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Brewin Dolphin – Markets in a Minute

Please see below, an update from Brewin Dolphin which covers the key factors currently affecting global investment markets. Received this morning – 12/06/2024

Another week has passed in the UK election campaign. So far, there is no sign that the polling has improved for the government. Instead, the news early last week that Nigel Farage will stand for election risks giving impetus to the Reform Party and dividing the right-wing vote further in way that stands to benefit the Labour Party. The ITV leaders’ debate seemed to be a draw in which both leaders underwhelmed. Labour holds a 20-point lead, while some polls show the gap between Reform and the Conservatives narrowing.

The performance of the economy has been improving, which would normally be a boost to the incumbent party. But with dissatisfaction over the cost of living, the ideal situation would be a reduction in inflation and interest rates that doesn’t coincide with an increase in unemployment. We have seen some increase in growth and some decrease in inflation but recently, hopes of falling interest rates have moderated, and that means that things like fixed rate mortgages are becoming more expensive.

For the last two years house prices have become quite tightly correlated to mortgage rates and, therefore, to interest rate expectations. Good news on growth becomes bad news on mortgage costs and that in turn weighs on house prices. Last week’s data from Halifax suggest that house prices have stagnated, and mortgage rates are currently still rising.

Will interest rates fall this Autumn?

When are interest rates likely to fall in the UK? The market now sees it as more likely than not that this will happen in September or November, but that could obviously change as the economic data roll in. As discussed a few weeks ago, central banks at this stage in the interest rate cycle are inevitably data dependent.

This week will be important because of the UK employment and wage data, but last week saw the purchasing managers indices (PMIs) released, which give a snapshot of economic activity around the world.

It is notable that in the vast majority of regions, we’re seeing an increasing proportion of companies experiencing faster new order growth. The phenomenon is repeated across manufacturing and services. There are exceptions, and the UK is one of them, although that may partly reflect the disappointing weather we’ve had in late spring. But even in the UK, the services sector seems to be in good shape.

A subindex of the PMIs, which we have referenced before, is the services sector prices charged index. This has been a useful gauge because while headline inflation rates have slowed, there has been some nuance to be aware of. Goods prices have seen some significant moderation, and it could be argued that the manufacturing sector has suffered a recession of sorts after the very strong goods demand of the lockdown era. But that disinflation has been offset by sticky services sector inflation.

Across most regions, the persistence of services sector inflation is the biggest headache for central banks. It’s the reason why we might see inflation level off rather than continuing to decline. However, services sector inflation is more materially impacted by wages than other sectors. Central banks can slow wage growth by raising interest rates – in contrast to other categories of inflation, such as commodity prices, which are largely out of their direct control.

So, when the market expects fewer rate cuts, it’s largely because it’s not seeing the expected slowdown in services sector inflation. Fortunately, the services sector prices charged PMIs eased slightly and, hopefully, reflect a slowdown in services sector wage inflation.

As mentioned, commodity prices are beyond the direct control of the central bank. After rallying in the first quarter, the oil price has eased off again and that should help headline inflation decline.

Oil ‘group’ production cuts extended to 2025

The weekend before last, the Organization of the Petroleum Exporting Countries (OPEC+) discussed at a meeting held in Saudi Arabia how much oil it plans to pump in future periods. The organisation extended its “group” production cuts until the end of 2025. These are cuts that affect all members, and which had been scheduled to run until the end of this year. That news was good for the oil price because it signalled lower supply. However, there were other elements to the announcement.

Added to these group restrictions are voluntary restrictions, which are met by a smaller group of countries; OPEC+ suggested these will start to be phased out from October this year. The persistence of voluntary cuts over the summer should push the market into deficit and support prices, but there had been speculation that they would be extended to the end of the year, so it wasn’t all good news for oil.

OPEC+ aims to keep supporting crude prices while also easing production restraints that have been frustrating some members, such as the United Arab Emirates (UAE). The UAE was awarded a 300,000 barrels-per-day increase in 2025.

This puts in place an 18-month plan that does involve some increase in supply through the UAE exemption and the phasing out of voluntary cuts, but the latter is kind of data dependent and could most obviously be reviewed in August.

First G7 members cut interest rates

Although the economy and inflation have been enough to dissuade most central banks from easing interest rates, last week was a landmark for major developed markets, as it saw the first G7 members cut rates since inflation rose following the pandemic. Canada got the ball rolling on Wednesday, with the European Central Bank following on Thursday. It’s extremely unusual to see the Europeans cutting rates before the U.S. Federal Reserve.

So, when will the Federal Reserve cut rates this cycle? When the economic data suggest it is time. There were some indications early last week that time might be drawing nearer, with a sharp decrease in the number of job openings.

However, the main focus, as always, was on the non-farm payroll report, which would tell us how many new jobs were created during May. The answer was 229,000, well above the expected 180,000. Wage growth was faster than forecast too.

These data suggest that the Federal Reserve will not be cutting rates until at least September, at which point it will get perilously close to the election, when it would ideally hold rates steady to avoid being accused of interfering in the political process.

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

Alex Kitteringham

12th June 2024

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EPIC Investment Partners -The Daily Update | CO2 Emissions Abatement

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

Following up on our recent All Solid State Batteries article, Bloomberg New Energy Finance (BNEF) recently published some interesting data on investment in energy transition by country/region and ‘technology’ in 2023 and, in addition, some detailed forecasts on emissions abatement for the period 2024-2030, 2031-2040 and 2041-2050. 

In 2023 the global spend on energy transition totalled US$1.77tr, 17% more than 2022. By region China (46.5%) led the way while the US (21.8%), Europe (17.8%) and RoW (13.9%) made up the balance. 

Currently the four major investment sectors are wind, solar, electrified transportation, and power grids.  The last, power grids, does not generate green power but is the anchor, or linchpin, between renewable generation and electrified transportation. 

BNEF’s forecasts for emissions abatement for 2024-2030 are – to state the obvious – forecasts and the 2031-2040 forecasts even more of a ‘finger in the air’ exercise but both are revealing and instructive. 

Carbon Capture and Storage (CCS) is forecast to account for 17.6% of carbon abatements during 2024-2030 period. The other three main contributors are solar (30.3%), wind (20.7%) and electrification (14.2%).  No other sector accounts for more than 5% (including nuclear). 

The surprise for this author was to note that solar and CCS forecast emissions abatement for the 2031-2040 period fall to 4.8% and 11.7% respectively. Wind ‘improves’ to 25.3% but electrification jumps from 14.2% to a whopping 34.6%. CO2 emissions abatements climb from 16.9bn tons in 2024-2030 to 21.9bn tons in the 2031-2040 period, a miserly 2.66% CAGR reflecting the technical difficulties and elevated cost of CCS. 

Conclusion – high voltage transmission cable producers are, we believe, a sure bet for the next decade. They may even outperform Nvidia! We understand that a Gemini (Google’s AI powered search tool) search uses almost ten times the power compared to an old-fashioned Google search. May be worth hanging on to those battery manufacturers as well. 

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

Charlotte Clarke

11/06/2024

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Does the outcome of the General Election impact on current pension legislation?

It looks like Labour are likely to win the General Election – it is theirs to lose.  Will Labour getting into power impact on existing pension legislation?  It’s difficult to answer this question.  Typically, 50% of what is outlined before an election never gets changed after the election.  That won’t be a surprise to anyone.

In any case, we have certainty about the legislation in place today. If you do think that legislation could change in future, it may be beneficial to act now if you are able to do so.

Areas of concern:

The Lifetime Allowance.  This was abolished on 06/04/2024 and we no longer have a cap at £1,073,100.00 for total pension benefits.  In press coverage today, it looks like Labour may not re-introduce the Lifetime Allowance.  This would be complex and send the wrong message to pension funders, impacting on senior staff in the NHS and Education etc.

Best left alone for all.

Pension Contributions

On 06/04/2023, the maximum annual pension contribution was increased to £60,000.00 gross per annum from £40,000.00 gross per annum.  We also have the ability to carry forward any unused allowances for the previous three tax years.

Labour could limit pension contributions, but again this would impact on senior staff in the NHS and Education etc.

Tax Relief

It has been suggested that Labour will remove marginal rate tax relief for personal pension contributions at 20%, 40% and 45%, to replace it with a tax relief on personal pension contributions of 30% for all (subject to standard contribution rules).

If you are funding your pension personally and you are a higher or additional rate taxpayer, this would not be good news.

Comment

Tinkering with pension legislation all the time is not good news.  As it can impact on our long-term planning, we need to have stable pension legislation, legislation that we can trust.  This is one area of politics that should have cross party agreement and a long-term plan.

The State would like us to fund our own pensions and not be wholly reliant on the State Pension.

What can we do?  We have certainty over the rules we have in place today.  If we are not sure what the rules will be under Labour, and you want to utilise the rules we have now and have the capacity to do so, you could take action now by making a large pension contribution for example.

Please take advice from an IFA before making any decisions.  Personally, I’m still hoping that pension legislation won’t change again – we will see.

Steve Speed

10/06/2024

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Tatton Monday Digest

Please see below article received from Tatton Investment Management this morning, which provides a positive global market update and economic predictions for the months ahead.

ECB’s Lagarde makes rate cut history

Rate cuts at last. The ECB delivered a 25 basis point cut last week, as expected, and markets got excited about easier monetary policy again. ECB president Lagarde spoke about “dialling back” now that inflation is closer to the official 2% target. Nobody expects a full-blown easing cycle (bets on a September cut were dialled back too) but markets are confident that rates will fall globally – especially weaker-than-expected US employment data seemed to confirm an autumn cut from the US Fed.

And yet, no one expects the US or Europe to reach the official 2% inflation target anytime soon. It begs the question of whether central banks have moved to an unofficial 3% target – which would arguably be justified by structural economic changes. Growth and inflation have consistently beaten expectations in the US, for example, but markets expect the Fed to push ahead with cuts this year and next.

That is pushing bond yields sharply down, which is supporting equity valuations. Does this challenge our assessment last week that profits, rather than rates, are driving stock markets? Not exactly. Rates were key this week, but markets are still laser focused on expected profit growth. Nvidia’s incredible performance encapsulates both points: falling rate expectations pushed it to the brink of a $3 trillion market cap last week, but underlying that valuation is an astounding track record for growing profits (up 600% year-on-year last quarter). This is the ‘goldilocks’ environment that markets long for. Rates fall and growth moderates, but not enough to truly hurt profits.

Lastly, a note about elections. Recent stock market swings in Mexico, India and South Africa, following unexpected election results, has some worried about whether the UK election might upset things. This is unlikely, since the near-term impacts of the main parties’ economic policies are unlikely to substantially differ. But even when markets do get spooked by politics, it tends to be short-lived, and in fact most of the time represents a good buying opportunity. It would take a lot to really upset markets at the moment.

May 2024 asset returns review

May was decent for global investors, global stocks gaining 2.3% in sterling terms. This was underlined by strong corporate profits and firmer rate cut expectations. Inflation slowed again but unevenly, sending global bond prices up 0.9%. The US was in line with expectations but Britain and Europe surprised to the upside. This was not enough to deter the ECB from cutting rates at the start of June, however, and US data seemed to confirm an autumn cut from the Fed.

US tech was again the standout, jumping 5.2%, but this was less about rate cut optimism and more about stellar Q1 profits. AI champion Nvidia reported the afore mentioned 600% year-on-year jump for the first three months of this year, and its stock price has been duly rewarded.

US Companies that didn’t live up to the hype were punished – showing that markets are laser focused on fundamentals – a far cry from the ‘valuation vertigo’ fears earlier in the year. Growth is less strong in the UK and Europe, but stock markets still rallied 2.1% and 3.5% respectively, as lower rates are expected.
 
Emerging markets were down 1.1% through May, despite mildly positive returns (up 0.8%) in China. Currency troubles hurt several EMs – as well as Japan, whose currency is among the worst performing this year. Commodity prices fell too, led by a 7.6% swing down for crude oil. Weaker oil demand is a sign of slowing global growth, but it will undoubtedly be a positive in terms of removing a key price pressure.

May was encouraging overall. Not only did markets recover April losses, but we saw the emergence of a healthy system of market checks and balances: where rates look set to stay higher for longer, profits look strong enough to account for it. And where profits don’t look as good, rate cuts should accommodate.

Will currency volatility return?

Currency markets are having an interesting time. The Japanese yen has lost nearly 10% of its value against the dollar year-to-date, and China’s renminbi is under pressure too – consistently trading at the top of its official exchange rate band. Historically, big currency swings can upset capital markets but, for years now, foreign exchange markets have had little impact on wider markets. That could be about to change.

There are two key reasons why: monetary policy divergence and deglobalisation. Japan is the clearest example of the first (Japanese interest rates are practically zero and US rates are 5.5%) but there is growing divergence between the US and Europe too – with cuts coming sooner in the latter. China is the clearest example of the second – with former president Donald Trump explicitly arguing that the dollar is too expensive relative to the renminbi.

Ironically, trade wars have strengthened the dollar, since threats to the global economy push people toward the world’s reserve currency. Central banks are increasing their dollar allocations too – reversing a long-term trend of higher renminbi allocations.

This impacts how we think about currency moves. A strong dollar is usually seen as a cyclical headwind to growth, but if there is a structural push for a stronger dollar we might have to re-evaluate. For example, the renminbi is historically weak against the dollar, but China’s trade with the US is now smaller than its trade with Asia. The renminbi looks overvalued relative to Asian currencies which would suggest it needs to depreciate.

That would mean financial and geopolitical headwinds – especially if Trump becomes president again. The pattern could play out in the UK and Europe too, considering growth is relatively weaker than in the US. The more economies become misaligned, the more we need to include currency movements as an additional factor in our investment outlook.

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

Chloe

10/06/2024

Team No Comments

EPIC Partners: Daily Update – Going Weekly

Please see below an article from EPIC Partners providing their daily round-up on markets, which was received this morning (07/06/2024):

No, don’t worry, at least not about us.  

In a move that has left many Londoners nostalgic, the Evening Standard, a staple of the city’s daily commute since 1827, is set to transition from a daily to a weekly print edition. This shift underscores the challenges faced by traditional news outlets in an era where financial sustainability is increasingly arduous. 

The newspaper has reported significant financial losses, totalling £84.5 million over the past six years, contributing to a decline in circulation from 850,000 to approximately 250,000. Factors such as reduced commuting, increased remote work, and Wi-Fi availability on the Tube have all played a role. 

Changing news consumption patterns are affecting the industry globally. These shifts have allowed opportunistic players like Alden Global Capital, often considered a stereotypical “vulture fund,” to acquire numerous newspapers in the US and implement severe cost-cutting measures. 

There are other models, however. Reuters, for instance, has capitalised on early knowledge of significant developments to make trades before releasing the news to the market. Hunterbrook Capital, a hedge fund, is copying that model and has raised $100 million to trade based on scoops from its affiliated newsroom, Hunterbrook Media. Unlike firms that take short positions before publishing their research, such as Hindenburg Research and Muddy Waters, Hunterbrook has established Chinese walls between its trading and journalistic arms. Whether this will suffice to fend off regulators and lawyers remains an open question. 

The situation with the Evening Standard is a stark reminder of a critical issue: who pays for high-quality, fact-based journalism? Free content with ads doesn’t seem to cover costs, micropayments haven’t gained traction, and many only skim headlines rather than reading full articles. This funding gap is something that opportunistic investors have been keen to exploit, threatening the future of long-form investigative journalism. 

High-quality journalism is crucial not only for democracy but also for efficient markets and vital for uncovering malfeasance, from corporate fraud to government corruption, playing a key role in maintaining public trust and informed decision-making. This is also essential for our investments to ensure risk-awareness and appropriate management. 

As the Evening Standard’s daily edition sails off into the sunset, rest assured that we will continue to deliver our daily dispatches. We continue to see it, say it. Sorted. 

Have a good weekend. 

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

07/06/2024

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Evelyn Partners Update – June ECB monetary policy decision

Please see the below update from Evelyn Partners for their thoughts on this afternoon’s (06/06/2024) ECB monetary policy decision:

What happened?

The European Central Bank (ECB) cut interest rates by a well communicated 25bps at their meeting today, taking their key deposit rate to 3.75%, main refinancing rate to 4.25% and marginal lending facility to 4.5% – from 4.00%, 4.5% and 4.75% respectively. 

The inflation projection for 2024 was upgraded to 2.5%, from 2.3%, 2025 was upgraded to 2.2%, from 2.0%, and reiterated at 1.9% in 2026.

Guidance was updated to include a new line “The Governing Council is not pre-committing to a particular rate path.”

What does it mean?

The ECB’s decision comes after a nine-month period of being on hold and is their first cut since the beginning of 2016. 

The move lower comes a day after the Bank of Canada became the first G7 central bank to cut rates in this cycle with their 25bp move lower to 4.75%, but notably ahead of the US Fed who has typically led monetary policy loosening in previous cycles.

Given that the move was so widely anticipated and already priced into the market, the focus was on the inflation projection and language surrounding future moves.

Arguably the upgrades to Inflation guidance struck a hawkish tone (introducing the hawkish cut?!) but the initial market reaction was surprisingly muted…

Unsurprisingly, and like other central banks, the guidance maintained a data dependent tone.

“The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.”

Bottom Line

The ECB’s Governing Council cut rates by 25bps taking their key deposit rate to 3.75%.  Markets are pricing a second incremental cut in September/October and third in the first quarter of 2025 demonstrating a ‘steady as she goes’ approach given the high levels of uncertainty and persistence in services inflation domestically and arguably also abroad.

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 DipPFS

06/06/2024

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Brooks Macdonald Daily Investment Bulletin

Please see below today’s Daily Investment Bulletin from Brooks Macdonald, which was received this morning, 06/06/2024:

What has happened

Ahead of an expected interest rate cut from the European Central Bank likely later today, the Bank of Canada (BoC) has got there before it. Yesterday, the BoC became the first central bank out of the so-called ‘G7’ group of leading economic nations to cut its interest rates in the current monetary policy cycle, cutting by 25 basis points to 4.75%. Not only that, the BoC governor Macklem said yesterday that it was “reasonable to expect further cuts”. Elsewhere, economic confidence in markets returned on Wednesday with US services industry survey data out that was stronger than expected. In marked contrast to the manufacturing data earlier in the week. US services Purchasing Managers Index (PMI) from the Institute for Supply Management jumped 4.4 points month-on-month to 53.8. It was well above market estimates and was the highest reading in 9 months. Equity markets were buoyed by the better data with gains led by tech stocks, while government bond yields generally edged lower.

Nvidia reaches another milestone

Nvidia, the US megacap technology semi-conductor chip designer has hit another milestone. The poster child for the generative Artificial Intelligence (AI) boom, Nvidia’s share price was up +5.16% yesterday in US$ terms. With it, Nvidia narrowly overtook Apple to become the second largest quoted company in the US, with a market capitalisation of US$ 3.012 trillion, versus Apple’s US$ 3.003 trillion. For context, Microsoft is still number one with a market capitalisation of US$ 3.151 trillion. The latest surge in Nvidia’s share price has come about following news over the past few days that the company plans to upgrade its AI technology every year, announcing new generation chips in development earmarked for launches in 2025 and 2026. Key to the latest enthusiasm around the stock, CEO Huang is looking to broaden the company’s customer base beyond the handful of cloud-computing tech giants that have hitherto generated much of its sales.

Oil prices see supply headwinds

Although the oil price saw a small bounce yesterday, it has dropped over the past week. Driving the fall was the latest OPEC+ meeting last weekend (the Organization of the Petroleum Exporting Countries plus non-OPEC members including Russia). Previously, OPEC+ members have been curbing output by a total of 5.86 million barrels per day (mbpd), or about 5.7% of global demand. At their latest meeting however, while OPEC+ agreed to extend 3.66 mbpd of cuts until the end of 2025, it said it would only prolong cuts of 2.2mbpd by three months until the end of September 2024. After September, OPEC+ plans to gradually phase out the cuts of 2.2mbpd over the course of a year from October 2024 to September 2025. That incremental supply is being seen as a headwind for prices and could signal some weakening in resolve amongst OPEC+ members to continue their supply curb discipline.

What does Brooks Macdonald think

Regular readers could be forgiven for thinking that it is not a Daily Investment Bulletin without mention somewhere about inflation! Over in Asia, inflation data out last month from Japan suggests that the recent recovery in prices, something which the Bank of Japan (BoJ) has hitherto been trying to engineer, is at risk. Japan’s so called ‘core-core’ Consumer Price Index (CPI) annual inflation, which exes out both fresh food and energy prices, dropped for the eighth month in a row in April. At an annual rate of +2.4%, it was the slowest inflation pace since September 2022, and not that far from the central bank’s 2% inflation target. For Japan’s central bank, there is a desire to try to normalise interest rates higher, after ending negative rates earlier this year. Should inflation rates continue to weaken, that could curtail the BoJ’s room for hiking, and risk putting yet more pressure on an already weak Japanese Yen currency this year. 

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 DipPFS

06/06/2024

Team No Comments

Brewin Dolphin – Markets in a Minute

Please see the below article from Brewin Dolphin providing their discussions on the potential impact of Donald Trump’s conviction on the upcoming US election.

The U.S. election is still more than five months away, but last week saw a significant milestone on the campaign trail.

Former President Donald Trump had been waylaid by the inconvenience of a trial for allegedly falsifying business records, in a case that stemmed from efforts to pay hush money to an adult film star. The jury unanimously found him guilty on 34 separate counts, prompting celebrations from many of his adversaries.

The outcome and the circumstances leading to the case would surely have been terminal for the electoral prospects of a conservative candidate for a government position, however, it is unclear whether they will have a material adverse effect on the former president’s odds of success.

It would be unusual for a convicted felon to serve as president, but it is not prohibited by the constitution. It would also be impractical for a jailed president to discharge his duties, but jailtime seems unlikely for a first-time offender and would likely be deferred in the event that this was the sentence.

While Trump cannot argue his case in the conservative[1]leaning Supreme Court, he does have a path and realistic grounds for appeal, so the conviction may yet be overturned.

The market reaction to Trump’s conviction

If the conviction doesn’t provide any legal impediments to a second Trump presidency, would it provide political ones? There was a flurry of activity on the PredictIt site, an online prediction market that allows users to buy shares for or against an event such as the U.S. presidential election. This activity briefly saw President Biden overtake his rival but since then, the gap has returned in Trump’s favour for now, though a little smaller than it was.

With the impact of Trump’s conviction on the electoral race uncertain, there was no discernible market reaction. It remains difficult to say with confidence which candidate the markets would prefer. Neither offers a path to fiscal sustainability, although President Biden would be expected to allow Trump’s temporary tax cuts to expire.

At the same time, Trump’s erratic and unpredictable execution of foreign and trade policy creates risks which investors won’t welcome.

The U.S. bond market was volatile last week, however, with low demand for a five-year auction spooking bond investors. The bid-to-cover ratio of 2.3 was the lowest in a year. This suggests less demand than we have seen in recent auctions, although a ratio of more than two suggests demand levels are generally strong.

More impactful than the uncertain electoral outlook is the uncertain economic outlook for the time being.

Consumer and business confidence improving

Last week, economic data was generally strong, continuing to undermine the case for interest rate cuts. There wasn’t a huge amount of economic data, but the Conference Board survey of consumer confidence was notably strong and would seem to undermine the impression that the U.S. economy is slowing down.

It is also worth noting that in the U.S., there is a strong relationship between consumer confidence and a recovery in the value of personal pension plans, which may have left households feeling more positive.

In the UK, business confidence, as measured by a survey of Lloyds’ business customers, continues to imply remarkable economic strength. Business confidence seems to have recovered to a level not seen since the end of 2015, before the run-up to the Brexit referendum.

The series, which measures the share of companies increasing prices, rose to an all-time high (this series only dates back to 2018). This will be a challenge to those hoping for continued moderation of price growth. As noted a couple of weeks ago, it is possible that June contains the last significant decline in the inflation rate, before base effects make it more reflective of these near-term price trends.

UK election outlook – as it stands

The UK election is already looming large, with just one calendar month to go at the time of writing. Despite the impression that the economy is strong and gaining momentum, voters seem unmoved.

The political benefits of two successive cuts to National Insurance rates have been limited. Indeed, polling released last week suggested why. Firstly, voters don’t believe either party will be able to meet their pledges to lower or even maintain taxes. Secondly, supporters of both parties would have a marginal preference for more spending on public services rather than lower taxes.

The UK election outcome remains Labour’s to lose. The next significant milestone would be the release of the manifestos, at which point analysis of tax and spending plans can take place.

However, as polling has revealed, the public has very low trust in government fiscal plans and shares the scepticism of the International Monetary Fund (IMF). The IMF has suggested additional ways of raising tax revenues to meet the demands of increased departmental spending, given the needs for more spending on healthcare and more investment on the carbon transition.

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

05/06/2024

Team No Comments

Epic Investment Partners: The Daily Update | Sheinbaum’s Agenda – Reviving State Energy Giants and Pursuing Green Ambitions

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

In a historic moment for Mexico, Claudia Sheinbaum has been elected as the country’s first female president after a decisive victory at the polls, a giant leap in Mexico’s traditionally machismo culture. Sheinbaum’s win represents a continuation of the nationalistic energy policies pursued by outgoing President Andrés Manuel López Obrador and his Morena party. Moreover, Sheinbaum is expected to live up to her reputation of being efficient, unlike many of her predecessors, an esteem she earned during her tenure as Mexico City mayor. 

Sheinbaum has promised to double down on strengthening and revitalising Mexico’s vital state-owned companies like the oil giant Pemex and electricity utility CFE. The president-elect aims to invest heavily to modernise these strategic assets and position them as drivers of economic growth and energy independence for Mexico. 

After decades of underinvestment, Sheinbaum believes prioritising and properly funding Pemex and CFE is the best way to unlock their full potential as key producers for the Mexican people. For Sheinbaum, revitalising Pemex and CFE is about more than just economics and energy self-sufficiency. It reflects her nationalistic vision of reasserting Mexican sovereignty over strategic industries and natural resources. While critics argue these state firms require private investment to thrive, the incoming administration seems committed to an opposing path of doubling down on government ownership and control. 

With a strong mandate, Sheinbaum appears determined to make the revival of Pemex and CFE a top priority. She stated she will pour billions into upgrades at Pemex’s aging refineries, as well as complete major projects like the new Olmeca refinery and coker units. This would allow Mexico to slash its dependence on imported refined petroleum products. Sheinbaum also wants CFE to lead renewable energy development nationwide. This falls in line with her 2024-2030 roadmap, which aims to “decarbonise the energy matrix as quickly as possible”. 

Mexico is one of only two G20 nations that does not have a net zero emission target. So Sheinbaum, a climate scientist with green ambitions, is clearly the right person to commence the shift. However, López Obrador’s legacy and influence would likely impede significant shifts from the current administration’s approach, potentially forcing her to pay a political price for substantial green reforms. Nonetheless, investors have welcomed the continuity and policy certainty presented by Sheinbaum so far. There is optimism that under the Sheinbaum government’s firm control over the energy sector will provide stability. 

Sheinbaum’s presidency is a giant leap in Mexico’s traditionally machismo culture. Who would have thought the old boys’ club would be disrupted by a bold, green-thinking woman determined to reassert sovereignty? With her firm hand on the wheel, Mexico’s path to energy independence and decarbonisation is sure to be one wild ride. Buckle up, the age of mujeres is here! 

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

Charlotte Clarke

04/06/2024

Team No Comments

How UK equities have responded to past general elections

Please see below article received from AJ Bell yesterday morning, with our thoughts added at the end for your perusal.

Given the rate at which prime ministers (and chancellors) seem to come and go, investors may be rightly inclined to avoid second-guessing the result of the next general election, which is now set for Thursday 4 July.

The lack of available cash in the government’s kitty, the Conservatives’ occasionally frayed relationship with ‘business’ and the likelihood that Labour took on board Trussonomics’ lesson that unfunded promises could prompt chaos may all mean that investors could be in the mood to take Sir Keir Starmer’s big lead in the polls, and any eventual victory, in their stride, even if the FTSE All-Share’s record shows it seems to prefer a Tory government, on average.

The prospect of a government spearheaded by Sir Keir and Rachel Reeves is unlikely to spark the sort of fear that would have been inspired by an administration whose driving forces were Jeremy Corbyn and John McDonnell. Moreover, the current Conservative government, whose tenure effectively dates back to 2010 and covers a flurry of five prime ministers, could be seen as having taken an increasingly interventionist approach to the economy, given such initiatives as sugar taxes, Help to Buy, energy price caps, windfall taxes on North Sea oil producers, 2021’s National Security and Investment Act and proposals for changes to the 2005 Gambling Act under the recent review. 

Increasingly vocal and forceful regulators, such as the Financial Conduct Authority, Ofcom, Ofgem, Ofwat and the Competition and Markets Authority, appear to be responding to public pressure for greater action, and perhaps the hardest part for investors going forward will be spotting which industry or sectors will come under scrutiny next, in the wake of such recent examples as betting, funeral services and veterinary services.

The headline data suggests that a Labour government, and a change in the identity of the incumbent in 10 Downing Street, need not be seen as an inherently bad thing.

A study of all sixteen of the general elections since the inception of the FTSE All-Share in 1962 shows that the UK stock market is by no means frightened of a change in government and it may even welcome it. On average, the FTSE All-Share has recorded a double-digit percentage gain in the first year after an election which sees one prime minister ejected from office and another, new one ushered into it. There are also greater average gains when a government changes relative to when it remains the same.

Source: LSEG Datastream data. *1964/66 to 1970 Wilson governments and 1974/74 to 1979 Wilson/Callaghan governments counted as one term. 2019 Conservative government to 22 May 2024 

Labour governments can also point to healthy average stock market gains during the terms of their five prime ministers during the 42-year era of the FTSE All-Share.

That said, the UK equity market has done better since 1962, on average, when the Conservatives have triumphed at the ballot box.

Source: LSEG Datastream data. *1964/66 to 1970 Wilson governments and 1974/74 to 1979 Wilson/Callaghan governments counted as one term. 2019 Conservative government to 22 May 2024.  **Adjusted for retail price index (RPI).

Some investors could therefore be forgiven for wishing for a Conservative government, on financial grounds, irrespective of their personal political preferences, especially as the average real, post-inflation return from the FTSE All-Share is markedly superior under Conservative governments than it is Labour ones.

The size of a government’s majority seems to be matter of indifference to stock market investors, even if any incumbent in 10 Downing Street will be looking for a thumping advantage in the House of Commons, so they can get on with the business of governing the country and formulating policy, rather than having to constantly curry favour with their own MPs first.

Margaret Thatcher’s crushing 1983 general election win helped to set the tone for her second term and that period yielded the best nominal (and real, post-inflation) returns from the FTSE All-Share from any post-1962 administration. However, Tony Blair’s second-term majority was even bigger, and that period yielded negative returns for investors in UK equities, using the FTSE All-Share as a benchmark.

Source: LSEG Datastream data. *Wilson initially PM with a minority of 33 after February 1974 and then with a majority of 3 after October 1974. Wilson stepped down in April 1976. **Wilson initially won a majority of 3 in 1964 which was increased to 96 in 1966. ***Blair stepped down in June 2007. ****Cameron stepped down in July 2016. *****Johnson resigned in July 2022. Liz Truss took over in September 2022 and was replaced by Rishi Sunak in October 2022. ******May’s initial working majority was based on a deal with the DUP. *******Performance under current government as of 22 May 2024

Again, the role of inflation is important here. The 1974-79 Labour administration that began under Harold Wilson and ended under James Callaghan started off with a tiny majority but on paper generated healthy returns for the FTSE All-Share, which rocketed. However, once those returns take a spiral in the RPI measure of inflation into account (and RPI is used as it offers a longer history than CPI), then investors actually lost out in real terms, in what was a difficult decade for shareholders, owing to the ravages of inflation.

Source: LSEG Datastream data. *Wilson initially PM with a minority of 33 after February 1974 and then with a majority of 3 after October 1974. Wilson stepped down in April 1976. **Wilson initially won a majority of 3 in 1964 which was increased to 96 in 1966. ***Blair stepped down in June 2007. ****Cameron’s majority relied on a coalition with the Liberal Democrats. He stepped down in July 2016. *****Johnson resigned in July 2022. Liz Truss took over in September 2022 and was replaced by Rishi Sunak in October 2022. ******May’s initial working majority was based on a deal with the DUP. *******Performance under current government as of 22 May 2024

Inflation also sorts out the real winners and losers, from the markets’ perspective, when it comes to individual prime ministers. Of the 13 prime ministers since 1964, four of the best five from the very narrow perspective of stock market perspective were Conservatives, once FTSE All-Share returns are measured in nominal terms.

But the shake-out comes in real, post-inflation terms, when four of the five best premierships for investors came under the Conservatives and the three worst under Labour.

This is not to make an economic point, rather than a political one. As former US president Bill Clinton’s strategist, James Carville, argued ahead of the then Arkansas governor’s 1992 election win, ‘It’s the economy, stupid.’ If the voters feel flush, they are more likely to vote for the incumbent government and less so if not, and inflation is a key part of that. 

The galloping inflation of the 1970s, and subsequent labour unrest, did for both Ted Heath in 1974 and James Callaghan in 1979. In the latter case, public appetite for a change of tack was particularly strong and ushered into power the nation’s first female prime minister.

Gordon Brown had little or no chance, having had the bad luck to preside over the Great Financial Crisis of 2007-09 and Tony Blair’s second term coincided with the bursting of the technology, media and telecoms bubble, the blame for which could not be laid at Downing Street’s door under any circumstances.

What will be interesting this time around is the degree to which inflation and the economy shape public thinking once more. The Brexit vote dealt Theresa May a difficult hand and the pandemic gave Boris Johnson a dud one, but the public will remember inflation and the cost-of-living crisis. Regardless of whether they blame that on the Bank of England’s monetary experimentation, supply chain dislocations caused by the pandemic, the oil price spike that followed Russia’s invasion of Ukraine, or just stick it on the government may be a crucial factor in how the general election plays out.

For all that Rishi Sunak now feels able to claim the credit for a deceleration in the annual rate of inflation back to 2.3%, prices are still rising and not shrinking. Since Boris Johnson defeated Jeremy Corbyn in December 2019, the retail price index is up by 31.9% and the consumer price index by 23%, so the cumulative impact of inflation upon consumers’ spending power is damaging indeed.”

Source: Office for National Statistics

Comment

Markets appear to have priced in a Labour win and we don’t anticipate much volatility around the time of the UK General Election. It is interesting to note how events impact on the performance of markets for Governments.

The Tories have a far better outcome overall. But does this Labour Party look more Tory than Labour? And what will happen when elected?

Steve

03/06/2024