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Brooks Macdonald – Weekly Market Commentary

Please see below an article published by Brooks Macdonald yesterday (24/01/2022) detailing their views on markets over the last week:

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

Please keep safe and healthy.

Carl Mitchell – Dip PFS

Independent Financial Adviser

25/01/2022

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Why oils, metals and banks hold the key to the FTSE 100 in 2022

Please see below, an article from AJ Bell examining the key determinants of the FTSE 100 performance in 2022 – received late yesterday afternoon – 16/01/2022

The FTSE 100 is up by around 10% over the past 12 months, and it is now trading within a couple of percentage points of the all-time closing high of 7,878 reached back in May 2018. Vaccinations, an end to lockdowns (in England, at least), ultra-loose monetary policy from the Bank of England, fiscal support from the Government, and a global economic recovery are all possible reasons for the headline index’s steady advance from the pandemic-induced panic low of 4,994 in March 2020.

“The question now is if catalysts are required for the FTSE 100 and UK equities to make further gains, and the sort of advances which justify exposure within the realms of a balanced asset allocation.”

But advisers and clients must look forward when they plan portfolios, not backwards, so the question now is if catalysts are required for the FTSE 100 and UK equities to make further gains, and the sort of advances which justify exposure within the realms of a balanced asset allocation.

Dividend payments are one possibility. A prospective yield of 3.9% for 2022 from ordinary dividends, with the prospect of further special payments on top, may appeal to some, although with UK headline inflation running at 5.1%, according to the consumer price index, that part of the investment case for the FTSE 100 and UK equities looks less enticing than it once did.

Merger and acquisition activity is another. Over 70 UK quoted firms received bids in 2021 and two FTSE 100 firms were acquired: insurer RSA (in a deal that was announced in 2020) and grocer Morrisons. Overseas buyers snapped up both and a pound that has failed to regain its pre-Brexit poll levels from 2016 may have had a role to play here, as it made these assets look cheaper to euro- and dollar-denominated buyers.

Bid activity suggests there is value to be had, but value still needs something to happen to crystallise it. And perhaps that takes us on to earnings momentum.

Go with the flow

The good news is that earnings momentum remains positive for the FTSE 100 as analysts continue to increase their profit estimates.

“The good news is that earnings momentum remains positive for the FTSE 100 as analysts continue to increase their profit estimates. The less good news is that aggregate profits growth for the index is expected to slow to a virtual crawl following 2021’s rebound.”

Aggregate earnings forecasts for the FTSE 100 in 2022 and 2023 continue to rise

Source: Company accounts, Marketscreener, analysts’ consensus forecasts

The less good news is that aggregate profits growth for the index is expected to slow to a virtual crawl following 2021’s rebound. Not all of the numbers are in yet, but total pre-tax profits for the FTSE 100 are expected to have doubled in 2021. While it is unrealistic to expect such a torrid pace to continue, advisers and clients could be forgiven for looking askance at estimates which look for 6% profits growth in 2022 and just 1% in 2023.

Aggregate earnings growth for the FTSE 100 is expected to slow dramatically in 2022 and 2023

Source: Company accounts, Marketscreener, analysts’ consensus forecasts

A matter of mix

The reason for this sudden go-slow lies largely with the FTSE 100’s mix of constituents. Without wishing to be too pejorative about it, the index is largely made up of the unpredictable (oils and miners), the indigestible (banks and insurers) and the downright stodgy (utilities, telecoms and to a lesser degree pharmaceuticals). A racy mix it is not, at least in the low-growth, low-inflation, low-interest-rate environment that has dominated for the past decade or more.

The FTSE 100 is heavily slanted towards miners, financials and oils

Source: Refinitiv data, Marketscreener, analysts’ consensus forecasts

But even here may be where opportunity lies because there is just the chance that the environment is changing. Markets are no longer preoccupied with where inflation has gone and how low interest rates could go, but where inflation could peak and how high interest rates may have to go to rein it in.

“Markets are no longer preoccupied with where inflation has gone and how low interest rates could go, but where inflation could peak and how high interest rates may have to go to rein it in. In this environment, the FTSE 100 could come into its own.”

In this environment, the FTSE 100 could come into its own. It has underperformed in the world stage since the Brexit vote (if not before). Underperformance can mean unloved and unloved can mean undervalued, at least from a contrarian’s perspective. And undervalued is always a potentially interesting starting point, with the FTSE 100 looking decent value relative to its own history on around 13 times earnings for 2022.

Granted, its unusual, or at least distinctly twentieth-century, earnings mix (lacking in technology, abundant in commodities) may mean the FTSE 100 deserves a low rating relative to international peers such as the USA, which is packed with tech, biotech, social media and online winners, and an equally large range of potential future disruptors.

FTSE 100 may take its lead from commodities in 2022

Source: Refinitiv data

But if inflation runs hot and stays hot, then ‘real’ assets such as commodities, or paper claims on them via shares in mining and oil producing, may not be such a bad place to be. Nor may banks, which would welcome, at least to some degree, higher interest rates and a steeper yield curve, as they will help to fatten up net interest margins and thus profits (so long as higher borrowing costs do not weigh too heavily on customers’ ability to meet interest payments and return principal). The FTSE All-Share Banks index is up by 10% this year already and can point to an advance of more than 25% over the past 12 months, so the market is starting to look upon the banks more favourably than it has for a while.

Banking stocks are warming to steeper yield curves

Source: Refinitiv data

An index that gets 62% of its forecast profits and 51% of its forecast dividends from miners, financials and oils may therefore sound a bit unpredictable, indigestible or downright stodgy. But if inflation takes a hold, then the FTSE 100 might start to look more tempting.

Equally, if even modest interest rates slow the global recovery right down, or even tip it over into a recession, or a new viral variant does that job, then the UK’s heavyweight index could yet struggle to move past that May 2018 peak and continue to lag its global peers, many of whom already trade at or near new all-time highs, including America, France, Germany and India.

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

Alex Kitteringham

17/01/2022

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The Dirty Business of Greenwashing

Please see the below article received from AJ Bell late on Friday afternoon:

The 2021 United Nations Climate Change Conference, known as the COP26 summit, was held in Glasgow earlier this month and brought together heads of state, government leaders and important industry figures from nearly 200 nations. The main objectives of the conference were to restrict the level of global warming to 1.5 degrees Celsius above pre-industrial levels, and to achieve net-zero emissions by 2050.

The global finance industry has always been seen as an important factor in the drive to achieve climate change targets, and indeed the COP26 meeting included a dedicated ‘finance day’ where key players from governments, central banks and business discussed how the industry could rise to meet the ambitious challenges of the conference

Investment strategies where values are taken into account, often known as Environmental, Social and Governance (ESG) investing, have been available for many years, but they are now very well established as a strong market trend, with consumers around the world placing ever-larger amounts into ESG products. A recent FCA survey indicated that 80% of respondents wanted their investment portfolios to “do some good” as well as providing them with a financial return, and 71% wanted to invest in a way that “is protecting the environment”.

For their part, the UK authorities such as HM Treasury, the Bank of England and the Financial Conduct Authority (FCA) have been working on a number of initiatives. On the COP26 finance day, the FCA published its strategy on ESG, indicating its desired outcomes and the actions needed to achieve them.

The strategy codifies a number of items that the regulator has previously announced, with themes of transparency, trust, tools, transition, and team. The overarching objective is to support the financial sector to drive positive change, particularly in the transition to net zero emissions.

One potentially important piece of work is the discussion paper published by the FCA on 3 November – Sustainability Disclosure Requirements and Investment Labels. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) contains a variety of provisions, including an obligation for financial advisers to take into account the ESG/sustainability preferences of clients as part of the advice process. SFDR was not implemented into UK law prior to Brexit, but the FCA has now launched its own Sustainability Disclosure Requirements which will cover much of the same ground as SFDR would have done.

Although the discussion paper is centred around the investment management industry, financial advisers are also referenced as a critical part of the value chain. The FCA’s proposals for advisers are not fully fleshed out in its paper, but a clear steer is given, so advisers should pay keen attention to the regulator’s moves in this area:

“…we recognise the important role that financial advisers play in providing consumers with sufficient information to assess which products meet their needs. We are also exploring how best to introduce specific sustainability-related requirements for these firms and individuals. Building on existing rules, a key aim will be to confirm that they should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable. We will develop proposals on this in due course, working with Government…”

One core problem associated with the area of ESG investing is that of labelling. The FCA has a concern that there is the potential for ‘greenwashing’, where sustainability claims made by investment management firms do not stand up to scrutiny. There is a litany of different labels which can be confusing for investors and advisers looking for suitable products. These products can be variously labelled as ethical, ESG, SRI, responsible, green, impact and so on. With labels being an important driver of consumer choice, the FCA is looking to enhance trust in this area and develop a set of objective classifications for products. Its proposal is to classify them into five high-level categories, as follows:

  • Not promoted as sustainable’ – Here, sustainability risks have not been integrated into the investment philosophy of the product and there are no specific sustainability objectives.
  • Responsible’ – The impact of sustainability factors on risk and return has been considered. There should be a level of ESG integration into the product’s management, with evidence of ESG capabilities and resources from the manager, and demonstrable investment stewardship.
  • Sustainable – Transitioning’ – Products with sustainability characteristics, themes or objectives which do not yet have a substantial proportion of underlying assets that meet the sustainability criteria set out in the UK Taxonomy, but the expectation is that this proportion will rise over time.
  • Sustainable – Aligned’ – Products with sustainability characteristics, themes or objectives which have a substantial proportion of underlying assets that meet the sustainability criteria set out in the UK Taxonomy.
  • Sustainable Impact’ – Products with explicit objectives to deliver net positive social and/or environmental impact as well as a financial return.

Alongside these labels, the FCA has indicated its intention for firms to provide the most pertinent sustainability-related information via consumer-facing disclosure, in order for investors to be armed with all the information required for them to make a considered choice with their capital.

The FCA’s proposals are at a very early stage, but the direction of travel is fairly clear. ESG investment is growing at a rapid pace, driven by strong consumer demand and a significant push from regulators and governments around the world. In many ways, the industry remains somewhat fragmented and its labelling can be confusing for customers. With increasing choice from asset managers, and more advisers incorporating ESG products into their advice process to meet their clients’ preferences, the regulator’s moves to build trust make the industry clearer and more harmonised will be welcomed in many quarters.

Our Comment

When we first started to write about ESG around 18 months ago, we commented that we expected the regulator to react to the growing ESG trends in the investment world.

As you can see here, we were not wrong, it seems like this is the start of their push towards giving us guidelines around ESG investing.

It’s not a bad thing though. Greenwashing is a major issue in the industry. The more investors read and hear about ESG investments, the more they discuss it with their advisers and the more likely they are to want to invest in this way.

This unfortunately means that some non ESG approved investments won’t want to lose out on the investors money and will greenwash their way into getting people to invest with them.

The proposed new disclosure requirements will help to prevent this in the industry by making the labelling of investments more clear and transparent.

Keep checking back for more ESG related content and our usual market commentary from some of the world’s leading fund management houses.

Andrew Lloyd DipPFS

29/11/2021

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Brooks MacDonald Daily Investment Bulletin: 22/09/2021

Please see below the Brooks MacDonald Daily Investment Bulletin received by us yesterday, 22/09/2021:

What has happened

European indices posted strong gains yesterday, offsetting much of Monday’s weakness, however US bourses performed less well remaining mostly flat from Monday’s close.

Evergrande

Whilst Evergrande has been at the centre of the financial world this week, Chinese markets have been on holiday. When the equity markets opened for trading this morning shares dipped however the People’s Bank of China injected CNY 90bn of liquidity into the system to steady investor nerves. Reports are suggesting that Evergrande will make the domestic coupon payment due tomorrow however there has been no word yet as to payments on the foreign dollar denominated bond. The interest payments due on bank loans at the start of the week are reportedly yet to be paid so plenty of moving parts to this story. Expectations are pointing to a restructuring orchestrated by Chinese authorities and for the government to allow Evergrande itself to default but to take steps to ensure there isn’t extensive contagion into either Chinese property prices or the property investment sector.

US Infrastructure

The bipartisan $500bn physical infrastructure bill that passed the Senate vote but was held up in the House is now said to be moving to a House vote on Monday. This has less to do with any movement on the broader ‘social infrastructure’ bill but more to do with the proximity of the debt ceiling which is now demanding the focus of Democrats and the White House. Should the Republicans not support the government funding bills the White House will be forced to use budget reconciliation to pass the bills. Given there are procedural limits on the number of reconciliation bills in a Congress year, this risks Democrats having to hastily incorporate the least contentious parts of the $3.5 trillion social infrastructure bill, effectively watering down the size and scope quite considerably.

What does Brooks Macdonald think At 7pm UK time we will receive the latest policy statement from the Federal Reserve followed by a press conference by the Fed Chair. Expectations are for the bank to continue to guide to tapering this year but with the caveat that the economy must remain on track for the central bank to pull the taper trigger. This optionality will be important for market sentiment as if the Fed leaves a delay of taper on the table, even if it’s likely they won’t use it, this will provide a release valve for market concerns over the coming months.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well

Paul Green DipFA

23/09/2021

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Powell reassures markets that the Fed wont rush rate hikes

Please find below an update from Invesco, received late on Friday, reassuring markets that the Fed won’t rush rate hikes.

Kristina Hooper, Chief Global Market Strategist, Invesco Ltd

Key takeaways

Some Fed officials took a hawkish tone

At Jackson Hole, several Federal Reserve officials were emphatic that tapering needs to begin – and soon.

Powell’s remarks calmed markets

But Powell offered a kinder, gentler view of tapering, declining to establish a timeline.

No rush on rate hikes

Powell also noted that rate hikes have a more stringent set of conditions and are uncoupled from tapering plans.

Last week — in the dead of August — the Kansas City Fed held its annual Jackson Hole Symposium. In a true sign of the times, the symposium was not actually held in Jackson Hole this year, as had been originally planned; instead, it was held virtually. This underscored the reality that things are not back to normal.

Some Fed officials took a hawkish tone

In the run-up to Federal Reserve Chair Jay Powell’s speech, several Fed officials were emphatic that tapering needs to begin soon. Kansas City Fed President Esther George said she expects the Fed to start tapering shortly. Dallas Fed President Robert Kaplan called for tapering to be announced by September and to begin by October or soon thereafter. Perhaps most surprising — and most hawkish — were the words of St. Louis Fed President James Bullard.

Bullard worried that the Fed’s balance sheet expansion is creating a housing bubble. He said that the tapering process should be finished by the end of the first quarter. What’s more, he articulated serious concerns about inflation; he seems sceptical that inflation is actually transitory and argued that by March 2022, the Fed would be able to assess whether inflation had moderated. He suggested that if inflation hadn’t moderated, the Fed would have to get “more aggressive,” which I would presume to mean rate hikes, and that would be sooner than expected. Not surprisingly, these hawkish comments rattled markets.

Powell’s remarks calmed markets

But then came Powell’s speech, and markets breathed a sigh of relief.  It’s true that things are certainly not back to normal, and Powell made that clear. He recognized that the pace of the recovery has exceeded expectations — and has been far swifter than the recovery from the Great Recession, with even employment gains having come faster than expected. However, he underscored the unusual nature of the recovery – he described it as “historically anomalous” — with personal income actually having risen. He said that while labour conditions had improved significantly, they were still “turbulent.” And of course, he pointed out that the economic recovery is being threatened by the resurgence of the pandemic.

Powell also underscored the unevenness of the economic recovery, that the Americans least able to carry the burden are the ones who have had to do just that. He emphasized that the services sector has been disproportionately affected, noting that total employment “is now 6 million below its February 2020 level, and 5 million of that shortfall is in the still-depressed service sector.”1

A kinder, gentler tapering

While George, Kaplan and Bullard took a more hawkish stance on tapering, Powell offered a kinder, gentler view. He recognized that the “substantial further progress” test for inflation had been met, but did not announce the start of tapering, or even call for it to be announced by September. He acknowledged that at the July Federal Open Market Committee (FOMC) meeting, most participants believed it would be appropriate to taper this year. And he recognized that in the month since the last FOMC meeting, there has been more progress on the economic front — but that there has also been further spread of the COVID-19 Delta variant. My read on this is that tapering is likely to be announced soon, but that Powell would like to maintain some flexibility given the uncertainties presented by COVID.

Powell seemed more certain in his assessment that inflation is largely transitory. He offered up compelling arguments to support that view, especially pointing to longer-term inflation expectations remaining anchored. I found this gave credibility to his more dovish stance.

The key takeaway: A ‘conscious uncoupling’

Powell channelled his inner Gwyneth Paltrow in asserting that rate hikes are uncoupled from tapering. In other words, he suggested that we shouldn’t expect rate hikes to begin just because tapering has ended. He asserted that rate hikes have a different and far more stringent test: “until the economy reaches conditions consistent with maximum employment and the economy is on track to reach 2% inflation on a sustainable basis.”1 This was perhaps the most important takeaway from the speech, given that markets seem far more concerned with when rate hikes will begin rather than when tapering will begin.

Looking ahead

All eyes will be on the August jobs report, due out at the end of this week. There are whispers that this could be a blowout with more than 1 million non-farm payrolls created. If that happens, I believe the Fed would be even more comfortable announcing tapering in September and starting to taper in October.

Further off into the distance, questions are swirling about whether Powell will be re-nominated as Fed Chair. While I suspect there may be a little grumbling from the extremes on both aisles of Congress, my money is on his re-nomination. However, speculation about this — and the future of the vice chairs (the vice chair and the vice chair for supervision) — will certainly occupy some markets watchers’ time in the coming months.

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

David

6th September 2021

Team No Comments

A unique event on Prudential’s ‘smoothed’ funds – a Unit Price Reset

Please see below details relating to the unique event impacting Prudential’s ‘smoothed’ funds.

The Pru PruFund ‘smoothed’ range of funds have been in existence since 2004 in an investment product.  Late yesterday afternoon, for the first time in c 17 years, Prudential announced a Unit Price Reset (UPR).  This is an increase in fund value in this case.

It looks similar to a Unit Price Adjustment (UPA) and is also a part of the ‘smoothing’ mechanism for PruFund funds.  If you look in their guide to the smoothing process, you can see it mentioned on the bottom of page 3;

https://www.pruadviser.co.uk/pdf/PRUF1098101.pdf?utm_term=PruFund%20Quarterly%20EGR%20&utm_campaign=PruFund%20&utm_content=email&utm_source=Act-On+Software&utm_medium=email&cm_mmc=Act-On%20Software-_-email-_-Latest%20EGRs%20and%20UPRs%20for%20the%20PruFund%20range%20of%20funds-_-guide%20to%20the%20smoothing%20process

Why is this happening now?

We have been through an unprecedented time in 2020 with the sharpest and quickest falls in markets and then subsequent recoveries.  The underlying fund performance has been strong since March 2020 and this UFR ensures that this is fully delivered to you.  To quote the Pru ‘It’s being done because it’s the right thing to do for all policyholders.’

It’s about treating customers fairly, in this case for clients like you in the Pru’s ‘smoothed’ funds.  Unusual circumstances can require unfamiliar solutions – all subject to a rigorous framework and governance and overseen by a specialist actuary, a specialist committee and signed off by the Prudential Assurance Company board.

How does impact on me?  The following UPRs have been announced:

ProductFundUnit Price Reset
Flexible Retirement PlanPruFund Growth+5.66%
Flexible Retirement PlanPruFund Risk Managed 4+4.56%
Trustee Investment PlanPruFund Growth+5.66%
Prudential ISAPruFund Growth+5.66%
Retirement AccountPruFund Growth Series D+5.66%
Retirement AccountPruFund Risk Managed 4 Series D+4.56%
Retirement AccountPruFund Growth Series E+3.63%
Retirement AccountPruFund Risk Managed 4 Series E+3.69%
Retirement AccountPruFund Risk Managed 5 Series E+5.02%

The difference in the UPRs is based on the current position, for example, if UPAs have been applied more frequently, as is the case with Series E funds.  It is also based on your risk profile, different funds such as the Risk Managed 4 and 5 funds have a different risk profile.

The only funds that have not been affected by this UPR is the brand-new range of smoothed funds, the five funds that are PruFund Planet.  I’ve outlined the main funds in the table above that affect our clients. It’s nice to get some good news at the moment, hopefully this will add to your enjoyment of the Bank Holiday weekend!

Steve Speed

26/08/2021

Team No Comments

AJ Bell: Why Chinese stocks are still not partying

Please see below for one of AJ Bell’s latest articles, received by us yesterday afternoon 22/07/2021:

Tomorrow (23 July) heralds the one-hundredth anniversary of the first meeting of the Chinese Communist Party and the country’s leadership continues to mark its birthday with a series of high-profile events, speeches and actions

Whether the centenary is anything that investors can mark with pleasure remains more of a moot point, even if the benchmark Shanghai Composite index trades some 15% above the levels reached just before the news of the pandemic seeped out of the Middle Kingdom in early 2020. These doubts persist for three reasons:

First, the president and general secretary of the Communist Party, Xi Jinping, marked the anniversary of the party’s foundation on 1 July with what many in the West saw as an aggressive speech as he warned any foes would be met with a ‘wall of steel’.

Second, China continues to intervene in financial markets, often in not-so-subtle ways. The crackdown on internet giants such as Alibaba and Meituan, and cybersecurity investigation into ride-hailing app Didi immediately after its stock market flotation in the US looked like expressions of displeasure with a trend toward overseas listings and a reminder to entrepreneurs of who was really boss.

Finally, China’s second-quarter GDP growth figure of 6.7% year-on-year undershot economists’ forecasts. This perhaps serves as a reminder that China is trying to combat the economic fall-out of the pandemic and keep the economy going on one hand, yet seeking to avoid letting financial markets, asset prices and debt get out of hand on the other.

Beijing and president Xi are hardly on their own in this respect – the UK, US, the EU, New Zealand, Australia and Canada are also members of what is a hardly exclusive club – but political legitimacy perhaps rests most fundamentally upon economic progress, employment and increasing prosperity than it does in China than anywhere else, not least because the authorities really have no-one else to blame if anything goes wrong.

DEBT DILEMMA

The last point is perhaps the easiest to tackle. Granted, China has a relatively low government debt-to-GDP ratio of 67% but that number is rising quickly. Moreover, the opaque structure of Chinese State-Owned Enterprises, let alone the so-called shadow banking system, mean the overall national debt-to-GDP figure is a less healthy 270%, according to China’s own National Institution for Finance and Development.

China may therefore be generating growth, but the quality of that growth looks questionable, given its reliance on fiscal stimulus and cheap debt. This perhaps explains why the Shanghai Composite index is trading well below its 2007 and 2015 highs even as the economy keeps expanding. A timely reminder that investors should never use macroeconomic data alone when it comes to selecting stocks, indices and funds (be they active or passive) to research and follow.

In the interests of balance, it must be noted that China’s currency is trading relatively strongly against to the dollar, after a six-year slide, so markets may not be too worried about the economic foundations (although again the US faces the same challenges).

POWER PLAY

Geopolitical risk is something which with all investors must live but there is little they can do about it, barring factor it into the risk premiums they demand when buying assets in certain countries – or in plainer English, pay lower valuations to compensate themselves for the potential dangers involved.

Sino-American relations remain strained, to say the least, as Beijing and Washington wrestle for supremacy in key industries, notably mobile telecommunications and semiconductors.

This is prompting talk of a new Cold War, a view perhaps supported by president Xi’s powerful speech on 1 July. Investors will be hoping it does not spill over into a hot war over Taiwan, for example, whose strategic importance is only heightened by the global semiconductor shortage.

But if investors can do little about geopolitics, they can do everything when it comes to corporate governance, either on their own or by paying a fund manager to do the donkey work for them. And perhaps the greatest concerns lie here, at least when it comes to Chinese equities.

Beijing’s indifference to the damage done to Didi Chuxing’s share price in the wake of the security investigation and assertion that US regulators cannot check Chinese audits of firms with listings in America is a big red flag (if you will pardon the expression). No-one, from a private individual to a trained fund manager, can invest in a firm if audited, verifiable and reliable accounts are not available.

This reminder that China has its own agenda – one that is designed to preserve the Communist Party’s hegemony well beyond the first hundred years – affirms that investors’ needs are secondary.

They are welcome to keep buying stakes in Chinese firms, or funds which track Chinese indices or own Chinese equities, if they wish. But they need to be sure they are paying suitably lowly valuations to accommodate the potential risks, which should also be in keeping with their overall tolerance levels.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well

Paul Green DipFA

23/07/2021

Team No Comments

PruFund range of funds – EGR and UPA announcement

Please see below for Prudential’s latest announcement regarding Unit Price Adjustments for the PruFund range of funds, received by us late yesterday 25/05/2021:

At this quarter’s review, we’ve announced no change to the Expected Growth Rates (EGR) and upward Unit Price Adjustments (UPA) to a number of the PruFund range of funds this quarter end.

PruFund UPA announcement 

Today we’ve announced there’s upward UPAs to the following PruFund funds:

FundUPA applied 
Prudential Investment Plan  
PruFund Growth Fund +3.56%
PruFund Risk Managed 4 Fund +5.33%
PruFund Risk Managed 5 Fund 
+3.67%
Trustee Investment Plan 
PruFund Cautious Pension/ISA Fund +2.00%
PruFund Growth Pension/ISA Fund+3.91%
PruFund Risk Managed 2 Pension/ISA Fund +2.09%
 PruFund Risk Managed 3 Pension/ISA Fund +3.22%
 PruFund Risk Managed 4 Pension/ISA Fund  +2.67%
Prudential ISA 
PruFund Cautious Pension/ISA Fund +2.00%
PruFund Growth Pension/ISA Fund +3.91%
PruFund Risk Managed 2 Pension/ISA Fund +2.09%
PruFund Risk Managed 3 Pension/ISA Fund +3.22%
 PruFund Risk Managed 4 Pension/ISA Fund  +2.67%
PruFund Risk Managed 5 Pension/ISA Fund +3.45%
Prudential Retirement Account – Series D 
PruFund Cautious Pension Fund – Series D+2.00%
 PruFund Growth Pension Fund – Series D+3.91%
PruFund Risk Managed 2 Pension Fund – Series D+2.09%
 PruFund Risk Managed 3 Pension Fund – Series D  +3.22%
PruFund Risk Managed 4 Pension Fund – Series D   +2.67%
Flexible Retirement Plan 
PruFund Cautious Pension/ISA Fund+2.00%
PruFund Growth Pension/ISA Fund +3.91%
PruFund Risk Managed 2 Pension/ISA Fund +2.09%
PruFund Risk Managed 3 Pension/ISA Fund +3.22%
PruFund Risk Managed 4 Pension/ISA Fund +2.67%
International Prudence Bond / Prudential International Investment Bond 
PruFund Cautious (Sterling) Fund +2.00%
PruFund Growth (Sterling) Fund+2.88%
PruFund Growth (Dollar) Fund+2.95%
PruFund Growth (Euro) Fund+2.68%

Please note UPAs also apply to the protected versions of the fund where applicable.

On the monthly PruFund Investment Date, a UPA is applied if the unsmoothed price is:

  • 4%, or more, higher than the smoothed price, for our PruFund Cautious, PruFund Risk Managed 1 or PruFund Risk Managed 2 funds, or
  • 5%, or more, higher than the smoothed price for our PruFund Growth, PruFund Risk Managed 3, PruFund Risk Managed 4 or PruFund Risk Managed 5 funds.

Growth rates aren’t guaranteed. The value of an investment can go down as well as up. Your client may get back less than they have paid in.

More information on the EGRs and UPAs for each product is available on PruAdviser.

Prudential have said that they have had a strong 6 month performance since the 25th November last year.  It’s important to note that PruFund funds lag both a rising and a falling market.  The increases or reductions in PruFund via UPAs are formulaic and non-discretionary.  They are based on the maths and the difference in fund value between the underlying assets and the ‘smoothed’ price.

M & G’s Treasury & Investment Office (TIO) who manage PruFund for Prudential are in the middle of a Strategic Asset Allocation review.  Within the next month or two we will find out how they change their assets focusing on long term returns.

The Expected Growth Rates (EGRs) have remained the same.  For example on PruFund Growth 5.70% gross per annum.  EGRs give you an indication of what the TIO think long term returns will be over 15 years plus.

These upwards Unit Price Adjustments are some very positive news and demonstrate the recovery in the markets as a whole. These UPAs combined with previous UPAs over the past 12 months have brought the majority of the PruFund range of funds back to positions similar to those before the drops caused by the Coronavirus Pandemic.

Hopefully this trend of recovery and positive performance continues as we see mass vaccine rollouts worldwide and lockdown restrictions gradually eased. Although we may not be out of the woods yet and there are no guarantees, this increase in the UPAs is a reason for optimism.  

Take care.

Paul Green DipFA

26/05/2021

Team No Comments

AJ Bell: Why the FTSE 100 is warming to an economic upturn

Please see below for one of AJ Bell’s latest investment articles, received by us yesterday 18/04/2021:

As the UK starts to emerge from its latest (and hopefully final) lockdown, the FTSE 100 already trades above the levels reached just before the pandemic first made its presence felt in China and Southern Europe in early 2020.

There can be no finer example of how financial markets are forward-looking, discounting mechanisms which seek to price in future events before they happen. Yet they are not right all the time. No-one, but no-one, owns a crystal ball (or at least one that works) and if markets really were that prescient, then there would never be major sell-offs or upward surges, as no-one would ever be surprised by anything.

What the advisers and clients must therefore do, in order, is assess the facts as they are known, determine the current consensus about what will happen and – by looking at valuation – decide whether the risks are to the upside or downside. Therefore, they must look at the broad range of possibilities concerning what may happen, what could be the biggest surprises and their potential impact so they can decide whether the potential upside rewards outweigh the downside risks over their preferred time horizon.

In sum, the best fund managers are not necromancers or chancers trying to guess the future. They are experts at judging probabilities and act according to the cold maths of valuation, be that measured by earnings, cash flow or yield. It may not take much good news to boost a market that has fallen sharply to price in negative events (it may even just take the absence of fresh bad news), while it may not take much bad news to jolt a market if it has made big gains.

The FTSE 100 bottomed in late March 2020 at 4,994, long before the worst news about the pandemic and its toll on lives and the economy became known. After a near-40% gain in the UK’s headline index over the past year, advisers and clients must once more assess the balance of probabilities so they can decide whether the index has further to run or not and a good place to start is earnings forecasts.

New highs

At face value, it does seem odd that the FTSE 100 is trading above its pre-pandemic levels, even if the number of daily new COVID-19 cases is back to where it was last March and last September, and the vaccination programme continues apace. The economic outlook is still uncertain: the effects upon the behaviour of corporations and consumers alike are yet to reveal themselves and other parts of the globe are less advanced in their race to inoculate their populations.

But it does make sense if you think that the consensus earnings forecasts for the FTSE 100 are going to be accurate. An aggregate of the estimates made for each member of the index suggests that the FTSE 100’s total pre-tax profit will be £178 billion in 2021 and £205 billion in 2022.

FTSE 100 is forecast to make record pre-tax profit in 2022

Those figures exceed the £166 billion made in 2019, before the pandemic hit home. Moreover, if the 2022 forecast is attained, then that would represent a new all-time high for annual earnings, surpassing the £199 billion made in 2011.

In this context, it is not too hard to see why the FTSE 100 is trading where it is, or even make a case for further gains, since the index trades below its May 2018 zenith of 7,779 even though record profits are expected for 2022.

Advisers and clients must therefore decide whether the forecasts are reliable, too optimistic or too pessimistic and what must happen for analysts to be off-beam (which they usually are, owing to the absence of that crystal ball).

Heavy metal

To do this, advisers and clients need to parse the FTSE 100’s earnings mix. Roughly 60% of forecast profits come from just three sectors: mining (now the single biggest earner), financials, and oil and gas.

Just three sectors are expected to generate around 60% of FTSE 100 earnings in 2021 and 2022

In some ways, this makes it easy for advisers and clients to judge the upside and downside potential: in crude terms, the stronger the economic recovery the better, so far as the FTSE 100 is concerned as the index’s key industries offer huge gearing into GDP growth. The opposite also applies. A weak recovery (or heaven forbid an unexpected double-dip) would be potentially a nasty surprise.

A breakdown of forecast earnings growth makes this picture clearer still. Analysts think that the FTSE 100’s aggregate pre-tax profit will rise by £75.1 billion this year and by a further £27.1 billion in 2022. Miners and oils are expected to generate two thirds of that between them in 2021. Oils, consumer discretionary and financials are forecast to provide four fifths of the expected profit uplift in 2022.

Just three sectors are expected to generate more than 75% of forecast earnings growth in 2021 and 2022

Rising commodity prices and steepening yield curves would therefore be a good sign; falling and flattening ones would not. Those advisers and clients who buy into the narrative that inflation is coming, after being largely dormant for 40 years, will therefore feel right at home in the UK. Those who still fear debt-ridden deflation may be tempted to steer clear and seek their fortunes elsewhere.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well.

Paul Green DipFA

19/04/2021

Team No Comments

The Silicon Valley of Green Tech?

Please see the below article from Invesco:

The health crisis of 2020 created a synchronised economic depression requiring equally radical policy responses.

Europe’s response was the creation of a €750bn European Recovery Fund. However, rather than just deploy the capital, member states chose to focus on a Green Recovery and hence use the funds to address the existential threat of climate change. In practice this means the European Commission spending is being guided by the newly developed sustainable finance taxonomy. Promoting activities supportive of the environmental objectives of climate change mitigation and adaption:

  • Sustainable use and protection of water and marine resources
  • Transition to a circular economy
  • Pollution prevention and protection of biodiversity and ecosystems
  • It also contains criteria that ensure activities ‘do no significant harm’

European environmental legislation is not new. For years Europe has been a first mover in safety standards and best practices that become global standards, however, the European Green Deal marks a more dynamic approach. Taxonomy is the means by which the market will administer the carrot or the stick to companies. Winners will be those seen to solve the environmental crisis and losers will be those thought to be the cause.

This comes at a time of other changes to the investment landscape. Savers now demand their asset managers embed sustainability into allocation decisions. Fund regulation is playing its role too, through the deployment of SFDR this year, funds will be classified dependant on embedding ESG principles thereby making it easier for savers to pick compliant funds and avoid others. Lastly, the pandemic has created the political cover to deploy the significant European Recovery Fund to sustainable companies.

Combined these elements create the foundations for success. European companies that comply with taxonomy will see their cost of capital fall vs those that don’t.

The EU Recovery Plan is interlocked with the Commissions’ 2019-24 priorities that included the realisation that “Europe needs a new growth strategy that will transform the Union into a modern, resource efficient and competitive economy”. This is an inclusive plan with The Just Transmission Mechanism’s goal that ‘no person or place left behind’. At least E150bn is being made available to address socio-economic effects of the transition out to 2027 – a topic we discuss in greater detail in another piece (link to The Just Transition article). However, the real prize isn’t intra-Europe it’s global.

The goal of climate neutrality requires significant investment and innovation. If the transition is effective through taxonomy rewarding companies in the transition phase, we will grant our existing enterprises a competitive advantage though access to the cheapest capital. This will create more dynamism through more innovation and the creation of products, services and refreshed skilled jobs to achieve all the EU goals. Brown companies can become Green.

This idea of creating a pathway isn’t new. Europe has 2030 targets not just 2050, including transition plans for hybrid ahead of full electric vehicles, coal to gas electricity generation and developing blue hydrogen ahead of green hydrogen being viable. Through this approach we can incentivise European companies to allocate their existing cashflow towards green innovation as opposed to being forced into ever larger dividend yields.

Silicon Valley is perhaps the best example of the prize on offer. The birth of Silicon Valley was a confluence of skilled science-based research, education, venture capital and defence spending, particularly through the creation of NASA and the space race. The success and longevity of which is a function of being the first and with it a sustainable multiplier effect.

We are already starting to see the positive effects from this focus on transition. European oil companies lead the way in reallocating hydrocarbon cashflows towards greener alternatives (Total, Repsol, BP). In renewable energy, Europe is home to the leading wind turbine manufactures (Vestas, Nordex and Siemens Gamesa) and our power generators are world leaders in green production (Enel, EDP, Acciona). In technology, European semiconductor companies have leadership in Auto electrification (Infineon and STMicro). We also have expertise in building materials and renovation focused on reducing energy consumption (SaintGobain, Wienerberger, Kingspan). Europe’s paper companies are transitioning to sustainable packaging and biofuels (UPM) and Europe is home to worldwide leaders in the circular economy (Veolia and Suez). All are stocks that are held in portfolios across the team, to a varying degree.

Europe has grand ambitions and a once in a generational opportunity to steal a march on other continents through early adoption of regulation and technology. Through incentivising companies to innovate and embrace climate change Europe can become a global exporter of Greentech products and services to the rest of the world and enjoy the multiplier effect. Europe has the potential to achieve net zero and in doing so become the Silicon Valley of Green Tech including the vibrancy, jobs and sustainability that comes with it.

Please continue to check back for a range of blog content and regular updates from us.

09/04/2021

Andrew Lloyd