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Legal and General: Our Asset Allocation Team’s Key Beliefs 28/06/2021

Please see below for Legal & General’s latest ‘Asset Allocation Team’s Key Beliefs’ article, received by us late yesterday 28/06/2021:

There are still a few weeks until Q2 earnings season, but early indications point to mainly positive news when events kick off properly in July. In this week’s Key Beliefs, we also discuss the ‘meme’ stock phenomenon and whether the 1960s pose a historical parallel for inflation today.

We’re in the middle of pre-announcement season for corporate results. While this is always very anecdotal in nature, company comments have so far had a generally positive tone and, perhaps even more tellingly, there has been an absence of any high-profile negative pre-announcements. Results from early reporters, companies with different quarter ends, have had a similar positive tone.

Another positive indicator is that earnings revision ratios have stayed at exceptionally high levels. There are always fewer forecast changes by analysts in between earnings seasons, but from the data that have come in, there have been far more upward than downward revisions. In May and the first few weeks of June, more than three quarters of revisions in the US were to the upside, a figure only matched in the immediate aftermath of recessions and after the corporate tax cut at the end of 2017.

All of this bodes well for the upcoming earnings season and adds confidence to the view that we’ll see another round of significant upgrades to analyst forecasts in the summer. And of course, significant analyst upgrades either put upward pressure on share prices or downward pressure on valuation multiples. We believe the truth will likely lie somewhere in between and continue the pattern of equities grinding higher at a slower pace than earnings estimates, which gradually deflates the high PE (price to earnings) ratios of the immediate recession aftermath.

Retail is here to stay

Retail investors and ‘meme’ stocks have been centre stage again in equity markets in recent weeks. Three things come to mind on the topic from a macro perspective.

First, the extreme moves continue to be limited to a handful of stocks. There are still no obvious signs of the volatility in affected stocks spilling over into the wider market. If you look closely enough, you can see the gyrations of Gamestop* and AMC* reflected in the relative intraday performance of US small cap indices like the Russell 2000. But the S&P 500 put together a long string of daily moves smaller than 1% in the last period of meme stock volatility.

Second, this most recent rally in retail favourites has been far weaker than what we saw in spring. This applies both to the magnitude of the outperformance of the stocks involved and to retail trading volumes. The share of TRF volumes (seen as a proxy for retail activity) of overall US volumes has stayed in the low-mid 40% range, which is far above pre-2020 levels, but a good bit below the nearly 50% mark regularly reached earlier this year. Overall, it’s still fair to say that the froth that was apparent in several retail-driven niches of the market in spring is much less of a concern today. Indeed, SPAC (‘special purpose acquisition company’) activity and prices have dropped a lot, as have prices in the digital asset sphere, like bitcoin.

Finally, if retail is a growing part of equity flows, then we are still in the early part of this story. The activity has so far been concentrated in Robinhood-type investors, who tend to be younger and less wealthy than the traditional retail investor base. US households own just under a third of US equities, but the top 10% of households own almost all of that, according to Goldman Sachs. Private client flow data from brokers show net purchases of equities this year, but their magnitude still pales into insignificance when compared with the previous decade’s net selling. So far, the increase in retail activity appears to have been driven by the smallest section of retail investors. The private client flow data suggest activity is spreading to traditional retail investors, but from today’s perspective we believe this theme remains much more of an upside than a downside risk.

Sounds of the ‘60s

In the mid-1960s, after years of subdued core inflation, there was a sudden increase which began a period of prices ratcheting higher. Unemployment fell through the first part of the decade, but as soon as it reached 4%, both wages and inflation moved up significantly. This suggested the economy was overheating and unemployment had probably breached the NAIRU a couple of years earlier. Indeed, it took a recession in 1970 to halt wage and price pressures temporarily, before the oil-shock induced big inflation of the 1970s.

The simultaneous increase in wages and inflation is a finding consistent with Ram’s econometric work, which shows that neither wages nor prices tend to lead one another; the wage and inflation process seems to happen simultaneously. So, if we wait for wages to move materially higher, we could be too late in spotting the inflation outbreak.

But there were some unique features of the ‘60s:

  • The Vietnam war played a crucial role. US Federal spending (entirely on defence) shot up by over 1% of GDP from mid-1965 to early 1967. The deployment of over 300,000 more troops served to tighten the domestic labour market further. This episode shows it is not a good idea to add stimulus to an economy already at full employment. The stimulus today has been in response to a large amount of slack, with unemployment still relatively high and participation low. We expect the current labour market demand and supply imbalances to be resolved later this year, but there are some risks if Congress passes a large deficit-funded infrastructure package
  • Unionisation exacerbated the wage-price spiral. The labour market appears much more flexible today, aided by an increasing number of ‘digital nomads’ or ‘work anywhere’ jobs
  • In the ‘60s, the Fed had far less sophisticated understanding of the role of inflation expectations (there was no TIPS market) and was less independent. We are confident that the central bank will take appropriate action, should the current wave of inflation not prove transitory
  • The increase in prices was broad-based. This is a clear difference from today, where the median CPI is still behaving well
  • In 1966, England last won a major football tournament (though I’m still convinced that the ball never crossed the line on England’s winning goal). This time round, however, we’ll need to wait a few more days to know whether it’s a unique feature of the 1960s or not…

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

Keep safe and well.

Paul Green DipFA

29/06/2021

Team No Comments

Four truths about inflation and the Fed

Please see the below article from Invesco received late yesterday afternoon:

Key takeaways

The Fed does not have a trigger finger

Just because the Fed reacts negatively to a data point doesn’t mean it’s going to tighten monetary policy at its next meeting.

Some inflation is expected

Time and again, Fed officials have warned that a spike in inflation is likely as the US economy re-opens.

The Fed’s approach has changed

The Fed has gone through a paradigm shift when it comes to inflation targeting.

Last week, investors shuddered as data showed a big rise in prices in the US and a greater-than-expected rise in prices in the eurozone. Stocks sold off, US Treasury yields climbed higher, and market pundits obsessed over inflation. I feel it’s important at this juncture to remind investors of a few truths surrounding inflation and the Federal Reserve.

1. The Fed does not have a trigger finger

Just because the Fed reacts negatively or says it’s surprised by one or more data points doesn’t mean it’s going to tighten monetary policy at its next meeting. Some investors were taken aback by Fed Vice Chair Richard Clarida’s comments last week when he said he was surprised by some recent data points such as the Consumer Price Index, which was much higher than he expected. However, he was quick to reassure: “Honestly, we need to recognize that there’s a fair amount of noise right now, and it will be prudent and appropriate to gather more evidence…” Don’t forget that the Fed’s new catch phrase is “patiently accommodative.” In other words, the Fed is going to err on the side of accommodation and is likely to deliberate extensively before tightening.

2. The Fed anticipates a spike in inflation as the economy re-opens

At a Wall Street Journal conference in early March, Fed Chair Jay Powell explained that, “We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects. That could create some upward pressure on prices.” In fact, time and again, Powell and other Fed officials have telegraphed that a spike in inflation is likely as the US economy re-opens. The Fed is ready and accepting of that rise in inflation.

3. We won’t know any time soon if the increase in inflation is temporary or persistent

A temporary rise in inflation is at least partially the result of base effects — in other words, the comparisons to a year ago look distorted given what poor shape the economy was in last spring as the pandemic took hold. In addition, there is currently a mismatch between supply and demand which can drive up prices — think of the supply chain issues that are being experienced right now in some industries and the pent-up demand that is now being exercised as economies re-open. However, these are likely to create only temporary inflation. After all, how many flights can you take and haircuts can you get once the economy re-opens? Clearly, the law of diminishing marginal utility suggests that at a certain point, satisfaction with each additional flight or haircut is reduced.

Now, there are forces that can lead to more persistent inflation. Typically wage increases lead to “stickier” inflation. We have not yet seen a significant rise in average hourly earnings in the United States, and it seems unlikely that will happen quickly given the very substantial amount of labor market slack.

Monetarists would argue that it all comes down to money supply; a significant increase in money supply can spur persistent inflation, and right now we have seen a very significant increase. However, one other key ingredient is usually present as well: an increase in the velocity of money, which we have not yet seen. The quantity theory of money posits that inflation is not just a function of money supply but also the velocity of money. As the St. Louis Fed explained in a brief research note, “If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.” But even if a money supply increase is enough to spur persistent inflation, this would not occur immediately — it usually occurs with an 18-24 month lag, suggesting we may not see it until late 2021 or early 2022.

4. The Fed’s inflation targeting policy represents a paradigm shift for the Fed

The Fed has gone through several paradigm shifts in the last several decades, and they’ve been transformational. I’m old enough to remember when the Fed didn’t believe in regular communication with the public, when the size of then-Fed Chair Alan Greenspan’s briefcase was the best indicator of what the Fed’s decision on rates would be at the next Federal Open Market Committee (FOMC) meeting. And now of course, the Fed is extremely transparent, working hard to telegraph its views and actions before taking them. Similarly, the Fed had a very different inflation targeting policy before last summer. Its current policy, called Average Inflation Targeting (AIT), means that the Fed’s objective is to push inflation enduringly above 2% and attain full employment before considering tightening. In other words, this new policy enables the Fed to be far more flexible and essentially tolerate economic overheating. This is NOT the Fed of yesteryear, which believed that its role was to take away the punch bowl just as the party was getting started. This Fed might leave out the punch bowl into the wee hours, even as partygoers get drunk.

What does this mean for investors?

This begs the question: what are investors afraid of? Are they afraid of inflation — or the Fed tightening in reaction to inflation? It seems to me that they are far more worried about the latter than the former. That would explain why last week’s negative reaction to signs of inflation was so very short-lived, as Fed officials provided reassurance. And so perhaps investors should be more concerned about the former, especially if the Fed remains “behind the curve” and is unable to easily tame inflation once it tries to. While I must stress that this is far from my base case scenario, it is a risk that needs to be considered since inflation can have a negative impact on some asset classes. If persistently higher inflation were to occur, investors could benefit from exposure to commodities, cyclical stocks, inflation-protected securities, emerging market assets and even dividend-paying stocks as part of a diversified portfolio.

This week there is more potential for volatility, as investors wait with bated breath for the FOMC minutes, which could offer more insight into what the Fed is thinking with regard to inflation and tightening.

Our Comments

The markets are still volatile at the moment but are generally on an upwards trend as you can see from the below chart of the FTSE 100 over the past year:

Source: Google, as at 16:35 BST 19/05/2021

Global markets are increasingly more interconnected and US inflation fears affects the UK markets (and vice versa).

Inflationary fears will continue as will the volatility however as we always state, its important to remain calm and ride the volatility out.

Andrew Lloyd

20/05/2021

Team No Comments

Brewin Dolphin Markets in a Minute

Please see the below update from Brewin Dolphin received late last night:

Most global markets fell back slightly over the past week, retreating from record highs set in the first trading week of the year. The falls came after a strong run for global markets that has, unsurprisingly, led to some profit taking. Also weighing on markets has been some disappointing economic data caused by new or expanded lockdowns.

For example, UK retail sales figures released last week saw the worst annual growth since 1955. US initial jobless claims increased sharply last Thursday, hitting their highest level in five months. US retail sales declined for a third straight month and manufacturing activity in the New York state slowed. Then the University of Michigan consumer sentiment index was weaker than had been expected. It is no surprise that markets have adopted a little more of a ‘risk off’ tone.

Last week’s markets performance*

  • FTSE100: -2%
  • S&P500: -1.47%
  • Dow: -0.91%
  • Nasdaq: -1.54%
  • Dax: -1.86
  • Hang Seng: +2.49%
  • Shanghai Composite: -0.10%
  • Nikkei: +1.35%**

*Data from close on 8 January to close of business on Friday 15 January.

Inauguration week starts on a cautious note

It was a quiet start to the week yesterday, as US markets were closed for Martin Luther King Jr Day. In Europe, markets were mostly higher; the pan-European STOXX 600 rose by 0.20%, France’s CAC 40 closed 0.44% higher at 13,848.35 and the Italy’s FTSE Mib gained 0.53% to 22,498.89.

In Asia, most markets lost ground, but China was the exception. The Shanghai Composite and Hang Seng indices both rose after China reported robust GDP data that confirmed it was the only major economy to expand in 2020.

In the UK, the FTSE100 closed down 0.22% at 6,720.65, while the FTSE250 eked out a gain of 0.12%.

China leads global recovery

China’s ongoing recovery continued apace at the end of last year. It recorded GDP growth of 2.3% for 2020 as a whole but growth accelerated in the fourth quarter, with its economy expanding by 6.5% compared to a year earlier. It was its fastest rate of growth in two years.

China’s growth was largely export driven, although government support for infrastructure projects also gave the economy a boost.

But even China is showing signs of pain during these difficult days. Retail sales came in below expectations, rising by 4.6% in December from a year earlier. While this is impressive by global standards, it was below expectations for 5.5% growth.

We expect China to continue to lead the global recovery in 2021, although growth should be more evenly spread around the world, assuming the roll out of vaccines proceeds smoothly.

Bond yields rising

Yields were a little lower on the back of this news, but not much. That is despite the very sharp increase in yields we have seen so far this year. This has been a topic of much speculation as the prevailing narrative had been that rates will stay low for the foreseeable future. However, very recently the market has begun to anticipate that monetary policy cannot remain this accommodative forever.

Currently forward interest rates presume that rates stay on hold for the next two years, but then begin to steadily rise. Implied rates have increased significantly over the beginning of the year, mainly in the US. Now those expectations have nudged outside the upper end of the Fed’s forecast range. The chart below shows the market implied interest rate for each year into the future.

Adding to the pressure on bond yields recently has been the fact that some forecasters have brought forward their expectations around the timing of the Fed beginning to slow down its bond purchases, or quantitative easing (QE).

Atlanta Fed president Raphael Bostic, who is about to become a voter on the FOMC, recently said that if the economy bounces back quickly, the Fed may be able to start paring back QE later this year. During the so-called ‘taper tantrum’ of 2013, the 10-year Treasury shot up around 130 basis points in just a few months. There are certainly some parallels between then and the backdrop today, so the bond market is highly sensitive to any discussion about the Fed altering the pace of its bond buying, which is currently at $120 billion per month.

Biden’s stimulus proposal

One of the factors weighing on the bond market is the prospect of extra fiscal stimulus. President-elect Biden announced his plan for spending, and it is eye-watering, at $1.9trn.

He has said he wants $2,000 stimulus cheques for individuals in addition to the $600 cheques already passed by Congress. It also includes $400 a week in emergency unemployment benefits, payable until September, and preventing a cliff-edge cut-off for jobless payments previously scheduled for March.

More controversially he also wants to more than double the minimum wage. This probably isn’t a serious proposition. It’s more of an effort to establish an anchor from which he can give a little ground and still be left with something meaningful at the end of the negotiation.

Inflation expectations on the up

Fundamentally, it has been rising inflation expectations that have been the driving force behind higher yields. Inflation is likely to look as if it is increasing over the coming months, but appearances will be misleading. Year-on-year energy prices will appear to have risen sharply in March when current oil prices are compared to those from a year ago, when prices actually went negative! But this is just a base effect.

There will also be some inflation caused by the reimposition of VAT in some jurisdictions. Statistical factors even imply that there is wage inflation in the current market because job losses in a large number of low-paid roles means that average wages are higher now than they were in 2019. None of these are real inflation, and policy makers will be able to safely ignore them – although headline writers may not.

Overall core inflation remains subdued, but it would be very unusual for it not to rise a little given the increase in manufacturing activity we have seen. In the longer term, more inflationary pressures may build, but for now a gentle increase in inflation gives us a preference for inflation-linked bonds over conventional bonds and reinforces the importance of having some precious metals exposure as a useful hedge.

Brief market updates like this help us get a quick overview of the markets and we share them in the aim of keeping our readers informed.

Today will be a historic day given that, across the pond, it is President Biden and Vice President, Kamala Harris’ Inauguration. VP Kamala Harris will today make history as the first female, first black and first Asian-American US Vice President, a great step towards a more inclusive and diverse future!

Hopefully, we could see positive market movements on the back of this, however, the markets are unpredictable (as have been the events of the world over the past 12 months).

Keep checking back with us for more updates like this.

Andrew Lloyd

20/01/2021

Team No Comments

Weekly Market Commentary | Fiscal stimulus and vaccination goals on the agenda for Biden this week as presidency begins

Please see below for the latest Weekly Investment Bulletin from Brooks MacDonald, received by us yesterday 19/01/2021:

US markets are closed on Monday ahead of a busy week of politics, earnings and central bank meetings

Last week saw most major equity indices decline as risk appetite waned after a strong start to 2021. The primary drivers of this were concerns over Federal Reserve tapering and fears that the new Biden administration may struggle to deliver the proposed fiscal stimulus. More positively, Chinese Q4 GDP showed a beat to the upside with the country growing by 2.3% year-on-year in 2020, a stark contrast to most other G20 nations which are expected to see significant declines.

Wednesday’s inauguration of Joe Biden as US President begins the politically important first 100 days in office

The week starts slowly with Martin Luther King Day meaning that US markets are closed. When they reopen however, politics in both the US and in Europe will dominate the headlines. On Wednesday, Joe Biden will be inaugurated as the next President of the United States and with it the politically important first 100 days will begin. The response to the coronavirus pandemic will be high on the new administration’s agenda with ambitious fiscal stimulus and vaccination goals being mentioned ahead of Wednesday. In February, the new President is expected to unveil a more comprehensive economic plan which will include infrastructure investment as well as policies to tackle climate change. Meanwhile in Europe, reports suggest that Italian Prime Minister Conte will survive a vote of no confidence today due to several abstentions. If these prove correct, this will reduce the near-term risk of fresh elections. Staying in Europe, the German Christian Democratic Union (CDU) have elected Armin Laschet as the new party leader, however it remains to be seen whether Laschet will be nominated as the chancellor candidate for the ruling CDU/CSU (Christian Social Union in Bavaria) coalition for September’s federal election.

Earnings season begins to gain traction this week with a string of banks and tech firms reporting

While we had a small number of earnings releases last week, including J.P. Morgan, this week sees a ramp up across both the US and Europe. The US tends to reach peak earnings momentum a little earlier than Europe so that region will be the focus for the rest of January. This week we have Bank of America, Netflix, Goldman Sachs, Morgan Stanley, Intel and IBM, so a range of sectors but a technology/bank focus. Coming into the season, large cap US equities are expected to see a year on year earnings decline for Q4 2020.

After a quieter start due to the US holiday, this week is likely to become far busier as US politics, European politics, earnings and central bank meetings all arrive. The European Central Bank is the major bank meeting this week and while no material change is expected, markets will be watching the rhetoric closely to see if there are any signs of tightening ahead.

Weekly 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 with Coronavirus.

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

Stay safe and well.

Paul Green

19/01/2021

Team No Comments

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

Team No Comments

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

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

In Summary

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

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

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

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

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

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

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

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

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

Keep safe and well,

Paul Green

27/10/2020

Team No Comments

As the midnight hour draws near, how will Brexit conclude?

Please see below the latest market insight from Karen Ward at JP Morgan, with particular reference to the ongoing complexities of Brexit.

An American colleague joined me on a call recently and was perplexed by the fact that I was talking about Brexit. “Isn’t Brexit done?”, he asked me. Alas, no. While the UK did officially leave the EU on 31 January, for the economy nothing actually changed since the UK entered into an 11-month period of transition. During this period, the UK and EU were supposed to agree on a future trade arrangement to commence on 1 January 2021. The clock is well and truly ticking.

Negotiations are proceeding slowly and significant differences still remain. At the root of the problem is the same issue that has plagued the discussion for the last four years. The UK wants to regain control – to become fully sovereign – setting its own rules and regulations overseen by British courts. However, the EU is not willing to grant significant access to the single market without guarantees that standards will not be undercut to gain competitive advantage.

So what happens next? Either the next six months will see a breakthrough and a free trade agreement (FTA) will be established or the UK will leave and trade on World Trade Organisation (WTO) terms.

Trading on WTO terms has been used synonymously with ‘hard Brexit’. What exactly does that mean? The short answer is potential tariffs, more customs paperwork for businesses that trade with the EU and potentially the need for the UK to be removed from EU supply chains if regulatory conformity cannot be guaranteed. It is these nontariff barriers that we would expect to have the most economic impact. There could also be significant ramifications for financial firms since the UK would lose its passporting rights – its ability to serve EU clients from the UK. Advocates for a hard Brexit argue that a clean break would allow the UK more flexibility in negotiating future trade deals with other trading partners, although any benefit from these agreements would still only be seen once these trade deals had been implemented, which is often a lengthy process.

What will happen and what will be the implications for markets? In our view, the announcement of a comprehensive FTA might see sterling rise to 1.45 against the US dollar. By contrast, in a no-trade deal scenario we see sterling closer to 1.10 against the dollar. Much weaker sterling would partially help the UK to cope with new trade frictions.

Our central expectation is that despite ongoing near-term sabre-rattling, by year end pragmatism will prevail and a relatively narrow trade deal will be agreed. When ‘Brexit’ was added to the English dictionary, the word ‘fudgery’ should also have been included.

We expect a significant amount of ‘fudgery’ in order to get a partial trade agreement done. This may, in fact, involve highlevel agreements that disguise what is essentially a transition to iron out the finer details. Such a narrow trade deal will likely still be disruptive to economic activity in the EU and the UK over the long term. But we expect various arrangements to ease the near-term burden of the change for both sides. We expect that both sides will want to minimise the day 1 disruptions given the extent to which both economies are still struggling to overcome the Covid-19 recession. Therefore, changes may well be phased in over time, spreading the economic cost over a number of quarters if not years. The UK could thus claim the sovereignty to set their own rules and standards without initially making substantial disruptive changes.

While this outcome is our central expectation, there are significant risks around it that investors should be mindful of. Sterling may be particularly volatile and, with almost 80% of revenues coming from abroad for the FTSE 100, this will also have implications for the stock market, since higher sterling could put downward pressure on earnings and vice versa should sterling fall, all other things being equal. However, we caution against relying too heavily on the FTSE rallying in the event of a hard Brexit as a disorderly Brexit would be likely to impact both UK and EU activity negatively, depressing some of the overseas earnings that matter to UK companies.

We will continue to provide the most up to date information on the markets and economy. Please check in with us again soon.

Stay safe.

Chloe

24/09/2020

Team No Comments

Weekly Market Update

Please see below a useful update received from Blackfinch Group which covers this week’s events from around the world.
UK COMMENTARY
Restrictions on social gatherings are reintroduced along with some tighter local restrictions. The government does not rule out another national lockdown if necessary.

MPs voted to back the Internal Markets Bill that will give the government the power to override parts of the Brexit agreement with the EU. The bill passed by 340 votes to 263. 

Data from the Office for National Statistics (ONS) shows that the UK has lost 700,000 jobs since March, with a further 5 million people still temporarily out of work.

Four-week grocery sales growth slowed by 8% in August, the lowest since April, with shoppers spending £155mln less in supermarkets. The data showed the impact of the hospitality sector reopening, with alcohol sales falling and personal grooming sales increasing. 

Inflation, measured by the Consumer Price Index, fell to 0.2% in August, from 1.0% in July, impacted by the Eat Out to Help Out scheme and the reduction in VAT on the hospitality sector.

The Bank of England policy committee votes unanimously to leave interest rates on hold, noting that UK economic growth in July was around 18.5% above its trough in April, but remained 11.5% below the fourth quarter of 2019. The bank ‘stands ready’ to adjust interest rates, bond buying and other monetary policy measures if necessary.

UK retail sales volume, including petrol, rose by 0.8% month-on-month in August according to the ONS, meeting analysts’ expectations. Year-on-year growth increased to 2.8%.
US COMMENTARY
The Federal Reserve makes no changes to policy at its latest meeting, although it did guide that it intends to keep interest rates low until 2023. The central bank also implicitly ruled out the possibility of negative interest rates.

Weekly initial jobless claims rose by 860,000, marginally above estimates, with continuing claims at 12.63mln.

Donald Trump reportedly gives his ‘blessing’ to a partnership between TikTok and US firms Oracle and Walmart, easing talk of a ban on the service in the US.
ASIA COMMENTARY
The Bank of Japan leaves monetary policy unchanged and upgraded its assessment of its economy, stating that data was improving after the shock caused by the COVID-19 pandemic.
GLOBAL COMMENTARY
The Organisation for Economic Cooperation and Development (OECD) predicts that the global economy will shrink by 4.5% in 2020, better than the 6% collapse it has forecast in June. The data suggests that should the pandemic be contained then global Gross Domestic Product (GDP) will rise by 5% in 2021, but if there are major second and third waves of infection, then this will likely reduce the growth to 2-3%.

Oil prices came under pressure after OPEC downgraded its outlook for global oil demand for the rest of the year and the International Energy Agency (IEA) cut its oil demand forecast for 2020 for the second month running.
COVID-19 COMMENTARY
The total number of daily cases reached new heights, but the number of daily deaths remains below April’s peak.

Pfizer announce that the effectiveness of its COVID-19 vaccine could be confirmed by October.

Novavax Inc announces expansion of its deal with India’s Serum Institute to produce 2bn doses of its COVID-19 vaccine annually, with all planned capacity to be brought online by mid-2021.

Moderna Inc states that it may soon submit its COVID-19 vaccine for emergency authorisation for people at high-risk, should the latest trials prove at least 70% effective.

We will continue to provide the most relevant articles and original blogs so please check in again with us soon.
 
Chloe

23/09/2020
Team No Comments

Blackfinch Group Monday Market Update

Issue 8, 14th September 2020

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

UK COMMENTARY

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

US COMMENTARY

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

EUROPE COMMENTARY

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

ASIA COMMENTARY

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

COVID-19 COMMENTARY

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

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

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

Keep safe and well,

Paul Green

14/09/2020

Team No Comments

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

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

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

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

A mixed start to the week

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

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

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

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

Market performance*

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

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

Coronavirus news

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

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

UK piles on the debt

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

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

Jackson Hole Symposium

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

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

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

US/China tensions cool

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

US economic data

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

Australia enters recession

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

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

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

All the best, keep well!

Paul Green

03/09/2020