News

Please see below, Brooks Macdonald’s Weekly Market Commentary providing a brief analysis of the key economic and market news over the past week. Received yesterday afternoon – 15/05/2023

Equity markets were subdued last week with US equities seeing small losses and European equities small gains. Technology equities outperformed with large cap US names leading the narrow but powerful rally seen in 2023.

Inflation expectation data suggests that consumers think that inflation will be stickier in the US

On Friday last week the release of the University of Michigan’s consumer and inflation data damaged sentiment. The long-run consumer inflation expectations rose to 3.2%, ahead of 3% in the prior reading and market expectations of just 2.9%. This number is often revised however the US Federal Reserve (the Fed) will be concerned that this may suggest that inflation expectations are becoming more anchored. The one-year measure of expectations was also above expectations but did fall slightly from the month prior. Consumer sentiment was worse than markets had expected, with consumers citing fears of a more protracted recession as a major contributor to the more sombre reading. This week investors will be looking to the US retail sales numbers on Tuesday which are expected to have expanded but for a meaningful proportion of this expansion to have been caused by higher gas prices. The headline number therefore may be a distraction and the data is likely to confirm a slowing in consumption compared to the start of 2023.

Allegations of fraud in the initial jobless claims puts the data release in focus this week

The high-frequency US initial jobless claims data is released on a weekly basis and will be watched closely on Thursday given this is the week where the surveys are completed for the next US employment report. Media reports and statements from the Massachusetts Department of Labor suggest that the recent initial jobless claims data may be misleading in suggesting a softening of labour market tightness. The state has accounted for around half the rise in four-week moving average claims since the late January low. Should these claims have been subject to fraud, as the data and media reports suggest, the initial jobless claims may start coming down significantly, whilst this would be good news for the US economy it is of course less positive for inflation.

UK labour market data this week will help determine whether the UK continues to hike interest rates

With the focus previously on US labour market strength, this week will see the release of UK labour market data which is particularly important as bond markets debate whether there will be a pause in the UK interest rate. Should the data continue to show strength in wage prices this will put pressure on the Bank of England to maintain its tightening stance.

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

Alex Kitteringham

16^th May 2023

Please see the below article from Tatton Investment Management, providing a brief analysis of the key stories from global markets and economies over the past week. Received this morning – 15/05/2023.

Overview: Trust the MPC to rain on May’s parade

After a period of waiting, things are hotting up after central banks acted as expected. Although equity and bond markets have been bearing up well, in our estimation, underlying risks have increased since May began. Last week, it was the turn of the Bank of England (BoE) to increase the UK base rate to 4.5%. After members of the Monetary Policy Committee (MPC) digested reports of tepid growth of 0.1% for Q1 (with March contracting by 0.3%), the 0.25% hike was nailed on. The BoE raised its estimate for economic activity this year and no longer thinks there will be a recession. However, year-on-year inflation is now likely to take longer to ease off, and is expected to remain above 8% as of June, and to finish 2023 at 5.1%. It says the risks are skewed towards inflation staying well above its 2% target. Not everyone agrees. The BoE still worries the UK does not have enough resources to fuel overall growth which is why it sees inflation risks skewed to the upside. The biggest resource shortage is the number of workers (skilled and unskilled) needed to do the work, and it’s difficult to see how this will be resolved in the short to medium term.

Meanwhile, the environment for businesses across the developed world remains difficult. Rises in short-term rates have happened almost everywhere and at the same time. Indeed, apart from the early 1980s, there has never been a such a period with virtually all central banks acting as if in concert. That unified action also means their policies have an unprecedented global impact, magnified by a more interlinked world than in the 1980s. At Tatton, we’re sure central bankers take into account the impact of each other’s decisions, and yet this final phase of rate rises could be viewed as coordinated overkill.

US debt ceiling brinkmanship is nothing new

US Treasury Secretary Janet Yellen has warned the federal government could default on its debt obligations very soon. Perhaps the oddest thing about this state of affairs is that it doesn’t feel like big news. The Treasury hit the current debt ceiling – at $31.4 trillion – on 19 January. Since then, it has been steadily running down the ample funds in the Treasury General Account, buffered by April’s tax receipts. President Biden wants to “take the threat of default off the table”, but Republican House speaker Kevin McCarthy has said his party’s position remains unchanged. Estimates for when the X-date (when the US is officially unable to meet its obligations) falls due are varied, with the latest suggesting it could come in August. But Yellen has warned the government might be unable to meet all its obligations as early as 1 June.

While the media gets excited about the debt ceiling soap opera, we’ve all been here before (at least three times since 2011, to be exact). And realistically the US government’s default risk is zero. Moreover, behind all the brinkmanship, US lawmakers will not want to bankrupt the government. Nevertheless, Biden’s suggested invoking of the 14th Amendment – which states the viability of US Treasury bonds cannot be placed into question – is a signal of how seriously he takes the situation. We mostly agree that reaching the dreaded X-date without an agreement is extremely unlikely but would point out brinkmanship can push things over the edge even when all participants do not mean it to. More important is what happens between now and the X-date – particularly for federal employees. The issue will likely see a short-term resolution, but that sets up an interesting budget confrontation later in the year. As well as dictating actual federal spending, that could well set the agenda for next year’s presidential election.

European energy prices: the great reset?

Wholesale gas prices – the main determinant of energy costs for European households and businesses – have not been this cheap since July 2021, when Russia began constricting supply in the lead-up to its invasion of Ukraine. Softer global economic activity appears to be a reason for commodity weakness this year – not just in gas but oil too. Brent crude prices are currently at around $75 per barrel, down from a peak of over $110 last summer. 

The removal of Covid restrictions has led to an economic rebound in China and previous Chinese growth spurts coincided with substantial commodity price rises. So why has this not happened so far this year, despite definitely positive growth in the world’s second largest economy? Recent import data from China shows a decline in the value of oil and gas imports. Interestingly though, the volumes of oil being imported are still very high – just cheap. Indeed, the implication is that the prices are well below market. This is almost certainly because China is soaking up cheap oil on offer from Russia, which has ample supply but few willing customers in the west. We suspected this was going on for some time, and the latest data effectively confirms it. Global energy distribution has reset; the higher prices of 2022 have encouraged new sources of supply. The Russian reduction of energy supply to the world as a whole has proved temporary. 

While few will be pleased that Russia is finding buyers for its gas and oil, it probably means that Europe’s peak of the energy crisis – the worst in the post-war era – is now past. After Russia began its war in Ukraine, we said global energy markets would drastically restructure, but without necessarily altering the fundamental balance of supply and demand. We are arguably seeing the results of this restructuring now. If so, it would mean downward price pressure is reaching an end. Europe’s energy crisis has certainly improved, but the continent might still have a tough winter ahead.

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

Alex Clare

15/05/2023

Please see the below article from Evelyn Partners for their thoughts on the Bank of England Monetary Policy Committee’s decision to raise interest rates by 25bps:

What happened?

The Bank of England increased rates by 0.25% today at the May monetary policy meeting, which was consistent with market and economic expectations. This takes the base rate to 4.5%, its highest level since 2008. The Monetary Policy Committee (MPC) voted 7-2 in favour of 25bps.

What does it mean?

The Bank of England (BoE) followed the Federal Reserve (Fed) and the European Central Bank (ECB) in raising its base interest rate by 25 bps. While it appears the Fed is pausing its interest rate hiking cycle, the BoE and ECB could still have some work to do. Much will depend on the incoming data.

At 10.1% in March, UK inflation remains stubbornly high. In contrast, US and Eurozone CPI rose 4.9% and 7%, respectively in April. This divergence has been driven by two main factors. First, like the rest of Europe, the UK has experienced a major energy price shock since the Russian invasion of Ukraine.

Second, the UK has experienced far greater labour shortages than the rest of Europe, similar to what we have seen in the US. Many young European workers have left the UK after Brexit and older workers are leaving the labour force due to long-term sickness. This has placed upward pressure on wages and inflation.

As a result, markets have repriced their expectations of the peak in the UK base rate over the last month – they now expect a peak of 5% instead of 4.5%. But much will depend on the data over the next couple of quarters.

We expect to see UK inflation start to ease as the base effects turn more favourable and the impact of higher rates is felt by the real economy. In its latest forecasts, the Bank of England now expects inflation to fall to around 8% for Q2 and 5% by Q4. They expect to meet their 2% target by the end of 2024.

On the plus side, the Bank now thinks the UK will avoid recession in 2023. It revised its 2023 GDP forecast up from -0.5% to 0.25%.

Bottom Line

With inflation remaining stubborn, the Bank will continue to monitor the incoming data before deciding whether to raise interest rates again. With the Monetary Policy Committee continuing to judge that “the risks around the inflation forecast are skewed significantly to the upside” we would not be surprised to see further hikes from the MPC

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

Andrew Lloyd DipPFS

12/05/2023

Please see below, an article from Liontrust highlighting the potential opportunities of investing in companies that are striving to provide a healthier future for society. Received this morning – 09/05/2023

With billions of people living longer than ever yet often in poor health, there is a growing focus on investing to improve people’s quality of life.

As society prospers, one of the constant and reliable areas of growth is in enhancing living standards. Medical innovation has driven up life expectancy across much of the world, with significant advancements in the ability to treat ill health and disease. Meanwhile, society has benefited from dramatic improvements in living standards with better urban environments, air quality and nutrition.

Yet there are significant challenges ahead. The combination of rising lifestyle diseases and an ageing population is placing significant strain on healthcare services such as the NHS. But while the challenges are immense, they also provide huge opportunities for those companies innovating to provide solutions to the issues and potential rewards for investors.

Post the Covid-19 pandemic, there has been a renewed focus on the need to improve the nation’s health and wellbeing. According to a survey by Public Health England, 40% of respondents gained around 3kgs of weight during the period. However, a survey by the British Heart Foundation show that two-thirds of respondents say that exercising is a top priority for improving their physical and mental health in the wake of coronavirus.

Martyn Jones, fund manager on the Liontrust Sustainable Future team, says: “The desire to improve quality of life and living standard continues to be an important driving force in the global economy and will provide a strong tailwind to the companies exposed to these trends. Our job is to back the rare businesses that can harness these tailwinds and generate strong profitability over the long-term with durable competitive advantages.”

A key investment theme for the Liontrust Sustainable team is Delivering healthier foods – which seeks to find companies that are helping to improve the nutritional characteristics of food in order to tackle the obesity epidemic.

Jones says: “By 2026, the market for healthier food and drink is expected to be worth around $1 trillion and an area of the market that we particularly like is in the flavour technology space.

“It is a cost that rarely makes up more than 10% of food and beverage products but is extremely important to the end consumer. In our view, this is not just a trend, but a market experiencing structural long-term growth.”

Jones highlights Kerry Group as a great example of this in the Sustainable Future portfolios. Established in 1972 as a dairy cooperative, it has since evolved to become one of the largest and most technologically advanced ingredients and flavours technology companies. Their innovations help to reduce salt, fat and sugar while retaining taste, texture and flavour.

The Sustainable team also focuses on investing in health, under its Enabling healthier lifestyles theme, through companies that provide goods or services that enable people to live a more active and happier lifestyle, such as gyms and fitness chains.

Yet with consumers globally facing a cost-of-living crisis and looking for ways to make ends meet, many are trading down from more expensive options to low-cost options such as Basic-Fit in Europe.

Though lockdowns across the world during the peak of the pandemic have been tough for the gym market, Jones believe that the tougher the situation, the more well-established low-cost providers will take market share, as they are already positioned to embrace home workouts and have lower operating costs and membership fees.

He adds: “Much of our sustainable thinking at Liontrust focuses on a cleaner and safer world in the future but a third goal requires people to be healthy enough to enjoy this. With a fifth of the world’s population expected to be overweight or obese by 2025, and related diseases impacting both life satisfaction and expectancy, there are issues we simply have to face.

“We believe that the long-term improvements in our living standards and quality of life will persist, driving growth in our themes and long-term returns of companies providing some of the innovative solutions.”

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

Alex Kitteringham

9^th May 2023