Team No Comments

Brewin Dolphin Markets in a Minute: Stock markets ease as inflation fears return

Please see below for Brewin Dolphin’s latest Markets in a Minute Article, received by us yesterday evening 14/09/2021:

US and European stocks fell last week as the prospect of higher inflation and slower economic growth weighed on investor sentiment.

The S&P 500 and the Dow ended their four-day trading week down 1.7% and 2.2%, respectively, amid a higher than-expected rise in producer prices and concerns about the Delta variant’s impact on the economic rebound.

The pan-European STOXX 600 eased 1.2% as the European Central Bank (ECB) said it would trim its emergency bond purchases. The FTSE 100 also fell 1.5% on concerns the Bank of England could start increasing short-term interest rates.

In contrast, Japan’s Nikkei 225 extended the previous week’s gains, adding 4.3% amid ongoing optimism that the new prime minister will bring further fiscal stimulus. China’s Shanghai Composite rallied 3.4% after newspapers reported ‘candid’ talks between the country’s leader Xi Jinping and US President Joe Biden.

S&P 500 ends five-day losing streak

The S&P 500 added 0.2% on Monday, ending its five-day losing streak, as rising oil prices boosted energy stocks. Airlines and cruise line operators also performed strongly, after the seven-day US Covid-19 case average fell to 144,300 from 167,600 at the start of the month.

UK and European stocks also edged higher, after a top European Central Bank official said recent gains in inflation did not yet pose a risk, and that the extremely low level of inflation seen in 2020 needed to be taken into account.

The FTSE 100 opened Tuesday’s trading session down 0.3%, after the Office for National Statistics reported that while UK company payrolls have returned to pre-pandemic levels, the recovery is uneven and labour shortages are likely to persist for the rest of the year.

US producer inflation accelerates

Last week saw the release of the latest US producer price index, which is a measure of inflation based on input costs to producers. The index rose by 0.7% in August from the previous month, which was a slowdown from July’s 1.0% increase but above estimates for a 0.6% rise.

The index rose by 8.3% on an annual basis, which was the biggest yearly increase since records began over a decade ago. This followed a 7.8% annual increase in July.

The data, which comes amid supply chain issues, a shortage of goods, and heightened demand related to the pandemic, suggests inflationary pressures are persisting despite the Federal Reserve’s insistence they will prove temporary and ease through the year.

Firms are also facing cost pressures from the tight labour market. The closely watched US Jobs Openings and Labor Turnover Survey (JOLTS), released last Wednesday, showed there were a record 10.9 million positions waiting to be filled in July, up from 10.2 million in June. It marked the seventh consecutive month of increased job openings, fuelled by factors such as enhanced unemployment benefits, school closures and virus fears.

ECB to trim bond purchases

Over in Europe, the ECB said it would move to a ‘moderately lower pace’ of pandemic emergency bond purchases following a rebound in eurozone economic growth and inflation. ECB president Christine Lagarde sought to reassure investors by stating that the shift to a slower pace of purchases was not tapering. This contrasts with the US Federal Reserve and the Bank of England, which have signalled they plan to start tapering asset purchases this year.

In comments reported by the Financial Times, Lagarde said the economic rebound was ‘increasingly advanced’, but added: “There remains some way to go before the damage done to the economy by the pandemic is undone.” She pointed out that two million more people are out of work than before the pandemic, and many more are still on furlough schemes.

Lagarde added that a fourth wave of infections could still derail the recovery, while supply chain bottlenecks could last longer and feed through into stronger-than-expected wage increases.

BoE split over rate increase

BoE governor Andrew Bailey gave a speech last week in which he revealed the central bank’s policymakers were evenly split between those who thought the minimum conditions for considering an interest rate hike had been met, and those who thought the recovery wasn’t strong enough. According to Reuters, Bailey said he was among those who thought the minimum conditions had been reached, but that they weren’t sufficient to justify a rate hike.

The comments have led to speculation that the next vote could skew towards raising the base interest rate, which currently stands at 0.1%.

Bailey also said there were signs that the UK’s economic bounce back from the pandemic was showing some signs of a slowdown. Indeed, data published by the Office for National Statistics on Friday showed monthly gross domestic product (GDP) grew by 0.1% in July – lower than the expected 0.5% rise and the 1.0% growth seen in June. Output in consumer-facing services fell for the first time since January, driven by a 2.5% decline in retail sales. Output from the construction industry also dropped amid a shortage of building materials and higher prices.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well

Paul Green DipFA

14/09/2021

Team No Comments

Artemis: Our view on regulatory changes in China

Please see below for one of Artemis’ latest articles received by us this morning 12/08/2021:

Regulatory changes in China continue to cause uncertainty. Raheel Altaf, co-manager of Artemis’ global emerging markets strategy, explains how the investment process has helped to provide downside protection. He shares his outlook and sets out why he believes exceptional value can still be found.

Over the past 12 months there have been a series of regulatory changes in China covering a range of industries.

Why is China doing this?

The main reason for this lies in the government’s determination to develop China into a modern socialist economy. The objectives of common prosperity, green development and independence in key technologies and industries are at the heart of their long-term agenda and are designed to achieve the nation’s rejuvenation by the middle of this century. The developments have mainly taken place in ‘new economy’ sectors, such as internet platforms and e-commerce. These have grown rapidly, in part because of lax regulations. The situation is changing now. The catch-up in regulation aims to address loopholes to ensure fair competition and sustainable growth.

Effects felt across multiple industries

These developments have led to sharp falls in share prices of former strong performers. For example, in February, anti-monopolistic laws targeting internet platforms were announced. This put pressure on some of China’s ‘mega-cap’ internet stocks, in particular Tencent and Alibaba. In July, China ordered education firms to go non-profit and banned foreign ownership. Shares of education stocks such as Tal Education and New Oriental Education fell around 70% as a result. More recently there have been reports that regulation on gaming may be increased, leading to jitters in that sector.

Our approach

We have been concerned for several years that the risks in popular (and often unprofitable) new economy stocks in China were not well reflected in their share prices, which had reached excessive levels. So we have avoided investing in these companies, which has at times been costly for our fund’s performance.

Is now the time to buy them?

We would argue that valuations have certainly moderated but fundamentals are deteriorating. Our proprietary screening tool SmartGARP has been indicating to us that the growth in ‘value per share’ (a combination of earnings, cash flows, dividends, operating profits and net assets) in these companies has been slowing. This is the result of new regulations, but also other competitive pressures. These risks can derail high-growth stocks at the end of their cycle. Share prices have corrected, but with the fundamental outlook heading downwards these stocks appear expensive and have the potential for further weakness.

Analysts continue to downgrade their profit forecasts in these mega-cap Chinese internet companies. With many Asian companies expected to report their Q2 earnings in August, we remain watchful for how the current environment has affected companies’ profits.

We have been commenting for some time on the stretched dispersion in valuations between low and high value stocks. The last six months have seen this start to reverse in many global markets.

In China, the valuation spreads reached extreme levels and the reversal only started at the end of January. There is therefore some way to go to catch up. Should China follow the same path as others, we expect a number of our holdings to see significant benefits.

Outlook

While continuing to avoid the mega cap internet stocks, we are still seeing attractive value in other less popular areas of the market, where the risk reward is highly favourable. Chinese banks (an overweight), as an example, have been a relatively safe haven recently. We expect markets to remain volatile, but remain confident that the favourable value per share of our holdings relative to the market is likely to be rewarded over time with better fund performance.

The fund’s value bias remains substantial. The Price/Book ratio of the fund is 0.8 and it offers a forward P/E of 6.3 vs 12.7 for the index (50% discount). The opportunity, in our eyes, remains an exceptional one.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well

Paul Green DipFA

12/08/2021

Team No Comments

Brooks MacDonald Daily Investment Bulletin: 28/07/2021

Please see below for Brooks MacDonald’s Daily Investment Bulletin received by us yesterday 28/07/2021:

What has happened

Equities had a weaker session yesterday with defensive equities outperforming technology stocks in particular. Some of this weakness in technology can be attributed to the concerns that China might continue to expand regulation after their foray into educational technology earlier this week.

Chinese technology

Markets have long had a concern around technology regulation in the US where a Democrat White House could try to curb the perceived overreach of big technology. Investors had downgraded this risk due to the economic impact of the pandemic but also a belief that the US would be unlikely to do anything too aggressive in case Chinese companies gained a competitive advantage. With China ‘going first’ on technology regulation this not only increases risks around Chinese securities but removes one of the arguments as to why the US would stay quiet on technology regulation for now. Meanwhile in the US, technology earnings saw some winners and losers with Alphabet rising 3% in the after-market but Microsoft losing an equal amount after it’s cloud-services business saw less growth than expected.

Federal Reserve

Now to the week’s major event, the Federal Reserve’s latest policy statement which is due out at 7pm UK time tonight followed by Fed Chair Powell’s press conference. Policy risk is at its highest at points of transition and the Fed will need to tread a delicate path today. The tapering genie is out of the bottle and will almost certainly be a conversation topic at the meeting however the extent to which Powell majors on this will give an important steer to the market. The rising risks around the delta variant and lower global growth expectations have both contributed to a less positive market backdrop ahead of tonight’s announcement. The statement will also need to address inflation where we have seen another upside beat to price levels in the June CPI numbers but inflation expectations have been falling in the bond market. Some of this reduction in inflation expectations is due to a belief that the Fed will not be afraid of raising rates over the next two years so there is a complex interplay that Powell will need to consider.

What does Brooks Macdonald think

Due to the rising uncertainties around the pandemic and economic growth, we expect Powell to stop short of warning that tapering is imminent. This meeting may well therefore serve as a placeholder until either the Jackson Hole Economic Symposium in August or indeed the meeting in September.

Source: Bloomberg as at 28/07/2021. TR denotes Net Total Return

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well

Paul Green DipFA

29/07/2021

Team No Comments

AJ Bell: Why Chinese stocks are still not partying

Please see below for one of AJ Bell’s latest articles, received by us yesterday afternoon 22/07/2021:

Tomorrow (23 July) heralds the one-hundredth anniversary of the first meeting of the Chinese Communist Party and the country’s leadership continues to mark its birthday with a series of high-profile events, speeches and actions

Whether the centenary is anything that investors can mark with pleasure remains more of a moot point, even if the benchmark Shanghai Composite index trades some 15% above the levels reached just before the news of the pandemic seeped out of the Middle Kingdom in early 2020. These doubts persist for three reasons:

First, the president and general secretary of the Communist Party, Xi Jinping, marked the anniversary of the party’s foundation on 1 July with what many in the West saw as an aggressive speech as he warned any foes would be met with a ‘wall of steel’.

Second, China continues to intervene in financial markets, often in not-so-subtle ways. The crackdown on internet giants such as Alibaba and Meituan, and cybersecurity investigation into ride-hailing app Didi immediately after its stock market flotation in the US looked like expressions of displeasure with a trend toward overseas listings and a reminder to entrepreneurs of who was really boss.

Finally, China’s second-quarter GDP growth figure of 6.7% year-on-year undershot economists’ forecasts. This perhaps serves as a reminder that China is trying to combat the economic fall-out of the pandemic and keep the economy going on one hand, yet seeking to avoid letting financial markets, asset prices and debt get out of hand on the other.

Beijing and president Xi are hardly on their own in this respect – the UK, US, the EU, New Zealand, Australia and Canada are also members of what is a hardly exclusive club – but political legitimacy perhaps rests most fundamentally upon economic progress, employment and increasing prosperity than it does in China than anywhere else, not least because the authorities really have no-one else to blame if anything goes wrong.

DEBT DILEMMA

The last point is perhaps the easiest to tackle. Granted, China has a relatively low government debt-to-GDP ratio of 67% but that number is rising quickly. Moreover, the opaque structure of Chinese State-Owned Enterprises, let alone the so-called shadow banking system, mean the overall national debt-to-GDP figure is a less healthy 270%, according to China’s own National Institution for Finance and Development.

China may therefore be generating growth, but the quality of that growth looks questionable, given its reliance on fiscal stimulus and cheap debt. This perhaps explains why the Shanghai Composite index is trading well below its 2007 and 2015 highs even as the economy keeps expanding. A timely reminder that investors should never use macroeconomic data alone when it comes to selecting stocks, indices and funds (be they active or passive) to research and follow.

In the interests of balance, it must be noted that China’s currency is trading relatively strongly against to the dollar, after a six-year slide, so markets may not be too worried about the economic foundations (although again the US faces the same challenges).

POWER PLAY

Geopolitical risk is something which with all investors must live but there is little they can do about it, barring factor it into the risk premiums they demand when buying assets in certain countries – or in plainer English, pay lower valuations to compensate themselves for the potential dangers involved.

Sino-American relations remain strained, to say the least, as Beijing and Washington wrestle for supremacy in key industries, notably mobile telecommunications and semiconductors.

This is prompting talk of a new Cold War, a view perhaps supported by president Xi’s powerful speech on 1 July. Investors will be hoping it does not spill over into a hot war over Taiwan, for example, whose strategic importance is only heightened by the global semiconductor shortage.

But if investors can do little about geopolitics, they can do everything when it comes to corporate governance, either on their own or by paying a fund manager to do the donkey work for them. And perhaps the greatest concerns lie here, at least when it comes to Chinese equities.

Beijing’s indifference to the damage done to Didi Chuxing’s share price in the wake of the security investigation and assertion that US regulators cannot check Chinese audits of firms with listings in America is a big red flag (if you will pardon the expression). No-one, from a private individual to a trained fund manager, can invest in a firm if audited, verifiable and reliable accounts are not available.

This reminder that China has its own agenda – one that is designed to preserve the Communist Party’s hegemony well beyond the first hundred years – affirms that investors’ needs are secondary.

They are welcome to keep buying stakes in Chinese firms, or funds which track Chinese indices or own Chinese equities, if they wish. But they need to be sure they are paying suitably lowly valuations to accommodate the potential risks, which should also be in keeping with their overall tolerance levels.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well

Paul Green DipFA

23/07/2021

Team No Comments

Legal & General’s Asset Allocation team’s key beliefs 19/07/2021

Please see below for Legal & General’s latest Asset Allocation Team Key Beliefs Article, received by us yesterday afternoon 19/07/2021:

Bearish sentiments

This week, we look at investor sentiment, Peru, and China – can you guess the obvious link between them?

Bulls and bears

The latest AAII Bull/Bear spread, which is based on a survey of investors’ outlooks, has started to drift lower again. The number of bullish investors has now declined to a year-to-date low.

Overall, there are still more bulls out there than bears, but the dampening of excessively positive sentiment can be seen in other indicators too. For us, this is a positive, as it reduces the risk that frothy sentiment quickly unwinds, prompting investors to pull positions and cause a market slump of their own creation.

Yet the overall bullish tone does still remain. Yields are low, policy conditions are generally supportive, and inflation – although high – is not seen as problematic. The vaccine story is also generally good, although we are aware of the risks.

In our own scenario analysis, the conclusions look similar – and that in itself acts as a red flag. Both our most likely scenario of a healthy recovery and the weighted average scenario in our analysis suggest above-trend growth and modestly above-target inflation ahead.

Given the positive sentiment, we think that is pretty well priced by markets too, so return expectations shouldn’t be too lavish from here if that scenario plays out. The upside is a ‘Roaring 20s’ type recovery; the downside is a COVID-19 variant or vaccine failure inducing a deflationary slump or rapid cycle compression, although neither attracts a particularly high probability in our view.

It’s fine to be in the crowd for a while – indeed, some of us may look forward to being in actual crowds again – but as investors we don’t want to stay there for too long. Consensus thinking can be dangerous.

Change at Paddington’s home

There is a new Paddington Bear movie in the pipeline, a Paddington exhibition at the British Library has opened, and Gareth Southgate’s management style has been juxtaposed against Paddington Bear.

Our reason for bringing him up, though, is his origins in “deepest darkest Peru”. Our economist Erik has had his spectacles on to look at Peru and other Latin American economies recently.

Peru now has a decidedly leftist government, but we believe it is a country with enviable fundamentals and China-like growth rates. In the run up to the recent elections, the currency sold off in anticipation of a hard-left candidate winning the vote.

Pedro Castillo did indeed win the presidency, and has vowed to overhaul the country’s economic model. But while his party is socialist, Castillo has drawn up more neutral policies since his victory, including central-bank independence and not nationalising the mining sector.

While we are wary of Castillo and will continue to monitor his policies and cabinet appointments closely, our view is that he may not be as negative for the country as the media are making out. With strong economic fundamentals, the risk event of the election behind us, and attractive valuations after the recent selloff, we have moved in on the currency, looking for negative sentiment to moderate.

Panda pop

This month has brought news that giant pandas are no longer endangered in the wild, according to China. The species is native to South Central China and, thanks to conservation areas, its outlook has been improving. Our view is that the Chinese economy is on a good footing too.

Much of the economic data looks solid and second-quarter growth came in stronger than expected. This made us a little surprised to see a cut in the reserve requirement ratio (RRR), one of the tools used to manage the economy, last week.

GDP is broadly back to its pre-pandemic trend, so if anything is responsible for the RRR cut it could be that growth remains a little unbalanced, with retail sales remaining depressed.

We added Chinese bonds to a number of portfolios in the early parts of the year as we believe the highly rated securities still offer an attractive yield and can play a role as an interesting diversifier in our portfolios. We still think that holds. The downside risk of a vaccine failure causing an economic slump in the country also makes us think these bonds could help should a bear market prevail.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well

Paul Green DipFA

20/07/2021

Team No Comments

Invesco: Emerging markets, China, and the road ahead

Please see below for one of Invesco’s latest investment articles, received by us yesterday 07/07/2021:

A year and a half after the first reported cases of a new SARS-like virus in Wuhan, China, we can now look back with greater clarity on a period of some of the most dramatic volatility since the Asian and global financial crises. Here, we assess what this volatility and the associated policy responses have meant for China and emerging markets and plot a dotted line for the road ahead.

Looking up after locking down

At the time the pandemic hit, the unresolved US-China trade war loomed large and global manufacturing was in the early stages of restructuring to accommodate new trade patterns. Despite this, China stood out from other countries in terms of its fiscal, monetary and industrial policy response.

Beijing’s policy decisions focused on maintaining domestic productivity and employment with as little disruption on the demand side as possible. Manufacturers were given liberal access to capital to maintain operations, and refunds on social security tax and unemployment insurance incentivised businesses to retain staff without layoffs.

At the same time, the central bank lowered its reserve requirements and removed blocks on certain loan extensions and renewals. Investments were made in traditional infrastructure projects like housing and transportation, and spending on the nationwide 5G network was accelerated.

As a result, China moved from having a GDP contraction of almost 6% for the first quarter of 2020 to being the only major world economy to print a positive GDP growth number for the year.

A dolorous relationship?

While China’s growth in 2020 is unmatched, the road ahead is not unwinding, particularly when we consider the impact that US policy decisions could have on the US dollar.

The growth of the US fiscal balance sheet in 2020 (accommodated via easy monetary policy) appears to have stimulated real inflation in the US economy – an outcome which has led to talk of tightening. If asset purchase programmes are tapered or rates increased, the likely outcome is a stronger dollar.

Historically, a strong dollar has been negative for emerging markets, as it increases the burden of US dollar-denominated debt. This is less of a factor today than it was prior to the Asian and global financial crises. However, the fact remains that this could dampen growth prospects in some emerging market economies.

Commodities buck the trend

In spite of the observation noted above, it is likely that a stronger dollar will benefit firms selling commodities into US dollar-denominated markets, as long as there is global demand for these products. This factors into the dramatic outperformance we have seen from steelmakers, iron miners, commodity chemical companies, and even coal producers.

The demand behind this outperformance is not part of the same super-cycle seen after China’s admission to the World Trade Organisation, when investment in capacity and infrastructure facilitated the country’s transition to the so-called ‘world’s factory’.

Even when we account for the fact that some of this capacity has moved to other countries in the context of trade realignment, the overall demand for commodity materials is not in the same league as two decades ago.

Instead of a broad, sustainable growth in demand, we are seeing a short-term build-up of inventories that reflects ‘new normal’ uncertainties about tariffs and pandemic lockdowns. This goes all the way through the product cycle, from raw materials to finished goods.

Although these dynamics are almost certainly near-term and should subside in the medium-term, they do attract speculation that disrupts the market.

The road ahead

What does this disruption mean for emerging markets? In the absence of significant inflows, there is a conservation of capital within the asset class. The sharp and transitory shifts described above get funded by parts of the market that have outperformed — in this case growth companies, in particular those in China. In this sense, China has been a victim of its own success as far as its response to the pandemic is concerned, as some investors look to lock-in potential gains.

That said, in our opinion, these sharp transitions do not signify a change in the long-term view for emerging markets. The types of firms that create and capture value for shareholders remain the same.

Even with an ageing population, China remains a large economy with an outlook for sustained, high-speed growth. The growing middle class offers opportunities for investment in education, real estate services, and world-leading innovative technology platforms that facilitate consumption.

It is worth adding that the size and scale of the domestic market should make it less susceptible to external volatility than other markets in the asset class.

What these transitions offer, then, is the potential to invest in the best long-term opportunities at more attractive valuations than normal market conditions afford. 

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well.

Paul Green DipFA

08/07/2021

Team No Comments

Invesco Investment Intelligence updates – 14/06/2021

Please see below for one of Invesco’s latest Investment Intelligence Updates, received by us yesterday 14/06/2021:

After April’s US CPI upside surprise, last week’s May reading was eagerly anticipated, albeit with a degree of trepidation. It didn’t disappoint. Headline CPI came in at 0.6%mom and 5%yoy, its highest level since 2008 (inflation peaked at 5.6%yoy then), while Core CPI rose even more at 0.7%mom, leaving it at 3.8%yoy, its highest since 1993. Both were 30bp above consensus expectations on a year-on-year basis. Strength was largely led by what are seen as “transitory” components, such as used cars (7.3%), car and truck rental (12.1%) and airfares (7%), even if there are other elements of consumer prices, such as shelter costs, that show more sustainable price pressures. Notwithstanding that we are probably close or at peak inflation as the impact of the lockdown starts to fall out of the calculation. How quickly and how far it will drop will be a function of whether rising costs, corporate pricing power and rising wages in a stimulus fuelled economy translate into more persistent inflation. For now, the Federal Reserve and increasing numbers of investors, witness a 10yr UST that is at its lowest level since early March, appear unconcerned about this risk. Time will tell whether this complacency is warranted or not, but it clearly remains a significant tail risk for financial markets.

Global equity markets finished the week at a fresh all-time high, with a rise of 0.6% for MSCI ACWI. It is now up 12.7% YTD. DM (0.6%) led EM (flat), with both the US and Europe ex UK hitting new all-time highs, up 13.8% and 16.7% respectively YTD, with the latter the strongest major market of the week (1.2%). Small Caps (1.3%) outperformed again, hitting new all-time highs, with DM (1.3%) ahead of EM (1.1%). It was a rare week of Tech and tech-related sector outperformance, led by IT (1.6%). HealthCare (2.8%) was the best performing sector. Real Estate also had a good week (2.1%) and is now the third best performing sector YTD, up 18.8%, behind Energy and Financials. Lower bond yields weighed on Financial sector performance, while commodity sectors also lagged. Sector performance underpinned a strong relative performance week for Growth (1.4%) versus Value (-0.3%), while Quality (1%) had a good week too. UK equities were slightly ahead (All Share 0.9%) on the back of a good week for large caps (FTSE 100 0.9%) on strength in HealthCare, Telecoms and Energy.

Government bonds had a strong week with yields pushed lower by the belief that US inflationary pressures are transitory and a dovish stance at the latest ECB meeting. 10yr USTs and Gilts fell 10bp and 8bp respectively, taking them to their lowest levels since early March. They are now down 28bp and 18bp below their YTD highs, but are still higher than their starting level, hence the negative returns YTD from the asset class. Bunds and BTPs fell 6bp and 12bp. The better tone in government bond markets supported a good week for credit markets, where IG outperformed HY globally. IG yields fell 5bp with spreads narrowing by 2bp. The latter at 91bp are within touching distance of their post-GFC low (87bp). In HY a decline of 5bp in yields took them to all-time record lows (4.54%), but spreads at 353bp remain somewhat above their post-GFC lows (311bp).

The US$ edged higher over the week with the US Dollar Index up 0.5%, its third weekly gain, leaving it up 0.7% for the year. The Euro and £ were down -0.4% and -0.3% respectively.

Commodities overall were down slightly on the week with a -0.6% loss for the Bloomberg Commodity Spot Index, which is up just under 22% YTD. Brent, up 0.9%, hit its highest level ($73) in two years. In its latest monthly report, the IEA said that OPEC+ would need to boost output to meet demand that is set to recover to pre-pandemic levels by the end of 2022. Copper was up marginally too, 0.4% on the week, after a late rally on Friday as investors bet that China’s sales of strategic reserves would have a muted impact on demand. Gold edged lower (-0.6%) as it continued to consolidate around the $1900 level.

Andy Haldane, the Bank of England’s outgoing Chief Economist, described the UK’s housing market as being “on fire” last week. Recent House Price indices from the Halifax and Nationwide, the two biggest mortgage lenders, showed annual price growth of 9.6%yoy and 10.9%yoy respectively. These were the fastest rates of growth since 2007 and 2014 respectively and a lot faster than the rates of growth (3% and 3.5% CAGR respectively) seen in the decade leading up to the pandemic, described by another senior BoE official as housing’s “Quiet Decade”. And last Thursday’s RICS House Price Net Balance reading, which measures the breadth rather than magnitude of price falls or rises over the previous 3 months, hit +83% – its highest level since the housing boom of the late 1980s. Regionally it hit +100% in the N, NW and SW of England and Wales, while London was the standout laggard at just +46%.

All in all, a very uncharacteristic housing market, which typically fall and only recover slowly in severe economic contractions. This time around a combination of factors have delivered a very different market outturn: easing of lockdown restrictions have released pent-up demand. The government has supported the market through the Stamp Duty holiday (due to finish at the end of September), although it may not be as big a motivator for moving as some think. A recent survey by Rightmove shows that it is not the biggest motivation, with only 4% saying that they would abandon purchase plans if they missed the Stamp Duty deadline. Mortgage availability has improved, particularly for first-time buyers. Borrowing costs are low. Excess savings built up during the pandemic have provided cash for larger deposits. Finally, lifestyle factors (more space, relocating from large metropolitan areas) are at play. This has created an excess of demand over supply (the gap between new buyer enquiries and new instructions in the RICS survey was the widest since 2013) and, as with any commodity, when these imbalances occur prices tend to rise.

So, will the market remain “on fire”? In the RICS survey a national net balance of +45% envisage higher prices in the short-term (3m), while a greater +64% see them higher over 12m, although prices are only seen rising between 2-3%. Halifax and Nationwide also see the potential for further price rises in the coming months as most of the current demand drivers remain in place against a backdrop of a continued shortage of properties for sale. So, the fire may rage for a bit longer. Longer-term the RICS survey sees house prices appreciating by between 4-5% over the next 5 years. A still robust market, but certainly not to the same degree that we’re seeing currently. That would be a positive outturn for the economy. 

Key economic data in the week ahead

The Federal Reserve and Bank of Japan meet this week to set their respective policy rates. Inflation data is a feature in both Japan and the UK this week, with the UK also publishing its latest employment report. In China economic activity for May is also released. Finally, there will be a number of post-G7 meetings in Europe next week, which may stir some interest, particularly those between the US and EU and Biden’s meeting with Putin.

In the US Retail Sales data for May is released on Tuesday. A decline of -0.6%mom is expected after no growth the previous month as the impact of pandemic-relief cheques faded. On Wednesday the Federal Reserve’s FOMC meets. While no change in policy is expected, market focus will be on its update of its economic projections, particularly any changes to the rates dot plot, employment and inflation projections (after two strong prints recently), as well as any clues on the future tapering of QE. Last week’s Initial Jobless Claims fell to a new pandemic low of 376k as the number of job openings has surged. On Thursday a further decline to 360k is expected.

There are a number of important data points this week in the UK. April’s Unemployment figures are published on Tuesday. A small decline to 4.7% from 4.8% is forecast. This compares to a recent high of 5.1% and 3.8% before the pandemic struck. On Wednesday May’s CPI will come out. Headline inflation is estimated to have increased 0.3%mom to 1.8%yoy mainly due to higher fuel prices. This will take inflation back to the levels seen immediately pre-pandemic. Core is also expected higher at 1.5%yoy from 1.3%yoy. So, both measures remain below the Bank of England’s 2% target. Retail Sales for May are released on Friday. After the non-essential shops re-opening bounce last month, a more sedate 1.6%mom is expected this month for sales ex Auto Fuel.

In Japan the Bank of Japan meets on Friday and is expected to keep its policy unchanged. CPI on the same day is forecast to have increased in May, but the Headline rate is still expected to be negative at -0.2%yoy, while Core is seen as flat, having fallen 0.1%yoy in April.

Chinese activity data for May is released on Wednesday. Industrial Production is forecast to have risen 9.2%yoy, slightly lower than 9.8%yoy in April. Retail Sales are also expected lower, but still strong at 14%yoy compared to 17.7%yoy in April. Fixed Asset Investment is seen up 17%yoy from 19.9%yoy last month.

There is no significant data coming from the EZ this week.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well.

Paul Green DipFA

14/06/2021

Team No Comments

AJ Bell: Why the FTSE 100 is warming to an economic upturn

Please see below for one of AJ Bell’s latest investment articles, received by us yesterday 18/04/2021:

As the UK starts to emerge from its latest (and hopefully final) lockdown, the FTSE 100 already trades above the levels reached just before the pandemic first made its presence felt in China and Southern Europe in early 2020.

There can be no finer example of how financial markets are forward-looking, discounting mechanisms which seek to price in future events before they happen. Yet they are not right all the time. No-one, but no-one, owns a crystal ball (or at least one that works) and if markets really were that prescient, then there would never be major sell-offs or upward surges, as no-one would ever be surprised by anything.

What the advisers and clients must therefore do, in order, is assess the facts as they are known, determine the current consensus about what will happen and – by looking at valuation – decide whether the risks are to the upside or downside. Therefore, they must look at the broad range of possibilities concerning what may happen, what could be the biggest surprises and their potential impact so they can decide whether the potential upside rewards outweigh the downside risks over their preferred time horizon.

In sum, the best fund managers are not necromancers or chancers trying to guess the future. They are experts at judging probabilities and act according to the cold maths of valuation, be that measured by earnings, cash flow or yield. It may not take much good news to boost a market that has fallen sharply to price in negative events (it may even just take the absence of fresh bad news), while it may not take much bad news to jolt a market if it has made big gains.

The FTSE 100 bottomed in late March 2020 at 4,994, long before the worst news about the pandemic and its toll on lives and the economy became known. After a near-40% gain in the UK’s headline index over the past year, advisers and clients must once more assess the balance of probabilities so they can decide whether the index has further to run or not and a good place to start is earnings forecasts.

New highs

At face value, it does seem odd that the FTSE 100 is trading above its pre-pandemic levels, even if the number of daily new COVID-19 cases is back to where it was last March and last September, and the vaccination programme continues apace. The economic outlook is still uncertain: the effects upon the behaviour of corporations and consumers alike are yet to reveal themselves and other parts of the globe are less advanced in their race to inoculate their populations.

But it does make sense if you think that the consensus earnings forecasts for the FTSE 100 are going to be accurate. An aggregate of the estimates made for each member of the index suggests that the FTSE 100’s total pre-tax profit will be £178 billion in 2021 and £205 billion in 2022.

FTSE 100 is forecast to make record pre-tax profit in 2022

Those figures exceed the £166 billion made in 2019, before the pandemic hit home. Moreover, if the 2022 forecast is attained, then that would represent a new all-time high for annual earnings, surpassing the £199 billion made in 2011.

In this context, it is not too hard to see why the FTSE 100 is trading where it is, or even make a case for further gains, since the index trades below its May 2018 zenith of 7,779 even though record profits are expected for 2022.

Advisers and clients must therefore decide whether the forecasts are reliable, too optimistic or too pessimistic and what must happen for analysts to be off-beam (which they usually are, owing to the absence of that crystal ball).

Heavy metal

To do this, advisers and clients need to parse the FTSE 100’s earnings mix. Roughly 60% of forecast profits come from just three sectors: mining (now the single biggest earner), financials, and oil and gas.

Just three sectors are expected to generate around 60% of FTSE 100 earnings in 2021 and 2022

In some ways, this makes it easy for advisers and clients to judge the upside and downside potential: in crude terms, the stronger the economic recovery the better, so far as the FTSE 100 is concerned as the index’s key industries offer huge gearing into GDP growth. The opposite also applies. A weak recovery (or heaven forbid an unexpected double-dip) would be potentially a nasty surprise.

A breakdown of forecast earnings growth makes this picture clearer still. Analysts think that the FTSE 100’s aggregate pre-tax profit will rise by £75.1 billion this year and by a further £27.1 billion in 2022. Miners and oils are expected to generate two thirds of that between them in 2021. Oils, consumer discretionary and financials are forecast to provide four fifths of the expected profit uplift in 2022.

Just three sectors are expected to generate more than 75% of forecast earnings growth in 2021 and 2022

Rising commodity prices and steepening yield curves would therefore be a good sign; falling and flattening ones would not. Those advisers and clients who buy into the narrative that inflation is coming, after being largely dormant for 40 years, will therefore feel right at home in the UK. Those who still fear debt-ridden deflation may be tempted to steer clear and seek their fortunes elsewhere.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well.

Paul Green DipFA

19/04/2021

Team No Comments

Legal & General: Our Asset Allocation team’s key beliefs

Please see below for Legal and General’s latest Asset Allocation Team’s Key Beliefs article received by us the afternoon of 25/01/2021:

Bubble trouble?

Never have more people searched for the term ‘stock market bubble’ on Google. Data stretching back to 2004 show that January 2021 is set to eclipse January 2018, when searches for the term both preceded and followed a 10% drop in the S&P 500 over nine trading days. As we have highlighted before, investor optimism is pretty well inflated and, while most sentiment indicators don’t look stretched, many are elevated.

Burst case scenario

Not everyone is optimistic, though. One scholar of market bubbles, Jeremy Grantham, opened his new outlook: “The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble.” Grantham has a good track record in predicting the moments when bubbles burst, so should we be worried? We think the famed investor may be right but, as he concedes, we believe the market could still run a lot further. Our own bubble index shows that the probability of a market bubble has indeed been rising. In fact, it is now the highest it has been since 2008.

What has driven this? We have seen an increase in capital raising through IPOs and SPACs, some of which echo the tech bubble of the late 1990s. US retail investor activity has also taken off, with easier access through investment platforms and, for some, new money to play with from stimulus cheques. However, we are just emerging from the COVID-driven economic recession. This means many macroeconomic indicators have improved, policy is supportive, and there is plenty more cash on the side lines ready to be deployed, regardless of further fiscal stimulus.

So while the market is definitely reminiscent of a bubble forming, it could easily still get much stronger from here. We therefore believe it’s too early to call a bubble now.

The moderates yield

If you weren’t able to watch any of the US presidential inauguration, I recommend viewing US National Youth Poet Laureate Amanda Gorman’s recital of “The Hill We Climb”, a powerful and gritty poem of hope for the future of the US, from a self-proclaimed presidential candidate for 2036.

In the more immediate future, the most relevant aspect of the new Biden administration to financial markets will be the prospect of more fiscal stimulus. The central case is for another virus relief package worth $1 trillion to be passed in the coming months, with an additional $1 trillion recovery package potentially following later. The quicker the economy recovers, of course, the smaller later packages will be.

Politically, though, we see the path of least resistance actually being for more fiscal spending rather than less. With a razor-thin majority, power accrues to the moderates, which means only consensus policies can pass. We expect it will be easier to build such a consensus on extra spending (giving things away) than on extra revenues (taking things away). While Democratic moderates have supported virus relief and the current package so far, several are not on record as supporting Biden’s tax proposals. Finally, voters don’t appear to care as much about deficits anymore, so senators probably won’t either.

Treasury yields could be the place where changing fiscal dynamics are priced, and indeed US yields have risen more than others in recent weeks after the Georgia runoffs, but as it stands we are comfortable with an overall neutral position on duration. In fact, we prefer US markets to UK gilts, which have only seen more modest yield rises despite the so-far successful vaccine rollout and expectations for a fiscally conservative budget.

Flexible recipe for fixed income

Multi-asset portfolios are like giant cakes, baked with multiple ingredients. We have decided to add a new ingredient to our cake: Chinese bonds. Technically it’s not new, as they are a growing part of emerging-market bond allocations in portfolios, but we have moved to an explicitly positive view.

We believe Chinese bonds add a lot of diversification to our fixed income holdings as China hums to a slightly different economic tune from the rest of the world, with a different monetary policy framework too. Historically, Chinese bonds have had a low correlation to other bonds. Their yields are relatively high, and we are particularly interested in bonds that could continue to provide protection in macro downturns as we believe many traditional bond markets will struggle to provide the defence they offered in the past.

This is just one of the steps we have been taking in portfolios to try to manage investor outcomes in a low interest-rate environment, with greater roles for non-traditional fixed income assets as well as defensive currencies and other strategies.

Regularly ‘picking the brains’ of investment managers and experts by reading articles like these can help update your own view of the markets and current global affairs.

Please keep reading these blogs to keep your view of the market well informed and up to date.

Stay safe and well

Paul Green 26/01/2021

Team No Comments

Market predictions and investment resolutions for 2021

Please see below for Invesco’s article on Market Predictions for the year ahead, received by us yesterday 06/01/2020:

Happy New Year! No one wants a year in review for 2020, but here is what I learned from the past year: History may not repeat itself, but it sure does rhyme. What we learned from 2020 is a repeat of the lesson we learned from the global financial crisis (GFC): Central banks are very powerful. They can’t cure viruses and they can’t create jobs, but they can boost confidence and move markets — a lot. That is the big similarity 2020 had with 2009: Central bank intervention mattered, especially by benefiting risk assets.

When I think of the New Year, I think of predictions and resolutions. And so today, I provide you with a little of both.

My New Year’s predictions

1. US-China relations may get warmer. There seem to be two factions emerging among Biden loyalists: “reformists” who want to push China aggressively on key issues and check its power, and “restorationists” who want to restore US-China relations to where they were in the Obama administration. I believe Biden will do what he typically does: land somewhere in the middle. I don’t expect US-China relations to return to what they were pre-Trump. However, I do expect the relationship between the two countries to improve and normalize. In particular, I expect more predictability and less volatility. While Biden may not unwind tariffs immediately, I do expect him to unwind the Trump administration tariffs after a “study” of their impact (which has obviously been negative for parts of the US economy, especially agriculture). The Biden administration will likely be aggressive on specific issues with China and pursue those issues multilaterally — but I expect that to occur within the context of a broader US-Sino relationship that is more cordial because the fortunes of many US businesses are tied to China. The Chinese economy is on pace to soon overtake that of the US, with the timeline expedited due to COVID, which gives China growing leverage. In fact, the Centre for Economics and Business Research recently released its forecast that China will overtake the United States by 2028 as the world’s largest economy, which is five years earlier than previously estimated due to the two countries’ very different recoveries from the pandemic.1 In addition, China has already begun to signal that it would like improved relations with the US. China’s Foreign Minister Wang Yi said in a recent interview with the South China Morning Post that both the US and China have been negatively impacted by the deterioration in their relationship over the past several years, and that US-China relations have come to a “new crossroads” with a “new window of hope” opening.2

2. Developed countries may have a better recovery than they did post-GFC. As COVID-19 vaccines are broadly distributed, I expect the economic recovery to be far more robust and inclusive than the economic recovery coming out of the global financial crisis. I believe the services industry will rebound with greater intensity, benefiting many lower income workers. That doesn’t mean that there won’t be more glitches in distribution — I fully expect there to be. And there will likely be more pandemic-related headwinds, such as the development of worse strains of the virus. However, once a substantial portion of the population is inoculated, I expect the economic recovery to be powerful. 

3. Oil may rise. Given my expectation for a strong economic recovery in 2021 as vaccines are distributed, I also expect demand for oil to increase significantly. I believe this will lead to a substantial increase in the price of West Texas Intermediate crude oil — even if we see a ramp up in oil production.

4. Bitcoin may fall. I know there is a lot of excitement over Bitcoin, but it’s starting to feel a bit like Tulipmania. Bitcoin rose more than 300% in 2020, with much of the gains made in the last few months of the year.3 I continue to believe gold is a far better choice for diversification into “hard assets” and as a hedge against geopolitical risk. Bitcoin might continue to run for a while this year, but I expect it to be volatile and to ultimately disappoint, as it has in the past after strong rallies.

5. The S&P 500 Index may have another double-digit return in 2021. With vaccine distribution beginning, a robust economic recovery anticipated in the not-too-distant future, as well as extraordinary accommodation from the Federal Reserve, I expect a continuation of the stock rally we saw in 2020, albeit with drops and pauses along the way. Better-than-expected corporate earnings should also help.

My New Year’s resolutions

1. Stay invested and well diversified. While I feel very confident about risk assets in 2021, that doesn’t mean there won’t be volatility and sell-offs in the coming year. I believe having adequate exposure to stocks, fixed income, and alternative asset classes is key to building a portfolio that may withstand volatility.

2. Look to Asia’s emerging markets. My outlook is especially bright for the emerging markets countries that have managed the pandemic well, such as China and Korea. These economies have a head start on the robust vaccine-fueled economic recovery that I expect in 2021.

3. Don’t overlook tech. While the economic rebound may result in strong performance by cyclical stocks in sectors such as energy and consumer discretionary, I don’t necessarily expect tech stocks to underperform. I continue to favor adequate exposure to the technology sector, as I believe many tech stocks may continue to benefit from trends that accelerated during the pandemic.

Although nothing is guaranteed for the future as proven by the year 2020, expert insight and opinion like this is a good way of seeing how actions and news developing worldwide could have an impact on the investment markets, and thus highlights good topics for discussion.

Please utilise blogs like these to aid your own informed opinions on what may lie ahead for the markets, but I reiterate that nothing is guaranteed for the future.   

Keep safe and well and all the best for 2021.

Kind Regards

Paul Green

07/01/2021