Team No Comments

Brooks McDonald Daily Investment Bulletin 25/11/2020

Please see below for Brooks McDonald’s latest Daily Investment Bulletin, received by us this morning 25/11/2020:

What has happened

The US market hit another all-time high yesterday as the vaccine backdrop mixed with positive news around the US transition and expectations that Janet Yellen will be appointed Biden’s Treasury Secretary. The bias towards non-tech stocks continued with the equal weight US market outperforming the traditional index yet again.

Vaccine update

As more vaccines are revealed we expect the pace of news flow in this area to increase and yesterday Sinopharm submitted an application to bring its vaccine to the Chinese market. The Sinopharm vaccine has already been approved for emergency use and has been rolled out quite widely already. Official approval would also open the door to exports to the number of ASEAN countries that have bought the vaccine. This could be a meaningful step for countries without access, either due to economic or political factors, to the cheap Oxford/AstraZeneca vaccine. On the latter vaccine we saw information that the half dose followed by full dose combination which achieved 90% efficacy was only administered to those under 55. This may suggest the population wide efficacy of that strategy is far lower but that isn’t necessarily a problem. Higher cost (financially and logistically) vaccines with high efficacy can be used for those most vulnerable but the cheaper vaccines with equivalent efficacy only in younger cohorts, can be used for herd immunity.

UK Spending Review

Today will see the long-awaited announcement from the UK Chancellor on the state of the UK’s Public finances as well as detailing some short-term next steps. Importantly this is only a one-year review which has been scaled down given the uncertainties of COVID (and indeed Brexit). The tone of the announcement is likely to retain a focus on supporting the economy and jobs short term with the FT reporting that a £4.3bn employment plan will be revealed. That number is however relatively small compared to the numbers in March and this reflects the new context of a far tighter fiscal backdrop coming into 2021, something that will be outlined during the speech.

What does Brooks Macdonald think

The formal budget was deliberately pushed back as the UK economy simply couldn’t handle fiscal tightening when we are in a period of rolling lockdowns. Even next year the government will need to strike a cautious balance between getting public finances back on track and not derailing a delicate recovery which would ultimately generate a need for more fiscal support down the line.

These articles provide concise and well-informed views that cover the whole of the market and are useful to maintain your up to date view of the markets globally.

Please keep reading our blogs regularly to give yourself a holistic and up to date view of the markets.

Keep safe and well,

Paul Green

25/11/2020

Team No Comments

Jupiter Fund Management: Active Minds 19 November 2020

Please see below for Jupiter Fund Management’s latest Active Minds article, received by us this morning 20/11/2020:

Dermot Murphy

Fund Manager, Value Equities

Has Value started the long journey back from the brink?

There has been a pronounced rotation from Growth into Value in recent days, an event which Dermot Murphy, Fund Manager, Value Equities pointed out has been very rare in the last few years.

In the UK, the names which suffered most during lockdown rallied hardest on Monday last week, but in many cases that momentum faded as the week went on. It was notable, however, that a UK-listed cruise company took the opportunity presented by the higher share price to issue a $1.5bn new equity issuance. Dermot would expect other companies to do similar over the coming weeks and months.

The rally broadened out over the course of last week, as companies that have struggled during lockdown despite being relatively insulated from the crisis caught more of the market’s attention. It’s important to note, said Dermot, that this rally in Value is just a drop in the ocean when it comes to the scale of the underperformance of Value seen in recent years. If this short rally is to turn into a longer-term trend, there is still a great deal of ground for Value to make up relative to Growth.

James Novotny

Credit Analyst

Rotation could get nasty over the tough winter

A divided US government following this month’s elections may accentuate the conflict between a difficult short-term outlook of rising Covid-19 cases and additional lockdowns in the US and Europe, and an optimistic medium-term view that includes the potential rollout of vaccines bringing  freedom of movement and the release of pent-up demand, said James Novotny, Macro Analyst, Fixed Income.

Two runoff elections in January will decide which party controls the Senate, but a divided US Congress is now the base case, in James’s view. This means a smaller fiscal stimulus package and a longer wait for it to be rolled out and is a potential problem given the challenging winter period, he added.

James said many year-ahead investment outlooks seem willing to look through these difficult few months, envisioning a smooth transition as investors shift out of US assets and from growth into value. He worries there could be a nasty rotation, however, not as pain-free as some investors believe. There needs to be a certain level of economic growth to support this rotation at a time of possibly higher corporate bond yields and potentially less fiscal and central bank stimulus, he said.

Last week’s market moves were illuminating because they were so stark, he said. Many people were caught wrong-footed, having positions that supported a ‘QE-forever’ trade, and the volatility, including in the foreign exchange markets, was concerning. So too was the fact that the US breakevens, a market measure of inflation expectations has failed to respond to the election and vaccine news, and have languished well below the Federal Reserve’s (Fed) inflation targets, he said. This signals a clear need for more stimulus at a time when President Trump seems to be trying to make the transition to a Biden White House difficult, James said.

The Fed needs to do more, but its next open market committee meeting is mid-December, and it may be a long month. Against this backdrop, the dollar should remain weak despite sporadic risk-off periods, given the record twin deficits, James said. Looking ahead, US assets bear close watching, especially the dollar and US break-evens, for any signs that the move out of US assets can be more painless, and to see that central bank policy is loose enough.

Matthew Pigott

Assistant Fund Manager, Emerging Markets

Chinese government draw a line in the sand with corporates

Interesting news in China, after the default of a flagship company in China’s drive for self-sufficiency in semiconductors, said Matthew Pigott, Assistant Fund Manager, Emerging Markets. This reminds us, in Matthew’s view, firstly that China’s attempts to pour money into its semiconductor industry will be a very long uphill battle.

Secondly it is a reminder that there are a lot of companies in China with a lot of debt and few prospects, so for the government to effectively say “even though you’re a tech company in a highly sensitive sector of strategic importance, we’re not going to stand behind you” has interesting implications for other corporates.

Matthew went on to talk about new competition regulation in the internet space, which is targeted at the e-commerce giants. The situation is complex, but the upshot is that the power of these tech mega caps will be checked. The biggest practical changes involved the banning of forced exclusivity arrangements and algorithm-based pricing. Shares in those stocks have been hit hard since the regulation was released, despite stellar 3Q results and record ‘Singles Day’ sales. Matthew said it is interesting that this regulation has come in at time when, as we’ve seen in other regions, the Growth/Value divergence in the market has shown signs of shifting.

Dan Carter

Fund Manager, Japanese Equities

Stage was already set for a shift in market leadership

Dan Carter, Fund Manager, also highlighted the stylistic rotation that has happened in the market, with Value stocks performing well in Japan as well. What has been driving the Japanese market in recent days has been the likes of banks, insurers, autos and transport stocks.

On the flipside, the those business giving up returns in the market have been asset light, higher valuation businesses – stocks that are common to many growth-focused Japanese active equity funds as there has been a lot of crowding into a relatively small number of names.

With hindsight, this shift shouldn’t have come as a surprise, said Dan. When he looked at the operational performance of business, he could see that the stage was set for a rotation. Operating profits across the market are down about 30% in the first half of the accounting year, but that is nevertheless well ahead of what had been a very bearish consensus. Upward revisions have generally been concentrated in manufacturers e.g. transportation equipment and electric appliances – expectations for these sectors were so low that we were due a turnaround.

Luca Evangelisti

Fund Manager and Head of Credit Research, Fixed Income

No ‘long Covid’ for European banks

The Q3 results for European financials were better than expected, said Luca Evangelisti, Fund Manager and Head of Credit Research, with lower provisions and rising capital ratios as most banks had already front-loaded their provisions for Covid-related loans in the second quarter. European banks also reported that more borrowers than expected had recommenced their loan repayments following the Covid-related payment holidays.

That’s all good, said Luca but banks are clearly still in an artificial situation where they have been helped by job support schemes, government guarantees and moratoria on loan repayments. Although the ending of these would be likely to have some effect on banks’ margins in the first couple of quarters of 2021, the prospect of viable vaccines and a return to more normal economic activity should limit the impact of the crisis on banks’ balance sheets. Luca therefore believes banks are in a fundamentally strong position.

As for the vaccine news, subordinated financials and senior level debt rallied strongly as did bank shares. That said, the decoupling of bank equity to bank debt, particularly CoCos (contingent convertible bonds) remains remarkable. For example, European bank shares are down around 30% year-to-date whereas Additional Tier 1 debt is up around 3% over the same period. And while the European Central Bank could have used the vaccine news to change its accommodative stance, Christine Lagarde made it clear that the Bank still intends to announce further measures in December which should provide support to credit spreads and the wider market in general.

These articles provide detailed and well-informed views that cover the whole of the market and are useful to maintain your up to date view of the markets globally.

Please keep reading our blogs regularly to give yourself a holistic and up to date view of the markets.

Keep safe and well,

Paul Green

20/11/2020

Team No Comments

Weekly Market Commentary: A key week ahead for Brexit talks amid significant Downing Street changes

Please see below for detailed economic and market news from Brooks McDonald’s in-house research team, received by us the evening of 16/11/2020:

Last week was dominated by a cyclical rotation caused by positive news around the Pfizer vaccine

Friday capped off a partial unwind of the sizeable rotation into cyclical stocks as last week’s newsflow was dominated by the Pfizer vaccine story. The next few weeks may see further efficacy data from other challengers such as Moderna and Oxford/AstraZeneca. Meanwhile, another Brexit deadline looms this week.

With changes at Number 10, markets are attempting to read the implications for policy

With a number of senior advisers leaving Downing Street at the end of last week, including Dominic Cummings, markets were scrambling to work out what this means for policy as well as Brexit. There are many theories abound but given the timing of Brexit talks this week, the exit of prominent Vote Leave figures seems less likely to be a coincidence. Prime Minister Johnson signalled that he was keen to shift to a levelling up policy agenda during meetings this week. This has taken a slight backseat as he was forced to self-isolate after being in contact with an MP who tested positive for coronavirus.

A key week for Brexit negotiations as talks continue ahead of Thursday’s EU Leaders conference

The government has been anxious to stress that these changes are not the harbinger of a softening of the UK’s Brexit stance. The UK’s Chief Negotiator David Frost said over the weekend that the UK’s negotiating position has been consistent, adding ‘I will not be changing it’1 . This week is important given the meeting of EU leaders on Thursday. While it is possible that talks drag on into early December, there is a growing sense of urgency on both sides that clarity for business needs to be achieved. The EU leaders meeting will likely disclose the current state of play within the negotiations and this could prove to be a pivotal week for a topic that seems to have had too many key weeks.

Sterling has remained largely rangebound coming into the negotiations this week. This is because the market knows that the current level is wrong. It is either too high (in the event of a no deal) or too low (in the case of a trade deal) and there are few solid signs of a shift one way or another. It is important to note that the blueprint for a trade deal is a ‘Canada style’ Free Trade Agreement rather than something akin to the Single Market. For this reason, even if we do see a deal over the coming weeks and a subsequent jump in Sterling, some economic risk is still likely to weigh on currency for the medium term.

Regular updates like these are a useful method of frequently updating your holistic view of the markets, especially given the way the market is rapidly changing by the day with recent news of multiple Coronavirus Vaccines.

Please continue to read these blogs to keep you informed.

Stay safe and well

Paul Green

17/11/2020

Team No Comments

Brooks McDonald Weekly Market Commentary – Hope for coronavirus vaccines amid rising cases in Europe

Please see below for Brooks McDonald’s weekly market commentary, received late afternoon 26/10/2020:

In Summary

  • As coronavirus cases continue to rise in Europe and the US, fiscal stimulus needs will increase
  • The Oxford vaccine candidate is reported to have led to a strong immune response in elderly patients
  • Central bank season begins with the European Central Bank (ECB) and Bank of Japan meeting this week

As coronavirus cases continue to rise in Europe and the US, fiscal stimulus needs will increase

Over the weekend, the US and many European nations recorded their highest number of daily COVID-19 cases, as the blame game started between House Democrats and the White House over the stimulus impasse. With just over a week to go until the US presidential election, something fairly miraculous would need to occur to get stimulus over the line. US equity futures are trading down to reflect this probability.

The Oxford vaccine candidate is reported to have led to a strong immune response in elderly patients

Momentum remains behind the growing US and European case load. Italy has now approved a new national curfew as the country, which had previously fared well during the second wave, sees a sharp surge in cases. France also set a record high in new cases with the positivity rate of tests also rising to 17%1 . There were some positive vaccine stories over the weekend in relation to two front runners however. The University of Oxford/AstraZeneca candidate is reported to have led to a robust immune response in elderly patients which is critical for an effective vaccine. As the elderly are most at risk of serious illness from COVID-19, and have a weaker immune system than the young, there were concerns that a vaccine would fail to produce an effective immune response. The Oxford vaccine has also seen its trials restart in the US on Friday after being halted last month.

Central bank season begins with the European Central Bank (ECB) and Bank of Japan meeting this week

The ECB are meeting on Thursday, the same day as the Bank of Japan. We expect the ECB to warn of downside risks to the economic outlook as well as inflation. This comes as European coronavirus cases, and subsequent restrictions, have risen significantly since the last meeting. There is likely to be the (now traditional) attempt to hand the responsibility for further accommodation to governments, with the ECB stressing the limits of monetary policy in a negative rate environment. Regardless, we may well see some additional easing before the end of the year, particularly if European fiscal policy disappoints as expected. We are entering central bank season with the ECB and Bank of Ireland this week and the Federal Reserve and Bank of England next week. We are expecting the rhetoric to be very focused on the downside risks to the economy but for central bankers to try to put pressure on further fiscal policy more than promising additional easing. Quantitative easing is very effective at restoring order in financial markets but is less helpful in boosting the real economy. If coronavirus cases continue to escalate, fiscal policy will need to carry the weight of the second wave stimulus.

Articles like these provide an efficient way to receive well-informed views that cover the whole of market and are useful to maintain your up to date view of global market news.

Please keep reading our blogs regularly to give yourself a holistic and up to date view of markets.

Keep safe and well,

Paul Green

27/10/2020

Team No Comments

Blackfinch Group Monday Market Update – 19/10/2020

Please see below for the latest Blackfinch Group Monday Market Update:

UK COMMENTARY

  • Boris Johnson unveiled a three-tier lockdown system to help control the spread of a second wave of infections
  • A lack of progress on a Brexit trade agreement saw Johnson suggest that the country should prepare for a ‘no-deal’ outcome
  • The three months to the end of August saw Britain’s unemployment rate rise to 4.5%, the Office for National Statistics (ONS) said, versus expectations of 4.3%
  • After a record low of 343,000 vacancies in April to June, there has been an estimated quarterly increase to 488,000 vacancies in July to September 2020. Vacancies, however, remain below pre-pandemic levels and are 332,000 less than a year ago.
  • The latest grocery market share figures from Kantar for the four weeks to October 4th show that sales growth rose by 10.6%, which is expected to be a result of the threat of another national lockdown. Shoppers spent an additional £261mln on alcohol as the 10pm curfew came into effect and the Eat Out to Help Out scheme concluded.

ONS data suggested that labour productivity, as measured by output per hour, fell 1.8% year-on-year. Output per worker fell by 21.1%, but it is expected that this is a result of the furlough scheme allowing employers to retain workers even though they are working no hours.

US COMMENTARY

  • The market continues to wait patiently for any news on a further government stimulus package. However some solace can be taken in the fact that no matter who wins the presidential election next month, there will likely be a sizeable fiscal stimulus package announced.
  • Third quarter earnings season started, giving investors much to digest, with the main area of focus being the level of recovery that companies have seen since the depths of the economic fallout from the pandemic
  • First time jobless claims increased to 898,000, the consensus forecast had been for a drop to 825,000. Continuing claims fell from 10.98mln to 10.02mln, a greater fall than had been anticipated by the market.

Retail sales rose 1.9%, well ahead of estimates, although industrial production showed a 0.6% decline in September.

ASIA COMMENTARY

  • On Tuesday 13th, Hong Kong’s stock market was unexpectedly closed as a tropical storm prompted authorities to shutter businesses and close schools

GLOBAL COMMENTARY

  • The International Monetary Fund has upgraded its GDP forecasts for this year. In its latest World Economic Outlook it predicts that global output will fall by 4.4% in 2020, better than the 5.2% slump forecast in June.
  • The largest shift was in the prediction for the US, with GDP seen shrinking by 4.3%, not the 8% previously anticipated
  • Improvements are also seen in the forecasts for Europe, the UK and China, with the fund saying that these changes are due to a “somewhat less dire” slump in the April-June quarter, and a stronger than expected recovery in July-September
  • Emerging markets saw their forecast fall, with a prediction for a 5.7% contraction, worse than the previously suggested 5% slump

The report also suggests that as a result of the pandemic 80-90mln more people will be pushed into extreme poverty globally.

COVID-19 COMMENTARY

  • Johnson & Johnson are forced to pause their COVID-19 vaccine trial due to ‘an unexplained illness in a study participant’

Pfizer and BioNTech have indicated that they could file for emergency use authorisation from the US Food and Drug Administration by late November for their jointly developed vaccine.

These articles provide concise well-informed views that cover the whole of the market and are useful to maintain your up to date view of the markets globally.

Please keep reading our blogs regularly to give yourself a holistic and up to date view of the markets.

Keep safe and well,

Paul Green

19/10/2020

Team No Comments

Brooks McDonald Weekly Market Commentary: US politics set to dominate the week ahead

Please see below for economic and market news from Brooks McDonald’s in-house research team posted 05/10/2020:

In Summary

  • Donald Trump’s hospitalisation rattled markets last week but reports that he is recovering buoy sentiment
  • US Stimulus talks remain ongoing but the two sides are still far apart, raising the risk of further delay
  • Barnier’s talk with EU countries over the UK fisheries policies suggests possible compromise ahead

Donald Trump’s hospitalisation rattled markets last week but reports that he is recovering buoy sentiment

After a weaker Friday, the expectation that Donald Trump may be released from hospital as soon as today has helped markets start the week in positive territory. US politics is certainly the key topic at the moment with investors trying to weigh up the probability of a Biden ‘clean sweep’ but also whether any US stimulus will come prior to the election.

US Stimulus talks remain ongoing, but the two sides are still far apart, raising the risk of further delay

Last week saw a volatile Presidential debate and the hospitalisation of Donald Trump due to COVID-19. It is still too early to say whether the latter has had any impact on polling. The two polls which took place during Friday and Saturday (when the news had broken) suggest Joe Biden’s lead remains intact but further information will be needed. Previously, investors were favouring a Trump re-election given the continuity and more market friendly policies. As the risk of a contested election rises and stimulus is delayed, the preference of markets appears to be shifting towards a comprehensive Joe Biden win. The logic is that a clear win is difficult to legally challenge by Donald Trump but also that it will allow significant fiscal policy to be unveiled. The less market-friendly policies are unlikely to be tabled whilst the US is focusing on the economic recovery and this buys time. Over the weekend, Donald Trump tweeted in support of stimulus, asking lawmakers to ‘work together and get it done’ however the gap between the Democrats and White House still appears to be significant.

Barnier’s talk with EU countries over the UK fisheries policies suggests possible compromise ahead

We have learned not to hold our breath on Brexit trade talks but despite the recent bluster there are signs that both sides are getting closer to a deal. While little concrete information came out of the call between Johnson and von der Leyen on Saturday, both sides stated their commitment to finding an agreement. The Financial Times suggested yesterday that EU negotiator Michel Barnier was set to have talks with EU countries impacted by the fisheries policy. This would suggest movement on one of the main sticking points alongside the role of state aid. US politics is likely to dominate the week ahead with European COVID-19 cases rising steadily in the background. Paris is shutting all bars from Tuesday amid a continued increase in cases. In the UK, hopes that cases had slowed last week were quashed as 16,000 cases were found to be unreported between 25 September and 2 October. This week we will also see the releases of the services and manufacturing Purchasing Managers Indexes across the world, with most countries reporting today and the UK tomorrow.

Although current global events may cause market researchers and analysts to concentrate heavily on certain areas of the market (in this case the US Election and it’s effect on the US Economy), it is important that we keep our views as holistic as possible and consider the whole market. Events such as the US election can have a knock-on effect on a wide variety of market sectors, and it is important to understand the reasoning behind these effects.  

Please keep reading our blogs in regular intervals to keep your view of the markets well informed, holistic and up to date.

Keep safe and all the best

Paul Green

06/10/2020

Team No Comments

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

Please see below for the latest blog from Legal and General’s Investment Management Team regarding their ‘key beliefs’ regarding the markets:

Forward looking

It may seem difficult when faced with the latest political developments and a second wave of COVID-19, but investors need to be forward looking. If markets are indeed relatively efficient pricing mechanisms, we shouldn’t focus too much on what’s happening today; instead we need to think about what could happen tomorrow and beyond.

As with all Key Beliefs emails, this email represents solely the investment views of LGIM’s Asset Allocation team.

Pent-up demand unleashed

From an equity perspective, the losers from social distancing have been hit hardest by the pandemic. But if and when consumer behaviour normalises, these stocks should also benefit disproportionately.

In the spring and summer, such a recovery felt too distant for the travel and leisure sector, so we preferred other laggards like autos and small-caps. But as time has passed, we now expect generally positive macro news over the coming three to nine months (on vaccines, rapid testing and regulatory decisions) to start becoming a tailwind for this sector as well.

While we have no edge on the specific events, market expectations do not look excessive: sentiment is still bearish on the sector and performance has remained underwhelming and stuck in the middle of the post-pandemic range.

A vaccine should help these stocks in two ways: through de-risking the future path of their earnings, and through upgrades to earnings estimates if consumers resume their past behaviours faster than expected. This has already happened for other sectors, perhaps helped by some pent-up demand after the lockdown.

That’s not to say there are no risks to this trade. A greater-than-expected second wave could further delay a restart, customers could reject the changes made to the travel and leisure experience, or outbreaks on cruises could set back the wider sector.

But we believe that being closer to a potential turning point in the news flow, without having seen any meaningful outperformance for the sector, makes the risk/reward dynamics attractive enough for a first step.

Powerful gambit

European Commission President Ursula von der Leyen gave her annual State of the Union address last week. Invoking Margaret Thatcher in an argument with a Conservative British Prime Minister was a bold but powerful gambit. In the words of the original Iron Lady back in 1975, “Britain does not break treaties. It would be bad for Britain, bad for relations with the rest of the world, and bad for any future treaty on trade.” The sense of frustration with the shenanigans in Westminster is obvious.

It is tempting to think that the latest dispute is terminal for the prospect of a successful conclusion to trade talks. But the nature of brinkmanship is that it drives matters to the brink. Almost all European negotiations go to the 11th hour or beyond, so it is pretty hard to infer anything definitive at this stage.

If forced to pick a direction for sterling from here, we think appreciation is more likely than further depreciation. Portfolios naturally heavy on foreign currency therefore need to be increasingly mindful of a “rabbit out of the hat” moment driving the pound higher.

For non-Brexit obsessives, von der Leyen also had some interesting things to say about green bonds and carbon objectives. The EU is set to embark on an unprecedented issuance spree to finance the recently agreed Recovery Fund. Up to 30% of the planned €750 billion will be raised via green bonds. In the short term, we think the surge of EU issuance risks driving up yields in ‘semi-core’ European nations like France. Over the longer term, given that the green-bond market totals around $400 billion outstanding today, this will really bring the asset class into the mainstream.

Off the charts

We have highlighted the TIM Monitor a few times in previous Key Beliefs as one of a number of quantitative risk environment indicators that we use. The monitor aims to provide a characterisation of the current market environment and the likelihood of extreme losses going forward based on the combined information from two indicators: the Systemic Risk Index, which measures equity market fragility, and the Turbulence Index, a measure of ‘unusualness’ in global equity returns.

Needless to say, equity markets proved to be both fragile and extremely unusual in the first quarter, so much so that the TIM Monitor was quite literally off the charts. The monitor moved into ‘Alert’ territory on 25 February, with the S&P 500 down by around 7.5% from its peak at that point. After that, the S&P 500 fell a further 30% to its low on 23 March. The monitor remained in ‘Alert’, with the Systemic Risk Index remaining uncomfortably high, until 17th August when it finally switched back to ‘Warning’, almost exactly at the time that US equities returned to their previous highs. So, it was a timely indicator to get out of equities, but a bit slow to get back in again.

The length of its tenure in ‘Alert’ territory in part reflects the fact that a small number of key drivers propelled the market back up again – swift and comprehensive monetary policy responses over the past decade have had a tendency to do exactly that in times of stress. But we must also acknowledge that it is partly down to how the Systemic Risk Index is constructed, as it is an intentionally (sometimes painfully) slow-moving indicator.

Within an investment process involving judgement, these types of frameworks can be extremely useful in providing a different lens through which to view the world. Each one comes with its own nuances, however, and hence we believe they are best used in combination with other metrics rather than in isolation.

Detailed and focussed opinions from market leading investment managers such as Legal and General can be a useful addition to your overall view of the markets.  

Please keep reading our blogs to ensure your holistic view of the markets is well informed, diversified and up to date. 

Keep safe and well

Paul Green

23/09/2020

Team No Comments

Brooks MacDonald MPS Monthly Market Commentary August 2020

Please see below for Brooks MacDonald’s MPS Monthly Market Commentary from August, received by us late yesterday 18/09/2020:

  • Global equities resumed their upwards trajectory during August, as signs of economic improvement and positive developments on a COVID-19 treatment boosted optimism about a worldwide recovery. Further strains in US-China relations unsettled markets, although there was an apparent ease in tensions late in the month.
  • UK stocks were up during the month, after it emerged that the economy expanded by a stronger-than-expected 8.7% in June from May1 . However, GDP shrank by a record 20.4% over the second quarter2 , which pulled the economy into a deep recession. A renewal of quarantine rules for people arriving in the UK from certain countries pressured stocks, particularly those in the travel sector. The composite purchasing managers’ index (PMI) rose to 60.3 in August from 57.0 in July3 , according to an early estimate.
  • US equities were higher over August. Hopes of further government stimulus – yet to be finalised by month end – optimism about a vaccine and a continued rally in technology stocks propelled the S&P 500 and the Nasdaq Composite indices to record highs. The contraction in second-quarter GDP was revised to 31.7%, on an annualised basis, from 32.9%, although it remained a record slump4 . The composite PMI rose to 54.7 in August from 50.3 in July5 , an initial estimate showed. In a significant change to monetary policy, the Federal Reserve said that it would adopt a more flexible inflation target regime aimed at supporting employment and the economy.
  • European markets moved upwards, helped by signs of economic improvement, particularly in Germany, and optimism about a COVID-19 treatment. However, the UK quarantine rules, which mostly affected European countries, unsettled investors. The composite PMI fell to 51.6 in August from 54.9 in July6 , an initial estimate showed.
  • Japanese equities increased over August, although Prime Minister Shinzo Abe’s resignation, due to poor health, rattled the market late in the month. Stocks made a strong start to August as they tracked gains in US shares and as a weakening of the yen against the dollar boosted exporters. The rises came despite bleak economic news: GDP shrank by a record 7.8% over the second quarter, which pushed the country deeper into recession7 . The composite PMI was unchanged at 44.4 in August8 – remaining in contractionary territory – an initial estimate showed.
  • Asia-Pacific stocks (excluding Japan) made gains over the month on continued signs of economic improvement, particularly in China. The US-China tensions restricted the increases. In China, a rise in exports and reduced factory price deflation in July boosted optimism about an economic recovery. The same optimism helped push South Korea’s Kospi Index to a two-year high during the month. Taiwan’s Taiex Index came under pressure after a sell-off in technology shares. Australia’s benchmark S&P/ASX 200 Index was little changed as optimism about a vaccine was largely balanced by continued worries about COVID-19 infections in the country.
  • Emerging markets edged up over August, on optimism about a vaccine and as US-China tensions appeared to ease. Indian shares rose steadily, with vaccine hopes helping the BSE Sensex 30 Index to reach a six-month high. Brazilian equities dropped on renewed political uncertainty as the resignation of a number of top economic officials imperilled planned reforms. Equities fell in Argentina as the country battled rising COVID-19 infections.
  • Benchmark yields on core developed market government bonds – including the US, UK, Japan and Germany – rose over the month. US benchmark 10-year Treasury yields hit a record low closing level of 0.52% on 4 August9 because of market concerns about an economic recovery, although they rose steadily over the rest of the month. In the corporate debt market, US investment-grade and high-yield spreads tightened further.

Brief and informative articles like these are an efficient way to take away key points regarding recent market developments globally.  

Please keep reading our blogs regularly to give yourself a holistic and up to date view of the markets.

Keep safe and well,

Paul Green

17/09/2020

Team No Comments

Blackfinch Group Monday Market Update

Issue 8, 14th September 2020

Please see below for the latest Blackfinch Group Monday Market Update:  

UK COMMENTARY

  • House prices rose 1.6% in August from July’s level according to the Halifax House Price Index. The annual increase in house price accelerated to 5.2% from July’s 3.8%, hitting its highest level since 2016.
  • Reports suggest that the UK is willing to walk away from Brexit negotiations in mid-October if a free trade agreement hasn’t been agreed upon.
  • A week of Brexit talks conclude with the EU telling Britain that it should urgently scrap a plan to break the divorce treaty, but Boris Johnson’s government have refused and continued with a draft law that could collapse four years of negotiations.
  • A rise in the number of COVID-19 cases in the UK brings fears of a second wave, forcing the government to reimpose some restrictions over social distancing. Daily cases have risen to close to 3,000, from c.1,000 at the end of August.
  • The British Retail Consortium’s figures report that year-on-year growth in retail sales rose 3.9% in August, but city centre shops continue to struggle.
  • UK gross domestic product (GDP) rose for the third month in a row in July, up 6.6%, although this is still 11.8% below January’s level.
  • A report from the National Institute of Economic and Social Research forecasts that the UK economy will emerge from recession at the end of the third quarter.

US COMMENTARY

  • Comments from Donald Trump that he may seek to ‘decouple the US economy from China’ suggest that the trade war between the two nations is far from over.
  • The US revokes visas for over 1,000 Chinese students on grounds of ‘national security’.
  • Initial jobless claims for the week are an exact repeat of the previous week’s number of 884,000. Continuing jobless claims rose to 13.39mln, above analyst expectations of 12.92mln.
  • Once again mutual agreement between the Democrats and the Republicans fails to be reached over details of a further COVID-19 support package.
  • US inflation rises by 0.4% in August, higher than forecast, but below the 0.6% rise seen in July.

EUROPE COMMENTARY

  • Insee, the national statistics institute of France, forecasts that the economy will contract by 9% this year, down from earlier predictions of an 11% drop.
  • EBC President Christine Lagarde announces that monetary policy remains unchanged, but that the bank has to carefully monitor the ‘negative pressure on prices’ that the Euro is exerting.

ASIA COMMENTARY

  • Revised GDP figures for Japan show that the economy shrunk by 28.1% in the second quarter of the year, worse than preliminary estimates released in mid-August.
  • China reports its largest jump in exports in 18 months, rising 9.5% in August compared to a year prior.

COVID-19 COMMENTARY

  • AstraZeneca confirmed that it had halted work on its COVID-19 vaccine, currently in development with Oxford University, after a ‘serious event’ during the trial process, reported to be a member of the clinical trial falling ill. However, trials officially restarted over the weekend.

These articles provide concise well-informed views that cover the whole of the market and are useful to maintain your up to date view of the markets globally.

Please keep reading our blogs regularly to give yourself a holistic and up to date view of the markets.

Keep safe and well,

Paul Green

14/09/2020

Team No Comments

Markets in a minute: Global markets rise but UK shares lag behind

Please see below for the latest Markets in a Minute update from Brewin Dolphin, received late yesterday 02/09/2020:

Global share markets mostly rose over the past week, driven by growing signs of an economic recovery, positive news on coronavirus developments, and the US Federal Reserve’s shift on inflation targeting (see below).

Sentiment in the US was so bullish that the S&P500 set fresh record highs every day last week, helped by a cooling of the US/China tensions. The UK, however, was a notable underperformer, with the FTSE100 weighed by a stronger pound. This reduces the value of multi-national companies’ dollar-based earnings.

A mixed start to the week

The UK markets, along with many in Europe, were closed on Monday, although in the US it was business as usual and shares fell slightly.

On Tuesday, however, US shares rebounded, with the Dowgaining 0.76% and the S&P500 rising by 0.75%, while the Nasdaq continued its extraordinary rally, rising by 1.4% to 11,939.67.

In the UK it was a different story, as the continuing strength of the pound and Brexit uncertainties saw the FTSE100 fall by 1.7% to 5,862.05, its worst level in three months.

In early trading on Wednesday, UK shares were heading up, as Nationwide reported house prices had had risen to an all-time high of £224,123 in August, as activity rebounded after the lockdown was eased.

Market performance*

  • FTSE100: -3%
  • S&P500: +2.4%
  • Dow: +1.4%
  • Nasdaq: +4%
  • Dax: -0.6%
  • Hang Seng: -1.2%
  • Shanghai Composite: +1%
  • Nikkei: -0.7%

*Data for the week to close of business, Tuesday 1 September.

Coronavirus news

New global coronavirus cases have been trending sideways for a month now. Infections in emerging economies may be slowing especially in Brazil, South Africa (which has gone from 13,000 new cases a day down to around 2,000), Pakistan, Mexico and Saudi Arabia.
In addition, new cases are falling in developed countries, led by the US which has seen a sharp decline, and also Japan, both of which are helping to offset some worrying rising trends in Europe.

Encouragingly, the death rate in this second spike of cases in developed countries is far lower than the highs of April, even though the number of new cases being detected is well above the April highs. This is likely to be because there is more testing of younger people and therefore more cases detected among younger, more resilient populations. This is helping to avoid a return to a generalised lockdown and helping keep confidence up. 

UK piles on the debt

Although the UK has only just entered a recession, recent data has started to illustrate the true extent of the damage so far suffered during the coronavirus pandemic. The Office for National Statistics has revealed that, following the sheer cost of its Covid-19 response, UK government debt has risen above the £2trn mark for the first time.

According to the data, spending on measures (such as the widely used furlough scheme) meant total UK government debt was £227.6bn higher in July 2020 than it was a year before. At the same time, tax revenue has been hit hard by the fact many businesses and people are earning and spending less. Combined with greater government borrowing, this is the first time UK government debt has been above 100% of gross domestic product (GDP) since the 1960s.

Jackson Hole Symposium

In his speech to the annual gathering of central bankers and policymakers in Jackson Hole, Wyoming, US Fed Chair Jerome Powell confirmed it is moving to a system of inflation “average targeting”.

This is important because it means that it will allow inflation to run above 2% to make up for a previous undershoot. The Personal Consumption Expenditure (PCE) price index is the Fed’s preferred inflation index for the 2% target, and in the chart below you can see it has been running below 2% for a sustained period of time for the past decade.

According to the St Louis Fed, even if you allow for 2.5% PCE inflation, which is an overshoot of inflation of 0.5%, it will take until 2032 to make up for the inflation undershot over the past decade. So, the implication is that the Fed wants to let the economy to run “a little hotter”, with faster-rising prices, without the need to raise interest rates or tighten monetary policy when inflation is above 2%. It also likely means that US interest rates will stay at, or near, 0% for a long time, which should be a positive for investment assets. Indeed, many think that the US will need to return to near-full employment and inflation of at least 2% before the Fed will consider raising rates again. We expect further guidance on this at the next Fed meeting later this month.

US/China tensions cool

Powell’s speech came in a week of broadly positive economic news for the US. At the beginning of the week, both the US and China affirmed their willingness to negotiate and declared they were ready to progress with trade talks. With tensions between the two nations a recurring source of stress for investors, this update was welcomed by markets.

US economic data

  • US Durable goods orders in July were up 11.2% vs expectations of 4.8%, helped mostly by new orders for vehicles and parts (+21.9%), electrical equipment and electronic products. Durable goods orders are a proxy for business investment demand and it has now risen for a third consecutive month – a sign things are really normalising.
  • US housing data, which is vital in supporting economic growth, has been really encouraging. July new home sales came in significantly above expectations at $900k versus the estimated $790k, surging to the highest level since the 2009 financial crisis. Existing home sales increased by a record 24.7% in July to an annual rate of $5.86m, the highest level since December 2006. The median house price rose to 8.5% on an annualised basis, the highest since April 2015. Pending home sales also rose 5.9% in July compared to June, after a huge 16.6% increase in June over May.

Australia enters recession

Having avoided a recession even during the financial crisis of 2008/09 (thanks to huge demand from China for its iron ore and other commodities), the world’s longest economic expansion has finally ended. After almost 30 years of uninterrupted growth, Australia’s economy contracted by 7% in the June quarter, following a 0.3% contraction in the first three months of the year.

Brewin Dolphin are market leading fund managers, and so receiving their regular insight in this efficient manner is a quick but well-informed way to update your consensus view of the global markets.

Please keep using these blogs to regularly update your knowledge of current market affairs from around the world.

All the best, keep well!

Paul Green

03/09/2020