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Brooks MacDonald Daily Investment Bulletin: 21/01/2021

Please see below for the latest Brooks MacDonald Daily Investment Bulletin received by us today 21/01/2021:

What has happened

Markets greeted the inauguration of Joe Biden with a rally driven by the tech heavyweights. Some markets concerns remained around the final handover of Presidential power from Trump to Biden so there will be an element of welcoming the calmer tone of the new President as well as removing a transition risk premium.

President Biden

Yesterday’s inaugural Presidential address saw President Biden attempt to change the tone in Washington by encouraging bipartisan debate rather than absolutism. This speech was followed by a series of executive orders as expected. This included the US re-joining the Paris climate agreement, ceasing the withdrawal from the WHO, ending the travel ban on a number of Muslin countries and a federal mask rule on interstate travel and within federal buildings. As a sign of the focus for the new administration’s economic goals, there were also some specific COVID support measures such as pausing federal student loan repayments and extending the federal eviction moratorium. Yesterday’s speech, coupled with that of Janet Yellen earlier this week, paints a market friendly picture where near term support remains the focus. Of course, the sting in the tail could be higher taxes down the line but we need to remind ourselves of the thin Senate majority and the fact the midterms are in November next year and this could change the power balance in Congress yet again.

Central bank decisions

Yesterday we heard from the Bank of Japan which left monetary policy unchanged whilst predicting economic challenges over the course of 2021. Today is the turn of the ECB and given the central bank announced a further easing package in December, little dramatic change is expected. The central bank meets under the cloud of Euro Area CPI estimates that showed the region in deflation (-0.3%) compared to the year before. Whilst forward looking CPI estimates have been rising, in line with the broad global market reflation narrative, even these future estimates remain well below the ECB’s 2% target. The central bank therefore likely has room to increase stimulus but it isn’t clear that simply doing more of what has been tried before (bank lending, negative rates and quantitative easing) will have the desired effect.

What does Brooks Macdonald think

Equities rose and volatility fell as power transitioned peacefully between President Trump and President Biden. It is interesting that yesterday’s rally was so tech focused given fears over regulation under a Democrat White House and Congress. The rally yesterday implies that investors are confident the new administration has its hands full with the COVID response and is unlikely to look towards market unfriendly reform within that context.

Daily investment bulletins like this could prove to be very useful in the near future. Yesterday’s Presidential Inauguration is sure to cause ripples in the markets globally and keeping up to date with developments as they happen can, as ever, be very beneficial to your own views of the markets.

Please utilise our blogs in keeping your own views of the market holistic and up to date.

Keep safe and well.

Paul Green 21/01/2021

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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

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Brooks McDonald Daily Investment Bulletin

Please see below for the Daily Investment Bulletin from Brooks McDonald, received by us today 05/01/2021:

What has happened

Markets started the day positively but the New Year jubilance faded as the US COVID outlook worsened and a tight Georgia run-off today could go either way. The US index started the day in positive territory before falling as much as 2.5% then settling 1.5% down at the close.

COVID’s new variant and restrictions

The new COVID variant has been responsible for a large quantum of the surge in the South East of England and news that it had now been detected in New York, Colorado, California and Florida did little to help the mood. Whilst there is no evidence that the new strain is more deadly it does appear to be transmitting aggressively, causing strain on the healthcare system. It is this strain that led to UK PM Johnson announcing that England would move into its third Lockdown with the new stay at home rules far more reminiscent of March 2020’s with schools closed and only essential journeys allowed. UK Chancellor Sunak is expected to unveil a fresh support package for UK companies in light of these new tough restrictions which are expected to produce a similar economic impact to that seen in March and April last year.

Georgia run-off

The other event keeping New Year optimism in check is the Georgia Senate run-off. This is clearly key in determining which party has control of the Senate and therefore whether a blue sweep can be achieved. Back in November the market’s base case was that the Democrats would win every race and this would give them the flexibility to launch substantial stimulus in Q1 2021. Once this didn’t immediately materialise, investors warmed to the idea of a split Congress as this would curb the chances of tax rises, tougher regulation and other less economically positive reforms. As we approach today’s election, the Democrats are ahead in both seats, albeit it narrowly, and investors are not entirely sure which side of the coin they want the race to land.

What does Brooks Macdonald think

A Democrat clean sweep or a split Congress both have benefits and negatives but our instinct is that a split Congress would be more market friendly as it retains the status quo and financial assets will look through the positives of US Fiscal Stimulus quite quickly as compared to broader reforms. Even if the Democrats do take both seats, and VP-Elect Harris is left with the deciding vote in the Senate, the current filibuster rules will stop contentious legislation. If we do see a blue sweep, markets will look very closely at any suggestions from the Democrats that they would look to remove the Filibuster from the next Senate session.

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

Please continue to utilise these blogs to help inform your own views of the markets.

Stay safe and well

Paul Green

05/01/2021

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Ravenscroft: A post-pandemic boom is possible…

A blog cut and pasted from an email received from Kevin Boscher, Chief Investment Officer at Ravenscroft, late yesterday afternoon, 30/12/2020.

A post-pandemic boom is possible…
 As we approach the end of an extraordinary year, in which nobody could possibly have predicted the unprecedented events that have unfolded, it is time to look forward to what 2021 may hold in store for the global economy and financial markets. The good news is that I remain optimistic that we will likely see a recovery boom over the next year or so and that this will be a positive backdrop for equities, in particular. It is true that most stock markets have already recovered strongly from their March lows and that a considerable amount of good news may be priced in already. In addition, with Europe and the US struggling to cope with a resurgence in the virus, which is necessitating further restrictions and threatening the nascent pick-up in activity, it’s also clear that the global macro environment remains challenging. However, despite this I believe that the outlook remains very supportive for both economic activity and financial assets.

History has repeatedly shown that equities require three main attributes to generate favourable returns; decent growth (both economic and earnings), plentiful liquidity and reasonable valuations. Beginning with the growth outlook, activity is recovering much better than expected with Asia leading the way. For example, retail sales in the US and Europe have not only clawed back all of their lost ground, but have made new highs. This is largely thanks to the “shock and awe” monetary and fiscal support from all of the key global policymakers. However, it is also partly due to the fact that consumers and businesses have quickly adapted to the new environment, thanks largely to the use of technology

Effective Covid-19 vaccines will unlock tremendous pent-up demand around the world as everyone is able to live a more normal life again. As savings rates have risen dramatically in the US, Europe and elsewhere over recent months, this will help fund a consumption boom over the next year or two.

At the same time, companies will need to increase investment to keep up with accelerating demand and boost productivity whilst governments will continue to spend heavily, financed by central banks. Global trade is also picking up at a material pace. Hence, all engines of growth will be working in tandem to fuel the boom.

Another positive factor is that although this pandemic-induced crisis is a transitory shock, like most natural disasters, it has resulted in structural shifts in policy.

This will make the recovery story very different from the post-Global Financial Crisis (GFC) recovery of 2009, when the world economy was plagued by a badly damaged banking system in the West, prolonged deleveraging and a collapse in Chinese investment spending.

This resulted in a long period of sub-trend growth, a sustained deflationary threat and a secular downturn in commodities. The global economy is recovering fast but governments and central banks are still worried about a “double dip” and renewed weakness and will continue to inject larger amounts of money into the economy.

So far, fiscal support has largely been focused on providing income support for individuals or businesses. Going forward, the emphasis will shift to rebuilding the economy and boosting long-term productivity and growth through investment in infrastructure, digitalisation of the economy, upskilling and environmental projects. This additional fiscal support, which will be financed by central banks, will simply add more fuel to the potential recovery in spending and investment over the next few years.

The increased infrastructure spending will also likely lead to a significant pick-up in construction activity, which in turn should be good news for commodity prices.

Two other features are supportive of the growth story. I expect the dollar to depreciate further over the next few years as the Fed keeps rates at zero whilst maintaining its bloated balance sheet, since real rates are lower in the US than in both Europe and Japan and because the magnitude of the “twin deficits” dwarfs any other major economy. Secondly, whilst the Brexit agreement will still bring about considerable disruption to trade and commerce across both the UK and Europe, it should result in a much better outcome than many had feared. A strengthening world economy is clearly positive for corporate profits and equities. Earnings have generally held up better than expected this year and analysts have already revised upwards their estimates for 2021 and beyond.

With economic growth forecasts also improving pretty much everywhere, we will likely see additional positive revisions for earnings over the next few months.

From a liquidity perspective, this is likely to remain plentiful and helpful for financial assets. Central banks have little option other than to help finance the increased government spending, thereby effectively monetising the debt and keeping financing costs extremely low for governments, corporates and consumers. Global debt levels are at record highs and in excess of 400% of GDP, compared with c. 280% post the GFC in 2009. These levels will continue to rise over the medium term, even as activity recovers. Not only will central banks, led by the Fed, keep interest rates at current levels for several years, they will also continue to expand their balance sheets and enlarge their quantitative easing (QE) programmes in order to absorb the issuance of government debt and support the economic recovery and financial assets. Financial repression is very much intact and bond yields will be kept low across the maturity range in order to force investors further up the risk scale in a search for yield. This is also a supportive environment for corporate bonds, especially high yield and emerging market debt.

All of this newly created money is unlikely to create inflation over the next year or so but it will flow into financial assets and eventually, economic activity. The secular disinflationary forces remain powerful and are a natural result of an ageing and high-income economy, where desired investment gravitates lower and eventually falls below available savings. This is true across Europe, the US and Japan where central banks have tried and failed for over a decade to generate higher inflation. The pandemic has intensified the excess saving problem at the same time as accelerating technological advances are driving down costs and boosting productivity, thus adding to the downward pressure on prices.

Eventually, inflation will almost certainly pick up as aggregate global demand starts to move ahead of supply and as credit demand and the circulation of money starts to accelerate.

However, this would be a welcome development for policymakers as they target higher nominal growth in order to inflate away the debt problem.

Looking at valuations, it is true that the mega-cap technology and growth stocks look expensive, which in turn pushes up the overall valuation of the US markets. However, there are many markets, sectors and stocks, which look good value, both in absolute terms and relative to their own history.

For example, UK equities look outright cheap as do several emerging markets. In addition, small and mid-cap stocks in many markets look attractive given accelerating growth whilst value stocks are at multi-decade lows versus their growth counterparts.

Old economy cyclicals, like industrials, materials, energy and financials, are all well positioned to benefit from a possible boom in economic activity and any sector rotation. Meanwhile, Covid-19 victims, like airlines and hospitality companies, have potentially huge hidden value, which could be unlocked by effective vaccines.

A couple of other factors support the valuation argument; given the unprecedented collapse in demand and earnings during the lockdowns, it is still too early to assess, with any degree of accuracy, the full impact on valuations, either for this year or next. Earnings could bounce back strongly in line with activity. Secondly, equities continue to look good value relative to bonds and cash and this is likely to stay the case for some time to come. Equities can trade on higher valuations for long periods of time when interest rates and the discount rate are so low and negative in real terms.

As already explained, whilst I am optimistic on the outlook, I also acknowledge that the background macro picture remains challenging given the below-trend growth and disinflationary secular forces and the cyclical deflationary Covid-19 shock. For me, the biggest threat to markets or the economic recovery going forward is policy error from any number of sources. For example, should the US fail to implement another effective fiscal stimulus programme or if the Fed doesn’t extend its QE programme sufficiently, this could be problematic. Similarly, if China starts to tighten policy prematurely in order to focus on reducing leverage, credit creation and excess capacity, then this would weaken global growth and add to deflationary forces. Also, any escalation of US/China tensions would be unwelcome at this stage. A second risk is that the planned vaccine programme disappoints in any way, i.e. the roll out is not as quick as hoped, more people than expected refuse to take it or it is less effective than anticipated.

Any adverse media from such outcomes could spook investors and the stock market, although I doubt they would kill the recovery or alter the positive medium term trend. Other key risks include the rise of political extremism, increasing hostility towards China in the West, a possible increase in business failures once government support ceases or an earlier pick-up in inflation than anticipated.

The key drivers for markets over the next year or so will likely be the unprecedented monetary and fiscal expansion together with the success of the vaccines. Assuming this goes as expected, 2021 should be another good year for equities and other risk assets.

As I have written about previously, the core irrefutable and long-term themes, which have performed so well for us at Ravenscroft over recent years, remain very attractive and are likely to generate superior returns for years to come. These include technology, healthcare, the emerging consumer, emerging markets generally and environmental related stocks.

I am also positive on the outlook for gold and commodity-related stocks generally, again as I have previously explained. Some of the more cyclical and beaten up stocks are also likely to perform strongly next year and we will look to benefit from this where appropriate. In the meantime, we remain cognisant of the multiple threats to this rosy picture and will continue to look for surprises which could negatively impact the outlook.

This has been a year like no other from an investment perspective and although it has felt tough at times, I think we are all somewhat relieved at how quickly things have recovered.

I am hopeful that the global economy and financial markets can continue to improve in 2021 and beyond and that we can again generate attractive returns for our clients through a combination of active management, strong research and our thematic approach.

Positive input from Ravenscroft to finish the year on.  Taking a wider view on input this year we generally expect investment returns to be lower for longer and for clients with a lower risk profile, circa 5/10 (‘Low Medium Risk’), a very diverse range of assets will be needed to generate reasonable long-term returns within their risk profile.  Long-term is 10 years plus.

For higher risk investors more equity content will help, but you will experience higher volatility.  This is fine if you have the right risk appetite, capacity for loss and timeframe or flexibility of timeframe to invest.

All the best for 2021 – a happy, healthy, and prosperous New Year to you and yours!

Steve Speed

31/12/2020

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Markets in a Minute: Markets rise over the week, but mood is soured by virus worries and Brexit

Please see below for the latest Markets in a Minute update from Brewin Dolphin, received yesterday evening 22/12/2020:

Global equity markets moved mostly higher over the past week, as the vaccines programme boosted optimism and an agreement on the US stimulus package edged closer. Eternal hope of a Brexit deal helped the more UK-centric shares and European markets. The FTSE100 has been an underperformer, however, as the dollar has been weakening relative to sterling, squeezing the earnings of FTSE’S multinationals, which gather most of their revenue in dollars. The ongoing dollar slide helped push commodity prices higher, and bitcoin briefly hit a record $23,000 amid a flurry of speculation, although nobody can really gauge its true value.

Last week’s markets performance*

• FTSE100: -0.26%

• S&P500: +1.25%

• Dow: +0.44%

• Nasdaq: +3.05%

• Dax: +3.93%

• Hang Seng: -0.02%

• Shanghai Composite: +1.42%

• Nikkei: +0.41%

*Data for week to close of business on Friday 18 December

Equity markets pull back at start of week

News of the virus mutation in the UK, and resulting restrictions on the movement of people and goods to numerous countries led to a sell off in many markets around the world on Monday. The FTSE100 closed down by 1.73% at 6,416.32, and the FTSE250 ended 2.11% lower at 19,962.11. In Europe, the pan-European STOXX 600 index fell 2.3% after the UK announced its tougher restrictions in response to the vaccine, and the EU’s largest market, the German Dax, fell by 2.82%. Reaction was more muted in the US, where the S&P500 lost just 0.4%, while the Nasdaq lost 0.10%. The Dow closed up by 0.12%.

US stimulus bill passed

The long-awaited US stimulus package to extend unemployment benefits and fund a range of other pandemic-related expenditure was passed on Monday night after nearly six months of wrangling. The package, worth $900bn in total, will send one-off cheques worth $600 to households, with extra payments for children. It will also extend unemployment benefit payments worth $300 a week for those who are out of work due to Covid-19. These payments will last until March and give the vaccination programme time to take effect. However, President-elect Joe Biden has signalled he will look to pass a larger bill once he takes office in January.

Markets sensitive to risk

There is a lack of liquidity in the market at the moment, as many traders have started their Christmas breaks and there is less money flowing into shares and bonds. This can make markets quite volatile, and there is no denying that the newsflow right now is quite alarming. We heard of the new strain of Covid-19 emerging from the UK, prompting Tier 4 containment measures in London, the south east and parts of eastern England over the weekend. In Europe, there are concerns surrounding movement of people and goods which has led to travel constraints. This could have an impact on the economy – and our lives – unless some resolution is reached quite quickly.

This bad news linked with a lack of progress on Brexit, with travel restrictions making negotiations harder, led to weakness in UK and European markets at the start of the week. However, the pound has recovered its losses, indicating that investors are perhaps taking stock and realising that this is probably not as frightening as the headlines first seemed. There were hopeful headlines on Tuesday morning about a compromise on fishing quotas, but there is no firm news of progress. We must wait to see how this plays out in the coming days, but markets will be jittery until the end of the year at least; even if a deal is agreed, it needs to be cleared by the EU member states which will not happen until the new year. The US, meanwhile, was far calmer, with the Dow even closing with a small gain, as the US stimulus bill was passed.

Economic resilience Taking a broader view, the global economy is holding up better than expected given such challenging circumstances. Many UK businesses had reported activity improving in December. The IHS/Markit flash composite purchasing managers index, which measures business levels compared to the previous month, rose to 50.7 in December from 49 in November. A reading above 50 indicates business is expanding. The services element of the index, which covers leisure and hospitality, rose to 49.9 in December from 47.6 in the previous month, suggesting business levels are still falling. Yet the data was still better than anticipated and shows the economy holding up relatively well. PMIs in the US were even stronger, with the businesses saying that activity levels were improving, especially in the manufacturing sector.

All in all, there is a sense of confidence that the global economy will get through this very challenging period and emerge to recover next year, as things return to normal. On a 12-month view, we remain optimistic on equities, although it could be a bumpy ride until as sentiment rises and falls along with the headlines.

Brewin Dolphin regularly give us their insight of the markets. Updates in this efficient manner are 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.

Keep well and all the best

Paul Green

23/12/2020

Team No Comments

Blackfinch Group Monday Market Update

Please see below for the latest Blackfinch Group Monday Market Update received by us today 21/12/2020:

UK COMMENTARY

  • Talks continued in the hope of finding a solution in the Brexit negotiations.
  • Data showed redundancies hit a record 370,000 in the third quarter of the year, with the unemployment rate rising to 4.9%.
  • UK inflation slowed again in November, to 0.3% from 0.7%, with prices weighed down by retailers cutting prices during ‘Black Friday’ sales.
  • The Bank of England voted to leave interest rates on hold and revised its expectations for the decline in gross domestic product in the fourth quarter, from 2.0% to a “little over 1%”.
  • UK retail sales fell 3.8% month on month in November, although economists had predicted a decline of more than 4%.

US COMMENTARY

  • Talks continued over a further stimulus package, with the deadline fast approaching.
  • The Electoral College ratified the November presidential election result, with each state voting in line with their electorate to confirm the upcoming inauguration of Joe Biden and Kamala Harris.
  • US retail sales fell further than expected in December, declining 1.1% month on month.
  • The US Federal Reserve announced it will buy at least $120bn of bonds each month until substantial further progress is made towards its maximum employment and price stability goals.
  • First-time jobless claims data came in above expectations in the week to 12th December, climbing to 885,000.

ASIA COMMENTARY

  • The Bank of Japan extended its virus-related corporate lending programme by six months to September 2021, while making no changes to its monetary policy.

COVID-19 COMMENTARY

  • The US began its vaccination programme, with the first three million doses of the Pfizer/BioNTech vaccine distributed for use across all states.
  • The US Food and Drug Administration approved the vaccine developed by Moderna for emergency use.
  • News broke of a new variant strain of COVID-19 that has become prominent in London, the South East and Eastern England.

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

21/12/2020

Team No Comments

Blackfinch Group Monday Market Update

Please see below for the latest Blackfinch Group Monday Market Update received by us today 14/12/2020:

UK COMMENTARY

  • Despite pushing past many self-imposed deadlines, talks continue over a potential Brexit deal. Boris Johnson has, however, suggested that a no-deal scenario remains the ‘most likely’ outcome.
  • UK gross domestic product (GDP) grew by 0.4% in October, 23.4% ahead of its low in April. However, this remains 7.9% below pre-pandemic levels.
  • The UK total trade surplus, excluding non-monetary gold and other precious metals, decreased by £6.5 billion to £0.8 billion in the three months to October 2020, as imports grew by £14.3 billion and exports grew by a lesser £7.8 billion
  • The Halifax House Price Index rose 1.2% month-on-month in November. Data showed that house prices were 7.6% higher in November than the previous year, the highest year-on-year gain since 2016.
  • Market research group Kantar released grocery market share data for the period ending November 29th, indicating the largest month ever for the grocery market, with £10.9bn spent in stores and online. Data showed that the average British household has spent over £4,200 on groceries this year.

US COMMENTARY

  • Talks continue over a further stimulus package, with the initial deadline of the 11th December extended. Multiple Federal support schemes designed to help the unemployed and to protect renters from eviction, are due to expire in the new year.
  • Figures to the 5th December showed that 853,000 Americans filed for unemployment, the highest level in eight weeks, as new lockdown measures began in multiple states
  • It’s believed that the US government is preparing to sanction a number of Chinese administration officials for their perceived undemocratic actions in the Hong Kong election

EUROPE COMMENTARY

  • The European Central Bank (ECB) has increased the size of its COVID-19 stimulus package by €500bn, as well as agreeing a nine-month extension. In a speech announcing the measures, the bank’s president Christine Lagarde commented that sufficient herd immunity may be reached by the end of 2021 to allow the economy to function under more normal circumstances.

COVID-19 COMMENTARY

  • The first COVID-19 vaccines were rolled out in the UK, with the US expected to follow suit next week
  • Researchers conclude that the vaccine in development by Astrazeneca and Oxford University is 70% effective based on trials of over 20,000 people
  • Sanofi and Glaxosmithkline suffered a setback in their vaccine research, which is expected to push the timeline for deployment to the second half of 2021, should their candidate receive the necessary approvals

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

14/12/2020

Team No Comments

Legal and General Asset Allocation team’s key beliefs

Please see below for the latest key beliefs article from Legal and General’s Asset Allocation team, received by us late afternoon 07/12/2020:

Festive spirits

Markets don’t seem to be taking a holiday break yet. Last week, equities rose, the US dollar weakened, and rates and inflation climbed higher. It doesn’t look like we will be able to relax any time soon, either; the coming weeks could see the start of vaccine distributions, the Trump administration transferring power, the conclusion of Brexit’s game of ‘deal or no deal’, and potentially a fiscal deal in the US.

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

Could the last bull please switch off the lights?

Recent news on COVID-19 vaccines has generally been positive, but the immediate economic outlook remains challenging. Europe is already in a renewed contraction, following a significant increase in restrictions to get the virus under control. US economic data have held up well so far because restrictions had been relatively limited, but stricter measures are starting to be deployed amid a surge in cases.

Then there are the fading hopes for fiscal stimulus. US households are beginning to run out of savings from the income transfers received during the spring lockdown, while more unemployment benefits are set to expire at the end of this month. There are signs Congress is beginning to recognise this danger, and Friday’s weaker payrolls report was a clear warning as talks have resumed on passing some targeted measures in the $500-900 billion range. It is not clear a compromise can be reached in time for Christmas; failure to achieve one risks an outright contraction in activity over the festive period and a negative GDP print for the first quarter.

Does it matter? The outlook for 2021 is bullish and markets might be able to look through any weakness as temporary. The main headwind for markets at the moment is the very broad positive sentiment. Next year’s consensus outlooks are bullish and our sentiment indicators are exuberant. What could possibly go wrong?

We remain cautiously bullish for the medium term but tactically neutral. We will not chase the rally at this point, preferring to take our risk in relative-value trades.

Every hero needs a crisis

Central banks had no choice in either 2008 or March this year. The world needed to be saved from a financial meltdown and so they flushed liquidity into the world.

However, today’s monetary policy can contribute to tomorrow’s meltdown. Keeping interest rates low to provide a safety net for markets can induce corporations and households to take on more debt and more risk. This dynamic has also tended to stoke inequality, as asset prices have been boosted even though unemployment has spiked. Managed stability creates instability.

Global leverage has increased significantly this year, undoing much if not all of the deleveraging of recent years. In a normal world, increased leverage is often resolved by a credit crisis, massive defaults, forced liquidations, or massive inflation. But apparently this isn’t a normal world.

Most of the increase in debt during the pandemic has been in the public sector, and a large part of this has been absorbed by central banks via quantitative easing. This debt sits with central banks and is perpetually rolled over, effectively debt monetisation. Central banks could commit to never selling it or just write it off, which would improve debt-to-GDP ratios. Cancelling public debt like this is prohibited in some countries, due to the moral hazard it could create for politicians. For others, the only constraint is ultimately inflation.

But ballooning debt is also a symptom of other problems like weak productivity and inequality (encompassing poor health, low wage growth, and poor education). This could result in further political tensions and anti-globalisation, similar to the experience of the 1930s.

Given the current economic output gaps, we don’t see runaway inflation as a likely scenario but our head of economics does expect mildly higher inflation in the years to come. This would change if we saw continued broad global fiscal support financed by central banks.

Do you feel lucky?

Bitcoin reached a new all-time high last week. The crypto-currency has mostly seemed a private-investor phenomenon, but we have seen increased interest from institutions. There are many things for them to like: past returns have been stellar (an annualised return above 100% over the past five years); it has offered some diversifying properties with only a slight positive correlation with risk; and, contrary to many currencies, it has the attraction of limited supply at a time when central banks are printing money.

However, there are also plenty of downsides. Bitcoins have no intrinsic value (at least tulip bulbs could yield a beautiful flower); they are not widely recognised or regulated; it takes the energy of a medium-sized nation to mine a bitcoin so it isn’t very environmentally friendly; and it is very expensive and slow to use in day-to-day transactions.

The first is perhaps the most existential risk: at some point bitcoins could become worthless if a more popular or efficient alternative is found. Central banks could well develop their own crypto-currencies, especially if bitcoins and others become too big and interfere with efficient monetary policy.

It could easily be years before the next bitcoin selloff but we know how this story is likely to end. At the peak of the 17th century tulip trade in Amsterdam, those paying fortunes for a single bulb were surely speculators who understood that tulip prices had no link to bulbs’ intrinsic value and just hoped to sell them to someone else at an even higher price. Many were successful in the year before the crash in 1637; their quick gains were what drew in others and excited pundits. Does that sound familiar?

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

08/12/2020

Team No Comments

Blackfinch Group Monday Market Update

Please see below for the latest Blackfinch Group Monday Market Update received by us today 30/11/2020:

UK COMMENTARY

  • Prime Minister Boris Johnson announced an end to the second national lockdown, with the country moving to a three-tier system after 2nd December. Additional rules governing the Christmas period were also announced, with three households allowed to form a ‘bubble’ between 23rd and 27th December.
  • The Composite UK Purchasing Managers’ Index (PMI) fell to a six-month low of 47.4 in November, from 52.1 in October, indicating a contraction in business activity. The services sector PMI contracted from 51.4 to 45.8, while there was expansion in manufacturing from 53.7 to 55.2.
  • Rishi Sunak announced the Government’s latest spending review. He confirmed that £55bn of COVID-related spending is in place for the next fiscal year, in addition to the £280bn allocated for 2020.
  • The Office for Budget Responsibility released its forecasts, showing its central case. This is where vaccines are widely available from mid-2021, leading to the economy being approximately 3% smaller in 2024/25 than if the pandemic hadn’t happened.

US COMMENTARY

  • The General Services Administration announced that it would begin the formal transition process to the president-elect Joe Biden. This will allow Biden and his team access to both funding and government agency officials. It’s the first sign that a smooth transition of power may take place.
  • Initial jobless claims came in ahead of expectations at a five-week high of 778,000
  • The Federal Reserve meeting minutes from early November showed that policymakers will consider further stimulus via asset purchase mechanisms

ASIA COMMENTARY

  • China’s industrial profits rose for the sixth consecutive month, posting an increase of 28.2% year on year according to the country’s National Bureau of Statistics

COVID-19 COMMENTARY

  • Results from clinical trials of the COVID-19 vaccine in joint development by Astrazeneca and Oxford University showed 70% effectiveness across all dosing regimens tested. One regimen showed efficacy of 90%.

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

30/11/2020

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