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Please see below, an article from Tatton Investment Management, providing a summary of the key issues currently affecting global investment markets. Received this morning – 04/11/2024

US, not UK, battening down the hatches

The budget dominated headlines, but global investors were again preoccupied with US politics. We said that volatility could spike amid tense markers, and that’s exactly what happened. It could continue until the US election outcome is eventually clear.

Many framed the UK budget as a fundamental change, but ironically the main economic impacts look cyclical rather than structural (according to the OBR). Rachel Reeves painted the budget as a starting point – the medicine before later supply-side reforms. We hope so, but only time will tell. Markets reacted negatively but not horribly: stocks fell and government bond yields rose. At least some of the yield rise was budget-related, but for now debt costs still look manageable.

UK bond yields also reacted to higher US bond yields, which rose because of Trump’s possible tax cuts and fiscal deterioration. Bond traders are getting nervous ahead of election day. We suspect non-US investors are also worried about political stability – judging by the fact higher US yields have not attracted the usual level of demand. Stocks sold off on Thursday, as a reaction to bond moves and underwhelming corporate earnings, but, this says more about short-term investor positioning than overall sentiment. We already know that US growth is improving from a slow summer. Absent a damaging post-election fight, the US is well positioned.

European earnings are worse – and unlike the US, it is not just past earnings but future expectations. Russia’s gains in Ukraine weigh heavily, and what happens there depends on the US election too. On the other hand, Middle East tensions have simmered, after Israel’s relatively tame response (avoiding oil sites) to Iran’s missile barrage. Oil prices fell, which should be a boon for global growth. But again, for positivity to manifest, we need to get the election over with. 

October asset returns review

Global stocks gained a respectable 2% last month in sterling terms, but this was almost entirely down to US markets. Large US stocks rose 3.4% in sterling terms, partly due to an improved economic outlook and partly due to dollar strength. Economic data releases made it clear that the US summer soft patch was just a blip and investors are broadly confident about the future – but volatility spiked at the very end of October. This was mostly about investors rolling back risks ahead of the deeply uncertain presidential election. Bond yields rose on a combination of stronger expected growth, the possibility of Trump’s tax cuts and ensuing fiscal deterioration. 

Some might see higher yields as a ‘risk off’ sign, alongside the stronger dollar and record high gold prices, in light of Middle Eastern conflict. But Israel-Iran risks actually dissipated through the month, lowering oil prices. 

European stocks fell 1.9%, amid a worsening growth outlook. Falling interest rates will help, but European companies face a tough road ahead. UK stocks also finished down, while bond yields went up – but this was less autumn budget related than media commentary would suggest. The yield bump at the end of October was partly due to the budget, but month’s trend was more about higher US yields. Japan’s initial stock market struggles, meanwhile, were about political uncertainty – but stocks actually gained in the end after a snap election surprisingly lost the government its majority.

Last but not least, Chinese stocks bounced up and down depending on how strongly investors approved of Beijing’s economic stimulus announcements. Policymakers announced $1.4 trillion worth of extra debt issuance last week, but on closer inspection this was more a restructuring (moving local government debt to the central government) than new fiscal support. Beijing’s stimulus drive has helped – reflected in China’s outperformance over three months – but we still don’t know by how much. 

Demographics and economics

The ONS reported last week that fertility rates in England and Wales fell to the lowest point on record in 2023. Demographic shifts are never linear, so the birthrate is likely to increase again in the next decade (it looks like we’re at a trough), but the long-term trend is clearly down. People often worry that this could lead to a shrinking, aging population. 

The basic problem with that is it leads to more people depending on economic production than those able to produce, holding back growth. If the economy and worker base isn’t expanding, businesses can’t grow and investment declines, ultimately affecting living standards. This is what happened in Japan’s so-called ‘lost decades’: its population now is the same as in the early 1990s, during which time it has gone from the second-biggest economy in the world to the fourth.

But Britain’s population is actually growing, thanks to immigration. Experts think that, because of declining fertility, the UK will need continued net immigration to sustain a working age population for the rest of this century. In situations like these, immigration becomes one of the driving forces of an economy. US immigration, for example, surged post-pandemic which many have argued boosted growth and solved a shortage of labour supply – bringing down inflation. 

Of course, that immigration surge has resulted in Donald Trump promising to deport millions. It’s easy for economists to think of this as an aggregate supply-demand problem, but distributional effects matter, both economically and for social cohesion. Moreover, on a global scale immigration is by definition zero sum. What will happen to the global economy when the world population stops growing? Optimists suggest technology and automation could be the answer – but that’s often just as socially difficult as immigration. Thankfully, we have a while to work out the answer.

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

Alex Kitteringham

4^th November 2024

China – Why an Unpopular Policy Measure Might Work

Please see the below article from EPIC Investment Partners:

China’s top legislative body is set to approve a substantial fiscal package next week, as Beijing moves to address its economic challenges. According to sources familiar with the matter, the NPC is considering approving the issuance of over CNY10tn (approximately USD1.4tn) in extra debt over the next few years. 

The comprehensive package is expected to include CNY6tn in special sovereign bonds primarily aimed at addressing local government debt risks, and up to CNY4tn in special-purpose bonds for land and property purchases over the next five years. This measure aims to enhance local governments’ ability to manage land supply and alleviate liquidity and debt pressures on both local governments and property developers.

The timing of the NPC’s meeting, which is scheduled for November 4-8 and coincides with the US presidential election, suggests that Beijing is keeping a close eye on the election outcome. The sources indicate that China may announce a stronger fiscal package if Donald Trump, who has vowed to impose 60% duties on imports from China, wins a second term.

While the proposed fiscal stimulus is significant, it falls short of package deployed in 2008 during the global financial crisis, which accounted for 13% of China’s GDP at the time. The current stimulus package is expected to amount to around 8% of the world’s second-largest economy’s output.

Analysts have noted that the policy priorities appear to focus first on addressing local government hidden debt, followed by financial system stability and then supporting domestic demand. In that order. We have sympathy with those who have expressed concerns that the stimulus measures may not be sufficient to substantially improve the economic growth outlook or address the ongoing deflationary conditions. What are really needed are concrete measures to stimulate domestic consumption via trade ins payments and other such incentives.

Or cut deposit rates to zero. While the latter would be a radical and very unpopular move, that fact is that Chinese household savings are absolutely massive and doing nothing to help the situation. Quite the opposite. This is effectively what happened in most major economies during both the GFC crisis and Covid era. This would also underpin the banking system’s profitability which would be no bad thing at all.

The proposed fiscal package reflects the urgency in Beijing to shore up the economy and mitigate the impact of the ongoing property sector crisis and local government debt issues. As China navigates these challenges, the outcome of the US presidential election could have significant implications for the country’s economic policies and the size of the stimulus measures.

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

31/10/2024

Please see the below article from EPIC Investment Partners detailing their discussions on the latest Job Openings and Labour Turnover Survey (JOLTS) data. Received this afternoon 30/10/2024.

Bloomberg published an article yesterday downplaying the latest Job Openings and Labor Turnover Survey (JOLTS) data. However, dismissing this report could be a mistake. The September figures revealed a substantial drop in job openings, falling by almost 400,000 to 7.44 million from a revised 7.86 million in August. This signifies a notable shift in labour demand, suggesting that businesses may be scaling back hiring plans due to economic uncertainty or financial constraints.

While JOLTS has its limitations, with a sample size of just 0.6% of establishments and a response rate of around one-third, a decline of this magnitude warrants closer scrutiny. It hints that employers are adjusting their recruitment strategies, potentially marking a turning point where demand for workers begins to cool.

Some argue that the survey’s limited scope makes it an unreliable barometer for the broader labour market, particularly given its lower response rate compared to payroll data, which surveys approximately 122,000 establishments. However, even with its limitations, JOLTS can offer valuable insights into emerging labour market trends, especially when it reveals shifts as significant as this. Ignoring these early warning signs risks missing the opportunity to understand potential inflection points in the economic cycle.

For instance, a softer quits rate – which fell to 1.9%, its lowest since mid-2020 – indicates that workers may be less confident about changing jobs. This hesitancy could suggest an underlying cooling of the labour market, even if payroll data continues to show job growth.

Friday’s non-farm payroll figures, and particularly the unemployment rate, will arguably provide us with a better measure of labour market conditions. However, it is worth noting that the Federal Reserve, with its “dual mandate” of price stability and maximum employment, is now focused primarily on the job market. This means the risks for the market are not symmetric. If the NFP data is as expected, the Fed will likely continue its easing mode. But if the data comes in much weaker, the Fed might opt for more aggressive easing measures than the market currently anticipates. This asymmetrical response highlights the importance of monitoring labour market indicators such as JOLTS, as they can provide valuable information about the underlying job trends well before the more widely followed payroll data.

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

30/10/2024

Please see the below daily update article from EPIC Investment Partners received this morning 29/10/2024:

A $20 billion renewable energy corridor connecting Australia and Singapore looks likely to proceed after Singapore’s Energy Market Authority deemed the project technically and commercially viable according to the operator, Australia’s SunCable. The company’s Australia-Asia Power Link plans to send 1.75gW of renewable electricity to Singapore via a 4,300km submarine cable. This equates to around 9% of Singapore’s current consumption. 

The rapid development of AIDCs (Artificial Intelligence Data Centres) is set to be a particularly important swing factor in the rate of growth of global electricity demand. With that in mind we were extremely interested by a recent Jefferies note comparing power tariffs (in USD/kwh) around the world. Qatar ($0.04, gas), Iceland ($0.07, geothermal) and Russia ($0.08 gas) have some of the lowest tariffs thanks to abundant domestic resources. 

In stark contrast Italy ($0.58), Poland ($0.53), the United Kingdom ($0.43) and Singapore ($0.34) need to import the raw materials or purchase electricity from their neighbours. Of course it is not always the price that matters, the resilience of supply is also a critical factor. This explains, in part, the increasing interest in small nuclear reactors.

Malaysia ($0.12) is in prime position to assist Singapore. For a start Malaysia has 40% excess power capacity (circa 15gW). It also has acres of cheap land, adequate water resources and is adjacent to Singapore. That said, the Germans and Poles might warn against becoming reliant on one supplier! 

Relations between Singapore and Malaysia have had their moments going back all the way to the break away of Singapore in 1965. 

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

29/10/2024

Please see the below article from Tatton Investment Management detailing their thoughts on markets over the past week, received this morning:

Markets in brace position

Markets are bracing for some big upcoming events: the UK autumn budget, and a knife-edge US presidential election. Trading volumes could fall as a result, causing volatility, but that shouldn’t detract from the positive long-term outlook.

The Chancellor, Rachel Reeves, confirmed a change to how UK debt is counted, allowing the government £50bn in extra borrowing. Some derided this as a ‘moving of the goal post’ tactic, but public debt definitions are always a bit arbitrary and change often. Bond markets didn’t seem to mind – perhaps because the US government has a similar rule. The good news is that this should mean fewer tax rises and more money for long-term investment. This budget is starting to look like the opposite of Liz Truss’s “mini” budget: anxiety in the build-up, but very little market impact in the event.

Meanwhile, European growth is struggling. Thankfully, the ECB has taken note, and last week moved into outright supportive mode – after previously promising to keep interest rates “neutral”. That will help risk assets and, hopefully, the economy. European exporters will be hoping for a rebound in Chinese demand too, following Beijing’s stimulus announcements. We still don’t know what shape the stimulus will take, but China’s stock market was one of the best performers last week.

The US corporate earnings season is going about as expected. There were some positive earnings ‘surprises’ from big tech companies, but these are always a bit artificial (companies guide down expectations to beat them). Bond yields rose, however, making stocks look slightly more expensive in valuation terms. It seems like bond traders are taking note of the threat that Trump’s proposed tax cuts pose to US fiscal sustainability. They aren’t panicking, but just covering their positions to brace for some potential risks. 

Market liquidity dried up a little as a result. That will likely make small moves feel bigger, potentially causing volatility. If so, long-term investors should remain focussed on a broadly positive economic outlook.

Can the goldrush continue?

Gold prices keep breaking to new highs. Since gold is the classic ‘safe haven’ asset, some think this portends global risks – but that’s at odds with the benign economic outlook. Strangely, gold is surging while inflation is falling, when you would expect it to be the other way around. Investor risk appetite is generally strong, so there doesn’t seem to be a ‘fear factor’ in gold’s rally. 

We often compare gold prices to real (inflation-adjusted) US bond yields, because they represent the available risk-free economic return, and gold is considered a stable store of value. People buy gold when the economy struggles, and risk assets when growth is strong. That’s why gold and real yields are historically correlated – but that relationship has completely broken down of late.

One reason is that emerging market central banks have bought considerable amounts of gold in recent years. Russia being frozen out of the dollar-denominated financial system prompted other developing nations to diversify their dollar holdings, out of fear it could happen to them. Chinese buyers are another key source of gold demand. Through China’s economic malaise, citizens have been buying gold as a means to keep money wealth away from a government they are wary of.

The final factor is simple upward price momentum – which has become prominent in the age of trend investing, but can swing down as quickly as it does up. The Chinese government is now stimulating its economy, so Chinese buyers could well drop off, and central bank purchases will inevitably wane too. 

Gold often gets headlines, but investors should be wary of it as a long-term investment. It is far from a ‘safe haven’ in terms of returns, which is why we prefer to invest clients’ money in more predictable assets like stocks and bonds.

Argentina on the narrow path to progress

Argentine president Javier Milei is a self-described “anarcho-capitalist” who promised a radical economic experiment when coming into office 11 months ago. His first task was quelling a hyperinflation spike that peaked at 25.5% month on month in December, and he has since dropped that to 3.5%, the lowest monthly gain since 2021. His main method has been to “take a chainsaw to the state”, slashing public spending (including, incredibly, closing down and reforming the tax collection agency). But, the chainsaw has cut economic growth too: the IMF forecasts Argentina’s economy to shrink 3.5% this year. Remarkably, confidence in Milei’s administration is faring no worse than previous presidents at this stage.

That might be because Milei has been more pragmatic than his campaign rhetoric suggested. He planned to remove the Argentine peso and get the whole economy using US dollars, but the central bank seems to have accepted a dual currency system. That is wise: Argentines use US dollars in everyday life, but full dollarisation would be impossible without a hard-fought funding agreement with Washington. The central bank has instead soothed inflation by projecting monetary discipline and regaining control of the money supply. The gap between Argentina’s official dollar exchange rate and the black market rate has come down to 20%, from 60% in January.

The light at the end of the tunnel is that the government is expected to run a primary budget surplus this year. Spending cuts have been sharp, with the aim of building domestic savings and balancing capital flows – which seems about to pay off. From that point, the government can stop compressing fiscal policy and unlock Argentina’s undeniable growth potential. We shouldn’t overstate the progress; Milei’s policies are still unproven, but the government is on a narrow path to success. That in itself is a surprise.

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

28/10/2024

Please see below, EPIC Investment Partners’ Daily Update, which is focused on yesterday’s release of the Federal Reserve’s Beige Book, which summarises information on the US economy. Received this morning – 24/10/2024

The Federal Reserve’s Beige Book, published yesterday, offers a sobering assessment of the US economy, suggesting that the recent 50 basis point interest rate cut may not be enough to avert a downturn. The report, a collection of anecdotal evidence from the Fed’s 12 districts, reveals a marked slowdown in activity, with only three districts reporting growth and three actually contracting. This paints a starkly different picture from the robust growth seen earlier this year, and better than expected employment data recently, raising concerns about the resilience of the US economy in the face of persistent inflationary pressures and global headwinds. 

The manufacturing sector, a key driver of economic growth, appears particularly vulnerable. The Beige Book highlights declining output across several districts, with businesses citing weakened demand and supply chain disruptions as key factors. This weakness in manufacturing is mirrored by a softening in consumer spending, with evidence of consumers “trading down” to cheaper alternatives. Such behaviour is often a harbinger of broader economic malaise, as consumer spending constitutes a significant proportion of US GDP. 

While the recent rate cut has injected some optimism, the Beige Book suggests that businesses remain hesitant to invest, despite the lower cost of borrowing. This reluctance reflects a deep-seated uncertainty about the economic outlook, which is further compounded by volatility in energy prices and uncertainty surrounding the upcoming Presidential elections. The housing market also presents a mixed picture, with high mortgage rates continuing to deter buyers despite increased inventory.  

One of the few bright spots in the report is the labour market, with most districts reporting stable to modestly increasing employment. However, even here there are signs of softening demand, with some businesses implementing hiring freezes and others reporting an increase in the number of applicants for open positions. Wage growth remains moderate, although there are pockets of upward pressure, particularly for skilled workers.  

The Beige Book’s regional breakdown reveals a mixed picture, with some districts showing greater resilience than others. The Boston and New York districts, for example, reported little change in overall economic activity, while the Philadelphia and Minneapolis districts experienced slight declines. The Richmond district was a notable exception, reporting modest growth driven by increased consumer spending and manufacturing activity. However, this positive development was tempered by the impact of Hurricane Helene, which caused significant disruption to businesses and residents in parts of the district. 

The report presents a worrying picture.  Although the Fed’s shift towards rate cuts improves the outlook, the risk of recession persists, particularly with interest rates still above neutral.  As the Fed has already embarked on a rate cutting cycle, we think a recession should be avoided, but it is not yet a certainty.

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

Alex Kitteringham

24^th October 2024