Team No Comments

People with financial advice four times more likely to have high financial wellbeing

Please see the article below cut and pasted from MoneyAge last week covering research by Aegon.

People with a financial adviser are four times more likely than those without one to have high levels of financial wellbeing, a new study from Aegon has found.

The pension provider said that people discuss with their advisers what makes them happy and gives them purpose to identify meaningful financial goals.

Aegon’s Financial Wellbeing Index, based on a representative survey of 10,000 people across a range of sectors, company sizes and job roles, revealed that just 10% of people who have never had any financial advice are fortunate to combine healthy finances and “a positive money mindset”, compared to 44% of those who have an ongoing relationship with a financial adviser, and 23% who have occasionally used a financial adviser.

The research also highlighted that the average advised client reported nearly three times as much in pension savings at £246,000, compared to £95,000 for non-advised people. This pattern was repeated across a range of other finances, with advised clients reporting total non-pension savings of £65,000 versus £32,000, and lower unsecured debt at £3,700 versus £6,400.

“Financial advice can make a significant difference to your future financial wellbeing,” said Aegon pensions director, Steven Cameron.

“Advisers have always been very focused on making sure they can boost their clients’ wealth. But the boost to mindset, while less well recognised, can be just as important to financial wellbeing. There is a growing awareness of the benefits of incorporating financial wellbeing into financial advice processes among financial advisers and planners.”

Aegon also stated that many advisers now try to establish what motivates their clients in order to build financial plans that enable them to achieve meaningful goals in life. The research found that 79% of those with an adviser say they have a clear sense of what gives them joy or purpose, which can significantly influence how people prioritise their finances, compared to 68% without.

Cameron added: “It’s important for all of us to think about our relationship with money, our vision of our future self and most importantly what makes us happy in life. Discussing this with an adviser can make sure you are managing your finances not just to have ‘more money’ but to allow you to give your future self the happiness, joy and purpose you want in retirement.”

People and Business IFA comment

The role of the IFA today is multifaceted, helping you to grow your assets tax efficiently, manage risk, define your objectives and help you achieve your objectives tax efficiently on a holistic basis.

We achieve this by engaging fully with our clients, communicating the issues, educating our clients about markets, products and their options, and gradually nudging them in the right direction.

This is done by keeping a close eye on markets, tax and regulatory changes alongside product innovation and fund launches.  It’s a full time and fully engaging role to be a modern IFA.  It’s also rewarding when we help our clients achieve their objectives whether it’s early retirement, inheritance tax efficiency, or protecting their family and business – their staff and key people too.

It’s no surprise to me that advised clients are in a better place over the long term, this is logical.  I might have a bias as an IFA, but I really believe in what we do.

Steve Speed DipPFS

09/08/2021

Team No Comments

Will a lack of skilled and willing workers derail the UK economic recovery?

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

Sunday 1 August saw the last taper of the Government’s job retention scheme. For the final two months of furlough employers will have to stump up 20% of a worker’s salary as well as paying pension and national insurance contributions. We’ve been here before and the last go-around forced the hand of employers and the result was hundreds of thousands of redundancies.

This time is different. Restrictions have been removed in England and the vaccination programme is well underway with almost 90% of adults having received their first jab. This time the issue might not be too few jobs but too few workers, at least in the right geographical locations.

The latest data from the Recruitment and Employment Confederation shows the jobs market is stronger now than it was before lockdowns ravaged the economy. It tracks new jobs posted and found that in the week to 18 July there were 194,000 new advertisements compared with 179,000 in the first week of March last year. Cities, long silenced, are dusting themselves off, flipping the closed sign to open and discovering that finding staff is a struggle.

Strip out the temporary ‘pingdemic’ that’s disrupted businesses and decimated production lines and consider how Covid has upended the labour market. With shops and restaurants closed workers were either furloughed or sought employment in other sectors like manufacturing.

Some people moved either because they could no longer afford to pay the bills, or to take advantage of not having to go into the office, making it a pandemic perk.

THE FIGURES SPEAK FOR THEMSELVES

The latest PAYE figures illustrate the shift. Despite more than 200,000 fewer people being on payrolls in June than pre-pandemic, some parts of the UK actually have more workers than they did before the first lockdown.

Of those new job adverts analysed by the REC the lion’s share of demand comes from London boroughs. The bright lights of the city that used to more than make up for the lack of space have dimmed and wide open green spaces have become a precious bargaining chip.

Investors need to pay close attention to how different sectors and businesses deal with the labour conundrum. Areas to watch include construction companies as they cannot afford to deal with a skills shortage when demand is so strong. Hospitality chains will need to find ways to avoid cutting back on their service hours. Can they search out blossoming suburban high streets where staffing might be less constrained? City stalwarts may have to permanently embrace hybrid working as a hiring incentive which could be considered more lucrative to some employees than a hike in wages.

Tesco is so desperate for lorry drivers that it is offering a £1,000 joining bonus to lure people in. The Road Haulage Association (RHA) has estimated there is a 100,000 shortage in HGV drivers across the UK.

FINANCIAL IMPLICATIONS

A tight labour market usually means wage rises and that has an impact on employer pension contributions and by extension Government coffers. There’s also the prospect that the spectre of stagflation could push the Bank of England to raise rates sooner rather than later, a major issue for firms carrying boat loads of Covid-related debt.

But recovery has slowed and the current hiring boom could fizzle out under autumn’s grey skies. Sectors like travel and events carry deep scars and the summer salve won’t be potent enough to overcome months of hardship. The latest figures from HMRC showed workers were still being added to furlough numbers in May as it became clear the season’s earnings potential would be curtailed.

It is important to consider how many of the circa 1.9 million workers still being supported by the scheme in June are in ‘zombie’ posts? How many will fall on the 1.57 million active vacancies currently available? That’s the calculation that every staff hungry company will be watching.

CONCERNS OVER JOB SECURITY

One must question if Covid restrictions are really gone for good. Anecdotally we’re told that a lack of confidence is preventing people from returning to sectors like hospitality because it still feels precarious.

Staff shortages weren’t part of the conversation a year ago when unemployment had been predicted to peak at 10% but then the whole pandemic has thrown our lives and our economies on their heads.

The hiring boom might be viewed as a good thing but if jobs remain unfilled and businesses can’t capitalise on what little reopening bounce remains then it could be just as costly as long lines at the job centre.

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

Andrew Lloyd DipPFS

06/08/2021

Team No Comments

Brewin Dolphin Markets in a Minute: Markets mixed as US GDP growth disappoints

Please see below for Brewin Dolphin’s latest ‘Markets in a Minute’ article, received by us yesterday evening 03/08/2021:

Global equities were mixed last week as weaker-thanexpected US economic data offset strong corporate earnings reports.

In the US, the S&P 500 and the Nasdaq slipped 0.4% and 1.1%, respectively, after gross domestic product (GDP) growth and durable goods orders missed expectations. Amazon’s warning of slower growth in the months ahead weighed on the consumer discretionary sector, whereas utilities and real estate stocks outperformed.

The pan-European STOXX 600 ended the week flat amid ongoing concerns about the spread of Covid-19. The UK’s FTSE 100 was also little changed after a spike in the number of people told to self-isolate continued to disrupt production.

Over in Asia, Japan’s Nikkei 225 lost 1.0% as new Covid-19 cases reached record levels, resulting in Tokyo’s state of emergency being extended until the end of August. China’s Shanghai Composite slumped 4.3% following the country’s regulatory crackdown on the technology and education industries.

Delta woes weigh on markets

US stocks closed slightly lower on Monday as concerns about the Delta variant were compounded by softer-than expected manufacturing growth. The Institute for Supply Management’s index of national factory activity fell from 60.6 in June to 59.5 in July, the lowest reading since January and the second consecutive month of slowing growth.

Asian markets followed Wall Street lower on Tuesday, with the Nikkei 225 and Hang Seng tumbling 0.5% and 0.4%, respectively, as fears about the spread of coronavirus overshadowed strong US corporate earnings.

In contrast, the FTSE 100 and the STOXX 600 added 0.7% and 0.6%, respectively, on Monday, following news that British engineering firm Meggitt has agreed a £6.3bn takeover by US company Parker-Hannifin. Shares in Meggitt surged 56.7% from Friday’s close.

Market gains continued into Tuesday, with the FTSE 100 and the STOXX 600 up 0.4% and 0.3%, respectively, at the start of trading.

US economic data misses estimates

Last week’s headlines were dominated by the latest GDP figures from the US. According to preliminary data from the Commerce Department, the US economy expanded by an annualised rate of 6.5% in the second quarter. This was better than the 6.3% increase seen in the first quarter but was significantly below forecasts of 8.5% growth.

Personal consumption was the biggest driver of growth, as the stimulus cheques issued between mid-March and April fuelled an 11.8% year-on-year increase in household spending. This was partially offset by lagging property investments and inventory drawdowns.

Separate data from the US Census Bureau showed orders for cars, appliances and other durable goods in June were also weaker than expected. Orders rose by 0.8% from the previous month versus estimates of 2.2% growth, although May’s reading was revised up to 3.2% from 2.3%. It came amid continued shortages of parts and labour as well as higher material costs.

Meanwhile, the Labor Department reported that 400,000 people filed initial claims for unemployment benefits for the week ending 24 July, above the Dow Jones estimate of 380,000 and nearly double the pre-pandemic norm.

More positively, US consumer confidence was little changed in July, hovering at a 17-month high of 129.1. Economists polled by Reuters had forecast a decline to 123.9.

Inflation picks up in Europe

Over in the eurozone, inflation accelerated to 2.2% in July from 1.9% in June, according to figures from Eurostat. This was the highest rate since October 2018 and above the 2.0% reading forecast by economists. Higher inflation came amid faster-than-expected monthly GDP growth of 2.0% in the April to June period. Compared with the same period a year ago, GDP surged by 13.7%. The eurozone economy is still around 3% smaller than at the end of 2019, but the expansion marked a strong rebound from the 0.3% contraction seen in the first quarter of 2021.

Germany missed expectations with a quarterly expansion of 1.5%, as supply constraints left manufacturers short of materials such as semiconductors.

Half a million come off furlough

Here in the UK, more than half a million people came off furlough in June. The gradual reopening of the hospitality sector drove more than half the total fall in jobs supported by wage subsidies, according to data from HM Revenue & Customs.

Shortages of labour and materials and problems recruiting staff meant manufacturing output and order book growth slowed to its weakest level in four months in July. The manufacturing PMI stood at 60.4, down from 63.9 in June. IHS Markit said July’s performance was still among the best on record but would have been even better had it not been for supply constraints.

Nevertheless, the International Monetary Fund (IMF) upgraded its 2021 growth forecast for the UK to 7%, meaning that together with the US it would have the joint fastest growth of the G7 countries this year. In 2020, the UK’s economic contraction was the deepest in the group.

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

04/08/2021

Team No Comments

Brooks Macdonald – Weekly Market Commentary

Please see below this week’s market commentary from Brooks Macdonald received late yesterday afternoon – 02/08/2021

Weekly Market Commentary | Despite summer holidays, it’s a blockbuster week for key data releases

By Edward Park

  • There were strong gains for US and European equities in July, but Asia ex-Japan lagged due to concerns over Chinese technology regulation
  • This will be a key week for the US infrastructure bill, which lawmakers hope to pass ahead of the summer recess
  • The US employment report due on Friday will be the last before the Jackson Hole symposium

There were strong gains for US and European equities in July, but Asia ex-Japan lagged due to concerns over Chinese technology regulation

July closed out a strong month for European and US equities, while commodities continued to make gains even as the ‘reflation’ trade cooled. Asia ex-Japan equities underperformed, with Chinese indices not helped by risk aversion around tougher regulation being introduced by Beijing in strategically important sectors.

This will be a key week for the US infrastructure bill, which lawmakers hope to pass ahead of the summer recess

A series of central bank meetings are due to be held this week, as well as it being a key week for the US physical infrastructure bill which needs to gather momentum in Congress with the summer recess looming. On the infrastructure bill, US senators have now agreed the text of a bipartisan bill so, barring amendments, lawmakers are hopeful it can pass this week. 

In terms of central banks, the Bank of England’s meeting on Thursday will be the week’s highlight. While no change is expected at this meeting, it will need to address CPI inflation, which is currently above the Bank’s formal target. The Bank of England has been more hawkish than some other major central banks. Nonetheless, we expect this meeting to stick to a transitory inflation narrative with a nod to clearer guidance later in the year. The Reserve Bank of Australia is also meeting this week, and it is expected to pause its asset purchase tapering given the ongoing lockdowns in the country.

The US employment report due on Friday will be the last before the Jackson Hole symposium

In terms of data, all eyes will be on the US non-farm payroll report, which will be released on Friday. The US Federal Reserve (Fed) has clearly stated, from the start of the pandemic, that employment levels are a key metric and that space capacity in the labour market was a primary factor for ongoing support. The point often made by Jerome Powell, the Fed’s chair, is that headline employment has improved, but the experience has been very different for lower wage workers. By shifting the requirements to a more balanced jobs recovery, the Fed has caused the bond market to price in only a gradual withdrawal of support over the next 12 months. Given that the tapering discussions have begun, however, and the all-important Jackson Hole meeting is almost upon us, this will be a closely watched employment report.

Despite investors moving into peak holiday season, we have a blockbuster week of central bank policy, fiscal policy, US earnings and key data releases. We still believe the hurdle to shift markets away from their transitory inflation narrative is high, but this will be an important week to test sentiment in the quieter summer weeks.

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

Charlotte Ennis

03/08/2021

Team No Comments

The problem with cash – should you be investing more?

Please see below an interesting article received from Beinvest recently. Although Britain has become a nation of savers following lockdown, this article provides an insight into the disadvantages of cash savings and discusses more beneficial alternatives.

Unable to travel, socialise or do many of the other things that usually deplete their bank accounts, Britain has become a nation of savers. However, this welcome financial cushion may not be as protective as hoped if inflation takes hold.

Around £75 billion was held in ISA accounts in 2019 to 2020, an increase of £7.1 billion over 2018/2019. However, most of this rise – £4.8 billion – went into cash ISAs, while Stocks and Shares ISAs can only command a distant second place. (1.)

Cash has its role. If people have a short-term savings goal, such as a house deposit or a new car, cash is almost certainly the right place for their savings. Equally, it is always sensible to have a few months’ worth of expenses in a readily accessible cash account as a buffer against life’s various hiccups – redundancy, sickness, a leaky roof. But too much in cash for too long can be corrosive for long-term wealth, particularly today.

The impact of inflation

Rising prices will erode the real value of a saving pot. While cash may feel inherently safe – £10,000 goes in and, usually, it stays at £10,000 – if it only buys half as much, that is a real problem. This isn’t as unlikely as it sounds: a savings pot of £10,000 would be worth just £6,100 in real terms after 25 years with inflation at 2%, the current Bank of England target. If inflation rises to 3%, that drops to £4,780. At 4%, that savings pot is worth just £3,750. (2.)

This wouldn’t be a problem if savers were getting sufficient interest on their savings accounts to compensate. But the majority of savings accounts now pay less than 1%. The top-paying easy-access savings account pays just 0.5% (3.). In extreme cases, banks charge their customers to save with them. Low interest rates have, unfortunately, changed the landscape. Cash savers are often losing money in real terms and the longer they remain in cash, the more the problem compounds.

Inflation today

Inflation has been relatively benign in recent years, hovering around the Bank of England’s target rate. However, there are reasons to believe that a higher inflation environment may be imminent. There are short-term considerations: as the world emerges from the strictures of lockdown, there is pent-up spending. After a year confined to their home, people are keen to travel, socialise, shop. At the same time, production difficulties have created supply problems for certain commodities and key components such as semiconductors. This is creating shortages and pushing up consumer prices.

There are also longer-term reasons for structurally higher inflation. Governments are spending vast sums to ‘build back better’, pouring trillions into decarbonisation plans and infrastructure building. This is also creating significant demand in key areas and driving prices higher.

Equally, some of the deflationary forces that have curbed inflation over the past two decades are reversing. Deglobalisation, for example, brought cheap goods from China and lowered prices for everyone. But the fragilities exposed by the pandemic have shown the difficulties inherent in long supply chains that cross multiple borders. Global governments are now working to ‘reshore’ critical industries. This may raise the price of goods and services.

In normal circumstances, central bankers would simply put up interest rates in response to any inflationary pressure. However, the recovery is fragile and central banks, led by the Federal Reserve, have made it clear that they will look through short-term inflationary pressures until economic growth is firmly established. It is also increasingly difficult for central banks to raise rates: debt levels are higher, particularly for governments. High rates also risk real disruption to equity and bond markets, which have grown dependent on central bank liquidity. This means inflation will be allowed to ‘run hot’ for longer.

Potential solutions

Cash is not the only problem area. Other ‘safer’ assets can also struggle during periods of high inflation. Inflation is generally bad news for bonds, for example, because their income is fixed and therefore doesn’t keep up with higher prices.

Stock market investments can provide better protection against inflation, providing it doesn’t rise too quickly. 1970s-style inflation tends to be difficult for most asset classes. Companies should be able to put up prices in response to inflationary pressures, which in turn should be passed on to investors in the form of higher dividends or profit growth. Historically, savings held in a diversified portfolio of shares have kept pace with rising prices over the long term.

For savers who have managed to build up some spare cash over lock down, it is worth considering the risks of holding it in cash at a time of potentially rising inflation. The stock market can be a volatile place, but it has some natural advantages in today’s climate. A carefully blended and diversified portfolio can help protect the real value of a savings pot. Remember, investments carry risk and you can get back less than invested.

Cash has a variety of important uses; for short-term known expenditure, for unknown emergency expenditure and for emergency funds just in case you lose your income or need to ‘switch off’ investment or drawdown pension income. We recommend that you have at least one year’s expenditure in cash deposits.

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

Stay safe.

Chloe

02/08/2021

Team No Comments

A.J. Bell – Emerging Markets: Views from the experts

Please see below a blog from A.J. Bell which was published and received yesterday (30/07/2021) and details the key areas that the Franklin Templeton Emerging Markets Equity Team are currently thinking about:

As you can see from the above, Franklin Templeton’s team believe the current inflationary pressures seen in markets are a temporary blip and should ease at some point.

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

IFA and Paraplanner

30/07/2021

Team No Comments

Brooks MacDonald Daily Investment Bulletin: 28/07/2021

Please see below for Brooks MacDonald’s Daily Investment Bulletin received by us yesterday 28/07/2021:

What has happened

Equities had a weaker session yesterday with defensive equities outperforming technology stocks in particular. Some of this weakness in technology can be attributed to the concerns that China might continue to expand regulation after their foray into educational technology earlier this week.

Chinese technology

Markets have long had a concern around technology regulation in the US where a Democrat White House could try to curb the perceived overreach of big technology. Investors had downgraded this risk due to the economic impact of the pandemic but also a belief that the US would be unlikely to do anything too aggressive in case Chinese companies gained a competitive advantage. With China ‘going first’ on technology regulation this not only increases risks around Chinese securities but removes one of the arguments as to why the US would stay quiet on technology regulation for now. Meanwhile in the US, technology earnings saw some winners and losers with Alphabet rising 3% in the after-market but Microsoft losing an equal amount after it’s cloud-services business saw less growth than expected.

Federal Reserve

Now to the week’s major event, the Federal Reserve’s latest policy statement which is due out at 7pm UK time tonight followed by Fed Chair Powell’s press conference. Policy risk is at its highest at points of transition and the Fed will need to tread a delicate path today. The tapering genie is out of the bottle and will almost certainly be a conversation topic at the meeting however the extent to which Powell majors on this will give an important steer to the market. The rising risks around the delta variant and lower global growth expectations have both contributed to a less positive market backdrop ahead of tonight’s announcement. The statement will also need to address inflation where we have seen another upside beat to price levels in the June CPI numbers but inflation expectations have been falling in the bond market. Some of this reduction in inflation expectations is due to a belief that the Fed will not be afraid of raising rates over the next two years so there is a complex interplay that Powell will need to consider.

What does Brooks Macdonald think

Due to the rising uncertainties around the pandemic and economic growth, we expect Powell to stop short of warning that tapering is imminent. This meeting may well therefore serve as a placeholder until either the Jackson Hole Economic Symposium in August or indeed the meeting in September.

Source: Bloomberg as at 28/07/2021. TR denotes Net Total Return

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

29/07/2021

Team No Comments

Brewin Dolphin – Markets in a Minute

Please see below this week’s Markets in a Minute update from Brewin Dolphin – received late yesterday afternoon – 27/07/2021

Markets hit record highs as earnings beat forecasts

Most major markets went up last week, as second-quarter earnings season in the US continued to demonstrate the robust profitability of the biggest companies.

In the US, the S&P 500 and the Nasdaq Composite went up 2% and 2.8% respectively. A raft of companies, including healthcare giant Johnson & Johnson and telecoms firm Verizon, reported second-quarter earnings that beat expectations. The benchmark more than recovered from the fall of the previous week, when inflationary concerns preoccupied the market.

The pan-European Stoxx Europe 600 rose 1.5%, also hitting a record high. Dutch technology company ASML was among those to report earnings that met with the market’s approval. ASML shares are up nearly 50% yearto-date.

The UK’s FTSE 100 edged up 0.3%. Outside the top flight, private equity firm Bridgepoint showed the strength of the market, rising 29% on the first day of its trading following its IPO in London.

China’s Shanghai index also edged up. However, the index fell back on Monday 26 July with regulation affecting education, property and technology sectors.

Shares were mixed on Monday, as investors braced for another slew of earnings.

British Airways owner IAG was among the risers in London. As the industry recovers from Covid-19, more flights are resuming. Normality may be some way off, but some investors remain optimistic about the industry’s prospects. The number of new Covid-19 cases in the UK has fallen for several days.

However, as the Guardian puts it, passengers “are arriving in countries where the Delta variant paralysing Britain is just becoming dominant – and Europe is responding by clamping down”.

Some countries have tightened border controls, with Malta barring entry to unvaccinated travellers and Germany bringing in stricter quarantine rules for people arriving from Spain and the Netherlands. More broadly, authorities from Greece to Italy and France to Portugal are bringing in what are effectively vaccine passports for a wide range of activities, although most are shying away from using that term, which has become incendiary.

Pingdemic

Meanwhile, concerns remain that some businesses are having difficulty operating because of the ‘pingdemic’, where people are unable to work because they have received notification on their phone saying they have to self-isolate.

Under pressure, the UK government changed its stance last week and said some double-jabbed staff at some critical organisations would be allowed to take tests to keep coming to work, rather than self-isolating.

Still, the EY ITEM Club forecasts that the UK will see GDP growth of 7.6% this year, the fastest growth since 1941. It forecasts 6.5% growth in 2022.

It said the expectations of a bounce-back in consumer spending and supportive macroeconomic policy contributes to the largely positive economic outlook.

But EY adds that questions remain over inflation prospects. It said inflation will be 3.5% by the end of 2021, adding that how consumers will tap into pandemic savings remains to be seen.

Shell, slew of techs to report

Oil giant Shell is among the companies scheduled to report second-quarter earnings.

The S&P 500 was little changed in early trade on Monday. It hit another record on Friday, buoyed by companies reporting strong second-quarter earnings. Among the major technology companies reporting after the close on Tuesday are Apple, Microsoft and Alphabet. Facebook and Amazon report on Wednesday and Thursday respectively.

Aon-WTW merger off

Meanwhile, in the insurance industry, Aon and Willis Towers Watson said they were scrapping their merger deal and would end litigation with the US Justice Department. The deal was first announced in March 2020. The companies said that, despite regulatory momentum around the world, including the recent approval of the combination by the European Commission, they reached an impasse with the US Department of Justice.

Aon shares increased about 7%, although it will have to pay Willis Towers a termination fee of $1bn. Both companies will provide further financial updates and outlook with their second-quarter earnings, reported MarketWatch. Aon is due to report on 30 July.

Regulation hits China shares

In China, the Shanghai Composite fell 2.3% on Monday. Some shares have been hit by new regulation in education, property and tech. Reuters reported that the CSI Education Index fell 9.6% to its lowest close in 16 months. The shakeout in China’s $120bn private tutoring sector follows Beijing’s announcement on Friday of new rules barring for-profit tutoring in core school subjects to ease financial pressures on families. The policy change also restricts foreign investment in the sector through mergers and acquisitions, franchises, or variable interest entity (VIEs) arrangements.

The weekend also brought new regulatory moves targeting technology and property, sparking selloffs in those sectors in Hong Kong and mainland markets on Monday, Reuters reported.

Another quick update from Brewin Dolphin, these updates are a good way of keeping up to speed with developments in the markets.

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

Charlotte Ennis

28/07/2021

Team No Comments

LGIM – Learning from the earning season

Please see below the latest article received from Legal & General Investment Management’s Asset Allocation Team which was received late yesterday (26/07/2021) afternoon and covers their views on a number of topics:

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

IFA and Paraplanner

27/07/2021

Team No Comments

Is a central bank liquidity drain to blame for market wobbles, rather than the Delta variant?

Please see below article received from AJ Bell yesterday, which highlights the effect that central bank policy and the Delta variant have on the volatility of global markets and economic recovery.

“Many investors are familiar with the saying that ‘markets like to climb a wall of worry,’ but few are less well versed with the opposite which is they ‘slide down the slope of hope.’ That is what may be happening right now as markets fret about the Delta variant and whether it could stop the global economic recovery from developing as quickly as the near-40% rally in the FTSE 100 from its lows would demand,” says AJ Bell Investment Director, Russ Mould.

“But another factor could be at work (besides the traditional light volumes and case of blues which can dog markets in summer), and that is central bank policy, because some leading monetary authorities seem to be draining liquidity rather than supplying the tidal wave of cheap money which, many argue, is a prime reason why asset prices are rising despite the difficult backdrop.

“The Bank of Canada has cut back the scope of its Quantitative Easing programme for the third time, the Reserve Bank of Australia has also eased the rate of asset purchases and New Zealand has stopped buying assets altogether. None of them are going as far as shrinking their balance sheet, but they are growing them more slowly or, in New Zealand’s case, finally holding it in check.

“Even the US Federal Reserve is getting in on the act. The American central bank is using reverse repos in vast quantities, even as it continues to run QE at $120 billion a month, with the result that it is siphoning liquidity away from the financial system with one hand even as it pumps it in with another.

Source: FRED – St. Louis Federal Reserve

“Without wishing to get too technical:

  • A repo (or repurchase agreement) sees a financial institution sell Government bonds (in this case US Treasuries) to another one, either a bank or central bank, on an overnight basis. It then buys them back the next day, usually as a slightly higher price. The idea is the seller can raise immediate liquidity if they happen to need it. (It also enables the counterparty to make a financial return pretty much without risk, given the extremely short time horizon involved and the collateral that backs the trades).
  • The repo rate spiked suddenly in the USA in autumn 2019 in what was seen as a sign that the Fed’s then Quantitative Tightening plan (of raising rates and withdrawing QE) was working well – so well that banks were scrambling for cash as the financial system began to creak. Under Jay Powell, the US central bank backtracked on QT and – as the pandemic hit – cranked up QE to ever-more dizzying levels in 2020. That tidal wave if liquidity mean the US overnight repo rate is 0.07% – down from that panicky 6.9% one-day spike two Septembers ago.

Source: Refinitiv data

  • A reverse repo (or reverse repurchase agreement) a bank or central bank sells Government bonds in exchange for cash to a range of counterparties, over a pre-determined timeframe (often overnight). This therefore drains cash out of the financial system, at least if a central bank is doing it and the Federal Reserve is hard at work here right now. At the last count, the Fed’s outstanding reverse repo liabilities were $860 billion, the equivalent to more than seven months’ worth of QE.

Source: FRED – St. Louis Federal Reserve

“In many ways it is hard to talk market talk of the Fed turning hawkish seriously – the dot plot of two quarter-point rate rises from a record-low by the end of 2023 is more like a budgie clearing its throat for a quick chirp rather than a vicious swoop from a bird of prey.

“But perhaps the US Federal Reserve is laying the groundwork for tightening monetary policy after all and taking these initial steps to test how financial markets (and the economy) will react.

“For the moment, there is no sign of financial stress anywhere in the system, at least according to the tried-and-tested St. Louis Fed Financial Stress and Chicago Fed National Financial Conditions indices. Both are trading very close to their all-time lows.

Source: FRED – St. Louis Federal Reserve

“The S&P 500 still trades close to all-time highs, so again the Fed will be hoping the turn in the liquidity tide does not rock too many boats here. A spike in the VIX and the stumble in the S&P will leave Fed officials on alert, though, as autumn 2019’s repo rate spike saw WeWork’s much-hyped flotation fall apart, Bitcoin sink 25% in a month and wider equity and bond markets both get the jitters, albeit very briefly.”

Source: Refinitiv data

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

Stay safe.

Chloe

26/07/2021