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Brewin Dolphin: Markets in a Minute

Please see the below market update from Brewin Dolphin, received yesterday evening – 21/12/2021.

Stocks fall as central banks turn more hawkish

Most major stock markets ended last week in the red as central banks moved to raise interest rates and rein in their support for the economy.

In the US, the Nasdaq slumped nearly 3.0% after the Federal Reserve’s survey of policymakers found a majority now expect three interest rate hikes in 2022 instead of two. The S&P 500 and the Dow also fell 1.9% and 1.7%, respectively.

The UK’s FTSE 100 slipped 0.3% after the Bank of England surprised the market with an increase in the base interest rate to 0.25%. The pan-European STOXX 600 also dropped 0.4% as Covid-19 restrictions tightened in several European countries.

Over in Asia, China’s Shanghai Composite slid 0.9%, with technology stocks particularly hit hard by the Federal Reserve’s more hawkish interest rate outlook.

Surge in cases gives investors the jitters

Stocks started this week in the red as a surge in Covid-19 cases gave investors the jitters. The FTSE 100 fell nearly one percentage point on Monday (20 December) with travel and leisure stocks under pressure after an emergency cabinet meeting was convened to discuss possible pandemic restrictions.

Wall Street stocks also closed sharply lower, following news the Omicron variant has now been found in 43 US states and around 90 countries. Also in focus was Democratic senator Joe Manchin’s statement that he would not back President Joe Biden’s ‘Build Back Better’ bill, thereby putting the legislation in jeopardy.

At the start of trading on Tuesday, UK and European stocks had managed to claw back some of the previous day’s losses, with the FTSE 100 and STOXX 600 opening 0.9% higher after the UK cabinet said it would wait for more data before imposing restrictions.

BoE first major central bank to lift rates

Last week, the Bank of England (BoE) became the first major central bank to increase interest rates since the pandemic hit. The monetary policy committee voted 8-1 to raise the base rate from 0.1% to 0.25%, surprising investors for the second time in six weeks. Investors and economists had expected the Bank to leave interest rates unchanged because of the uncertainty created by the Omicron variant.

Governor Andrew Bailey said the Bank needed to tackle the strong inflationary pressures building up in the economy. The annual rate of inflation hit 5.1% in November, the highest level in a decade. Bailey told the BBC it could reach around 6% in the next two to three months. He said the Bank had thought “long and hard” about the impact of Omicron on economic activity before making its decision. “But it is not at all clear if the impact [on the economy] could cause inflation to come down, or even go up,” he added.

Fed and ECB reduce asset purchases

The US Federal Reserve announced last Wednesday that it would taper its support for the economy more quickly than planned. Stimulus will be reduced by $30bn a month from January and is expected to end by March. Fed chair Jerome Powell said economic activity is on track to expand at a robust pace this year, and the US is making “rapid progress” towards maximum employment. Officials forecast that benchmark interest rates would need to rise from current near-zero levels to 0.9% by the end of 2022 amid higher inflation and declining unemployment.

The European Central Bank (ECB) also announced it would reduce bond buying under its pandemic emergency purchase programme, which is due to end in March. However, bond buying under the asset purchase programme will be increased and will continue for “as long as necessary to reinforce the accommodative impact of its policy rates”, the ECB said.

Black Friday boosts UK retail sales

Last week also saw the latest retail sales figures from both the UK and the US. In the UK, retail sales volumes rose by 1.4% in November from the previous month, faster than analysts had expected and 7.2% above their February 2020 level.

Growth was driven by non-food sales, including clothes, toys, computers and jewellery, with retailers reporting strong trading around Black Friday and in the lead-up to Christmas, the Office for National Statistics said. Clothing stores sales volumes were above their pre-pandemic levels for the first time.

In the US, retail sales were below expectations, rising by 0.3% in November following a revised 1.8% gain the previous month. The suggestion is Americans started their holiday shopping earlier than usual to avoid empty shelves amid the ongoing supply chain disruption. After adjusting for inflation, retail sales fell by 0.5% in November from the previous month.

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

22/12/2021

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Fidelity – Hawkish Fed enters 2022 with a catch

Please see below an article from Fidelity which was published late last week and received late yesterday afternoon and covers Fidelity’s views on the US Federal Reserve and its potential movements in 2022:

As you can see from the above, the Fed remains focused on inflationary pressures and some action is likely to be needed to help curb these pressures. However, now is the time for potential policy mistakes by moving too soon or too aggressively on interest rate hikes. This needs to be managed carefully. The Fed appear to have a good grasp of the key issues at the moment and their communication to date is better than the Bank of England’s.

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

21/12/2021

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Covid trumps inflation at the top of investor concern for 2022

Please find below an article detailing the impacts of Covid on stock markets and investments, received from AJ Bell yesterday – 19/12/2021

DIY investors are entering 2022 in a mood of constructive realism, recognising market risks, but also largely confident in their investments. Six in ten expect further covid restrictions in 2022, and a resurgence in the pandemic is the number one worry for investors as we head into the new year. Indeed, covid is seen as a greater risk than inflation, which makes sense seeing as the stock market provides some protection from price rises. Inflation comes a close second in the list of concerns for 2022 though, which shows investors are wary of price rises and the effect this may have on their portfolios. Global politics and high stock valuations are also cause for concern for some investors. 

On the whole though, investors see the glass as half full rather than half empty. About 50% were confident or very confident about their investments in 2022, and around four in ten were neutral. That’s also reflected in forecasts for the Footsie, with two thirds of investors (65.7%) expecting the UK stock market to make further ground over the course of the coming year. Almost half of investors expect single digit returns in 2022, which suggests investors aren’t getting carried away, and are settling in for a more modest year for growth than 2021.

Investors are also becoming more attuned to ESG considerations, with four in ten (38.3%) saying these were going to play a bigger part in investment decisions in 2022. There’s already been a groundswell of interest in ethical funds in the last two years, and our survey suggests this isn’t going to abate in 2022. More than two thirds of investors also said they think there should be grater clarity over companies’ net zero plans. 

The ESG agenda has developed so rapidly across the investment industry that the information available to investors is struggling to keep up. The FCA is formulating proposals on a new green labelling regime, expected in the first half of 2022, which should help make things a bit easier for investors seeking ESG investment options.

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

David Purcell

20th December 2021

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Invesco – Global Equities have nothing to fear

Please see article below from Invesco received yesterday – 16/12/2021

Global Equities have nothing to fear

We are living in one of the most noteworthy periods of change in history.  The internet and the digitization of nearly everything have created some massive new industries.

In the scientific space, the mapping of the human genome at the beginning of the century has yielded new ways of treating some of our most challenging diseases, including Covid-19.  

Our philosophy is focused on durable structural change. We don’t follow cyclical trends, instead the central themes in our investment strategy are for the long-term. As we head into 2022, we are not looking to what excites us just for the year ahead, but what excites us over the next 3-5 years.  

The formidable networks of the tech giants

Alphabet, Facebook, Amazon, Mastercard and others in our Invesco Global Focus Equity Fund, are great companies with deep intellectual libraries and formidable network effects.

There is nothing temporal or fleeting about the size and scale of their advantage, these companies have created, or are operating within, economic ecosystems that have expanded structurally.

Perhaps the most important thing to understand about networks is that, once entrenched, they can only be displaced by the creation of an entirely new one.  That’s a tough task.  People are on Facebook, Google and Amazon because everyone else is, too.

Meanwhile, credit cards were the earliest iteration of digital payments. There are now a myriad of ways to send money to people to pay for things online or in a store. The use of these by consumers is only going to increase.  

Companies are transforming IT functions  

IT departments are planning to move much of their software from an on-premise platform to the cloud, facilitated by Amazon Web Services and Alphabet, along with other players in the world.

This is no small thing. It represents a huge shift in the IT stack that has a long way to go.  Software in the cloud rids the enterprise of some of the big capital outlays and a lot of hardware that is costly to maintain.  The best innovations, the ones that represent a structural shift, always deliver an outcome that is both better and cheaper. 

As a part of the move to the cloud, cyber security in enterprises have undergone an overhaul. Instead of only having to secure a single premise, there are now a myriad of endpoints, and many things running in the cloud. This means a different toolkit is needed for network security.  

That is a big evolving field that is growing in importance as networks get distributed and their workloads shift to the cloud. CrowdStrike has built the first fit-for-purpose cloud-based security software.  It is not an adaptation of legacy on-premise software, it was designed to secure modern network endpoints, and modern threats and it is growing very rapidly. 

The chart below shows that the growth of spending on security is significantly outpacing the growth of IT spending overall, a trend which should provide a continued tailwind for CrowdStrike in the years to come.

Source: Bloomberg Intelligence, IDC

Drug development evolving following the mapping of the genome

Elsewhere, the mapping of the human genome completed around 20 years ago has created new opportunities for drug development and clinical research.

We are now seeing its impact, both in the method of drug development and clinical research. The development and manufacture of the Covid-19 vaccinations is a direct result of that.  The virus was quickly genetically sequenced on an Illumina sequencing machine, enabling it to get to market fairly rapidly by customary standards. Normally, commercialising a medicine usually takes a few billion dollars and 10 to 20 years to come to fruition.  

We are, however, in the early stages of this theme.  We have chosen to invest in companies such as Illumina, diabetes giant Novo Nordisk and Thermo Fisher Scientific, a provider of a wide array of diagnostic and lab equipment sold to research labs, hospitals and the biotech and pharma industry.   Each is the leading global player in their respective arenas with strong intellectual property rights and substantial long-term opportunity.   

Standing the test of time

The market narrative in 2021 was all about the cycle, even though there are some profound changes happening all around us.  The thing about cycles is that they are just that, they are passing, reflecting a temporal change in preference. 

Structural change, of the sort we look for, is much bigger than that. It doesn’t separate the world into cyclical or defensive, it separates it into winners and losers, and the losers fade into obscurity.  

The portfolio we hold today was not assembled to perform only in a tailored environment.   What drives our holdings isn’t complicated.  Their growth rates and economic profitability have been going up together. The market is what it is, but we are invested in a portfolio of 35 businesses, with each holding a significant competitive edge in an expanding economic ecosystem. 

Many pieces we read from the ‘outlook’ genre touch on subjects that keep the writer up at night, or challenges they expect in the year to come. The truth is, for us, there’s not a lot that scares us as we head into 2022 or the years that follow.

While negative headlines may drive a few bad weeks or a few bad months for your equity portfolio, they shouldn’t scare you as a long-term investor. In fact, negative headlines often create the temporary pullbacks in stock prices that can set you up for fantastic long-term returns in the years ahead.

In our years, we’ve seen all manner of inflationary scares, geopolitical tensions, terrorist attacks, currency crises and the like, but none of them have mattered to generating long-term returns for our clients.

As those that follow our strategy may recall, what we think matters most is buying durably advantaged companies at the right price, run by management teams we can trust to do the right thing with shareholders’ money. If we can find opportunities like that and invest in them with conviction, good outcomes will follow over a 3-5 year investment horizon. The rest is just noise. 

Please continue to check back for our latest blog posts and updates.

Charlotte Clarke

17/12/2021

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Five key charts for 2022 (and beyond)

Please see below an interesting article received from AJ Bell this afternoon, which offers key potential market-related scenarios for the 12 months ahead as we approach the end of this year.

No-one, not even central bankers, knows what is ahead of us in 2022, and whether inflation, stagflation or deflation will result from the combination of the pandemic, lockdowns and supply-chain chaos on one side, and massive amounts of fiscal and monetary stimulus designed to boost demand on the other.

Going ‘all in’ on one scenario is probably not going to be good idea and portfolio construction will need to address range of outcomes, as frankly anything is possible (especially given the likelihood of central bank and government interference action). Keeping an eye on the following charts – and investment decisions – may help investors sense which way the wind is blowing so they can try to obtain the best possible risk-adjusted returns for their portfolios

‘Value’ versus ‘growth’

For want of a better turn of phrase ‘growth’ has outperformed ‘value’ for the thick end of a decade, thanks to the prevailing, low-growth, low-interest-rate, low-inflation fog which has enveloped the globe.

If that environment persists, firms which are seen as capable of providing secular trend increases in sales, profits and cash flows (or maybe even just the first one) will remain highly prized. If it changes, and inflation and strong nominal GDP growth take over, then there would be no reason to pay high multiples for secular growth when cyclical growth (or ‘value’) would be available at much lower valuations. Industrials and banks could then lead the charge.

One way of measuring whether this shift in leadership is happening is by comparing the performance of the Invesco QQQ Trust, packed with growth stocks, against the iShares Russell 2000 Value ETF. If the line goes up, value is doing better, and vice-versa. Value’s latest attempt for glory is petering out a little, perhaps owing to worries over Covid variants and the effects of higher prices and clogged supply chains on economic activity.

‘Developed’ versus ‘emerging’ markets

Emerging markets dominated for the first decade of this millennium but developed ones have subsequently ruled the roost. Demographics, debt-to-GDP ratios and the possible trend toward ‘onshoring’ in the West are all factors here but it seems reasonable to expect export-driven emerging markets to fare relatively well if global growth rates pick up. Any attempts by China to loosen monetary policy and stoke growth could also help emerging markets, where the Shanghai market has a big weighting.

Real and paper assets

Looking at the relative performance of the Bloomberg Commodity and the FTSE All-World (equity) index, commodities and ‘real’ assets outperformed between 2000 and 2010 but equities and ‘paper’ assets have dominated since.

Again, this trend could be reasonably expected to continue if we stay stuck in a low-growth, low-rate, low-inflation world. But if inflation (or maybe stagflation) take hold, ‘real’ assets could come to the fore for three reasons: they could be stores of value; central banks may keep printing money but they cannot print oil, gold or property; and investment in finding new resources is dwindling thanks to pressure from politicians, investors and the public alike amid environmental concerns.

All that glitters

The subject of ‘stores of value’ and ‘haven assets’ can lead to heated debate. It is hard to argue that Bitcoin is a store of value, given the wild price swings of the last five years, and the same accusation can be levelled at gold. Neither produces a yield. And both trade way above their marginal cost of production.

Yet rampant deficit creation by governments and money printing by central banks (in an attempt to effectively monetise and fund the extra debt) do persuade many to make an investment case for one or the other (although rarely both).

Gold did next to nothing and underperformed Bitcoin again in 2021. But its role as a haven during times of great uncertainty – when it looks like the authorities are not in control – could come into play if inflation gallops higher. The gold price relative to Bitcoin makes for an interesting chart but the metal may remain dormant if inflation fizzles out.

Chop and change

After a brief foray to 30 on news of the Omicron variant, the VIX, or ‘fear,’ index which gauges future volatility in the US stock market, is trading pretty much in line with its long-run average of 19. If markets retain their faith in central bank control, inflation remains subdued and the variant passes by, fear will likely dissipate. But if inflation takes hold and confidence in policy makers ebbs, volatility may make its long-awaited comeback.

Please check in again with us shortly for further relevant content and news as we countdown to Christmas and the New Year.

Stay safe.

Chloe

16/12/2021

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Graham B – Greater Manchester

‘It’s now been over 5 years since I was introduced to Steve Speed and the team at People and Business and I’m pleased to share that they are still doing a great job with their investment advise despite the challenges we are currently all experiencing.

In fact, in my case, I’ve gone a step further and decided to retire recently. However, before doing this, I had a lengthy (open and honest) conversation with Steve about our future plans and how our investments would meet these needs as well as being careful enough to plan for the unexpected. As ever, Steve was able to provide solid advice based on his considerable knowledge and experience and also to guide as to the most tax efficient way to draw funds.

I still maintain that Steve is one of the most dedicated professional people I have ever met, but at the same time approaches his work in a very relaxed and personable style and I would have no hesitation of recommending his services and that of People and Business.’

Graham B – Greater Manchester – 15/12/2021

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Brewin Dolphin: Markets in a Minute

Please see this weeks Markets in a Minute update from Brewin Dolphin:

These regular investment bulletins help us keep up to date with what is happening in the markets.

Please continue to check back for our latest blog posts and updates.

Andrew Lloyd DipPFS

15/12/2021

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Weekly Market Commentary | UK booster campaign accelerated following Pfizer efficacy report

Please see below, the weekly market commentary from Brooks Macdonald, providing an update on monetary policy and the ongoing risk of the Omicron variant – received yesterday afternoon – 13/12/2021.

  • Equities rallied strongly last week as Omicron fears eased
  • This week sees the Federal Reserve, European Central Bank and Bank of England announce their latest monetary policy
  • Existing vaccines are shown to provide good protection against Omicron, accelerating the importance of booster jabs

Equities rallied strongly last week as Omicron fears eased

Last week saw an uptick in optimism around the Omicron variant with equities benefitting from a broad rally early in the week that favoured cyclical and tech sectors. The rally lost steam by the end of the week, but this is more of a reflection of the sharp gains on Monday/Tuesday rather than a sudden bout of fear.

This week sees the Federal Reserve, European Central Bank and Bank of England announce their latest monetary policy

This week could be pivotal for central bank policy, with eight of the G20 central banks reporting on their latest policy. Those eight contain the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England, with all of those banks expected to be considering a change to their monetary policy. Starting with the Fed, with the Consumer Price Index number last Friday in line with (elevated) expectations, an acceleration of the Fed’s tapering programme looks likely. Should the speed of asset purchase tapering double, for example, this would lead the current process to conclude in March and leave some room for the Fed to consider the timing of their first rate hike. This week’s Fed meeting will also provide the latest ‘dot plot’ of interest rate expectations so there is a lotto focus on. The ECB was expected to unveil a shift in policy towards rates guidance rather than liquidity guidance, in essence a slight pivot towards tightening policy. Given Omicron, this may be delayed until the New Year but it is a close call. In the UK, the Bank of England is expected to raise interest rates by 0.15% to 0.25% but again this is dependent on how the bank interprets the latest Omicron risk which has certainly grabbed headlines this weekend.

Existing vaccines are shown to provide good protection against Omicron, accelerating the importance of booster jabs

On Friday, the UK released a report looking at the efficacy of three Pfizer vaccine doses (two initial, plus a booster) which showed a c.75% effectiveness against symptomatic disease. The data underlined the importance to governments of the booster campaign and plans were announced to offer all adults in England a booster by 31 December. Omicron’s growth rate appears to be significantly higher than delta and this is causing governments to release some quite daunting predicted case numbers.

With each day that goes by, financial markets are building confidence that Omicron will be less severe than delta but that it will spread rapidly, leading to some nervous moments. Short term restrictions are likely across the world as governments buy time for their booster rollout. Looking forward though, investors are more sanguine.

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

14/12/2021.

Team No Comments

J.P. Morgan Asset Management – Selecting stocks for an environmentally sustainable future

Please see below an article which was recently published and received early this morning from J.P. Morgan and cover their views on sustainable investments:

As you can see from the above, ESG factors are becoming more prevalent for everyone and to start the decarbonisation process, this will require a significant amount of investment globally.  The level of investment required to start this shift will present opportunity for investors and we think ESG investing will become more mainstream in the future.

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

13/12/2021

Team No Comments

Stock markets stage full recovery after Omicron fears

Please see below article received from AJ Bell yesterday afternoon, which suggests that investors appear to have decided the new Covid-19 variant won’t derail economic growth.

Stock markets hate uncertainty, and the arrival of Omicron has created an information vacuum which is likely to persist until scientists and economists get to grips with the likely health and economic effects caused by the latest variant of concern.

On 26 November, the so-called fear gauge, the VIX index, spiked higher as investors scrambled to hedge their portfolios, sending US markets down by around 2%.

UK and European markets dropped by more than 3% with travel related shares and economically sensitive stocks, such as banks, taking the brunt of the fall.

British Airways owner International Consolidated Airlines dropped by as much as 20% and Lloyds dropped by close to 10%.

Commodities like oil and copper sank as markets moved to price in lower global growth, while interest rates dropped.

Comments from Moderna chief Stephane Bancel prompted another sell-off in markets on 1 December after he predicted a ‘material’ drop in effectiveness from current vaccines against the new variant.

Fed chairman Jay Powell added to uncertainty on the same day after he surprised markets by saying the US central bank would discuss an increase in tapering (removing stimulus) at the December meeting, which sent bond yields higher and prices lower.

Elevated volatility saw the VIX index climb from 18.58 on 24 November to 31.12 on 1 December. Historically, large spikes in the VIX index have been associated with ‘market capitulation’ and higher future stock prices.

Sentiment already appears to be shifting. The VIX has since dropped back to 22.02 and at the time of writing (7 Dec), the FTSE 100 index had recovered all its losses since the variant first dominated the headlines, and was trading slightly above pre-Omicron levels.

The index has been helped by a strong rebound in index heavyweights Royal Dutch Shell and BP.

After falling as much as 15% on Omicron worries oil prices have staged a recovery rally following a meeting of oil producers’ cartel Opec+ (Dec 2) where Saudi Arabia and its allies agreed to press ahead with efforts to increase production by 400,000 barrels a day each month.

Opec+ also hinted it would adjust production if necessary, which seems to have provided support to prices. Brent Crude has risen by around 8% to $71.70 per barrel since the meeting.

Before the Opec+ meeting several countries including the US, China and the UK had indicated they would release supplies from their strategic oil reserves to help curb prices.

We endeavour to publish relevant content and market news regularly throughout the festive period, so please check in again soon.

Chloe

10/12/2021