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Tatton Investment Management – Monday Digest

Please see this week’s ‘Monday Digest’ from Tatton Investment Management providing a brief insight into markets over the past week:

Still mostly sticking to the plan

Amid a cacophony of political noise, the Federal Reserve’s updated interest rate forecast that drove markets last week. The signal that rates would be cut just once this year was called “hawkish”, but we think it was more “bullish”.

First though, manifestos. Labour and the Conservatives released their policy plans this week, with markets again largely indifferent. That might sound strange, considering that UK assets have underperformed since Rishi Sunak called the July election – after a period of outperformance. But Britain’s biggest stocks are more focused on global growth, and particularly energy and commodity demand. That’s why they did well before, and not so well now. Rate cuts from the Bank of England – expected by August at the latest – are more important for our domestic markets.

Fed cuts are equally important. Markets had been expecting two this year, but the Fed’s ‘dots plot’ revealed that officials expect to cut rates just once in 2024. This was more about acknowledging US economic strength than a hawkish preference. Recent US inflation data has been soft, but job market data two weeks ago was exceptionally strong. This strength is giving the Fed pause. Officials are sticking to the rate cut plan, just getting more realistic about how, when and to what magnitude it can be implemented.

Markets reacted well, but unevenly. Stocks are up in aggregate, but this is almost entirely down to a handful of tech stocks. This is a sign of generally weakening global growth. Europe has underperformed, not just because of Macron’s surprise election call but weaker Chinese demand too. In the US, smaller caps have slipped back.

After business sentiment surveys next Friday, we will get a better sense of where the economy is heading. Following the very strong run earlier in the year, markets feel a little fragile. It has been powered by a strong run up in earnings expectations which is starting to seem questionable given the run of softer economic data. But if sentiment data is better, we could see pro-cyclical assets do well.

Macron makes an educated bet.

Emmanuel Macron shocked the world this week by calling for a snap parliamentary election at the end of this month. The French President effectively threw down the gauntlet to far-right challenger Marine Le Pen and her National Rally (RN) party, after the latter won the largest share of French votes in last week’s European parliament elections. Macron was clear about his reasoning: “I do not want to give the keys of power to the far right in 2027, so I fully accept having triggered a movement to provide clarification,”

Markets indeed want clarification, having sold off dramatically on the apparent threat of an RN-led parliament. We wrote last week that election-inspired sell-offs tend to be short-lived and can actually make for good buying opportunities. We broadly stand by that assessment in the case of France, but we would add that volatility is likely at least until the final round of voting on July 7th.

Markets’ biggest fear about a RN victory seems to be a fiscal crisis, with Macron’s finance minister warning of a “Liz Truss-style scenario”. We shouldn’t get carried away by hyperbole, though, since sectoral analysis suggests that French companies would be relatively unaffected over the medium term. The long-term is hard to work out, since it depends on what happens at the presidential election in 2027. Marcon seems to be betting that, win or lose, his chances in 2027 will be better than if he lets RN support fester. That is plausible, but a gamble.

The risk for Macron is that an RN-led parliament spends years fighting the executive at every turn and successfully blames the deadlock on him. The risk for markets is that this heightens bond volatility and increases the anti-EU sentiment in the bloc’s second-largest economy. Volatility is likely, in the short-term at least.

Peso struggles despite election continuity

Following the surprisingly large victory for Mexico’s left-wing party Morena in the June 2nd election, the Mexican peso has lost more than 10% of its value against the dollar since the election. This might sound like par for the course as far as Latin American elections go, but markets’ vote of no confidence is more complicated than it seems.

Claudia Sheinbaum, Morena’s candidate and now Mexico’s first female president, represents continuity from president Andrés Manuel López Obrador (nicknamed AMLO). Markets similarly feared AMLO when he came in six years ago, but he achieved the improbable by both pursuing socially progressive policies and staying (mostly) in the good books of international investors. The peso is stronger now than when he assumed office – even after the recent nosedive.

Markets don’t like the scale of Morena’s victory, taking the presidency, a supermajority in the House and nearly a supermajority in the Senate. This makes it likely that 18 contentious constitutional reform bills outlined by AMLO, including the removal of congressional seats and independent regulators as well as directly electing supreme court judges, will be passed. Some fear these undermine the separation of powers. Morena’s economic policies are also seen as unfriendly to international investment.

The fears are not unfounded, but we suspect they might be overblown. Sheinbaum confirmed that she will stick with the current finance minister and fiscal rules. More importantly, Mexico’s politics does little to disturb the structural case for its growth: a beneficial realignment of US trade. After years of US-China trade wars, Mexico became the US’ largest trading partner in 2023. This structural push is not going away, with anti-China sentiment a point of rare bipartisan support in Washington.

Politics on both sides of the border mean clashes with the US are likely, which arguably increases the policy risk attached to Mexican assets. But the underlying case for Mexico remains.

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

17/06/2024

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Evelyn Partners on the 2024 General Election

Please see below article received from IFA Magazine and Evelyn Partners earlier this afternoon, which highlights the pension and tax questions that savers are asking.

Much is up in the air across many facets of pensions and tax policy, and until a few weeks ago the main political parties had most of the rest of the year to make clear some intentions. 

However, campaigning is now well underway with limited clarity as the country looks towards a 4 July poll. 

Gary Smith, Partner in Financial Planning at wealth management firm Evelyn Partners, says: 

‘We haven’t seen the manifestos yet, and even when we do they might not contain much concrete detail on pensions, inheritance tax or the taxation of investments. So we are left in a world of probabilities, possibilities and suspicions around upcoming changes to the financial landscape that savers might have to navigate.  

‘The fact that we are looking at a very probable change of government come 5 July throws up some urgent questions around what’s in store for pensions both state and private, or for families planning how pass on their wealth – but campaign rhetoric doesn’t provide many answers. We do know that change for savers is closer at hand than it was a fortnight ago.  

‘We’ve had the surprise “triple-lock plus” gambit from Rishi Sunak, and while he might not get the chance to put it into practice, it does reignite the state pension debate, as well as disquiet over frozen allowances for everyone. Unless Labour moves to match it, which seems unlikely, it opens up some clear water on policy. 

‘One elephant in the room is the prospect that a new Government might look to the taxation of pensions, or other wealth assets, to escape the fiscal restraints the main parties have imposed on themselves.’ 

The Institute for Fiscal Studies and the International Monetary Fund have warned that both parties’ public finance projections indicate a significant funding gap, of up to £30billion, unless unscheduled spending cuts are enforced. A recent poll revealed that 56 per cent of British voters expect taxes to go up after the UK general election if Labour win, and 52 per cent if the Tories remain in power. 

Labour has now promised not to hike VAT, which means both parties have pledged not to raise any of the three biggest levies – income tax and national insurance being the other two – that account for the lion’s share of Treasury revenues. Labour has also vowed not to raise the headline rate of corporation tax, the fourth biggest fundraiser. 

Smith says: ‘A new government might look at the tax treatment of pensions or certain IHT reliefs to bridge a funding gap that seems bound to open up even if public sector spending is severely restricted. Savers, however, should be very wary of acting on such possibilities and it is highly unlikely any changes to the tax system would be enacted before April 2025.’ 

State pension triple lock (plus?) 

Smith says, ‘The affordability of the triple-locked state pension is a can that keeps getting kicked down the road and an election is not the time that either main party is likely to break that pattern. 

‘In fact, the Conservatives have doubled down with their £2.4billion “triple lock plus” pledge. Mr Sunak has said he would create an “age-related” tax-free personal allowance in the income tax system, which would rise to keep it above the rate of the state pension. This would mean two different personal allowances: one for working-age people that will be frozen until 2028 and another higher one for retirees that would change annually.  

‘There are issues with this, apart from affordability and the potential to be generationally divisive. It’s not clear what sort of personal allowance would apply to those who continued to work after state pension age – and 1.37million people aged 65 and over were still in work last year. It would also add another level of complexity to the UK tax system. 

‘It’s questionable whether the Conservatives would have tabled this policy if they had a good chance of remaining in power, but it does at least shine a light on how frozen thresholds are raising the tax burden by stealth. Promises from both parties not to raise headline tax rates offer little comfort when we all know we’re going to be paying more tax anyway due to fiscal drag. 

‘One favour today’s workers can do for themselves is to assume the triple lock might not be sustainable for more than a decade, and that they need to save more than they think to make up for that.’ 

The pensions lifetime allowance 

Smith says, ‘While Jeremy Hunt’s abolition of the pensions lifetime allowance was widely welcomed, some of the details in the implementation have caused lingering uncertainty and confusion – as has Labour’s undertaking to reinstate it. 

‘We hope Labour will soon offer some more clarity on how and when it plans to reintroduce the LTA. If an LTA is reintroduced, the key questions will be at what level, and will there be some sort of carve-out for highly-paid NHS clinicians? It seems very unlikely a new LTA would be set back at its most recent £1.073 million – a level that landed doctors and surgeons with unwelcome tax charges, exacerbated staffing shortages in the NHS and led to Hunt’s decision to abolish the threshold. 

‘Under the last Labour government, the LTA ended up at £1.8 million, which would now be worth over £2.5 million adjusted for inflation since. It wouldn’t be surprising if the LTA was reintroduced at something like the £2 million mark. 

‘Either away, it is important to understand that the LTA has been removed from the statute book and so a future Government wishing to reintroduce it could not just switch it back on the day after the election but would have to pass new legislation which would likely take the form of a Finance Bill on the back of a Budget – and Shadow Chancellor Rachel Reeves has ruled out a summer Budget.  

‘The legislative process takes time and therefore is unlikely that a new LTA could be in place until April 2025. Applying a new LTA retrospectively would be highly contentious, open to challenge, and therefore unlikely. There is also strong precedent, from the original introduction of the LTA and previous reductions in the threshold, that those impacted would able to take out protection, typically by ceasing further funding.  

‘Given all this, for some savers who may have previously ceased pension funding because of the LTA and are very keen to restart with regular or lump sum contributions, the current window of opportunity might be worth taking advantage of, after taking some advice.  

‘But making drastic changes to one’s financial plans in what is a fluid situation is probably inadvisable, particularly for those who are about to access their pots. For instance, if some savers are thinking of rushing to access their 25 per cent tax-free lump sum because of fears over what Labour might do – as some reports have suggested – they should take advice before any hasty action.’ 

Could there be other changes to pension taxation? 

The Conservatives have affirmed that they would not introduce any new taxes on pensions or increase existing ones for the whole of the next Parliament. They would maintain the 25 per cent tax-free lump sum and tax relief on pension contributions at the marginal rate of income tax. National Insurance would not be extended to employer pension contributions. 

Smith says: ‘We have no indication of any such plans from Labour but no such assurances either. In spite or because of this, the taxation of pensions is inevitably drawing some speculation, not just over the reintroduction of the LTA, but other areas where a future government could look to raise revenue. 

‘Labour objected to Jeremy Hunt’s pension taxation reforms at the 2023 Budget as “a tax gift to the wealthy”, so the increase of the annual allowance from £40,000 to £60,000 cannot be considered untouchable. The annual allowance is arguably an easier and more efficient way to cap the amount spent on pension tax relief than the LTA, so some sort of reversal of the AA increase is not unthinkable, whether it comes alongside or instead of a new LTA. 

‘Another way to limit the Treasury spend on pension tax benefits would be to reduce or do away with the 25 per cent pension commencement lump sum, or to limit tax relief on pension contributions. Either measure would be controversial, and the latter would be an administrative challenge, so they are perhaps unlikely, at least early on in a new government’s parliament. 

‘But as pension contributions are an effective way to pay less tax as thresholds remain frozen, it’s understandable if suspicions that a new government might look to cap or reduce tax relief in some way are leading some savers to stash cash into their pensions now. 

‘One final tax-preferential treatment of pensions that could come under scrutiny is the exemption of defined contribution pension pots from inheritance tax.’ 

The questions around inheritance tax exemptions 

Smith says: ‘Labour have made it clear they think some inheritance tax exemptions and allowances are too generous, so it’s possible some sort of measures will be taken to reduce them if they gain power. 

‘While the IHT-exempt status of defined contribution (or money purchase) pension pots has not been mentioned by Labour, it has been highlighted more than once by think-tanks as an anomaly, so it might well be on Rachel Reeves’ radar. 

‘If some steps were taken to levy IHT on the transfer of pension assets, this would probably lead to a widespread draining of drawdown pots, and a lurch towards other assets and tactics that mitigate against IHT, which at 40% is quite significant. 

‘The other major talking point on IHT is around business and agricultural property reliefs, with a think-tank this week highlighting how they help some large estates shelter assets from IHT, and questioning the potential eligibility of most AIM shares for Business Relief.

‘There are legitimate reasons behind business and agricultural IHT reliefs, which help family and rural business to remain intact and going concerns on the death of owner, thereby savings jobs and assets of community value. Objections to the inclusion of AIM shares miss this point, and even a drive to remove AIM shares from Business Relief must take into account that it’s there to encourage private investment in small British firms that is sadly in short supply in the UK economy at the moment.’ 

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

Chloe

14/06/2024

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EPIC Investment Partners – The Daily Update: Inflation Cools, Fed Remains Cautious

Please see the below article from EPIC Investment Partners detailing the latest inflation figures and thoughts of the Fed. Received this morning 13/06/2024.

The latest Fed-friendly inflation figures provided considerable relief, as they eased more than anticipated. In May the headline print was flat, while the core reading rose 0.2%. Year-over-year the figures cooled to 3.3%yoy and 3.4%yoy, respectively. The three-month annualised headline CPI fell below 3% for the first time since January. Moreover, the core reading, which decelerated to its lowest level in over three years, was of significant interest given its stickiness. 

Furthermore, the “supercore” measure, i.e. core services less shelter, actually produced a negative print (-0.04%) for the first time since late-2021. So, a considerable cooling from the 0.5% three-month average. On an annualised basis, “supercore” eased to 4.8%, so remains a concern. 

Real average hourly earnings unexpectedly rose to 0.8%yoy with the weekly figure stalling at 0.5%yoy, possibly due to fewer hours worked. 

Although the dis-inflation trend appears to have resumed, policymakers have stressed the need for more evidence of downward momentum before commencing their easing cycle. We believe that while there is a narrative emerging that the inflation report will confirm recent inflation stickiness as merely a temporary blip, it would be premature to make such an assumption, particularly as we have warned that the last “mile” to 2% could be the hardest.

Markets were quick to react, the dollar fell off a cliff, we saw a new all-time high in the S&P Index, and a sharp rally across the US Treasury curve, the 2-year UST yield witnessed the largest single drop so far this year having fallen ~16bps to 4.67%. Futures bets for cuts this year sharply shifted to two cuts, with a ~85% chance as early as September and another by the end of the year. 

Some of the market moves (dollar and USTs) pared back following the FOMC announcement. As expected, the Fed held interest rates steady and signalled it may start cutting rates as late as December 2024, despite continued progress on lowering inflation. The central bank projects only one 25bp cut this year (from three projected in March), followed by four additional cuts (up from three) in 2025, reflecting an outlook for the economy to broadly hold its current trajectory over the next few years. The median core PCE inflation forecasts were revised higher to 2.8% (from 2.6%) and 2.3% (from 2.2%) for this year and 2025, respectively. Futures markets are this morning pricing a 99.9% chance of a cut in November with the possibility of a further cut in December.

Fed Chair Jerome Powell said policymakers see the current policy stance as “about right” and will watch for clear signals from data on inflation, labour market, growth, and risks before adjusting rates further. While leaving the door open to an earlier cut if inflation keeps declining, the Fed appears willing to move cautiously given the uncertain inflation outlook and resilient economic conditions.

Market participants will closely scrutinise PPI data later today, and comments from Federal Reserve officials over the next few days for any indication that the central bank’s rate projections, known as the “dot plots,” failed to fully account for the recent benign inflation data. If policymakers suggest the dot plots are outdated or voice increased concern over persistent inflation, it could reignite speculation of an additional rate cut in 2024.

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

13/06/2024

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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

Team No Comments

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

Team No Comments

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

Team No Comments

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

Team No Comments

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