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Brewin Dolphin: Markets in a Minute 13/07/2021

Please see below for Brewin Dolphin’s latest ‘Markets in a Minute’ article, received by us yesterday evening 13/07/2021:

Equities mixed as US Treasury yields slide

Stock markets were mixed last week as fears about a slowdown in global economic growth led to a steep decline in longer-term bond yields. US indices suffered heavy losses on Thursday as the yield on the benchmark ten-year Treasury note slid to a near five-month low. Although falling bond yields usually increase the relative appeal of equities, investors feared it signalled expectations of a slower recovery from the pandemic. The S&P 500 and the Dow managed to claw back losses on Friday to end the holiday-shortened week up 0.4% and 0.2%, respectively.

The spread of the Delta variant of Covid-19 also weighed on investor sentiment, particularly in Asia where Japan’s Nikkei 225 plunged by nearly 3.0%. Tokyo is being placed under a fourth state of emergency to try to curb the rise in infections. In Europe, the STOXX 600 recovered from Thursday’s sharp pullback to end the week up 0.2%. Germany’s Dax also added 0.2%, whereas France’s CAC 40 slipped 0.4%. The UK’s FTSE 100 was flat as the government confirmed it would ease quarantine rules for fully vaccinated adults and under-18s from mid-August, despite the surge in infections.

Stocks rise ahead of Q2 earnings season

Wall Street stocks were in the green on Monday (12 July) ahead of the start of the second quarter earnings season. Analysts expect strong results from banks such as JP Morgan Chase and Bank of America. The Dow, S&P 500 and Nasdaq all closed at fresh record highs, with the Dow narrowly missing the 35,000 mark. The FTSE 100 edged up 0.1%, with insurer Admiral leading the way on news its first half profits are likely to be higher than expected. Travel-related stocks underperformed amid data showing passenger numbers at Heathrow Airport in June were almost 90% lower than pre-pandemic levels. The FTSE 100 was up 0.3% at Tuesday’s market open, after the Bank of England said it was lifting Covid-19 restrictions on dividends from lenders. Shares in NatWest, HSBC and Lloyds all rose by around 2% following the announcement.

US economic data miss forecasts

A raft of worse-than-expected US economic data weighed on equities and bond yields last week. The Institute for Supply Management’s gauge of service sector activity fell to 60.1 in June, lower than the 63.5 figure forecast by economists in a Reuters poll and down from 64.0 in May. It came amid labour and raw material shortages, which resulted in the survey’s measure of backlog orders rising to 65.8 from 61.1 in May. The IBD / TIPP economic optimism index also slipped from 56.4 in June to 54.3 for July, its lowest reading since February. Elsewhere, figures from the Labor Department showed US weekly jobless claims rose to 373,000 for the week ending 3 July, worse than the 350,000 Dow Jones estimate. Job openings hit a record high of 9.2m in May, which was up 1.7% on the previous month but lower than the expected 9.3m.

UK economic rebound slows

Here in the UK, gross domestic product (GDP) expanded by 0.8% in May from a month ago, down from April’s 2.0% increase and weaker than the 1.5% expansion predicted in a Reuters poll. The Office for National Statistics said GDP growth remained 3.1% below its level in February 2020, just before the pandemic struck. The services sector rose by a weaker-than-expected 0.9% between April and May, as the huge surge in accommodation and food services output failed to offset slower increases elsewhere. Services growth was 3.4% below its February 2020 level. Meanwhile, manufacturing output slipped by 0.1% as the ongoing microchip shortage disrupted car production, leading to the steepest fall in the manufacture of transport equipment since April 2020. Construction output fell for a second consecutive month, down 0.8%, but remained the only sector to have output levels at above its pre pandemic level.

Eurozone retail sales rebound

There was more positive economic data from the eurozone, where monthly retail sales rose more than expected in May following a decline the previous month. According to Eurostat, retail sales rose by 4.6% monthon-month and by 9.0% from a year ago. This was above consensus forecasts of a 4.4% monthly rise and an 8.2% annual increase. The surge was driven by purchases of non-food products and car fuel as several countries lifted coronavirus restrictions. However, the rapid spread of the Delta variant has cast doubt over the speed of Europe’s economic recovery. On Friday, Germany and France warned people against travelling to Spain, where the infection rate is the highest in mainland Europe. The Netherlands said it would reintroduce restrictions on hospitality venues just two weeks after lifting them. Figures from the European Centre for Disease Prevention and Control, reported by the Financial Times, showed the weekly Covid-19 infection rate for the EU and European Economic Area rose to 51.6 per 100,000 people on Friday, from 38.6 the week before. The infection rate is expected to exceed 90 per 100,000 people in four weeks’ time.

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

Keep safe and well

Paul Green DipFA

14/07/2021

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Invesco Investment Intelligence updates – 14/06/2021

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

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

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

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

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

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

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

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

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

Key economic data in the week ahead

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

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

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

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

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

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

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

Keep safe and well.

Paul Green DipFA

14/06/2021

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Invesco Insights: Israel’s economic data starts to show the impact of vaccines

Please see below for one of the latest Invesco Insight articles written by Kristina Hooper, Chief Global Market Strategist at Invesco Ltd. This article was received by us today 07/04/2021:

A month ago, I wrote about the great progress Israel was making in terms of inoculating its citizens against COVID-19. At the time, I said that we would want to follow economic data in Israel closely for indications of what the US and UK could expect in the near future — as they are making swift progress in vaccinating their respective populations — as well as what any country can expect once it successfully vaccinates a significant portion of its population. Therefore, I think it’s worth re-visiting Israel to see the impact that widespread immunization has had on its economy. It’s clear that Israel’s vaccination program is not only having a substantial impact on consumer confidence, but also on spending.

Israel’s data shows the impact of vaccines

While vaccinations only began in December, they ramped up quickly. As of April 4, Israel has given at least one dose of a COVID-19 vaccine to 59% of its population, with 54% fully vaccinated.1 The economic impact was seen relatively early on. As morbidity moderated, restrictions eased and the third lockdown was rolled back — and the Bank of Israel’s Composite State of the Economy Index for February increased by 0.4%.2

Mobility, which we have found to be a helpful indicator of economic activity, has increased substantially. By the end of March 2021, retail and recreation mobility (restaurants, cafes, shopping centers, movie theaters, etc.) was off by only 6% from January 2020 levels, while grocery and pharmacy mobility is actually higher than those early 2020 levels.3 And, not surprisingly, economic activity accelerated in March. Daily credit card data shows that the value of transactions for the week ending March 22 was actually 15% higher than it was in January 2020.4 By comparison, back in April 2020, the value of transactions was more than 40% below its level in January of 2020.4 The rebound in spending has been strongest in some of the areas hardest hit by the pandemic, especially leisure and tourism.

Why is this time different?

What makes this time different than past economic re-openings, like we saw in spring 2020? Before broad vaccinations, the re-opening of an economy was a double-edged sword. Typically, a re-opening would often be followed, after a lag, with an increase in COVID-19 infections. In addition, the increase in economic activity would typically be tempered because some consumers would be reluctant to go out and spend despite the re-opening because of health safety concerns.

I believe this time is different because vaccinated consumers will be more likely to re-engage in pre-pandemic economic activity and, according to medical research, should be well protected against COVID-19 — so spending should not be tempered as in past re-openings. Israel’s re-opening is already proving that vaccinations are leading to an uptick in consumer activity, and they haven’t seen another wave of COVID-19 infections.

A preview of what’s to come in the US and UK?

In my view, Israel’s current state illustrates what we can soon expect in countries such as the United States and then the United Kingdom — and in any country once it has achieved broad vaccination of its population. In the United States, 31% of the population has received at least one dose of a vaccine, and 18% have been fully vaccinated.1 In the United Kingdom, 47% of the population has received at least one dose of a COVID-19 vaccine, although only 7.8% of the population is fully vaccinated.1

The US economy is already seeing significant improvement, further helped by fiscal stimulus. For example, the March employment situation report saw a far-better-than-expected increase in non-farm payrolls at 916,000.5 And we just got the ISM Services PMI for March, which was also far better than expected, clocking in at 63.7 with all 18 services industries reported growth.6 The only problem is that COVID-19 infections are on the rise in some states in the US, so vaccinations will need to maintain momentum in order to slow and ultimately stop the rise in infections.

The UK is a bit more complicated and hasn’t shown as much improvement yet because it remains at a relatively strict level of pandemic-related lockdown, although stringency is being eased gradually.

Investment implications

I expect that rising vaccinations and improving economic data are likely to lead to a continued rise in bond yields and outperformance of smaller-cap and cyclical stocks, especially in countries that are leading the recovery.

I should add that in the US, there are a few clouds on the horizon in the form of growing fears of rising taxes. And that is likely to be the case for a number of countries burdened with higher debt levels created by the pandemic. While far from a reality at the moment, if an increase in taxes becomes more likely — especially a large increase in corporate taxes – we could see some shift in leadership, albeit modest, to larger-cap and more defensive names. However, it’s important to stress I don’t believe this would end the stock market recovery, but could just cause some rotation in leadership.

But right now, the focus is on the virus and vaccinations. As the Brookings-FT Tracking Index for the Global Economic Recovery has indicated, the ability to control COVID-19 is likely to be the main determinant of economic success in 2021.7 That is why the index shows major economies such as China and the US leading the global recovery. The index suggests that there may not be a coordinated global economic rebound, but that instead there may be a time lag for some countries, especially Europe and Latin America, given their lack of progress in vaccine rollout and general difficulties in controlling the virus. This isn’t surprising — and it’s something we anticipated last year when putting together our 2021 outlook. In other words, we believe an economic recovery is in the future for all parts of the world, but its timing and strength will be dictated by control of the virus and vaccine rollout progress, and so we will want to follow this data closely.

Key takeaways

Recent data has been positive

Mobility, which we have found to be a helpful indicator of economic activity, has increased substantially in Israel.

A preview of what’s to come?

In my view, Israel’s current state illustrates what we can expect in countries that achieve broad vaccination of their populations.

What might this mean for stocks?

I expect this economic recovery to be very robust, which may lead to outperformance by smaller-cap stocks and cyclical stocks.

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

Keep safe and well.

Paul Green DipFA

07/04/2021

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Small caps can tell us a lot about the market mood

Please see below for one of AJ Bell’s latest Investment Insight articles, received by us yesterday 28/03/2021:

Small cap stocks are perceived to be riskier than their large cap counterparts and with good reason. As such, they can be used to judge wider market risk appetite – if small caps are rolling higher, we are likely to be in a bull market. If they are falling, we could be shifting to a bear market.

In general, small caps tend to be younger firms that are still developing. They are potentially more dependent upon certain key products or services, a narrower range of clients and even key executives.

Their finances might not be as robust as large caps and they are more exposed to an economic downturn, especially as they are less likely to have a global presence and be more reliant on domestic markets.

The UK’s FTSE Small Cap index currently trades at record highs, while the FTSE AIM All-Share stands near 20-year peaks. The latter is still well below its technology-crazed highs of 1999-2000. Equally, they are more geared into any local economic upturn.

America’s Russell 2000 index, the main small cap benchmark in the US, is up 16% this year and by 116% over the past 12 months. That beats the Dow Jones Industrials, S&P 500 and NASDAQ Composite hands down on both counts.

In fact, the Russell 2000 now trades near its all-time highs, having gone bananas since last March’s low. Such a strong performance suggests that investors are in ‘risk-on’ mode and pricing in a strong economic recovery for good measure.

Rising Prices

One data point which does not sit so easily with the US small cap surge is the slight pullback in America’s monthly NFIB smaller businesses sentiment survey, which still stands 12 percentage points below its peak of summer 2018.

This indicator must be watched in case it does not pick up speed as America’s vaccination programme continues and lockdowns are eased. Further weakness could suggest the recovery might not be everything markets currently expect.

Equally, inflation-watchers will be intrigued by the NFIB’s sub-indices on prices. In particular, the balance between firms that are reporting higher rather than lower prices for their goods and services, and especially the shift in mix towards smaller companies that are planning price rises rather than price cuts.

If both trends continue, then bond markets could just be right in fearing that an inflationary boom is upon us.

Interest rates on the move

The number of interest rate rises continues to gather pace on a global basis. Last month there had already been five hikes this year in borrowing costs, in Zambia, Venezuela, Mozambique, Tajikistan and Armenia. There have now been six more – Kyrgyzstan, Georgia, Ukraine, Brazil, Russia and Turkey.

The 11 rate increases we’ve seen year to date is already two more than in the whole of 2020.

In contrast, the US Federal Reserve is content to sit on its hands despite what is happening elsewhere. Chair Jerome Powell continues to reaffirm the American central bank’s commitment to running its quantitative easing scheme at $120 billion a month, while any plans to increase interest rates from their record lows seem to be on hold until 2024.

Powell does not seem concerned about inflation and is seemingly willing to risk its resurgence to ensure that the economy gets back on track in the wake of the pandemic.

Yet financial markets are still taking the view that a strong upturn is coming, because US government bond prices are currently going down, and yields are going up, regardless of what the Fed says. That is a huge change from the last decade or so, when bond and stock markets have been happy to slavishly take their lead from central bank policy announcements.

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

29/03/2021

Team No Comments

AJ Bell Investment Insight: The questions facing UK gilts

Please see below for AJ Bell’s latest Investment Insight article, received by us yesterday 14/03/2021:

In some ways, markets had little to digest in the immediate wake of the Budget, as so much of the chancellor of the exchequer’s speech had made its way into the newspapers the previous weekend.

Rishi Sunak did come up with a couple of surprises all the same, in the form of the superdeduction for capital investment and his plan for eight freeports, designed to boost the UK’s trade flows in a post-Brexit world. The key issues raised by the Budget, at least from an investment perspective, passed unasked:

  • Why should anyone lend the UK money (and therefore buy its government bonds, or gilts) when it does not have the means to pay them back?
  • Why should anyone lend money to someone who cannot pay them back in return for a yield of just 0.77% a year for the next ten years (assuming they buy the benchmark 10-year gilt)?
  • Why would anyone buy a 10-year gilt with a yield of 0.77% when inflation is already 0.7%, according to the consumer price index, and potentially heading higher, especially if oil prices stay firm, money supply growth remains rampant and the global economy finally begins to recover as and when the pandemic is finally beaten off?

Anyone who buys a bond with a yield of 0.77% is locking in a guaranteed real-term loss if inflation goes above that mark and stays there for the next decade.

In sum, do UK government bonds represent return-free risk? And if so, what are the implications for asset allocation strategies and investors’ portfolios?

GILT YIELDS ON THE CHARGE

The benchmark 10-year gilt yield in the UK has surged of late. It is not easy to divine whether this is due to the fixed-income market worrying about inflation or a gathering acknowledgement that the UK’s aggregate £2 trillion debt is only going one way – up. But the effect on gilt prices is clear, since bond prices go down as yields go up (as is also the case with equities).

This is inevitably filtering through to exchange-traded funds (ETFs) dedicated to the UK fixed income market. The price of two benchmark-tracking ETFs has fallen, albeit to varying degrees. The instrument which follows shorter-dated (zero-to-five year) gilts has fallen just 2% since the August low in yields.

Meanwhile, the ETF which tracks and delivers the performance of a wider basket of UK gilts (once its running costs are taken into account) has fallen 8% since yields bottomed last summer.

That 8% capital loss is at least a paper-only one, unless an investor chooses to sell now, but the yield on offer does not come even close to compensating the holder for that paper loss, which supports the view that bonds now represent return-free risk.

SAVING GRACES

However, the higher bond yields go, the greater the return they offer and that means at some point investors may decide that the rewards are sufficient compensation for the risks, especially as three arguments could still support exposure to UK gilts.

  • The market’s fears of inflation could be misplaced. Bears of bonds have been growling about record-low interest rates and record doses of quantitative easing would lead to inflation for over a decade – and it has not happened yet.

If the West does turn Japanese and tip into deflation, even bonds with small nominal yields would look good in real terms and possibly better than equities, which would do poorly into a deflationary environment, at least if the Japanese experience from 1990 until very recently is a reliable guide.

  • The UK’s financial situation may not be quite as bad as it seems. Yes, the national debt is growing but the Bank of England’s monetary policy is keeping the interest bill to manageable levels.

The Government’s interest bill as a percentage of GDP has hardly ever been lower. That buys everyone time and is also why Sunak is tinkering with taxes, to convince bond vigilantes and lenders alike that the UK can and will repay its debts, as
it has every year since 1672 under King Charles II. A big leap in bond yields (borrowing costs) would be expensive.

  • The Bank of England could move to calm bond markets with more active policy. Whether that calms inflation fears is open to question but financial repression (see a recent edition of this column) could yet come into play, supporting bond prices and reducing yields.

In sum, no-one has a crystal ball. Therefore, bonds could yet have a role to play in a well-balanced portfolio over time, but it is inflation, rather than risk of default, that looks likely to be the greatest threat to any holder of gilts.

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

15/03/2021

Team No Comments

Blackfinch Asset Management – Monthly Market Moves

Please see below for Blackfinch Asset Management’s latest Monthly Market Moves article, received by us yesterday 08/03/2021:

Market Performance

1st- 28th February 2021 (in GBP Total Return)

FTSE 100+ 0.65%
S&P 500 (USA)– 1.21%
FTSE Europe (Ex UK)– 0.94%
TOPIX (Japan)– 1.87%
MSCI Emerging Markets– 3.82%

Market Overview – February 2021

February was a tale of two halves for global bond and equity markets. What started out as a relatively positive month quickly reversed into a period of turbulent trading. Almost exactly one year to the day since the initial pandemic sell-off, inflation concerns caused bond yields to rise, causing a negative impact on equity markets, particularly those tilted towards growth stocks.

Inflation Fears Shake Markets

  • It has long been assumed that the economic recovery from the pandemic would cause some inflationary pressures. However, the fear that central banks, particularly in the US, may withdraw their substantial monetary policy support gripped investor attention.
  • President Biden’s $1.9trn stimulus package, which includes issuing further cheques to large swathes of the US population, moved closer to being agreed. This added further fuel to the inflation flames, evidenced already by the $600 cheques issued in January causing retail sales to come in way ahead of market expectations.
  • US Federal Reserve Chairman, Jerome Powell, did his best to reassure investors that the central bank will not consider raising interest rates, but his assurances did little to calm their nerves.
  • These fears caused the value of the US Dollar to appreciate. This in turn negatively impacts Emerging Markets, where countries hold significant portions of their debt in Dollars and therefore servicing this debt becomes more expensive.

Is the End in Sight for Lockdown?

  • More than 20 million people in the UK, almost one-third of the population, have received their first COVID-19 vaccine injection, with nearly 800,000 having received both doses.
  • Prime Minister Boris Johnson set out his ‘roadmap’ for an end to lockdown measures in England, starting with children returning to school on 8th March. While proposed dates are in place for a complete easing of lockdown, the public, and investors, should not get complacent given the prevailing uncertainty in the interim.
  • UK Gross Domestic Product came in ahead of expectations in December, reiterating the ongoing economic recovery.
  • Despite this, the UK economy contracted by a record 9.9% in 2020 but has so far managed to avoid a double-dip recession.

Little Change in Central Bank Policy

  • The Bank of England (BoE) left interest rates unchanged at 0.1% and kept its bond-buying programme at £895bn.
  • The BoE also commented on the possibility of negative interest rates, stating that most banks would need six-months to prepare for such a move. While this could be seen as foreshadowing a potential move towards negative rates in the future, it at least gives institutions some comfort that any move would not be in the near term.
  • The European Central Bank made no change to its monetary policy, keeping interest rates on hold as well as maintaining the €1.8trn Pandemic Emergency Purchase Programme (PEPP), confirming it will run until at least March 2022.
  • Chairman Jerome Powell announced that the US Federal Reserve will need to remain accommodative for “some time” yet. While its programme of substantial monthly government bond purchases looks likely to continue, Powell noted this could be eased once inflation and employment targets are reached

Summary

With markets having a difficult month, it is important to recognise just how far they have come in the last 12 months. As we pass the one-year anniversary since developed equity markets started to decline, as the potential impact of the pandemic became a reality, we must keep in mind that markets have rallied strongly since their trough in mid-March 2020. Therefore, periods of profit-taking are to be expected, particularly in those areas that have rallied the strongest.

While an end to lockdown measures feels within touching distance for some countries, including the UK, the emergence of new variants of COVID-19 remains a concern. As such, we need to temper any excitement of a ‘return to normal life’, as there is still a long way to go. Even so, right now in the UK the signs are promising that we may have our freedoms returned to us come the summer.

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

09/03/2021

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Brooks MacDonald Weekly Market Commentary 01/03/2021

Please see below for Brooks MacDonald’s latest weekly market commentary received by us late afternoon 01/03/2021:

In Summary:

  • Yield rises remain the major driver of equity markets
  • Johnson & Johnson’s single shot vaccine is approved in the US, adding to the breadth of vaccine supply
  • Israel eases some restrictions as the UK is set to lay out its reopening plans

Yield rises remain the major driver of equity markets

Last week saw a large uptick in volatility as higher yields caused a sell-off in markets that focused on secular growth sectors such as technology. Meanwhile, previously unloved sectors such as banks performed strongly on the back of steepening yield curves and lower expected defaults in the future as the economy recovers.

Johnson & Johnson’s single shot vaccine is approved in the US, adding to the breadth of vaccine supply

The theme of the last few days has been a tightening of restrictions, rather than loosening, as several European countries needed to roll back liberties and Auckland, New Zealand entered a fresh lockdown. More positively, the Johnson & Johnson (J&J) vaccine has been approved in the US with the company saying they can ship 100 million doses in H1 2021. While the efficacy data was less compelling for the J&J vaccine, it is recommended as a single dose vaccine which makes the rollout of logistics simpler.

The change in yields has had an outsized impact on technology companies

The ‘price’ of a financial asset is the sum of its future cashflows adjusted for a discount rate. In practice this means the sum of a company’s future earnings which are adjusted for interest rates plus an extra company specific risk premium on top. Value companies tend to produce higher earnings now but less exciting earnings in the future. Growth companies, by contrast, produce little now but are expected to make outsized earnings in the future. Because the earnings in growth companies tend to be further away, the discount rate is more important. Due to the power of compounding, a small change in interest rates can significantly reduce the present value of future earnings 10 or 20 years away. This is exactly what happened last week when a pickup in interest rate expectations caused high growth companies to look less attractive. The moves were relatively small, with the US 10 year rising around 7bps to just over 1.4% but with valuations richer in the technology space, this was enough to catalyse a sell-off.

Of course, the question is whether central banks will let further yield rises happen. So far, the Federal Reserve have pushed back against expectations for sustained inflation but have broadly welcomed the pickup in yields, saying it is reflective of an improved economic backdrop. The next Federal Reserve (Fed) meeting is on 16-17 March, however this week we hear from a series of members including Fed Chair Jerome Powell. Should rapid rises in yields continue to be a theme, we expect the Federal Reserve to step in, at least verbally, to steady further rises. Yield rises can impact both financial stability and damage the economic recovery so central banks will be paying close attention.

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

01/03/2021

Team No Comments

Brooks MacDonald Weekly Market Commentary | Vaccine distribution continues to be key focus for investors

Please see below for the latest Brooks MacDonald Weekly Investment Bulletin received by us yesterday 01/02/2021:

Vaccine nationalism raises its head as competing contracts and supply issues collide

A bout of risk off sentiment hit equities, bringing most European and US indices slightly negative for the first month of 2021. The risk of a vaccine trade war, less positive data from Johnson & Johnson’s vaccine and the risk of further COVID-19 restrictions all dampened the mood. Friday saw a bubbling over of increasingly hostile words between the EU and AstraZeneca. In short, the EU imposed the right to ban vaccine exports outside of the EU (and select countries) and effectively imposed a hard border between Northern Ireland and the Republic of Ireland. This proved only temporary, with the hard border reversed and the prospect of export bans to the UK played down as Friday and the weekend progressed. So called ‘vaccine nationalism’ has been a threat for several months as issues over regional supply chains combine with the sequencing of competing contracts and an increasingly frustrated populace. On Sunday, the UK announced that it had provided almost 600,000 vaccinations in one day (over 1% of adults), which may suggest that as supply increases, countries will be able to work quickly to inoculate their populations.

Markets look ahead to Friday’s US employment data after last month’s disappointment

This Friday sees the important non-farm payroll US employment figures released. Last month saw a decline of 140,000 jobs1 , the first decline since the first wave of the pandemic. This month economists are expecting a 50,000 increase and therefore for the headline 6.7% unemployment rate to remain stable2 . US economic data has shown resilience in the face of the current COVID-19 wave but there is still a large amount of spare capacity in the labour market, something that may curb any bubbling inflationary pressures. With employment a major item on President Biden’s agenda, it seems likely that the US Stimulus Package will move through Congress under the Budget Reconciliation rules. The downside of using this process is that there is a limit on the scope of the legislation and a limit on the number of times the process can be used.

US stimulus may progress using the budget reconciliation process but this has limits

The prospect of using the budget reconciliation process has dampened expectations of a bipartisan agreement that could leave the door open for further stimulus over the coming months. The reconciliation process means that the bill can pass with a simple majority in the Senate rather than being held up by the filibuster. The reconciliation process has historically only been used once per calendar year due to its inbuilt limitations, so there will be additional scrutiny on the proposed package if it is expected to be the only US stimulus in 2021.

Weekly investment bulletins like these are a good way to get regular input from market experts. 

The mass rollout of the vaccine is set to cause gradual change to the market outlook, hopefully life and economies will improve.

Please keep up to date with our blogs.

Keep safe and well.

Paul Green 02/02/2021

Team No Comments

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

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

Bubble trouble?

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

Burst case scenario

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

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

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

The moderates yield

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

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

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

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

Flexible recipe for fixed income

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

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

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

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

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

Stay safe and well

Paul Green 26/01/2021

Team No Comments

Brooks McDonald Daily Investment Bulletin

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

What has happened

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

COVID’s new variant and restrictions

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

Georgia run-off

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

What does Brooks Macdonald think

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

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

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

Stay safe and well

Paul Green

05/01/2021