth. Any support will certainly be mild (the age of Beijing’s ‘bazooka’ support is over) but we shouldn’t underestimate its importance. There are suggestions that PBoC tightness contributed to the August liquidity shortage – along with the infamous yen ‘carry trade’ unwind. If that liquidity drain is plugged, it at the very least removes a headwind for markets.

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

Chloe

02/09/2024



Team No Comments

Evelyn Partners Update – UK July CPI Inflation

Please see below article received from Evelyn Partners this morning, which provides an economic update for the UK.

What happened?

UK July annual headline CPI inflation came in at 2.2% (consensus: 2.3%), versus 2.0% in June. In monthly terms, CPI was -0.2% (consensus: -0.1%), compared to 0.1% in June.

Core CPI inflation (ex-energy, food, alcohol and tobacco) came in at 3.3% (consensus: 3.4%) vs 3.5% in June. In monthly terms, Core CPI was 0.1% (consensus: 0.2%), compared to 0.2% in June.

What does it mean?

Despite headline inflation reaccelerating slightly back above the BoE’s 2% target, unfavourable base effects where largely to blame, as a -0.4% monthly print from July 2023 fell out of the annual comparison. Both headline and core inflation undershot expectations in July with both measures’ comings in 0.1% lower than forecasters had been expecting.

Within today’s data, the category for Housing and household services, which includes energy, was responsible for nearly all this month’s acceleration in the annual rate. Despite the category remaining in deflationary territory, pricing pleasures are easing at a slower rate than they where a year ago, causing the overall annual rate to accelerate. Restaurants and hotels, which had been one of the hotter segments of the economy started to ease in July with the annual rate decelerating to 4.9% from 6.2% the month prior. This move was responsible for the largest negative contribution to the headline annual rate in July.

Despite decelerating in July, it’s the services segments of the economy that continue to run hot, with annual services inflation coming in at 5.2% compared to -0.6% for goods inflation.

However, looking forward:

The slowing trend in core CPI inflation remains broadly intact. Lead indicators, such as producer price inflation remain supportive. Moreover, cost-push led inflation from wages that feed into the service sector is also decelerating. In addition to weakening employment data, annual private sector wage growth slowed to 4.9% in June, down from a peak of 8.2% in June 2023.

Bottom Line

Although the annual rate of headline inflation reaccelerated slightly in July, much of this came because of poor base effects. With all 4 main measures of inflation coming in below expectations today, the inflation picture will remain a source of encouragement to the Bank of England (BoE). Markets are currently still split on if the BoE will cut rates again at their September meeting or if they will replicate the actions of the European Central Bank and pause after their first cut, but committee members will still have one more month of macro data to inform their decision before then.

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

Chloe

14/08/2024

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Markets in a Minute

Please see below article received from Brewin Dolphin yesterday evening, which provides a global market and economic update.

Last week was volatile for markets. A major driver of the weakness in Japanese stocks was the strength of the Japanese yen. Most of the activity took place in the early hours of Monday morning when the Japanese TOPIX index fell a stunning 12% in a single session. This capped a three-day descent into the technical definition of a bear market (a 20% cumulative decline). Before we get too carried away, the TOPIX had recovered by 11.5% when the Japanese market closed on Friday. So, the peak-to-trough decline of the Japanese market since mid-June was 24%, but is now just 15%. In sterling terms, this would represent a 15% total decline and just 7.5% following the partial recovery. The decline in Japanese stocks is different depending upon whether you’re a Japanese investor (in yen) or a UK investor (in sterling).

The carry trade revisited

The difference in returns by currency reflects that Japanese equities have not just been affected by currency; they have arguably been driven by it.

Apologies for the repetition for regular readers, but the Japanese carry trade has been a major influence on markets. A carry trade involves borrowing money in a low-interest rate environment (like Japan) and investing it in a high-interest rate environment (like the U.S.). The returns are made up of the interest earned in the invested currency less the interest due in the borrowed currency, plus the gain (or loss) in the invested currency relative to the borrowed currency. The carry trade does not need to be invested in bank deposits or even bonds in the invested currency. It seems likely that some of it has flowed into U.S. equities, or maybe specifically tech shares (based on the observation that tech shares rose as the yen fell, and fell as the yen rose).

Understanding the size of this trade is very difficult. However, this week J.P. Morgan gained a lot of headlines announcing that it had unwound by 75%. How did it estimate this? By checking how much of the carry currency appreciation since August 2021 has now reversed.

We’re not convinced by this because it’s using a basket of carry trades that together seem to have been much less effective than the yen/dollar carry trade we’re trying to measure (the basket went up less and came down more). Looking at the yen/dollar trade specifically, over the period J.P. Morgan measured, the trade has only unwound by around 25%. That would seem more in line with data on positioning by investors, but unfortunately, that data is not timely enough to account for this week’s movements. In summary, it’s hard to tell how much carry trade is still in place.

Focusing on liquidity

The Bank of Japan (BoJ) seems worried about the carry trade. It’s been keen to move very slowly in its interest rate normalisation process – so much so that during its last monetary policy meeting, it referenced a statement saying that so far, interest rate increases have not yet led to tightened monetary policy. Last week, the BoJ’s deputy governor, Shinichi Uchida, also sent a strong dovish signal in the wake of historic financial market volatility in Japan by pledging to refrain from hiking interest rates when the markets are unstable. It seems likely that the BoJ is very focused on the impact interest rate differentials could have on financial conditions, not least because its domestic demand could be impacted by currency volatility. Japanese domestic investors have been buying overseas assets in their own funded version of the carry trade. By contrast, U.S. investors invest principally at home, allowing the Federal Reserve to be more parochial with its monetary policy. Any weakness in the U.S. economy will be met by interest rate cuts, inflicting more potential pain on carry traders.

U.S. growth concerns linger

There wasn’t much data last week that provided further insight into the fundamentals that may drive U.S. rate cuts or Japanese rate hikes. As mentioned, the BoJ will tread carefully. In the U.S., weekly jobless claims cut a reassuring tone, with new claims falling well below previous troughs during economic expansions. The caveat to this is that far fewer people now claim the unemployment insurance benefit in the U.S. than previously. Why? The explanation seems to be that either they are migrants who may not yet qualify for insurance, or they find opportunities in the gig economy that are preferable to the hassle of claiming insurance.

The difficult thing for investors is that the week after the payroll report is always a quiet one for economic data, so there was little to reassure or intensify worries about U.S. growth. In addition, we remain in a liquidity trough due to the summer holiday season, and the earnings season is unlikely to change the market’s perception of consumer strength (although it will be interesting to hear from the discount retailers still to report). Friday morning saw the Taiwan Semiconductor Manufacturing Company report a sharp increase in revenue in July, which bodes well for suppliers like ASML following the bruising market response to Intel’s planned reduction in capital expenditure the week before last. Technology shares have suffered during the current earnings season due to fears they might be overinvesting.

What’s next?

This week, we’ll see what’s happening to inflation in the U.S. It’s easy to imagine the market has moved on from inflation. After two months of reassuringly low inflation, focus has shifted to growth. Continued weakness of inflation will be good for bonds, but bad news for carry traders, who are invested in the dollar market. There’ll also be UK inflation and employment data. The Bank of England has taken the plunge and started cutting interest rates. It could probably do with seeing its decision validated by some modest weakness.

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

Chloe

14/08/2024

Team No Comments

The Daily Update – The Market’s Roller Coaster Ride

Please see below article received from EPIC Investment Partners this morning, which provides a global market update.

The global market rout that began on Monday showed signs of easing on Tuesday, with the Nikkei 225 rebounding more than 8% after its worst day since 1987. However, investors remain on edge as they grapple with the implications of a potential US economic slowdown and the Federal Reserve’s policy stance. 

The catalyst for the sudden risk-off sentiment appears to be growing fears of a “hard landing” as central banks, particularly the Fed, attempt to tame stubborn inflation without tipping economies into recession. Friday’s shockingly weak U.S. jobs report crystallised these concerns. It raised doubts about the health of the economy and the Fed’s ability to engineer a soft landing while keeping rates at 23-year highs. 

According to Mohamed A. El-Erian, the market turmoil can be attributed to five key factors: worries about a US growth slowdown undermining “American exceptionalism”, concerns that the Fed’s policy stance is too restrictive, crowded investment positions being caught offside, geopolitical risks in the Middle East, and domestic political developments ahead of the US presidential election. 

Nonetheless, the volatility outburst underscores the precarious and non-linear path to policy normalisation. As central banks attempt to delicately balance cooling demand whilst avoiding a hard landing, markets are prone to air pockets. Investors should brace for choppy and potentially divergent conditions across asset classes in the coming months. In this environment, selectivity and relative value are crucial. 

Within equities, companies with pricing power and resilient margins are likely to weather the storm better. In fixed income, high-grade credit offers attractive yields with lower default risk. Wealthy nations’ bonds are a strong addition to the portfolio aside from plain vanilla US Treasuries given global recessionary risks. 

Looking ahead, incoming US inflation and jobs data, as well as the Fed’s Jackson Hole Symposium, will be key watchpoints for any hints of a monetary policy pivot. More broadly, staying nimble and reactive will be critical as even small data surprises can spark outsized market moves in this fragile environment. While the path ahead might remain bumpy, the volatility spike does not fundamentally alter the broader macroeconomic backdrop at this stage. 

In this “middling” macro regime, a focus on quality, value, and resilience across asset classes remains the prudent approach. If the market’s ups and downs leave you feeling a bit queasy, just remember: every roller coaster eventually comes to a stop. 

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

Chloe

07/08/2024

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Brooks Macdonald Daily Investment Bulletin

Please see below article received from Brooks Macdonald yesterday, which provides a global market update as we enter August.

What has happened

If, like me, you had holiday and time away from markets in July, then you probably missed something of a game of two halves in markets in the month that wrapped up yesterday. Early on in July, markets at an index level were doing well, with the US S&P500 equity index hitting a succession of record highs. We also saw government bond prices up (and bond yields down) during the month, on the back of hopes that interest rate cuts would increasingly start to filter through, especially in the case of the US on the back of a softer US inflation print. But about half-way through July, equity market leadership shifted, as tech stocks fell. The so-called ‘Magnificent 7’ group of US megacap tech stocks were down over -10% from peak to trough, entering technical correction territory. Given their weight in US equity indices, that was a big headwind for larger-stock index performance. Instead, we saw a meaningful rotation into the smaller capitalised end of the stock market, as rate cut hopes lifted the outlook for smaller companies who are generally much more sensitive to funding and credit conditions. Indeed, the outperformance in July of the US Russell 2000 small cap equity index over the US Nasdaq technology equity index was the largest in any month since February 2001. Coming back to tech, it was a better day yesterday, with good results from Meta after the US close driving the company’s shares up over +7% in after-market trading. Nvidia shares meanwhile staged an impressive one-day rally up +12.81% yesterday.

US job data points to further cooling, supporting Fed rate cut hopes

A broad gauge of US labour cost growth closely watched by the US Federal Reserve (Fed) cooled in the calendar Q2 by marginally more than analysts had been forecasting.  Out yesterday, the US Employment Cost Index (ECI) a broad measure of labour costs, increased by +0.9% in Q2 sequential quarter on quarter (QoQ). This was weaker than the +1.0% expected, after rising +1.2% QoQ in Q1. In year-on-year terms, the ECI was up +4.1% in Q2. Separately, a report from the US-based ADP Research Institute showed US companies added the fewest number of jobs in July since January, while wage growth fell to the slowest pace since 2021 for both so-called ‘job-changers’ and ‘job-stayers’ alike. That was a constructive backdrop for the Fed meeting later in the day, where rates yesterday were kept on hold as expected, but Fed Chair Powell pointed markets in the direction of a first US rate cut in the current cycle to likely come in September. Specifically, Powell said that if the Fed get the data that they hope to get, then a reduction in the policy rate could be on the table at the September meeting.

Investors are proving to be less forgiving

The current calendar Q2 corporate reporting season is seeing a somewhat mixed picture unfold, and in turn it is prompting a somewhat mixed reaction in markets. We highlighted this in our post-Asset Allocation Committee meeting communication out earlier this week. That is to say, according to Factset who have reviewed the latest US S&P500 company reports, while the percentage of companies reporting positive earnings surprises is above average levels, the magnitude of earnings surprises is below average levels. Furthermore, while the aforementioned index is reporting its highest year-over-year earnings growth rate since Q4 2021, the market has been rewarding positive EPS surprises reported by companies less than average and punishing negative EPS surprises reported by companies more than average.

What does Brooks Macdonald think 

The market reaction to the latest round of US quarterly earnings results makes sense. Mindful that we are roughly only coming up towards half-way through the results season, nonetheless, these results are landing having followed a period of very strong equity market performance, where the US S&P 500 equity market had notched up fresh record highs as recently as mid-July. As a result, there is a lot less room for manoeuvre left in equity valuations should company results, or their outlooks not beat expectations, in particular focused around megacap US tech stocks. In valuation terms, the MSCI USA equity index 12-month forward Price-to-Earnings Per Share ratio is currently 21.00x versus the past 30-year average of 16.98x. Interestingly, such a valuation gap versus historical averages is virtually non-existent when looking at equity markets on a global ex-US basis. Here, the MSCI All Country World excluding US equity index trades on 13.48x versus the average since 2001 of 13.44x.

Index 1 Day1 Week1 MonthYTD
 TRTRTRTR
MSCI AC World GBP 1.6%2.2%0.1%12.4%
MSCI UK GBP 1.1%2.7%2.5%10.5%
MSCI USA GBP 1.6%2.5%-0.3%15.4%
MSCI EMU GBP 0.5%0.6%-0.3%5.7%
MSCI AC Asia Pacific ex Japan GBP 1.2%0.9%-1.4%8.0%
MSCI Japan GBP 4.1%2.2%4.2%11.8%
MSCI Emerging Markets GBP 1.2%0.9%-1.2%7.1%
Bloomberg Sterling Gilts GBP 0.5%1.3%1.9%-1.1%
Bloomberg Sterling Corps GBP 0.3%0.9%1.8%1.4%
WTI Oil GBP 4.2%1.1%-5.9%8.1%
Dollar per Sterling 0.2%-0.4%1.7%1.0%
Euro per Sterling 0.1%-0.3%0.6%3.1%
MSCI PIMFA Income GBP 0.9%1.6%1.3%7.0%
MSCI PIMFA Balanced GBP 1.0%1.7%1.2%8.0%
MSCI PIMFA Growth GBP 1.1%1.9%1.0%9.9%
Index 1 Day1 Week1 MonthYTD
 TRTRTRTR
MSCI AC World USD 1.6%1.5%1.6%13.1%
MSCI UK USD 1.2%2.0%4.1%11.2%
MSCI USA USD 1.6%1.8%1.2%16.1%
MSCI EMU USD 0.6%-0.1%1.3%6.3%
MSCI AC Asia Pacific ex Japan USD 1.2%0.2%0.2%8.6%
MSCI Japan USD 4.2%1.5%5.8%12.4%
MSCI Emerging Markets USD 1.2%0.3%0.3%7.7%
Bloomberg Sterling Gilts USD 0.6%0.7%3.5%-0.3%
Bloomberg Sterling Corps USD 0.4%0.3%3.4%2.2%
WTI Oil USD 4.3%0.4%-4.5%8.7%
Dollar per Sterling 0.2%-0.4%1.7%1.0%
Euro per Sterling 0.1%-0.3%0.6%3.1%
MSCI PIMFA Income USD 0.9%0.9%2.9%7.6%
MSCI PIMFA Balanced USD 1.0%1.0%2.7%8.6%
MSCI PIMFA Growth USD 1.2%1.2%2.6%10.6%

 Bloomberg as at 01/08/2024. TR denotes Net Total Return.

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

Chloe

02/08/2024

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The Daily Update | The Mirage of Western Prosperity: A Debt-Fuelled Illusion

Please see below article received by EPIC Investment Partners yesterday, which provides a global economic update.

The global economy has been spluttering for years, even before the pandemic struck. Sluggish growth, especially in economic powerhouses like China and the G7, painted a grim picture. We speculated many years ago that this slowdown was likely caused by shrinking working-age populations, a demographic trend that has persisted post-pandemic. Despite some recent glimmers of recovery, the underlying problems remain, masked by a perilous reliance on debt. 

Take the United States, for example. A 2.7% GDP growth rate might seem rosy, but it’s a mirage. The US government is running a gargantuan 7% budget deficit, borrowing far more than it earns. This unsustainable fiscal policy conjures an illusion of growth, but it’s a house built on sand. 

The situation isn’t much rosier in other major economies. Growth forecasts for 2024 in nations like Canada, France, Germany, and the UK are all significantly lower than their pre-pandemic levels in 2019. While US employment figures might appear robust, the reality is that the economy is propped up by government spending, not genuine productivity. 

Adding to the unease is the alarming level of debt in these nations. Except for Germany, all G7 countries have a debt-to-GDP ratio exceeding 100%. Servicing such high levels of debt at interest rates above GDP growth is simply not sustainable. 

This addiction to debt has ominous consequences. As Jerome Powell, the Chairman of the Federal Reserve, has cautioned, this trajectory is unsustainable. In a recent speech, Powell emphasised the gravity of the situation: “The U.S. federal government is on an unsustainable fiscal path. The debt is growing faster than the economy. It’s as simple as that.” 

Powell’s stark warnings underscore the precarious nature of the current economic situation. The US, and indeed much of the Western world, is living on borrowed time. Ironically, while there is much handwringing over ESG and sustainability policies, there’s little discussion about whether government spending itself is sustainable. 

In light of these mounting pressures, substantially lower interest rates are not just likely, they are inevitable. The sheer weight of accumulated debt, coupled with anaemic economic growth, leaves central banks with few options. This shift towards lower rates is not a policy choice, but an economic imperative. 

The question is not whether interest rates will fall, but how far and how fast. 

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

Chloe

26/07/2024

Team No Comments

What does the election mean for UK markets?

Please see below article received from Jupiter Asset Management this morning, which provides their market predictions following the Labour Party’s victory in the UK General Election. 

As the nation wakes up after polling day, the public, press and markets will be digesting news of the result. To give an investment perspective on what it means for markets, we asked some of our experts for their immediate reaction.

Matthew Beesley, CEO

“The UK market has very healthy underlying fundamentals and is trading at near all-time high levels. Yet frustratingly at the same time, the valuations of UK stocks are also at record low levels because of the political uncertainty of the last few years. There is every reason to hope that the new government will usher in a period of political stability, prioritise the Edinburgh reforms and hold themselves accountable to a clear industrial growth strategy that will cement the UK’s recovery and turn it back into a key focus for international investors.”

Adrian Gosden and Chris Morrison, Investment Managers, UK Equity Income

“This election was decided without major policy announcements from either of the main parties, and we are hopeful that a stable political backdrop will prove to be good for the economy and for market sentiment. UK equities have enjoyed solid performance this year to date, and we are looking for a sustained rebound in the market, helped by supportive factors such as weakening inflation, a potential Bank of England rate cut, attractive valuations for UK equities and good earnings performance from UK companies.”

Tim Service, Investment Manager, UK Small & Mid Cap Equities

“After nearly a decade of political shocks in the UK, today’s election result feels unusual for a Labour win having been so predictable. I expect this to be good news for the UK equity market over the medium-term, if for no other reason that markets and companies alike crave certainty. A government with a clear mandate will give companies confidence to hire people and invest in the future, while markets can better discount future company profits accurately.

However, ‘certainty’ is a still a relative concept given Labour’s campaign rhetoric to deliver change – so it’s important for investors to consider how new legislation, tax and spending plans might affect individual companies. We hope that Labour can start addressing productivity issues through planning reform and infrastructure investment, while also reenergising the UK’s capital markets. We are encouraged that Labour seems to recognise the problems, but would stress the urgency with which the remedies are required.”

Mark Nash, Huw Davies and James Novotny, Investment Managers, Fixed Income – Absolute Return

“Relative to the high level of uncertainty seen in the aftermath of international elections over the last few weeks (South Africa, India, Mexico, EU, France) and the concerns around President Biden’s performance at the first US presidential debate, the UK election has been something of a non-event. Labour’s victory means that we have now entered a period of relative stability in UK politics which is in stark contrast to the possibility of continued volatility elsewhere, especially in the run up to the US presidential elections in November. The UK could well look like a haven of political stability, a very different landscape to the years since the Brexit referendum.

The new government has to contend with the perilous scale of the UK’s twin deficits, with the adverse market reaction to Liz Truss’s mini budget almost two years ago still vivid in our memories. Labour will need to convince the market, and also the electorate, that they are fiscally prudent while still improving the shoddy state of UK public services and anaemic productivity and growth profile, none of which will be easy.

Growth will be their get-out-of-Jail free card, easier said but hard to deliver. They look likely to rest their hopes on a better trade deal with the EU to try and reduce friction at the border with the EU, and also by liberalising the UK planning laws. If they can succeed in this endeavour, then there may be some renewed hope for better UK growth along with less inflationary pressure within the UK. Despite the UK’s fiscal position, we believe Gilt yields look cheap compared to other countries that have a weak fiscal position (e.g. France) so there may well be some flows towards Gilts from other challenged sovereign bond markets that continue to have political problems now our election is done and dusted.”

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

Chloe

05/07/2024

Team No Comments

Tatton Monday Digest

Please see the ‘Monday Digest’ article below, received from Tatton Investment Management this morning. 

Tatton Monday Digest Politics, where policy takes a back seat

Last Friday marked the end of the second quarter, culminating in the day after the first 2024 US Presidential debate, widely seen as disastrous for Biden, yet financial markets have remained relatively steady. Institutional investors are currently engaged in their scheduled portfolio rebalancing, however, this time it is causing minimal disruption across asset classes. 

Thursday’s debate was anticipated to scrutinise presidential fitness rather than policy details. Biden’s disastrous performance raised concerns even among loyal Democrats, potentially jeopardising his electoral viability with any loss of voter support being very damaging.

We think betting markets show a more unbiased indicator than polls, reflecting a notable shift post-debate. Trump’s odds improved to 54.8%, a 4% gain, while Biden’s plummeted below 25%, a decline exceeding 15%. Betfair Exchange Politics indicates a 60% likelihood of Republican victory, signalling diminished prospects for Democrats if Biden remains their nominee.

Amidst debate fallout, California Governor Gavin Newsom emerged as a prominent alternative in market discussions should Democrats opt for a candidate change. The viability of such a shift hinges on internal polling and strategic calculations within the Democratic Party, which may in flux at the moment.  

Market reactions following the debate were almost blasé. US stock futures saw modest gains, contrasting with a decline in US Treasury bond prices (indicative of rising yields). The dollar also rose. International stocks were a little weaker. This implies that investors are currently expecting a slight near-term benefit for US growth should Trump win, but that it may also mean a worse budget deficit.

Looking beyond the US, global elections share common themes: aspirational manifestos mean that most important policies will not be clear until well after the elections are finished amidst heightened voter polarisation. In France the right wing did well in the first round of voting, but outright victory may be hampered in the second round by tactical voting simply to prevent the Le Pen from winning. In the UK, Labour’s centrist manifesto seems less alarming to markets, yet clarity on actual policies also remains vague.

Compared to the start of the year, global economic data remains mixed with a slight positive bias, bolstered by upward revisions in world growth forecasts. The Chinese economic policy push to bolster economic activity has driven down goods inflation, but this signals weakening domestic demand. The US shows a loss of growth momentum with slew of profit warnings from consumer-facing companies ahead of Q2 results. Consumer caution over inflation has tempered spending, impacting sectors like housing and consumer goods.

Gentle economic slowing that allows the Fed to cut rates, should lead to rebounding growth amid an otherwise stable dynamic characterised by tight labour supply driving business investment into productivity enhancing technology advancements. Europe is in a similar position although admittedly with softer underlying growth.

Looking ahead, companies broadly remain on a positive path, but market risk will continue to emanate from policy volatility uncertainties. We’ll know a bit more next week after the UK elections and possibly a lot more after the second round of the French election 

Basel III banking regulation – the Unending Endgame

Last week marked the 50th anniversary of the Herstatt Crisis, a pivotal event that triggered the establishment of the Basel Committee on Banking Supervision by the G-10 nations. In 1974, Herstatt Bank’s collapse during currency trading left a $620 million loss ($400bn today) on the global banking sector, prompting G-10 nations to form the Basel Committee on Banking Supervision to mitigate such risks.

Initially overseen by the Bank for International Settlements in Basel, Switzerland, the committee aimed to regulate an increasingly interconnected global financial system. It took 14 years, until 1988 for Basel I, which introduced international banking regulations focusing on capital adequacy, classifying assets into risk categories and requiring banks to maintain capital equal to at least 8% of their risk-weighted assets.

It was hoped Basel I would prevent bank failures spilling into the global financial system, but it failed. The Barings Bank collapse in 1995 and the Long Term Capital Management debacle in 1998 underscored its limitations and led to Basel II. Introduced in 2004, it aimed to enhance risk management and transparency by assessing asset risks more accurately, however it also failed spectacularly to prevent the 2008 financial crisis. This led to the development of Basel III, implementation of which began in 2010 and continues, albeit slowly, with the final phase known as the “Basel III Endgame.”

Basel III extended Basel II’s focus on risk management – increasing minimum capital requirements, raising common equity levels from 2% to 4.5% of risk-weighted assets. It introduces capital buffers to absorb losses during economic stress, mandates liquidity ratios to ensure banks maintain high-quality liquid assets and imposes stricter requirements on globally significant banks.

However, Basel III places greater weight on banking regulation but not on other financial institutions such as private equity and credit firms, which are now seeing stronger equity returns. Last week US bank shares rose when the US Federal Reserve Recent announced revision to moderate the impact on large banks with sizable trading operations reducing the increases in capital adequacy to about 5% from a potential 16% rise.

In Europe, implementation has been delayed pending alignment with potential US revisions. Politics may disrupt the final outcomes as well. It is worth remembering, that Trump removed some of the regulations for US regional banks in his first term and he may seek to allow US banks more latitude.

Perhaps more likely is that the non-bank players, especially the private equity and credit firms, will seek to prevent similar regulation being applied to them, as highlighted by the Bank of England last week when it reenforced the need for international co-ordination for private equity  cross jurisdictions.

So, for the banks, “Endgame” might be applied to this Basel episode. For private equity firms, their episode will probably be called “Opening Gambit”.

The rise and fall of Ocado

Ocado, known for its distinctive green and white delivery vans and association with M&S, began in 2000 as a pioneering online grocery service in the UK. Initially praised for its innovative technology and logistics, including automated Customer Fulfilment Centres (CFCs), Ocado quickly gained market traction. Its 2010 stock market debut saw shares rise from an initial 180p to nearly 600p, buoyed by efficient operations and a partnership with Waitrose, which bolstered its IPO.

A turning point for Ocado was licensing its Smart Platform technology globally, securing deals with major retailers like Morrisons, Kroger, Casino, and Aeon. This expansion underscored Ocado’s tech prowess and potential for substantial revenue growth, reflected in its share price peak of around 2886p in 2020.


However, the grocery sector’s fierce competition and narrow margins strained Ocado, despite its technological edge. High costs associated with building and maintaining CFCs, alongside increasing competition from Amazon Fresh and traditional grocers going digital, pressured Ocado to continually innovate.

The COVID-19 pandemic briefly boosted Ocado as online grocery demand surged. However, the temporary spike strained operations and inflated costs, raising concerns about long-term sustainability post-pandemic. Analysts, including Morgan Stanley, now project prolonged cash flow challenges and debt accumulation.

Morgan Stanley’s cautious forecasts include fewer CFC deployments and heightened debt levels, signalling ongoing operational and financial hurdles for Ocado. This shift in sentiment has driven a significant decline in Ocado’s share price from its peak to just 281p last week, underscoring investor scepticism about its ability to manage these challenges effectively.

Looking ahead, Ocado must focus on cost management, margin improvement, and expanding its technological services to new markets to regain investor confidence. While its innovative approach sets it apart, navigating the competitive and cost-sensitive grocery sector remains a formidable task.

Ocado’s journey serves as a cautionary tale in the tech industry, highlighting the complexities of sustaining growth amid operational pressures and competitive forces. Its evolution underscores the volatile nature of high-growth enterprises reliant on borrowed potential, where minor shifts in profitability drivers can lead to significant market reactions.

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

Chloe

01/07/2024

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The Daily Update | From Central Banks to NFA Predictions

Please see below ‘Daily Update’ article received from EPIC Investment Partners earlier this afternoon, which provides global economic analysis.

The Bank of England (BoE) maintained interest rates at 5.25%, as widely anticipated, despite headline inflation reaching the 2% target in May. Governor Bailey said: “It’s good news that inflation has returned to our 2% target. We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.” 

The BoE’s primary concern, mirroring its US counterpart, is persistent service inflation, which only marginally decreased to 5.7% from 5.9% in April. The central bank attributed part of these increases to regulated prices and volatile components, rather than underlying inflationary pressures. 

As in the previous meeting, seven Monetary Policy Committee (MPC) members favoured maintaining rates, while two advocated for a 25bps cut. However, this decision was described as “finely balanced,” suggesting a more nuanced discussion around potential rate cuts. 

The MPC meeting minutes revealed stronger-than-expected economic growth, the BOE forecast 0.5% GDP growth in Q2 2024, up from the 0.2% projected in May. This growth, partly driven by increased government spending, marks a clear recovery from last year’s recession. However, MPC members expressed concerns about persistent wage growth potentially leading to further price increases, and the risk of rising energy prices in autumn contributing to higher inflation. 

The MPC’s subtle shift in guidance, focusing more on the August forecast round rather than immediate data releases, indicates a more forward-looking approach. This change suggests the committee may be becoming less reactive to short-term data fluctuations and more focused on broader trends. 

Barring significant surprises in June’s inflation data, the BoE could commence its easing cycle in August. Markets are currently pricing in a ~70% chance of a cut in August, up from ~30% ahead of the BoE announcement.  

The upcoming change in MPC personnel, with Broadbent’s departure and the more hawkish Clare Lombardelli’s arrival, introduces an element of uncertainty that could influence the timing of the first cut. 

In other news, the Swiss National Bank (SNB) reduced rates by 25bps to 1.25%, marking its second cut this cycle. Unlike many Western countries, Switzerland’s inflation has fallen below 2%, stagnating at 1.4% in May. Of note, the SNB expressed willingness to intervene in the foreign exchange market, given the recent surge in the franc amid European political uncertainty. 

Remember our Net Foreign Asset (NFA) model that we use to predict Euro success? Well, it’s been a mixed bag. While the wealthy nations have largely triumphed, a few upsets have left our Fixed Income team scratching their heads. Belgium (6 star NFA) fumbled against Slovakia (2 star), but they’ve got another shot at glory against Romania (2 star) this weekend. Meanwhile, our model suggests the Netherlands (7 star) should outshine France (3 star) tonight, despite the latter being one of the tournament favourites. Will the Dutch make it rain Oranje, or will the French prove that football prowess is not about wealth? 

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

Chloe

21/06/2024