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Invesco: Why are global stocks selling off?

Please see the below article from Invesco detailing their thoughts on the latest bout of market volatility. This article is from their Multi Asset team on the reasoning behind the ‘global sell off’:

Global stocks have fallen sharply from their all-time highs in the last few weeks.

It appears we are on the brink of that next broad-based 10% decline as the economy weakens, the Federal Reserve passed on lowering interest rates at the July meeting and investors continue to lighten their holdings in expensive tech stocks.

It is hard to say with precision how long this bout of volatility will last for, and even though market participants appear to have quickly moved from pricing an overly rosy picture to an overly negative one, we think that at this stage, investors shouldn’t necessarily throw in the towel.

The current state of play of financial markets

Risk assets performed strongly since the start of the year, driven by hopes for a goldilocks economic scenario and a rush into US tech stocks fuelled by enthusiasm for artificial intelligence technology. At their peak on July 16th, global equites were up 14% in GBP terms.

In the last few weeks however, sentiment started to shift, with global equities giving back half of their year-to-date gains. Bonds on the other hand have offered multi-asset investors some reassurance as this more classical growth-driven sell-off has seen government bonds cushion part of the blow in equities by moving in the opposite direction.

Notwithstanding the alarming moves, investors should note that most markets are still up for the year as shown below.

What has triggered the sell-off?

It’s hard to pin this on any single event. Below we list what we think are some of the key culprits.

1. Recession fears?

After several months of stability, economic data around the world has started to soften with the most noticeable decline being in the US – evidenced by last Friday’s unexpected 114k new jobs added (lower than the 215k average of the last year) and the unemployment rate jumping to 4.3%, the highest since October of 2021. Although that’s not in and of itself an unhealthy unemployment rate, its sudden march higher has raised concerns for a potential recession.

2. Fed too slow to act?

Post the 2022 pull-back, equity markets have been unstoppable, buoyed by falling inflation and growing expectations of rate cuts, particularly from the US Fed. But during last week’s meeting, the Fed didn’t cut rates as many had hoped triggering fears that the Fed may be too late to act before a slow in hiring turns into rampant layoffs.

3. AI trade losing steam?

After benefitting from stellar returns, investors started to unwind big positions in the likes of Apple, Nvidia, Microsoft, Meta, Amazon, Alphabet and other tech stocks. Warren Buffet, Berkshire Hathaway’s CEO for instance recently sold half of Berkshire’s stake in Apple, which many see as a troubling sign for the health of the tech sector. Because these companies make up an enormous chunk of the overall value of the S&P 500, when investors sell off tech stocks, that has a massive detrimental effect on the broader market.

4. Unwinding of the Japanese yen carry trade

While less structural in nature, the mayhem that swept across world markets was amplified by a market strategy known as the “carry trade.” Japan’s benchmark Nikkei 225 plunged 12.4% on Monday and markets in Europe and North America suffered outsized losses as traders sold stocks to help cover rising risks from investments made using cheaply financed funds borrowed mostly in Japanese yen. Markets recovered much of their losses on Tuesday. But the damage lingers.

More common than you think

Drawdowns (a decline of less than 10%), are always coming. Since the early 1980s, there has been a greater than 5% drawdown in the S&P 500 Index in every year but two (1995 and 2017). Even in this year, which had felt relatively benevolent until the past few weeks, the S&P 500 Index experienced a 5% drawdown in April before climbing to an all-time high in the middle of July.

On the other hand, corrections (declines of greater than 10%) happen less frequently. Corrections typically don’t just emerge out of nowhere. Often, they’re the result of policy uncertainty and/or surprising weakness in economic activity. The market has currently gone since Nov. 2, 2023, without an official correction, representing a 188-day period of a resilient economy and declining inflation.

Reasons to remain constructive as the dust settles

We appear to potentially now be on the brink of that next 10% decline as the economy weakens, the Federal Reserve passed on lowering interest rates at the July meeting and investors continue to lighten their holdings in expensive tech stocks.

It is hard to say with precision how long this bout of volatility will last for, and even though market participants appear to have quickly moved from pricing an overly rosy picture to an overly negative one, we think that at this stage, investors shouldn’t necessarily throw in the towel.

Growth slowdown is not the same as recession

In our opinion, this macro backdrop is consistent with an incoming deceleration but not indicative of imminent recession risks given:

  • Ongoing resilience in consumer and corporate balance sheets
  • The labour market is cooling, but not falling off a cliff
  • Banks do not appear to be tightening lending standards significantly
  • There does not appear to be significant excess in the economy

As of today, growth is solidly in positive territory on a global basis, with developed markets growing between 1-2% and consensus expectations signalling similar growth rates over the next two years.

The Fed should join the rate cut party soon

Last week, the Fed kept its main interest rate between 5.25 per cent and 5.5 per cent. However, the combination of a slowing jobs market, cooling inflation and the negative market reaction should lead the central bank to finally act. Historically, markets tended to perform well in easing cycles that were not associated with recessions. All eyes are therefore set on the Fed’s next meetings scheduled for September, November and December.

Tech stocks may be falling out of favour, but we don’t think this is their end

Tech stocks are still trading at lofty valuations, and while this may temper future upside potential, we don’t think investors will completely shy away from the sector. To evaluate the sustainability of their performance, investors should eschew reliance on charts of share price performance and focus instead on business fundamentals and valuations. While not unassailable these companies have large moats, very strong balance sheets, and many have revenue streams that are far less cyclical than tech companies of the past.

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

Andrew Lloyd

08/08/2024

Team No Comments

The Daily Update – The Market’s Roller Coaster Ride

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

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

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

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

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

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

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

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

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

Chloe

07/08/2024

Team No Comments

Brooks Macdonald Daily Investment Bulletin

Please see below the Daily Investment Bulletin from Brooks Macdonald, which was received on 06/08/2024:

What has happened

What a difference 24 hours makes. The big takeaway coming into today’s trading session is that markets, for the time being at least, appear to have found their footing. This comes after markets over the past week hit by a triple whammy of weaker economic data, mega-cap US technology results disappointments, and the surprise interest rate hike out of Japan. Much of the rebound from yesterday’s lows is stemming from a better-than-expected US ISM (Institute for Supply Management) Services PMI (Purchasing Managers’ Index) which has in part pushed back some of the fear that the US economy was about to tip into recession. Arguably the epicentre for the wave of selling over the last few days, Japan’s TOPIX has this morning posted a gain for the day of +9.30% and has as a result pushing the index for the whole of 2024 to date back into positive territory (just) of +2.33%. Otherwise, the other news out overnight is that Australia’s central bank (the RBA), has left interest rates unchanged at a 12-year high (of 4.35%) for the sixth meeting in a row.

A better US services PMI pushes back on fears of impending recession

After the weaker US manufacturing PMI and weaker US non-farm payroll jobs data last week, the markets were desperate for good news. For near-term investor sentiment, coming to the rescue was yesterday’s US services PMI print. The July reading saw a rise to 51.4 from 48.8 in June (and better than the 51 expected). Importantly, it put the index into expansionary territory (over 50). Beneath the headline, the ISM employment sub-component saw a bounce up to 51.1 (against 46.4 expected) and reaching its highest level since September 2023. While the data also showed some degree of sustained inflationary pressure, with the ‘prices paid’ sub-component up to 57 (versus 55.1 expected), markets were yesterday understandably more focused on the economic growth side of the equation.

Latest US Fed survey on credit conditions sees continued improvement

Also supporting a more constructive picture yesterday was the latest (calendar-quarterly) US Federal Reserve Senior Loan Officers’ Opinion Survey (SLOOS). While credit standards for commercial & industrial loans were still tightening, they were doing so at their slowest pace for 2 years, since Q2 2022, while standards for mortgages moved back to neutral. Reflecting the more market-friendly nuance, the US S&P500 banks sector index marginally outperformed the wider market yesterday. Historically, there is quite a good correlation between the SLOOS and trailing 12-month corporate earnings growth, so as the SLOOS continues to see a turn away from relatively tighter credit conditions, so this might bode positively for the earnings picture more broadly.

What does Brooks Macdonald think

Yesterday’s wild swings in markets has seen volatility return with a vengeance. At one point intraday yesterday, the so-called ‘fear gauge’ (the VIX index which measures the volatility of the US S&P500 equity index) was trading at 65.73, up 42.34 points and up +181% from Friday’s close. To put that in context, the largest full day move since the VIX index was first calculated back in 1990 was the 21.57-point increase on 12 March 2020 at around the time of the initial Covid-19 wave. After yesterday’s part-recovery in investor sentiment, last night the VIX index closed at 38.57. Whether the latest 24hours marks a slow return to some degree of relative market calm, or whether it is just the opening bout of more volatility to come, it is impossible to say. However, what we do know is that, as we said in our recent July edition of our Quarterly Market Overview, in an uncertain world, diversification remains key, enabling us to position our asset allocation settings for more than just one central forecast economic and market scenario.

Bloomberg as at 06/08/2024. TR denotes Net Total Return.

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

Charlotte Clarke

06/08/2024

Team No Comments

EPIC Investment Partners – The Daily Update, Payrolls Boost Rate Cut Expectations

Please see the below article from EPIC Investment Partners detailing their thoughts on the labour market upon receipt of recent payroll statistics. Received last week.

A week is a long time in politics, but it can feel like an eternity in financial markets. In our recent piece, “The Mirage of Western Prosperity” (Markets – EPIC Investment Partners (epicip.com) we highlighted the concerning debt levels of G7 nations, concluding that the question wasn’t if interest rates would fall, but how far and how fast. Recent events have provided a resounding answer.

The precipitous drop in global bond yields, notably a 45 basis point decline in the US 10-year since our daily, can be partly attributed to Federal Reserve Chair Powell’s hints that payroll data might be overstating job growth, suggesting a September rate cut is on the horizon.

Today’s payroll figures further solidified this expectation, with the headline number falling well short of forecasts (114k versus expectations of 175k). Crucially, the unemployment rate has risen to 4.3% from its low of 3.4% in January last year. Models like the McKelvey Rule and Sahm Rule, which use changes in unemployment to predict recessions, are flashing warning signs. Adding to the unease, Intel’s announcement of a 15,000-person workforce reduction suggests trouble brewing within certain US companies.

However, jobs aren’t the sole driver of this rapid shift in interest rate expectations. The US ISM manufacturing survey, while indicating contraction, isn’t new news, as the survey has shown contraction for 20 of the past 21 months. What is noteworthy is the sharp decline in household expectations of future income. Last week, the University of Michigan’s Consumer Confidence report, while weaker than last month, masked a concerning trend buried within its data. A survey question on expected income changes has seen one of its sharpest declines ever, suggesting that people are bracing for reduced incomes or job losses. This implies weaker demand going forward, which in turn could lead to more job cuts, creating a potentially vicious cycle. Watch for larger rises in the unemployment rate going forward.

This raises questions about the seemingly strong job gains in recent payroll data. It’s important to remember that payroll figures measure the number of jobs, not individuals employed, and incorporate a statistical adjustment called the birth/death model. This model, based on historical data, can overestimate job creation, particularly at economic turning points. Therefore, the unemployment rate provides a more reliable picture of the labour market’s true state.

Today’s payroll data and the further rise in the unemployment rate reinforce our earlier assertion: the question isn’t if interest rates will fall, but how far and how fast. Moreover, today’s figures raise the alarming possibility that we may already be in the midst of a recession. 

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

Alex Clare

05/08/2024

Team No Comments

Brooks Macdonald Daily Investment Bulletin

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

What has happened

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

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

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

Investors are proving to be less forgiving

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

What does Brooks Macdonald think 

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

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

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

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

Chloe

02/08/2024

Team No Comments

EPIC Investment Partners – The Daily Update

Please see the below article from EPIC Investment Partners detailing their thoughts on the renewable energy market and discussions on a potential rise in nuclear energy. Received this morning 01/08/2024.

Before we look at the nuclear option, we note that a subsidiary of Zhejiang Akcome New Energy Technology Co has become the latest solar panel manufacturer to declare bankruptcy.  This follows quickly after another smaller manufacturer, Gansu Golden Solar Co, entered a pre-reorganisation process earlier this month.  Expect many, many more to fall by the wayside.

This is not because China is holding back on rolling out renewable, quite the reverse. An interesting article published by The Guardian recently compared global solar and wind power projects currently under installation.  China accounted for a staggering 64.5% of the total with the US next at 7.6%. No other country accounted for more than 2.5%.  Indeed, the Asia Society Policy Institute recently suggested that China’s National Bureau of Statistics is severely underreporting renewables power generation as it does not include, amongst other things, rooftop solar.

A recent survey, attributed to the OECD, asked the question “Would you be willing to live near a …..”  Over 80% of respondents replied “no” to landfill sites, waste incinerators, large airports and chemical facilities.  Interestingly nuclear, at 35%, recorded the lowest “no” vote among the nine other options which included wind farms, high voltage transmission cables and mobile relay stations.

Oklo Inc, an advanced nuclear technology company based in California, estimates that a 15MW (scalable to 50MW) reactor with a 40 plus year life could be installed on just a two-acre site within 12 months and cost just $70mn. Oklo provides nuclear fission reactors which can be fuelled by recycled nuclear waste. We understand that spent fuel, similar to naturally occurring uranium, only contains around 1% of the all-important U-235 isotope (capable of sustaining a chain reaction in a thermal-neutron reactor) compared to the 5% needed for a traditional pressurised water reactor.

If ‘nimbyism’ is not a problem, as the OECD survey suggests, watch out for a small nuclear power plant in your neighbourhood! For the adventurous investor Oklo is New York listed.

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

Alex Clare

01/08/2024

Team No Comments

Brewin Dolphin: Markets in a Minute

Please see the below article from Brewin Dolphin which provides a brief analysis of the key factors currently affecting global investment markets. Received late last night – 30/07/2024

A challenging week for the equity market’s hottest stocks

Last week was challenging for investors, with the so-called “pain trade” hitting hard. Pain trade is a term used in financial markets to describe a scenario where the market moves in a direction that causes the maximum discomfort or losses to the largest number of market participants.

The pain trade has been building for a few weeks since the improvement in small-cap stocks. A couple of weeks ago, we described how semiconductor stocks had been hit by political pressure from both sides of the aisle – the Biden administration threatening to clamp down on companies facilitating the use of U.S. technology in the Chinese chipmaking industry, and former President Donald Trump casting doubt over the willingness of the U.S. to defend Taiwan against Chinese aggression.

Last week saw some of the biggest technology companies reporting earnings, which weren’t taken well. On the face of it, with 40% of the S&P 500 having now reported, the headlines will seem familiar: 79% of companies have exceeded analysts’ estimates of their earnings. The average company has beaten earnings estimates by 4% and been rewarded by a 0.5% share price fall. The market has seen the earnings glass as half empty over the past few weeks.

As the week ended, the technical outlook for equity markets remained challenging. They fell through key support levels and have not yet fallen into oversold territory.

Beyond tech

The majority of the market’s recent declines seem to relate to profit taking and sector rebalancing. Technology and associated stocks became the clear outperformers, and many sectors were left behind.

The prospect of an interest rate cut is seen as a boost to small caps, real estate, and other forgotten sectors, and investors have begun to look for less crowded ways to play the spread of artificial intelligence (AI).

Within real estate, data centres are perhaps the most obvious beneficiaries of AI, but focus has also shifted to their power needs. Utilities have staged a few rallies during 2024 as beneficiaries of the increased electricity demand from data centres. The International Energy Agency estimates electricity consumption demand for data centres could double over the next two years to 1000 TWh, the equivalent of Japan’s power needs.

The current wave of technology-led returns has prompted some challenges of course, but some of these are quickly dismissed. Is this like the technology bubble of the late 90s and early noughties? No, because these companies are very profitable and seem to be on relatively sensible valuations in many cases. Challenges remain nonetheless.

Are we heading for an anticlimax?

We’ve all seen the incredible rise of Nvidia, with its sales doubling over the last two years – but can those sales be maintained? Inevitably, there will be a cycle of investment in demand for computing capacity. But the questions remains, how long will the current upswing last and how severe will the subsequent downswing be?

This comes down to the strength of the use case for AI. If AI is used widely and effectively in the economy, the demand will remain. Alternatively, if it proves to be more hype than reality, cloud providers may find themselves with too much computing capacity, leading to a lack of demand for new semiconductor investment.

We are quite hopeful of the potential of AI because, unlike other general-purpose technologies, there are relatively few barriers to use. The venues for many AI implementations are computing clouds, which are accessible to all. For many medium-sized companies, it’s possible to develop AI applications in-house. For those without the capability, providers are deluging them with offers of service.

At the same time, the potential applications of AI seem broader than for the internet, which was essentially a communication mechanism. This seems quite different from the early days of the internet when development expertise was scarce, technology hardware was expensive, connections were slow, and not all customers were online.

Unlike previous general-purpose technologies such as rail, electricity, telecommunications, and the internet, a viable infrastructure for widespread adoption of AI already exists.

What do we know about Kamala Harris?

Another major development last week was that the Democrats were on the brink of formally confirming Vice President Kamala Harris as their U.S. presidential election candidate. Even before President Joe Biden stepped down, it was clear she would be the only viable candidate. Harris has access to existing campaign funds, which were raised for her and Biden, although funds swelled upon confirmation that Biden would no longer run.

The best guess is that she would provide a degree of continuity with the Biden administration, although the role of vice president essentially means deferring to the president’s agenda, so it can serve to mask her own preferences.

Harris is considered to come from the progressive (meaning left wing) side of the party. She also hails from California, which has a poor reputation for having a high cost of living, heavy tax burden, and burdensome regulation, while also struggling to address issues of homelessness.

Republican attacks blame her for the increase in illegal border crossings, which is perhaps unfair given this didn’t fall within her area of responsibility. She also has a reputation for being prone to gaffes.

The biggest challenge Harris faces may be found in her failed attempt to run against Trump in 2020. She wasn’t able to generate much enthusiasm and was fairly easily beaten in the primaries by Joe Biden. Of course, this is a competition against former President Trump rather than President Biden, who has endorsed her, so her ability to appeal to neutrals is in focus.

It will take some time for the American public to form a view on Kamala Harris. In the meantime, election forecasts, in terms of the presidency and the U.S. Congress, will be unusually uncertain.

China holds third plenum

It would be easy to overlook the Chinese Communist Party’s third plenum, which took place the week before last and was reported to the public over that weekend. These party meetings are held every five years and map out the general direction of the country’s long-term social and economic policies.

Understandably, the plenum ends up being a little vague. The important point is that there would be no material clarification of the role of Chinese-style modernisation, or so-called socialism with Chinese characteristics.

This essentially means continuing with the common prosperity principles that President Xi Jinping has been espousing, while recognising a greater role for markets in the economy, but confusingly, still committing to a model in which assets are state-owned or state-directed.

It’s a model that must be concerning for Chinese investors because it leaves companies unclear on the extent to which profit motives should be balanced against social goals, and whether something might be socially desirable one year and less desirable the next.

If the concern is that this might lead to poor allocation of investment, then bear in mind that China’s commitment to invest and build capacity in certain key industries has seen huge overcapacity in solar and is now doing the same in battery technology. It’s unclear whether this strategically guided investment has resulted in the kind of technological advantage the Communist Party was aspiring towards. Many of the most efficient solar panels are built by non-Chinese companies across a range of jurisdictions. However, they have resulted in substantial declines in costs and seem to be doing the same for battery cells.

The tension here is between patient capital deployed by China and the Western model. The former works on the basis that companies can develop a strategic competitive advantage through state ownership, whereas in the Western model companies are assumed to be more nimble, motivated, and efficient if they are pursuing a profit motive.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

31st July 2024

Team No Comments

EPIC Investment Partners – The Daily Update | China High Tech Drive

Please see today’s daily update from EPIC Investment Partners received this afternoon:

The four-day Third Plenum in Beijing was the first meeting of the Central Committee that President Xi presided over since securing a third term in power. The lack of specific measures to tackle the ongoing residential property woes was disappointing although the shift to increase overall funding to local authorities was welcome. President Xi also vowed to make “high-quality development” the guiding force of the economy. 

The global manufacturing of solar panels is totally dominated by China. Estimates vary but the surge in capacity in recent years has seen capacity utilisation slump to 50-60%. P-type solar cells dominate capacity at present (circa 85% market share) but are likely to be replaced by the more efficient N-type solar cells .

N-tyle cells are designed with a specific doping process to improve efficiency and performance. Doping refers to introducing impurities into a pure silicon wafer to alter its electrical conductivity. P-type cells have an efficiency of between 15-22% although some have been rated as high as 23.6%. N-type cells can reach efficiencies of 25.7% and one would expect that number to climb further.  

The International Technology Roadmap for Photovoltaic projects that N-type cells’ mono-crystalline silicon (c-Si) will reach a market share of 28% by 2028, up from a mere 5% in 2017, while Solar Magazine estimates that N-type cells will account for 70% of production by 2032. 

Interestingly the Ministry of Industry and Information Technology (MIIT) recently announced new guidelines stipulating that existing and new capacity on N-type solar cells must exceed an average photoelectric conversion efficiency of 25% and 26%, respectively. Is this the death knell for the 85% market share P-type cells as “high-quality development” accelerates? Probably. Some estimates suggest that over 20% of current capacity will exit the market in short order, potentially lifting capacity utilisation significantly. 

The larger, better financed and better managed firms will survive and benefit from the exit of bit time players. We have seen this in the Chinese steel industry where decarbonisation and digitalisation dominate official policy. 

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Charlotte Clarke

30/07/2024

Team No Comments

Tatton Investment Management – Monday Digest

Please see the below article from Tatton Investment Management providing an insight into markets over the past week.

Don’t fear the rebalance

The rough patch for global stocks continues – yet again concentrated in the frothy US mega-caps. Smaller caps continue to be a bright spot, but in aggregate these gains are being outweighed by large-cap losses. The “Magnificent 7” (Mag7 – Apple, Amazon, Alphabet, Meta, Microsoft, Nivida, Tesla) looks far from magnificent, falling more than 11% since early July. Ultimately, though, we think the market-wide rebalance is positive.

Tesla was the worst offender last week, losing 12% share price after extremely disappointing Q2 profits. The electric carmaker is being hit by both sour tech stock sentiment and a global downturn in the autos market. Chinese overproduction means carmakers have no pricing power – and there is a similar story in microchips. Manufacturers are under real pressure.

Fortunately, that weakness is not yet spreading into services – as it historically has. The problem is firmly on the supply side, and demand has held up reasonably. For now, it looks like manufacturing weakness is a good thing for consumers – lowering their prices and giving them more money to spend on services. That could change (particularly if manufacturers cut jobs) which we will have to keep an eye on.

We welcome the large-to-small cap rotation, but Mag7 losses could still be painful for markets overall. Those companies are big enough that their troubles weigh down the entire stock market – in which US consumers are heavily invested. Still, capital readjustment helps growth prospects for smaller caps, as will the Federal Reserve’s upcoming rate cut. The case for global, not just US, growth is still strong. The UK has been a notable bright spot, for example, thanks in large part to the new government’s closer European relations.

Last week’s market wobble might not be over, for the US mega-caps at least. But the rotation will hopefully move capital from where it was too concentrated to where could have the biggest growth benefits. Investors should not fear the rebalance.

Sahm-thing to worry about?

The “Sahm rule”, a US recession indicator based on how quickly unemployment is rising, is close to being triggered. The rule says that a recession starts when the three-month average unemployment rate is 0.5 percentage points above its lowest level in the previous 12 months – because when unemployment rises, it usually rises quickly. After US unemployment climbed to 4.1% in June, the gap has now narrowed to just 0.43pp.

We are unlikely to trigger the 0.5 threshold soon for technical reasons (the previous low drops out of the monitoring period next month) but a similar regularity noted by former New York Fed president Bill Dudley (three-month average unemployment 0.3pp above the cycle low) has already been breached. Of course, recession indicators are all rules of thumb that come with exceptions, and American economist Claudia Sahm, the rule’s namesake, noted last year that her rule would not be the first to break down during this post-pandemic cycle.

The key question is whether unemployment will stabilise at the current rate, or job losses will spiral. Fed officials seem to expect stabilisation, largely because current unemployment is close to their estimate of the ‘neutral’ rate. This is backed up by the ‘Beveridge curve’ – data showing that there is a balancing point between unemployment and job vacancies (increases in the latter are usually thought to be inflationary). June’s unemployment was at that point, which we can interpret as neutral (as the Fed seems to) or, more worryingly, as a tipping point.

Past resilience of the US economy should perhaps suggest a positive view, but this might be counteracted by the drying up of pandemic-era savings. Upcoming rate cuts will help in any case, but businesses might not be far from cutting jobs. The US economy certainly looks more fragile than it did a few months ago.

China won’t ship out inflation

The cost of shipping freight out of Shanghai has soared recently. This has historically been an indicator of downstream inflation – thanks to its effect on Chinese goods producers, and eventually US consumers. Spiking Shanghai freight are therefore worrying many about a return to global inflation. But we think this time is different, and we won’t see inflation shipping out of China.

What seems to be pushing up costs this time is a massive pickup in US demand for Chinese goods. This is almost certainly due to Donald Trump: the former president and Republican candidate unleashed a wave of tariffs on Chinese trade during his first term, and has promised to do so again if re-elected. His administration will reportedly target 60% or higher tariffs on Chinese goods. With Trump currently the favourite for November’s election, Chinese exporters and US importers think this might be the last realistic chance to trade. So, they are rushing to exchange goods, even if freight costs seem prohibitive.

This is unlikely to result in price pressures down the line, simply because Chinese firms are in no position to put up prices. Its domestic economy is weak and the government has been exacerbating a severe overproduction problem. That has resulted in ‘dumping’ goods (particularly electric vehicles) on international markets, pushing down prices. This is one of the key reasons global manufacturing is so weak. At the moment, China is exporting disinflation.

Chinese producers will likely bear the freight shipping costs, because they have little choice. Whether Trump wins or loses in November, we should expect the rush of China-US shipping to end in 2025. Freight costs are not as inflationary as in the past.

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

Carl Mitchell – DipPFS

Independent Financial Adviser

29/07/2024

Team No Comments

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

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

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

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

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

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

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

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

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

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

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

Chloe

26/07/2024