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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

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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

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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

Team No Comments

Epic Investment Partners: The Daily Update | US Economy Losing Steam, but Crows Are Smarter Than They Seem

Please see below, EPIC Investment Partners’ Daily Update detailing the latest figures on the strength of the US economy. Received this morning – 31/05/2024

The Fed’s Beige Book lived up to its name, revealing little in the way of new colour on the US economy, which it noted had maintained modest growth from early April to mid-May, though conditions varied across industries and regions. 

Most districts reported slight economic expansion, though consumer spending remained subdued due to high inflation and uncertainties. Some sectors like travel/tourism and housing showed resilience. Employment rose slightly overall with modest job gains, but labour shortages persisted. Wage growth was moderate. Inflation continued rising modestly, with businesses facing consumer pushback on price hikes and smaller profit margins. Input costs were mixed, with some declines in material prices. Modest price growth was expected near-term. 

Despite pockets of resilience, overall economic outlooks grew more pessimistic due to rising uncertainties and downside risks stemming from inflation, tighter financial conditions, and economic headwinds. 

Furthermore, data released yesterday showed the US experienced a slower growth rate in the first quarter of the year than initially estimated, primarily due to weaker consumer spending on goods. GDP rose 1.3%yoy, lower than the previous estimate of 1.6%. Personal spending, which is the main driver of economic growth, advanced by 2.0%, a downward revision from the earlier estimate of 2.5%. 

We also had an insight into corporate profits and inflation figures. Adjusted pre-tax profits for corporations declined by 0.6% in the first quarter, marking the first drop in a year. The Fed’s preferred inflation metric, the personal consumption expenditures price index (PCE), rose at an annualised rate of 3.3% in the first quarter, slightly lower than the initial projection. The core PCE gauge, which excludes food and energy, increased by 3.6%, a minor revision from the previous estimate of 3.7%. Markets will closely monitor the hotly anticipated PCE deflator readings for April, due later today. The headline figure is expected to have risen 0.3%mom and 2.7%yoy, and the core reading is forecast at 2.8%yoy. 

Finally, it seems some crows have taken the phrase “bird brain” and given it a whole new meaning! In a remarkable discovery that might just ruffle a few feathers in the world of animal cognition, scientists in Germany recently found crows do in fact possess counting skills and are able to associate different sounds with numbers. These brainy birds have shown that they can not only outwit many seven-year-olds (“proven” in 2014), but they can now challenge most of their younger siblings with their arithmetic mastery. So, the next time you see a kindergartener excited about their counting skills, you can clap back with a resounding “Caw! Caw! Caw! Caw!”

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

Alex Kitteringham

31st May 2024

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EPIC Investment Partners: The Daily Update | Bobby Dazzler to Brown’s Bottom

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

Gold is certainly dazzling investors this year. With the precious metal maintaining recent highs, uncharacteristically mirroring equity returns, and surprising commentators better used to obvious ‘safe haven’ status, it is interesting to reflect on its historic place in global financial stability. Perhaps the current phenomenal appetite by the Chinese, looking for a hedge against the potential economic instability of the world’s second largest economy amid a residential real estate crisis, reflects more of its traditional place in a financial cycle.

And where does ‘Bobby’ fit in? Sir Robert Peel, as Home Secretary, formed the Metropolitan London Police Force in 1829. The constables were known as ‘bobbies’ or ‘peelers’. Earlier in his career, he chaired the Bullion Committee at Westminster, charged with restoring national finances after expensive wars with France which had forced Britain to depart from the gold standard. The ‘Resumption of Cash Payments Act’ placed the country once more on the gold standard, and despite considerable scepticism, it soon became evidence of Britain’s possession of a sound currency, and economy, for the remainder of the nineteenth century.

His ‘Bank Charter Act’ of 1844 set the limit of how much currency the Bank of England could issue according to its holdings of gold and began the process of centralising note issuance. This became the second pillar of economic stability upon which the United Kingdom relied until 1914.

So, Sir ‘Bobby’ Peel may well have understood the current preoccupation of the Chinese with a dazzling precious metal, at a time of financial, domestic and global instability. He would have been less impressed with the sale of more than half of the UK’s gold bullion reserves between 1999-2002 at an average price of around $275 per ounce! Brown’s Bottom, indeed.

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

Andrew Lloyd DipPFS

30th May 2024

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Brewin Dolphin – Markets in a Minute

Please see below this yesterday’s global market round-up from Brewin Dolphin, which was received late yesterday afternoon – 28/05/2024:

The event which seemingly caught the world off guard last
week was the announcement of a UK general election, which
will be held on 4 July. The papers on Thursday morning were
rife with stories of cabinet members being kept in the dark,
and many asked why an election would be called now when
the Conservatives lag so dramatically in the polls.

Theoretically, an election could have been held as late as
next January, but that would have required campaigning
over Christmas (which is not something voters would have
appreciated). The working assumption had been that the
election would take place in November.

Last month, we questioned that assumption:

“…an established preference exists to not have elections
coinciding amongst members of the so-called Five Eyes
intelligence collaboration alliance (driven by the U.S. and UK
and incorporating Canada, Australia and New Zealand). The
perception is that a change of power in these countries can
complicate their responses to signals intelligence. The UK and
U.S. electoral systems tend to mean complete changes in the
executive government, rather than the evolving coalitions seen
in other countries, which heightens the risk.”

So, there lies a political, or at least non-economic, reason not
to have the election in November. Was it meaningful? It hasn’t
been cited as such; instead, the decision is rumoured to have
been made after the local elections, which were predictably
terrible for the Conservatives, but perhaps not decisively great
for Labour.

The economic rationale for a July election

Economic motivations seem clearer. The most obvious reason
for calling a July election is the inflation rate announced on
Thursday morning.

The figures showed a relatively sharp decline in the inflation
rate, from 3.2% to 2.3%. This bookended a period in which
the UK, which suffered unfortunately high inflation rates for
many months, has seen a significant improvement in inflation
figures (it peaked at more than 11% in late 2022 and was still
nearly 9% a year ago).

The so-called base effect drove the decline in inflation that
caused the apparent slowdown. This was therefore more a
reflection of last April’s price increases dropping out of the
numbers than this April’s price increases being particularly low.

To a lesser extent, the same thing will happen next month,
providing a continuing narrative of lower inflation as we
approach election day. The controversy is what happens after
that, because the strength of services inflation in Wednesday’s
report might cause prime minister Rishi Sunak to worry about lingering inflationary pressure, like that seen in the U.S. this year.

Another measure for underlying inflationary pressure is the
monthly change in median prices, which has been picking
up recently.
The other reason for thinking last month that an earlier
election might be on the cards was public finances, which
were worse than the Office for Budget Responsibility (OBR)
predicted at the Spring Budget:

“…these latest data suggest UK finances are getting tight.
There will be little point in holding a fiscal event if there is no
scope for further tax cuts. If forecasts are excessively optimistic,
the risk is that fiscal policy might need to be tightened, a
politically unpalatable prospect both parties are hoping to
postpone until after the election.”

Another month’s public finance figures were announced
on Wednesday. Although they were overshadowed by the
inflation news, and then the election announcement itself,
they have deteriorated again, and OBR forecasts will need
to take account of compensation payments due in respect
to the NHS contaminated blood scandal as these become
sufficiently certain.

The scope for tax cuts is therefore falling. Meanwhile, growth
is relatively good for now, bouncing back from a technical
recession in the second half of 2023. Unemployment is
relatively low, but jobs growth has been slowing, so there
is more scope for joblessness to rise than decline.

So, overall, the economic backdrop for a 2024 election might
not get much better than this.

While the rationale for an early election may exist, it doesn’t
mean the government will prevail. Indeed, according to polling
and election forecasters, a substantial Labour majority seems
virtually inevitable.

Both parties will be working on their manifestos, and the
changing state of public finances will complicate their efforts,
but what do we know about their differences and what do
they hope to change?

The dividing lines between the Conservatives
and Labour

Labour has proposed several solutions to boost the British
economy, including planning reform, better EU relations, the
Green Prosperity Plan, and strengthening workers’ rights.
It aims to increase funding for the NHS, schools, childcare,
policing, and border security. To finance these initiatives,
Labour plans to crack down on tax evasion, increase the
energy tax levy, reform the non-domicile tax regime, abolish
the carried interest loophole, and charge VAT on private
school fees.

Labour also pledges to keep corporation tax at 25% and
maintain current income and capital gains tax rates.

Labour’s Rachel Reeves aims to balance the budget
and strengthen the OBR’s role. However, given the high
government interest expenses, the deficit is expected to
remain significant, with UK debt potentially rising to 300%
of GDP by 2070. Concerns about government finances will
persist for policymakers.

When the manifestos are written, likely in two or three weeks,
they will be scored by the Institute for Fiscal Studies. It’s
common for them both to err on the side of generosity. It’s
likely that the gap may be particularly wide this year, and
particularly so for Labour.

The Conservative Party has made life awkward for them
with popular tax cuts and defence spending commitments,
which Labour will have to reverse if it doesn’t want to limit
its own initiatives. So far, it has suggested it will keep
these commitments.

Since the announcement

Rishi Sunak’s election campaigning has been greatly hindered
by the weather. As well as his campaign launch speech, it
has also impacted economic statistics. If the prime minister
was looking for April’s retail sales to fit the narrative of an
improving economy, he’ll be disappointed. Consumers bought
around 3% less in April this year than they did last year. Why?
Probably because it was the sixth wettest April since 1836,
with 55% more rainfall than average and about 20% less
sunshine. Not a great shopping month.

Assuming some normalisation in weather patterns, some
catch-up spending would see May and June recover some of
that lost activity, which could give an impression of economic
momentum as we approach election day.

Could there be more sinister weakness lurking behind the
weather effects? Consumer confidence seems to have
improved over the month, and based on the best data we
can access, it seems even with a slowdown in employment
growth, aggregate real wage growth is expanding.

Away from the UK

Provisional data for economic performance in May comes
from the purchasing managers indices. They show that the
UK economy continues to perform ok. Admittedly, the service
sector seems to have slowed down markedly during May, but
even that slower pace reflects a still-healthy expansion.

Globally, the services expansion still seems to have good
momentum. Crucially, the U.S. bounced back with its
strongest services business growth in a year.

Services activity has been expanding far faster than
manufacturing, where companies have had to work through
inventories built up after strong lockdown-driven demand for
durable goods. We are hopeful the fourth quarter of 2023
marked the low for manufacturing, and the latest data support
the expectation of a continued, if slow, recovery.

The other familiar theme we’ve discussed in these notes is our
preference for semiconductors and Nvidia was among the last
companies reporting this earnings season, issuing probably
the most anticipated earnings release this quarter.

Nvidia is a good example of the real-world economic
beneficiaries of the revolution in digitisation and artificial
intelligence. Its valuation seems high, but its financial
performance is stunning. A year ago, it made $7bn of
revenue; the equivalent quarter just reported saw that rise to
$26bn. Profits have increased from $2bn to nearly $15bn.

The observation that the U.S. equity market price-to-earnings
ratio is at the upper end of its historic range is a fair one, but it
has to be seen in the context of the extraordinary companies
that have come to dominate the market.

A simple price-to-earnings ratio does not take account of the
different pace of growth or the reliability of earnings constituents may have. It partly reflects profit margins but does not
demonstrate the remarkable profitability of some members.

There has never been a time when such large companies
have been able to grow profits at such an extraordinary
pace. That is not to say that all members of the so-called
Magnificent Seven are unambiguously positive, but excluding
any of them based upon a crude measure of earnings
multiples would be unwise

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

Carl Mitchell – DipPFS

Independent Financial Adviser

29/05/2024

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Tatton Investment Management – Tuesday Digest

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

Overview: Nvidia versus the Fed

Having had recovered to previous highs, markets were mostly flat to slightly down overall this week. Despite the surprise election call dominating our headlines, global markets were preoccupied with Nvidia’s corporate earnings and the US Federal Reserve meeting minutes.

In fact, the FTSE 100 barely reacted to the election news at all, with global trends seen as more important for UK stocks than domestic politics. In part this is because little is expected to change. A Labour victory is a practical certainty, but the party’s self-imposed spending rules will limit the economic effects. There may be a small boost to growth from public investment, but the policy change that would actually help – significantly improving trade and customs relations with the EU – is still unlikely. The Bank of England’s interest rate cuts, which will be unaffected by the election, are more important for the medium-term outlook.

In the US, Nvidia’s incredible six-fold jump in profits showed the AI boom is still going. The chipmaker’s earnings were eagerly anticipated, but in the end drowned out by dreary reminders from the Fed that growth brings inflation. The minutes from the Fed’s May 1 meeting noted that “Various participants mentioned a willingness to tighten policy further should risks to inflation materialise in a way that such an action became appropriate,”

This spooked investors, but shouldn’t really be a surprise. We know that inflation is a natural consequence of US strength. Price data since the meeting has been more encouraging too, and no one really thinks the Fed will tighten again soon.

Growth and inflation are acting like checks and balances on markets at the moment. Investors naturally get excited about strong business sentiment and profits, but these come with inflation pressures and ‘higher for longer’ prospects for interest rates. The Fed doesn’t actually have to do anything to keep markets from overreaching; the push and pull of growth and inflation expectations does it for them. Decent stock returns, underpinned by earnings growth, are likely in this environment – but melt ups are not. To us, that seems like a reasonable trade-off.

AI Trade Broadening?

“Nvidia day” has become a globally watched event, and the AI chipmaker didn’t disappoint. First quarter revenues were up 262% year-on-year, boosting its stock yet again, taking the world’s third biggest company to an incredible $2.5 trillion market cap. Nvidia is the undisputed champion of the AI craze, jumping from a $1tn to $2tn market cap in just nine months.

This stellar price action has some investors worried about Nvidia – and AI stocks in general – being overvalued. Despite being a landmark year for the company’s earnings growth, for example, Nvidia’s 2023 profits were still below Home Depot and only slightly above Russia’s sanction-hit Sberbank.

A couple of things need bearing in mind. One, stocks can be overvalued even if they possess great underlying potential and their products are genuinely transformative – as exactly happened during the dotcom bubble. And two, overvalued doesn’t always mean a bubble. Stock market bubbles are characterised by exuberance, which in general requires loose financial conditions – and those we don’t have currently.

AI stocks have high valuations, but so do many fast growing US companies – where the popular AI investment plays are. These valuations don’t seem unreasonable compared to the lofty predictions made of generative AI (Goldman Sachs think it will add 7% to global GDP over a 10-year period) and the profit growth already shown by the likes of Nvidia.

Investors are clearly focused on how these technologies will turn a profit, and not just sensationalism. Already we are seeing a broadening of the AI investment theme to second-round beneficiaries, like the materials or energy providers needed for large data centres. Goldman Sachs estimate that power demand from data centres will more than double by 2030, benefitting utilities and those financing power purchase agreements. Investors are focused on long-term opportunities and not just buzzwords. Working out what those profit opportunities are is crucial.

US election: it’s politics, stupid

Despite strong US growth, Americans are unhappy with President Biden’s handling of the economy. 58% disapprove of his policies, according to a Financial Times poll, and only 28% think he has benefitted the economy. Inflation is the biggest concern, as the less well-off are struggling with prices and interest rates more than anyone else. This inequality is one of the reasons many are unhappy despite strong aggregate data.

Another reason could be politics itself. There is a strong correlation between US consumer sentiment and party political allegiance. This is not just about votes, which might flock to whoever is considered to bring the better economic prospects, per the old adage “it’s the economy, stupid”. Party allegiance is much less likely to change – particularly in the polarised US – and it seems to have a big effect on what people think about the economy.

The divide between Democrats’ and Republicans’ economic outlooks more than doubled between the Obama and Trump presidencies, shrinking a little under Biden but staying much wider than before. Year-ahead inflation expectations is the biggest dividing line. Democrats were scared about inflation under Trump but now seem sanguine, while Republicans were completely relaxed until Biden came in and are now very worried about inflation.

Rather than votes being decided by how people feel about the economy, Americans’ views on the economy seem to be about who is in office. Maybe “it’s politics, stupid”. To make things more complicated, the US economy itself is hard to interpret at the moment. Growth and inflation is strong, but rates are uncertain and the signs are hard to put into a consistent narrative.

The political divide in economic sentiment is yet another complicating factor. Republicans are likely to see good news as bad news – fearing growth is inflationary – as we head into November, while Democrats will likely see good news as good news.ypto rally might run out of steam, but it is unlikely to reverse.

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

28/05/2024

Team No Comments

Evelyn Partners Update – Labour wants Bidenomics for Britain

Please see the below article from Evelyn Partners detailing their insights on the recently called general election on 4th July. Received yesterday.

So, how do the parties compare? According to opinion polls, the Labour Party is set to form the next UK government with a comfortable majority. The poor showing of the Conservatives in the May local elections also adds weight to the argument that opposition leader, Keir Starmer, is set to become the seventh Labour Prime Minister, a century after James Ramsay MacDonald became the first Labour Prime Minister on 22 January 1924.

No doubt, investors will be trying to figure out what a Labour government might mean for UK financial markets. Politics matters when it comes to valuing UK equities. For instance, UK stocks suffered a material de-rating in the lead up to and after Brexit, including the political paralysis in the Commons under Prime Minister Theresa May‘s minority Conservative government. During that time, the UK’s stock market’s limited exposure to the rallying technology sector has also contributed to its unloved status with investors.

To get an idea of the potential impact from a prospective Labour government we need to understand the party’s economic agenda. A good starting point is Shadow Chancellor Rachel Reeves’ speech at the annual Mais lecture in March. It largely focused on delivering “broad-based and resilient growth” through greater state involvement in the economy and has some differences from the approach taken under the current Conservative government. The bottom line is that the Labour party wants to raise the growth potential of the UK economy through its economic agenda, which can be largely summarised in two key parts:

Stability and investment: Reeves argues that businesses need economic and political stability to create the conditions to invest with confidence through a policy she’s coined as “Securonomics”. Labour believes that by improving the information flow to firms through “partnership” with the government, as well as providing strategic direction and selective policy intervention, firms will be encouraged to invest their capital. This tailored economic approach for Britain is similar to “Bidenomics” – the flagship policies of President Joe Biden’s administration.

In short, Labour wants to direct business investment to areas where it believes the UK will have a strategic competitive advantage (e.g., green technology); commonly known as modern supply side economics. This is different to the traditional supply side economics championed by former Prime Minister Margaret Thatcher more than 40 years ago where regulations were cut to allow free markets to determine where private investment goes (think of the privatisations of British Telecom and British Gas in the 1980s).

Reforms: Reeves also made clear “the single greatest obstacle to our economic success” is the planning system. She argues that it creates barriers for opportunity, growth and home ownership and Labour will put “planning reform at the very centre of our economic and our political argument.”

Labour intends to address planning obstacles by streamlining applications with off-the-peg processes. Importantly, to address local opposition to planning proposals, Labour wants to devolve power away from the central government. The idea is that regions and local governments are assumed to have better knowledge of their respective areas and are better placed to fast-track high-value applications. While Labour’s policy is akin to the current government’s approach, Reeves wants to make even more progress on devolution. For instance, on planning reform, Labour intends to reintroduce mandatary local housing targets, employ more people to tackle backlogs and bring forward the next generation of “New Towns.”

Labour also wants to reform the labour market by strengthening workers’ rights. This includes banning zero hours contacts, repealing anti-union laws and ending “fire and rehire”. This will be unveiled in an employment bill within the Labour administration’s first 100 days. At this stage, it is unclear what impact labour reforms will have on the employment outlook.

Translating Labour’s policies into economic growth

A new Labour government would face a vastly different backdrop compared to the last one under Prime Minister Tony Blair in 1997 when government debt and the budget deficit were much lower. It’s likely that a Labour government will need to make spending cuts and/or raise tax over the next parliament to stay within current fiscal rules.

Certainly, Labour will be wary that breaking fiscal rules could lead to financial market turmoil: the short premiership of Liz Truss in 2022, when gilt yields soared to leave her economic agenda in tatters is a case in point. So, this will mean that fiscal policy could be a drag on growth and impact the independent Office for Budget Responsibility’s average real GDP growth expectation of 1.6% per annum over the next five years.

Labour aims to raise economic growth to offset the downside to output from bringing in the deficit. This will largely be dependent on encouraging firms to invest their shareholder’s funds in government-directed strategic areas by providing a favourable and stable environment through “Securonomics”.

Labour also expects its planning reforms and decentralisation to help raise workers’ productivity. However, this will be difficult to do when whole economy productivity (defined as output per hour worked) is already so low. It has increased by just 0.6% since 2009, after the end of the Global Financial Crisis (GFC). Austerity, financial sector deleveraging, competition from imports affecting the manufacturing sector and the rising proportion of the workforce on long-term sickness leave are already contributing factors to the UK’s poor productivity. For comparison, productivity rose at an annualised pace of 2.3% from 1971 (when the data starts) to the end of 2006, the year before the GFC started.

How would a Labour government affect the UK stock market?

There is plenty of uncertainty over whether a Labour government delivers on its rhetoric and whether their policies work to support growth, company earnings and valuations. So, we use scenario analysis to assess the impact on our expectations for the long-term returns of UK equities.

Our Head of Quantitative Strategy, Krishna Nehra, estimates a base case of 5.6% (nominal, annualised returns) for UK equities over the next 10 years. This is based on future real GDP growth, valuations and dividend yields. Under a bullish scenario, where Labour lift the UK’s potential growth rate and valuations expand, that would rise to 7%, while a bear case would produce returns of 4.9% per year.

Ultimately, what will probably drive UK equity returns is whether a Labour government can improve the investment landscape for UK companies.  In the Mais lecture, Reeves recognised that unlocking private investment requires institutional reform to encourage UK financial companies to invest in productive assets domestically. This will be crucial, as the scrapping of the dividend tax credit by Chancellor Gordon Brown in 1997 led to the share of UK equities owned by pension and insurance companies to fall from around 46% to just 4% currently.

If Labour wins the election, only time will tell if their policies succeed in lifting the economy’s growth rate. However, given the poor state of the UK government’s finances and subdued productivity, it will be a hard task for the next government to achieve.

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

24/05/2024

Team No Comments

EPIC Investment Partners: The Daily Update | Nvidia – Pricing in the Future of AI and Innovation

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

Nvidia’s stock elicits polarised opinions, as its exponential revenue growth trajectory creates ambiguity between hype and value. Sceptics cite the company’s lofty price multiples as indications of overvaluation and price bubbles while advocates contend that conventional metrics inadequately assess the potential of transformative technologies to drive growth.

Nvidia epitomises the conflict between traditional valuation methods and the disruptive potential of innovation. As investors navigate this landscape, they must balance scepticism with recognition of the potential for genuine paradigm shifts.

The Fourth Industrial Revolution is currently underway, characterised by the rapid integration and advancement of groundbreaking technologies across various sectors marking a pivotal moment in human history. As innovations in artificial intelligence, robotics, the Internet of Things, 3D printing, nanotechnology, biotechnology, and quantum computing continue to unfold, they are reshaping industries, economies, and societies worldwide.

Nvidia is a core holding in the EPIC global equity strategy because it is positioned at the epicentre of this digital transformation, uniquely poised to reap the economic benefits of this revolutionary era.

In the first quarter ended April 28th, revenue surged 262% year-on-year and crushed guidance figures. Pricing power was also exceptionally strong as adjusted gross margins increased 220bps sequentially to 78.9% ahead of guidance of 77%.

Nvidia’s CEO Jensen Huan stated that demand for both its current Hopper AI platform and its more advanced incoming Blackwell system will both outstrip supply well into next year.

We see further upside ahead.

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

Andrew Lloyd DipPFS

23rd May 2024

Team No Comments

The Daily Update – Sticky UK Inflation & US Supply Woes Linger

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

This morning, we heard that UK inflation fell to 2.3% in April, the lowest level in nearly three years, as easing energy and food costs provided relief to households. However, the smaller-than-expected decline dampened hopes of an imminent interest rate cut by the Bank of England. Analysts had forecast a sharper drop to 2.1%, leading markets to trim predictions of a 25bp rate reduction as early as next month. 

The drop in the headline CPI from 3.2% in March was driven by falling energy bills (a sharp fall in the energy price cap), coupled with the cost of goods declining by 0.8%. Nonetheless, services inflation, a key measure watched by the BoE, came in hot, rising 5.9%, indicating the inflationary bug has spread through the economy. With wage growth also robust, economists warn the BoE may exercise caution at its upcoming meeting, as elevated services inflation poses an upward risk to inflationary pressures in the second half of the year.  

Ahead of the figures, the IMF upgraded its UK growth forecast to 0.7% for this year, from 0.5%, estimating a 1.5% expansion in 2025. The organisation expects inflation to near 2% in the coming months, predicting that the BoE will cut rates by as much as 75bps this year and 100bps in 2025, taking rates to 3.5% by the end of next year. The IMF also explicitly warned of further national insurance contribution cuts “given their significant cost.” The Fund also warned that the UK government is not on track to meet its main fiscal rule, i.e., reducing national debt in five years’ time, predicting net debt will continue to rise to 97% of GDP, instead of falling to 93% of GDP as forecast by the UK.  

Across the pond, supply chain disruptions continue to plague businesses across the United States, according to a recent survey conducted by the New York Fed. The survey, a follow-up to a similar poll in October 2021, revealed that about a third of service companies and nearly half of manufacturers are still struggling to obtain necessary supplies. This has hampered production, with many firms reducing output and raising prices in response – a troubling development as the Fed battles stubbornly high inflation. 

The survey results align with the New York Fed’s Global Supply Chain Pressure Index, which has tracked supply availability since 2021. However, there has been a slight divergence in the past few months, potentially indicating that inflationary pressures tied to stronger demand are building again. This is evident in the rising container shipping rates, with the spot rate for a 40-foot container from Asia to the US West Coast now more than double the level a year ago and nearly triple the pre-pandemic average. 

Lastly, for those of you in need of a giggle, the winner of the Beano’s Britain’s Funniest Class competition went to the Year 6 class at Northside Primary School in North Finchley, London:  

What’s the hottest area in the classroom? The corner – because it’s 90 degrees. 

In response, Mike Stirling, director of mischief at The Beano, said: “Year Six, Northside Primary School found the funniest angle overall and are deservedly now immortalised in Beanotown”. 

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

Chloe

22/05/2024