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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

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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

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

Please see below for Legal & General’s latest Asset Allocation Team Key Beliefs Article, received by us yesterday afternoon 22/02/2021:

The consumer economy

Tim Drayson, our head of economics, often warns us not to bet against the US consumer. Last week, the US retail sales numbers for January smashed forecasts and once again showed that stimulus works, especially direct cash payments to households. Around 25% of the $600 received by individuals earning $75,000 or less was immediately spent, generating a $30 billion bounce in retail sales across all categories. Perhaps as a sign that economic optimism is already well priced in, equity markets chopped around last week although Treasury yields have been drifting higher.

The price of everything…

Clients are asking whether stock markets are getting ahead of themselves. We push back on this. If equity prices move up in lockstep with your view of the future improving, you should become neither more nor less optimistic. Given we believe we are early in the cycle, the mantra should remain unchanged: stay long, buy the dips.

Price is no determinant of value or valuations; it is only useful in relation to what you get for what you’ve paid. Is $100,000 a lot for a car? It depends if it’s for a Golf or a Ferrari. This is one reason we use multiples to think about valuations. Multiples that have historically exhibited mean-reverting properties over the long run have had some predictive power for longer-term returns. Prices, though, are not mean reverting and tell you nothing about future returns.

We pay particular attention to relative valuation. The yield gap is one representative measure; it hasn’t moved much recently but is still high by historical standards. Moreover, early in the cycle it’s quite normal for valuations to shoot up. This rebound has, so far, looked quite similar to the one in 2009 in magnitude.

Our baseline is that this bull market will last until the next recession. There’s a lot of runway left before then, in our view, and we expect the S&P 500 to be materially higher before the bull market ends.

Real talk

Investors are becoming more worried about the rise in bond yields and the possible impact on equity markets. The recent choppiness in equities while yields have drifted up adds to their nervousness. Although we believe nominal and real yields will rise further (and by more than currently priced in the forwards), we think this should be well digested by equity markets. We note that the 2013 taper tantrum saw a 75 basis point spike in bond yields but ‘only’ a 6% correction in the S&P. (Tim recently discussed the possibility of new US tapering.)

Empirically, there’s not much evidence that rising real yields are particularly bad news for equities, especially from these very low levels. In fact, rising real yields have mostly been associated with higher equities. Historically, the correlation between real yields and equity markets has turned negative at much higher real yields.

It’s crucial to understand what is driving yield moves. As long as rising yields reflect a combination of higher inflation and better growth prospects, this should be positive for markets. Only when policymakers become worried should we be ready for change. Equity markets may panic when they see either a de-anchoring of inflation expectations or they need to bring forward the timing of policy normalisation. In our view, it is far too early for either of these, but clearly both need to be monitored very closely.

All about that base effect

The next round of stimulus is still being debated by Congress. Last week, Treasury Secretary Yellen commented that “the risk of doing too little is greater than of doing too much”. If such an approach is adopted, the direct uplift to household incomes will potentially be at least three times larger than included in the COVID relief bill at the end of 2020. This money should hit people’s accounts just as the US begins to re-open more fully. Alongside the excess household savings accumulated during the pandemic, this could fuel a surge in demand.

This makes us think about the implications of the money supply glut. None of us have seen money supply grow on the current scale, the only precedent being during the Second World War. Half of the increase in broad money supply sits directly in household accounts, and cash as a share of financial assets for non-financial corporates is at its highest levels since 1969. We believe that a significant amount of this cash will be spent, boosting growth, corporate profitability, and possibly inflation.

On inflation, we know there will be a pronounced base effect around the spring as prices fell sharply while the economy was locked down last year. This, plus later boosts from CPI components that were depressed by restrictions like airfares and hotel prices, could temporarily raise inflation above target-consistent levels.

The Federal Reserve has highlighted this potential outcome, with January’s minutes containing a discussion on why it would be prudent to look through this increase. This makes sense in our view as it is equally likely that inflation will fall back in the summer. Base effects reverse, and there are also some aspects of inflation that have been lifted by the pandemic but are likely to weaken once the economy reopens. Used-car prices are an example.

Further out, the inflation picture becomes much murkier. How much slack will be left in the economy? Does the jump in money supply matter? Are some of the structural disinflationary forces of the past decade, like technology, beginning to shift? How well anchored are inflation expectations?

We believe that inflation becoming high enough to constrain monetary policy is still a way off. But if we get there, central banks in developed markets might be surprised by how much they have to raise rates to reduce inflationary pressure. Money doesn’t play a role in their models, despite monetary aggregates generally being excellent predictors of economic aggregates, and they aren’t able to directly undo the monetary and fiscal one-two that’s been so effective at putting cash in consumers’ pockets.

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

23/02/2021

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Brooks MacDonald Daily Investment Bulletin: 11/02/2021

Please see below for the latest Brooks MacDonald Daily Investment Bulletin received by us today 11/02/2021:

What has happened

Markets were largely rangebound for the second day in a row as investors await any change to the vaccine narrative and the size and pace of US Fiscal Stimulus.

Fed Chair Powell

Yesterday Fed Chair Powell spoke to the Economic Club of New York. The two overall themes were an ongoing need for fiscal support and pushing back against concerns over inflationary pressures. Powell highlighted that the US market had struggled to generate inflation even when the jobless rate was at the multi-decade lows of 3.5% and that significant slack existed now. The Federal Reserve’s estimates of the true level of unemployment are c. 10% after the ‘hidden slack’ has been adjusted for. Powell weighed in on the stimulus debate stressing the headwinds to inflationary pressures and pushing back on the notion that larger stimulus would cause the US economy to overheat. These comments come as the various votes on the elements of the stimulus bill are moving through the House of Representatives with a vote expected on the full bill in a fortnight. On monetary policy, he stressed the need for ‘supportive monetary policy’ for the US to reach full employment again, calming fears that the Federal Reserve would look to reduce stimulus in the foreseeable future.

Vaccine update

The World Health Organisation recommended that the Oxford/AstraZeneca vaccine should be used on all adults even in countries where new variants are present. The WHO also endorsed the method, trialled by the UK government, to delay the second dose in order to provide a higher percentage of protection in the community at a faster rate. There has been some debate, particularly in European countries, over the efficacy of the Oxford/AstraZeneca vaccine in various demographic groups and the WHO’s support should help shift that debate. As we have mentioned previously, the Oxford/AstraZeneca vaccine is expected to be a workhorse for population wide protection due to its low cost and easier logistics, the WHO’s comments reduce the risk of countries needing to seek new supply sources.

What does Brooks Macdonald think

Fed Chair Powell’s comments yesterday very much played to the market’s narrative that the output gap (the gap between current output and potential output) will keep inflation under control for the time being. The debate on the overall size of the US Fiscal Stimulus package is being determined by a series of smaller votes on components of the broader bill. Powell’s comments yesterday may help calm concerns over the overall size of the bill as it progresses through Congress.

Markets globally will be responding to ongoing vaccination rollouts and keeping up to date with developments as they happen can, as ever, help inform your own views of the markets.  

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

Keep safe and well.

Paul Green 11/02/2021

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Will US dollar weakness last?

Please see below for Invesco’s article regarding the US Economy, received by us late Friday 05/02/2021:

A weak US dollar is commonly seen as a benefit to international stocks as foreign companies’ returns appear more attractive in dollar-denominated terms. So it’s no surprise that, as an equity strategist, I’m often asked about my outlook for the US dollar.

After a dramatic “risk-on” rotation beginning in early 2020, we greet the new year with a technically oversold US currency and overbought stock market. In other words, investor positioning has become lopsided, arguing that a countertrend bounce in the “greenback” and near-term drawdowns in stocks may be in store.

Looking further ahead, however, I believe the “buck” should continue to depreciate for a host of reasons, and expect the current weak dollar cycle to last for years to come.

A history of US dollar cycles

The trade-weighted US dollar Index measures the value of the United States dollar relative to other major world currencies. Since the early 1970s, the relative value of the US dollar has ebbed and flowed between long and well-defined periods of strength and weakness. As illustrated in Figure 1, it seems the “greenback” is only four years into the current weak dollar cycle. On average, such cycles have lasted about eight years, the longest having been roughly 10 years.

Figure 1. It seems the “greenback” is only four years into the current weak dollar cycle

Factors that support a weak US dollar

While past dollar cycles can offer clues about what the future may hold for the currency, history isn’t enough on its own. As such, I assembled a number of other factors that I believe support a weak dollar, including:

  • Valuations suggest that a swath of international currencies are trading at substantial discounts, especially in emerging markets (EM), meaning that they may have more room to strengthen compared to the dollar.
  • The Federal Reserve remains firmly in  monetary easing mode, which means the path of least resistance seems to be downward for the US currency. If quantitative easing (QE) represents a choice between the economy and  the “greenback,” the Fed has opted to save growth and jobs by opening the spigots and inflating the monetary base at the expense of the currency. From a long-term perspective, I think it’s reasonable to expect the US dollar to weaken further should the Fed keep such an abundant supply of currency in circulation.
  • The deep economic impact of the coronavirus pandemic has necessitated counter-cyclical government support to an unprecedented degree. In turn, ballooning twin deficits have become stiff fundamental headwinds for the US dollar. Why? When the US spends more than it earns, it floods the global financial system with US dollars, placing downward pressure on the value of its currency.

My recent chartbook – Seven reasons for a weaker US dollar and stronger international stocks – takes a deeper dive into these factors, as well as other reasons why I believe we may only be halfway through the current weak US dollar cycle.

Investment implications

In a global context, currency dynamics are an important component of investors’ total returns. For example, EM currency strength (the flipside of US dollar weakness) has boosted dollar-based investors’ returns on EM stocks (priced in US dollars).

Why have EM stocks moved in the same direction as their currencies? It’s a virtuous, self-reinforcing “flow” argument. Before foreign capital can flow into EM stocks, foreign currency-denominated assets must be sold in exchange for EM currencies.

Apparently, improving fundamentals versus 2015/16 have made the emerging market economies a more attractive destination for foreign capital, and the Fed’s dovishness is helping the situation.

For investors, this isn’t just an EM story. It’s a bigger message — one that I believe has positive ramifications for international stocks more broadly.

Learning about major players in the markets such as the US and their effect on the global markets as a whole can be useful and keep your holistic view of the markets up to date.

Please continue to check our blogs section for articles like these.

Keep safe and well.

Paul Green

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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

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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

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Brooks MacDonald Daily Investment Bulletin: 21/01/2021

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

What has happened

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

President Biden

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

Central bank decisions

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

What does Brooks Macdonald think

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

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

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

Keep safe and well.

Paul Green 21/01/2021