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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

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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

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

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

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

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UK equities outperform as sterling drops sharply

Please see below up-to-date commentary from Brewin Dolphin, received late yesterday. The article provides insight into mixed market performance with Covid-19 and Brexit developments noted as current contributing factors. 

Equity markets were mixed last week as markets struggled to gain traction amid a flow of (mostly) worrying news. There was the worsening second wave of Covid-19 in Europe and the announcement of tighter restrictions on socialising in the UK. Then, a potential hitch with the AstraZeneca vaccine, added to increasing worries of a no-deal Brexit. On the financial front, perhaps the most remarkable development was the 3.5% fall in sterling which likely helped the FTSE100 outperform its international peers over the past week.

Last week’s markets performance*

• FTSE100: 4%

• S&P500: -2.5%

• Dow: -1.66%

• Nasdaq: -4%

• Dax: +2.8%

• Hang Seng: -0.77%

• Shanghai Composite: -2.83%

• Nikkei: +0.86%

*Data for the week to close of business, Friday 11 September.

A mixed start to the week

Equity markets in the UK and Europe turned in a mixed performance on Monday despite encouraging news about the resumption of the AstraZeneca/Oxford University vaccine trials in the UK.

The FTSE100 closed 0.1% down on Monday and the more domestically focused FTSE250 rose by 0.7%. Sterling rose 0.76% against the dollar to $1.289, and by 0.42% against the euro to €1.085.

In Europe, the pan-European Stoxx600 gained 0.15%, the German Dax fell by 0.07% while France’s CAC-40 closed up by 0.35%.

In the US, however, the positive vaccine news from the UK helped boost sentiment, as the Dow closed up by 1.2%, the S&P500 rose by 1.27% and the Nasdaq rebounded by 1.87% to 11,056.65.

Analysts said hopes about an early vaccine were tempered by concerns about rising Covid-19 cases in the UK and Europe leading to tighter suppression measures, with a consequent dampening of economic activity.

In early trading on Tuesday morning, UK shares were heading up.

Brexit is back

The developments over the last week have suggested an increased risk of a no-deal departure. And just as in previous bouts of Brexit-related stress, the worse things go, the greater the pressure is on the pound. The fortunate thing from an investment perspective is that this tends to be supportive of UK bonds (which perform inversely to the UK economy), and also UK equities, because of their inverse sensitivity to the level of the pound. In other words, when the pound falls, all other things being equal, most UK equities rise.

This might seem counterintuitive, but the reality is that the sensitivity of even UK equities to the UK economy is generally low and mostly limited to a small number of sectors, such as retail, real estate, home construction and banks. More broadly, the overall market tends to be more exposed to the overseas currencies in which its revenues are denominated. For example, around 75% of the earnings for companies in the FTSE100 come from overseas and so are denominated in foreign currencies. Therefore, when the pound falls, these earnings are worth more in sterling terms and this helps UK equities.

Overseas equities, unsurprisingly, are even more inversely sensitive to the level of the pound as they are both denominated in foreign currency and economically linked to revenues received in other currencies.

Below we show the % change in trade weighted currency, the top graph shows 2015 to present and the bottom chart shows the period from 15 May 2020 to present.

What this means

All of which means that, ultimately, we don’t see Brexit as a material investment risk. Paradoxically, the greater issue for us is how to protect wealth when Brexit risks subside because, under those circumstances, we would expect to see the pound rise and bonds (and possibly equities) fall – again, all other things being equal.

So how do we see Brexit developing? It seems likely that the current standoff is another episode of the brinksmanship that has been exhibited throughout the last four years. The intention of the government is to pressure the EU into making some concessions on fishing and, most notably, state aid. Most outstanding issues between the EU and the UK seem reconcilable, but the state aid point is one the UK government seems to want to push. Why? It seems like the government wants to ensure it can do everything it can to support strategically sensitive industries such as technology and renewables. This idea of a “Made in UK” strategy to match the “Made in China 2025” strategy is what the European’s are afraid of. It seems likely that, when push comes to shove, the UK will be forced to find a way of discreetly backing down – but we can’t be sure.

Covid-19 developments

This also comes with an adverse trend in relative Covid-19 performance as well. America’s renewed surge in cases which began in the Midwest has failed to gather pace while some large states are seeing further improvement. Progress is not universal, however, and as we can see from Europe, a true second wave is likely in the US at some point. But for now, the US case growth numbers are improving which is helpful for Donald Trump as we approach the election in November.

Case growth in the UK, on the other hand, has accelerated. This prompted the government to impose new restrictions that came into effect from Monday to great consternation from the back benches. Evidence continues to point to Covid-19 as a continuing threat with the low rate of hospitalisations during France’s second wave now beginning to pick up. The concern here is that young people are spreading the virus amongst themselves and then introducing it to older generations of their families.

Covid-19 and your investments

Regarding the investment risks of a second wave of Covid-19, we believe that investors already expect successive waves until such time as there is a widely available vaccine. The question from an investor’s perspective therefore is not so much whether further waves come, but what the impact is on perceived valuations.

Understanding how the market reacts to that is not trivial. However, we should distinguish between what we saw in the early part of 2020 which was a shock, from what we might see in future periods, which will be more of an evolution of a known risk.

When we had the shock in March it was largely because the structure of the policy environment and the market were both set up for late-stage economic expansion. That is quite typical for the entry into a recession and is the reason that equity markets react so poorly to the onset of recessions.

On a valuation basis, the loss of a year or two’s worth of earnings is bad news but would not justify the falls seen earlier in the year – hence markets were able to rebound substantially.

With Covid-19 much more of a known-unknown, and with market expectations of ebbing and flowing regional measures to try and slow those waves, we acknowledge that Covid-19 remains an important factor for the market, but it should form part of the ‘wall of worry’ that markets often find themselves climbing.

Wall of worry

The cliché about climbing the ‘wall of worry’ describes the way in which markets are often resilient in the face of known risks. It assumes investors gradually become resigned to the fact that these issues will be resolved in due course and reflects the way in which the overly cautious gradually get sucked into the improving narrative. It is helped by such circumstances also tending to coincide with periods when monetary policy is very supportive.

One more handhold on that wall came from the news that the testing of AstraZeneca’s vaccine has been paused. Although one of the front runners, this was not the only candidate. However, over the weekend it emerged that the trial would resume in the UK and India, but it remains paused in the US.

Also providing a great deal of angst is the planned end to the furlough scheme next month. Chancellor Rishi Sunak is under a great deal of pressure from lobbyists and trade unions to extend the scheme further to prevent a “tsunami” of job losses this autumn.

An extension would not be without international precedent. Germany has announced an extension to its Kurzarbeit scheme, which gives financial aid to employers while allowing them to reduce employees’ hours. It had been scheduled to finish in March 2021 but has been extended for another year. France has also extended its version of the furlough scheme but has tweaked the rules so that employers must reduce hours for workers rather than keep them off work altogether. If the British government is going to follow suit, it is leaving it late.

We strive to update our blog content regularly in order to provide the most relevant and accurate data so please check in again with us soon.

Stay safe.

Chloe Speed

16/09/2020

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Weekly market performance update Tuesday 1 September 2020

Please see below for the latest market update from Invesco this morning:

The main focus of the week was the Jackson Hole Symposium and comments from Fed Chairman Jerome Powell on the way forward for US monetary policy (see chart of week). A “dovish”, risk asset supportive Fed remains the order of the day. Andrew Bailey, the governor of the Bank of England, also spoke at the Symposium, where he emphasised that the BoE had plenty firepower left to fight off recessions and stimulate growth. The other “highlight” of the week was the unexpected resignation of the long-standing Japanese Prime Minister, Abe, which potentially brings some shortterm uncertainty to Japanese politics, although the key reforms of the Abenomics-era are likely to be sustained by whoever emerges as his successor.

Global equities had a strong week, edging higher last week, with the MSCI ACWI hitting an all-time high on Friday. Gains were again led by the US, where the NASDAQ is now up over 30% YTD. EM also had a good week. Strength in IT-related stocks boosted Growth ahead of Value, despite strength in Financials, as bond yields moved higher. UK equities underperformed, down slightly on the week, with a stronger £ weighing on the foreign earnings-heavy FTSE 100.

Fixed income markets had a tougher week. Rising yields hurt government bond markets, which in turn negatively impacted the closely correlated IG market. Both were down slightly on the week. HY, however, managed a small gain, with global spreads and yields hitting post-crisis lows.

The dovish Fed pushed the US$ back close to its post-crisis lows, with gains strongest in £ and the Euro, with the former now having regained all its previous YTD losses and the latter at its highest since 2018. A weaker US$ provided a boost to commodities, with oil, copper and gold all making modest gains.

  • One of the highlights of last week was the speech by the Federal Reserve Chairman, Jerome Powell, at Jackson Hole, which he used to officially announce historic changes to the Fed’s approach to setting monetary policy. A shift in policy that had been widely expected given the policy framework review that Powell had initiated nearly two years ago.
  • The chart shows the 3-year monthly moving average of PCE headline inflation over the past two decades and the Fed’s target rate of 2%. It clearly shows that there has been a persistent shortfall of inflation relative to the 2% objective over the past decade. In light of this, the FOMC now “seeks to achieve inflation that averages 2% over time”. Powell emphasized that the new inflation strategy is “flexible”, with the Committee aiming to achieve this objective “over time” without defining a specific lookback period or horizon over which to achieve the average. Although the Fed has been deliberately vague as to the extent of overshoot that will be tolerated, the upshot is that the Fed is now aiming for above-target inflation.
  • At the same time with the 50-year low in unemployment (3.5% in late 2019/early 2020) failing to push inflation higher, the Fed will also now focus on “shortfalls” rather than “deviations” in employment from its maximum level, and won’t raise interest rates in response to labour market strength in the absence of clear signs that inflation is actually rising.
  • What does this mean for monetary policy? It effectively gives the Fed more leeway to run looser for longer policy. This means that the Fed Funds Rate is unlikely to be going up anytime soon. Goldman Sachs believe that it won’t be until 2025 that tightening starts. And with average inflation likely to weaken before it strengthens, there is an expectation that this will potentially open the door for further unconventional policy measures at the FOMC’s September meeting (16th).
  • And the implication for financial assets? The higher inflation outlook on its own should benefit real assets (equities, gold and other commodities) over nominal fixed income (government and corporate bonds), although easier monetary policy for longer should also underpin bonds. Finally, a more “dovish” Fed will likely put some downward pressure on the US$.

Key economic data in the week ahead:

  • A pick-up in news flow from the previous week.
  • A lot of survey data will be published. Final PMI readings for August for major economies (US, Japan, EZ and UK) will come out on Tuesday (Manufacturing) and Thursday (Services and Composite). These are expected to confirm the results from the Flash surveys a couple of weeks earlier, with the highest readings in the UK and the US, while the EZ and Japan were the laggards, with the latter still below the 50 level.
  • In the US, alongside the PMIs there are also the closely followed ISM Manufacturing (Tuesday) and Services (Thursday) surveys for August. The former is expected to see a marginally more positive reading of 54.5, but the latter is forecast to decline to a still robust 57.4. The first Friday of the month brings US Non-Farm Payrolls expected at 1.5m, slightly lower from the 1.7m in July. US unemployment is expected to show a reduction to 9.8% from 10.2% in July. The Underemployment rate, however, is forecast at 16.5% – slightly lower than last month’s 18% and perhaps a truer reflection of the current state of the US labour market. Ahead of this data, US Initial Jobless Claims on Thursday is expected to show an improvement to 950k last week from 1,006k the previous week.
  • In the UK, July’s money and credit figures are published on Tuesday and are expected to show further signs that business and household borrowing rates are moving back towards normal. Mortgage Approvals, for example, are expected to rise to 55k from 40k, but that is still well below the 60-70k range seen prior to the crisis. Likewise, Consumer Credit growth is expected to be in positive territory for the first time since April (£0.8bn). Nationwide’s House Price Index comes out on Thursday, with August expected to see a 0.5%mom increase, which would make it 2%yoy. Pent-up demand and the Stamp Duty holiday are clearly helping here.
  • Preliminary CPI for August in the EZ is released on Tuesday and expected to continue to show inflation at very weak levels, flat mom compared to July’s level of -0.4%mom. This would leave headline inflation at a mere 0.2%yoy and Core at 0.9%. Retail Sales for July are published on Thursday and, while remaining positive (1.4%mom), are expected to be somewhat weaker than in June (5.7%mom).
  • In Japan the Jobless Rate for July on Tuesday is expected to increase to 3.0% from 2.8%, so somewhat above the lows of 2.2% seen in late 2019. The closely followed Jobs-toApplicants Ratio is expected to decline further and at 1.08x would be the weakest since early 2014.
  • In China, business surveys dominate the week with both the Caixin and Official PMIs being released. Little change is expected in both sets of readings, with all remaining above the 50 level and Services continuing to be stronger than Manufacturing.
  • Australia rarely gets a mention here, but on Wednesday Q2 GDP is published, which will confirm that the economy has slipped into its first recession for a remarkable 29 years.

Invesco are market leading investment managers and so their views and insight can be valuable in providing a well informed and holistic view of the markets.

Updates like these are useful tools in keeping your views of the markets widespread and up to date.

Stay safe and well.

Kind Regards

Paul Green

01/09/2020