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Market Snapshot

An overview of what has been happening across global markets.

A monthly snapshot of the current economic climate that could impact your financial affairs

Market performance shows reasonable progress

Markets managed to break the difficult trend year to date and make progress towards the end of the month despite plenty of continued anxiety over inflation, interest rates and growth. There are great inconsistencies in the current environment, with widespread dissatisfaction despite generally low levels of unemployment and rising house prices (often a prime confidence builder) around the world. Inflation is the critical issue of the day and is inescapable in the press on a daily basis.

Inflation continues despite windfall tax

At the epicentre of the inflation show are energy costs and Ofgem’s current estimate of the price cap increase in October which implies a rise to around £2,800 – well over double the level in October 2021 – and would mark the highest share of consumer wallets on record (dating back to the 1950s). The government was forced to change tack in the face of this threatened increase, announcing a tax on the excess generating profits. The windfall tax had little impact on oil and gas stocks, which continue their march higher, as it is applicable only on UK profits. These form a relatively small share of the profits from the largest UK-listed diversified oil and gas majors – BP and Shell. More challengingly, it has impacted the renewables sector more at this stage which may moderate additional investment at a time when this is much needed as part of the energy mix.

The taxed profits will be put towards offsetting higher energy bills and will reduce, but not fully negate, the impact of the October rise. It does, however, represent a meaningful injection of spending into the economy at a time when demand is already exceeding supply and causing uncomfortably high inflation. Pressure is growing on Boris Johnson from the back benches to go even further. Having survived the indignity of a ‘no confidence’ vote, with over 40% of Tory MP’s opposed to Johnson’s leadership, the PM may look to appease some of his critics by cutting taxes to further alleviate the pressure on households.

The hospitality sector continues to expand despite rising costs

Elsewhere in the economy, the Purchasing Managers’ Indices (PMIs), a well-recognised barometer for demand and wider corporate health, currently reflect an environment in which growth remains firmly positive but slowing. That slowdown was generally a little more pronounced for the manufacturing sector, reflecting the shift in demand away from the goods that had sustained people during the pandemic and towards the experiences they have been missing out on. The most notable experiences being holidays and eating out (areas where price insensitivity is high and accordingly a not insignificant influence in the inflation picture in the short term).

These areas are an exception to the greater resilience of services which remained above 50, implying the sector continues to expand, but at a slower pace (a reading above fifty suggests the service sector is expanding, while a reading below fifty suggests the service sector is in contraction). It would be easy to dismiss the reading as an anomaly, but as UK consumers were saddled with higher energy bills and higher national insurance deductions from April onwards, May’s data gives us the first impression of how significant this is. The question now is whether the easing of demand serves to reduce price pressures. The survey reported that companies are finding it harder to pass on cost increases to consumers.

All this complicates the hand of the Bank of England, which would like to raise rates more in order to respond to the inflationary threats but will be mindful of hurting the economy too. In the absence of any evidence of the employment demand weakening, it seems unlikely that the Bank of England can be too cautious about interest rate increases in the very short term.

Further windfall taxes considered internationally

Outside of the UK, other governments are considering their own windfall taxes. Hungary, which remains a stumbling block in terms of building a consensus to frustrate Russia’s oil sales, announced multinational companies would be required to turn over the most of what prime minister Viktor Orban described as their “extra profit”. This will be used to subsidise utility bills and pay for the cost of modernising the Hungarian armed forces. In China, premier Li Keqiang convened an emergency meeting with thousands of representatives from local governments, state-owned companies and financial firms. He called upon them to stabilise growth, describing the current level of activity as worse than in the immediate aftermath of COVID-19.

What is happening in the US

In the US, the economy continues to be supported by strong demand but is showing some signs of weakness. Employment data remains robust with 390,000 non-farm jobs added in May (ahead of consensus expectations of 320,000) but warnings of recession continue to grow. Consumer confidence fell in May as, apparently, did Elon Musk’s confidence. The Tesla chief warned he has a “super bad feeling” about the economy, indicating 10% of Tesla workers may face losing their jobs. Though based on previous comments, Musk’s comments ought to be taken with a pinch of salt, the proposed cuts are nonetheless concerning given the demand and long lead time at Tesla.

Turning to the housing market, momentum has stalled due to the inflation uncertainty outlined above and higher bond yields, this trend has been more pronounced in the US where bond yields influence financing cost and activity. A second reading of first quarter US gross domestic product (GDP) revealed a revised-down figure for residential investment, again remaining just modestly positive. Residential investment is not a big category of GDP, but it does tend to be watched closely. This is because it is quite labour intensive and drives a lot of subsequent economic activity (for example, moving, furnishing) as well as ultimately aiding the supply side of the economy by supporting labour mobility.

The silver lining

Having waded through a lot of potential gloom, it is worth reiterating that markets actually performed reasonably well towards the end of May. Much of the news – while understandably headline grabbing - was expected and, after a few troubling weeks, markets were already depressed. In times of weak market sentiment, small changes can have a more meaningful impact.

As we approach the end of the quarter investors remain very cautiously positioned and markets should benefit from rebalancing flows from pension funds with very prescriptive strategic asset allocations.

Previous months

May 2022 - Investors re-assess as market volatility remains high

April was a weaker month for stocks, but the volatility spilled over into the beginning of May as well. On everyone’s mind has been the twin factors of higher inflation and higher interest rates. In a different scenario to what is typical, the inflation that has been suffered recently is due entirely to supply constraint and a lack of response as prices increase (price increases typically incentivise supply) which could be influenced by a number of post-COVID-19 factors.

Earnings season is also in full swing and, so far, growth is lower than in previous quarters (as the base effects are tougher and activity is softer due to supply or pricing uncertainty) but still better than expected, with Earnings Per Share surprising by +6% in the US and +9% in Europe. However, in stark contrast to the optimism in 2020/21 investors are much more sceptical and demanding, with companies that are missing estimates being penalised sharply – in this respect Netflix has been the sacrificial lamb this spring with underwhelming subscriber numbers and increased streaming competition leading to c.70% share price drop year to date. Big tech more broadly is under the microscope like never before as investors reassess their post-pandemic growth assumptions and wider market volatility remains high as markets continue to wrestle with inflation, the war in Ukraine, China’s COVID-19 outbreak, and interest rate rises.

China’s COVID-19 challenge continues

For investors, part of the conundrum is whether these short-term factors will reverse. There are grounds for some optimism. The delay in shipments from China due to COVID-19 restrictions has allowed the logistics market some opportunity to catch up, with freight rates dropping accordingly. Clearly that’s not universally good news, even from a supply perspective, as part of the reason for it is that Chinese factories aren’t producing as much.

We expect China to be able to manage its COVID-19 challenge by increasing vaccinations and eventually being able to relax lockdowns and note there is scope for the government to financially stimulate the economy, much like what happened here in 2020/21. The Chinese Communist Party’s recently reiterated objective (5.5% for this year) is likely to require assistance to be achieved in light of the COVID-19 issues and response. In addition to monetary response, the Chinese authorities are ramping up infrastructure investment once more.

The benefits of a market which is desynchronised, and therefore not facing the same inflationary and monetary pressures as the rest of the world, could entice investors to revisit China but some may be reluctant to return to the table after being burned by the regulatory clampdowns of the past year.

Interest rates continue to rise in the US and the UK

Understandably, much attention is being lavished on interest rate setters in the current environment and two meetings in the first week of May, while not hugely informative in terms of the future direction of policy, managed to get pulses racing regardless.

The Federal Reserve meeting was remarkable in its lack of material shocks. The Fed raised interest rates by 0.5% and described the way in which 'balance sheet run off' would start in June at a pace of $47.5billion before accelerating in September to a pace of $95billion. During the preceding weeks the most currently hawkish FOMC member, James Bullard, had refused to rule out the possibility of a 0.75% hike, raising much speculation about whether one might be hinted at for the next meeting. But Fed chairman Jay Powell confirmed it was not currently part of the committee’s thinking, triggering a sharp, but brief, equity market rally.

Powell referenced the core Consumer Price Index (CPI) rate slowing in March to 0.3% month-on-month from 0.5% month-on-month in February. This is part of an essential judgement he has to make over whether higher prices are feeding into higher wages and vice versa, forming a so-called wage price spiral that can only be halted by aggressive central bank action. Adding to that was a reassuring set of employment data that showed a slower pace of wage growth despite a very healthy level of jobs growth.  If this continues it will give Powell the confidence to slow the pace of rate hikes. Ultimately there was very little information communicated and the US market continues to exhibit violent intraday swings which seems to be a function of increased retail participation via options.

When the Bank of England’s monetary policy committee (MPC) announced policy, the details were again in line with expectations, with interest rates rising to 1%. However, the Bank’s forecasts caught the eye with a surprisingly high estimate of inflation hitting 10% in the final quarter of this year, at which point it expects growth to slow leading to an overall decline during 2023. These forecasts could imply a period of slow growth that occasionally dips into negative territory, but it seems more likely that the Bank is expecting a recession, without explicitly using the dreaded “R” word. After digesting these forecasts and voting intentions, the markets decided that interest rates will not rise as fast in the UK as had been expected, causing bonds to rally and the pound to slump.

Economic distress continues in Russia

Being the most sanctioned country, Russia faces huge economic headwinds and sky-high inflation. The Russian central bank issued new projections that showed Russia’s economy may contract by 8-10% this year, while inflation is set to reach 18-23% by the end of this year. Economic distress will deepen in the coming months and supply chains will be severely impacted by a lack of imported components.

Russia has cut off gas to Poland and Bulgaria, and threatened to cut off gas supplies to any EU countries which do not pay in roubles. President of the European Commission, Ursula von der Leyen, meanwhile has set out plans to phase out Russian oil with the G7 similarly committing to phase out or ban the import of Russian crude. As the war progresses, although there seems to be no imminent disruption, the tail risk of gas being shut off to major EU economies like Germany and Italy will lead to terrible economic consequences as gas will need to be rationed, with many economists expecting an outright recession in such a scenario. So far, there is a lack of clarity on how European leaders will proceed, and developments remain very fluid.

Upside and opportunity

So, challenges lurk at every turn it would seem, and there are undoubtedly significant headwinds for investors to navigate, but with c.80% of S&P 500 companies and c.70% of STOXX 600 companies beating earnings estimates last quarter, there remains scope for upside and opportunity on both sides of the Atlantic.

April 2022 - The impact of war continues 

As we move into Q2, tragically we are now more than a month into the war in Ukraine, with the conflict sadly showing no signs abating. The war has exacerbated inflationary pressures, which continue to dominate the narrative for investors with things likely to get worse before they get better as Europe attempts to wean itself off Russian oil & gas and supply chain issues push prices higher still. Markets have had a rollercoaster ride through March, sinking initially after the outbreak of war then roaring back from their post-invasion lows before slowing once more.

Bond yield volatility causes a stir

A lot of headlines were generated by the inversion of the yield curve (the yield on a two-year bond rising above the yield on a 10-year bond). This is a useful indicator because it has tended to invert ahead of recessions and, by implication, ahead of large equity market drawdowns. Bond yields lurched higher in response to the release of employment data for the US. The data was broadly in line with expectations in terms of the number of jobs created, with figures remaining strong. The aspect to note for the Federal Reserve will be unemployment, which fell to 3.6%. Prior to the onset of COVID-19, unemployment had reached 3.5% but, nevertheless, this is a level of joblessness which suggests a tight labour market.

The inversion of the yield curve is not a precise tool of timing. It tells you we are in the last throes of an economic expansion. However, those last throes can last many months, perhaps even a year or more. During that time, equity returns have generally been pretty respectable and earnings growth was also red hot. The annual pace of growth is the fastest in over a decade (excluding the period immediately following the pandemic, which was distorted by the types of jobs that were lost).

Inflationary pressure as Europe looks for alternatives to Russian oil supply

The estimates of inflation for the month of March (the first full month since Russia’s invasion of Ukraine) are in and shed some light on the impact the war has had on the wider supply chain crisis. Covering Spain, Italy, Germany and France, these estimates continue to surprise analysts by the strength of their inflation. The principal driver of this is energy prices which soared after the invasion but have been very volatile since. Prices had reached over $130 per barrel but after some toing and froing they are now back down around $100. There hasn’t been too much good news to drive that and OPEC+ appears reluctant to provide much assistance. Members took just 12 minutes to decide to increase oil production by 432,000 barrels per month in a move designed to show how strong the unity is between members. It left little time to discuss the impact on supply from the loss of what is estimated to be around 1.5 million barrels a day of Russian supply. However, by some estimates the current COVID-fighting lockdowns in China may be denting demand by around 1 million barrels a day. The Biden administration has announced plans to release 180 million barrels of oil from the US strategic petroleum reserve (SPR). Historically, many commentators have observed that these kinds of releases are short lived in their impact before attention shifts to the increased demand needed to restore the SPR back to its previous inventory.

The surging oil price has certainly been good news for the energy majors with BP and Shell up 10% and 25% respectively over the first quarter. Investors eyed stocks with an immediacy in terms of earnings whilst more growth-oriented investments, with returns projected out into the future, have languished.

Is there a recession looming?

The main controversy for investors relates to how soon a recession could fall upon us. Currently, the employment market is too strong, which tends to align with a strong environment for stocks and a weak one for bonds. That can change quite fast, but at the moment, every indication is that companies want more staff. The likely driver to change that dynamic would be the rising level of consumer spending that has to be channelled into non-discretionary areas such as heating, motor fuel and food - all of which are rising for everyone. Utilities bills are a particular problem for those of us in Europe. Rents and house prices are rising fast in the US. Spending on discretionary consumer goods and services will reduce as a consequence. At some stage, the risk is that demand for consumer goods declines to a level below supply, at which point companies need to cut back on supply capacity and the labour market goes into reverse, followed by interest rates. These are the conditions that cause a recession, something which investors concede is required as a firebreak to end the cycle of inflating prices and wages. There will, of course, be volatility along the way, but it need not be the scarring events that we saw in 2002 or 2008.

COVID-19 continues to impact Chinese economy

To varying degrees this is the challenge in many markets, but the one exception is China. Looking at the Chinese economy seems almost like going back in time to the middle of 2020. China has just completed the first of two lockdowns in Shanghai, during which residents are not permitted to leave their homes except to go to mandatory testing sites. The two lockdowns are lasting four days each, with the first covering the east of the city and the second covering the west. It is indicative of a heavy-handed COVID1-19 suppression policy that the Chinese Communist Party is having to impose in order to minimise the rise in infections. The lockdowns are already evident in the disappointing result in the Purchasing Managers Index, but the situation is sure to deteriorate further.

Looking forward

So, as we enter the second quarter of an already hectic year, challenges remain, particularly in the east of Europe and the path is littered with pitfalls. Volatility is likely to remain at elevated levels but there are reasons to believe that markets have a way to go yet with corporate earnings continuing to grow and balance sheets in relatively robust shape.

March 2022 - Russian invasion of Ukraine and the impact on economies

As we enter the spring, the disruption caused by COVID-19 is beginning to recede with restrictions removed or being phased out depending on your locale within the UK, though any optimism for a return of more tranquil times has been shattered by events in Eastern Europe.

The current situation in Ukraine has sent shockwaves around the world and the human impact of this conflict has been devastating for many. Here we look at the ripple effect on oil and gas and interest rates, and the outlook for markets.

Action from western leaders

Russia has been excommunicated from the global payments system SWIFT and sanctions have been imposed on the Central Bank of the Russian Federation (CBR), meaning it cannot access almost two thirds of its $643 billion reserves which are lodged outside of Russia. This has prompted the CBR to more than double interest rates to 20% and has sent the rouble plummeting to all time lows against the dollar.

Many Russian securities fell by around 90% in value before all assets became virtually untradable and removed from MSCI and FTSE indices. It was not just the direct Russian Companies that were impacted; there is a ripple effect with the likes of BP and Shell seeking to disaggregate and in time offload Russian investments, German carmakers have suspended deliveries and operations, and shipping to and from Russia has been restricted to foods and medicines.

Oil and gas

The impact on the Russian economy will be severe and outsized when compared to the initial fallout for the wider global economy with Russia accounting for just 1.8% of global GDP. The ‘but’ sits around energy supply. Russia is a key supplier of oil and gas to the world, with geography meaning that much of this is focused on Europe. Fear of supply or potential changes to sanctions have prompted the oil price to move above $110 a barrel after OPEC opted not to ramp up production levels beyond existing plans. In such uncertain times it seems reasonable to expect the oil price to be much more volatile than has been the case for the past 10 years and all eyes will be on the $140 level reached in 2008 which many will see as significant. Oil has been the universal driver for inflation in a range of economies not least the UK so further moves higher will only increase pressure on Central Banks

What is happening with interest rates?

So intense has the news flow been on Ukraine and Russia, many market participants have almost forgotten about the potential increases of interest rates. The Federal Reserve appear focused on a tightening cycle with Jay Powell throwing his weight behind a 25bps hike this month and more to follow in an effort to keep inflation within a manageable range. That said, should anxiety surrounding Ukraine move beyond geopolitical and humanitarian concern and begin to impact the global economic recovery, might we see a degree of temperance in terms of the timing and size of those interest rate moves? For now, consensus would point to anywhere between four and six interest rate rises in both the UK and US this year and investors will be monitoring central banker announcements for any hints as to a shift in approach. Common sense would suggest there will be fewer interest rate increases or that Central Banks will be mindful of the political concerns and may push out the timetable. After all, Central Banks have a role to promote financial stability, which feels like a topic that should be taking up more of their thought process.

Outlook for markets

Clearly, the fast moving and volatile situation in Eastern Europe is extremely concerning, however, it is worth bearing in mind that from an investment perspective steep declines in stock markets are not unusual, and they tend to be short lived.

History shows us that equities have been resilient during periods of crisis in the past, such as the Cuban Missile Crisis, the Iraqi invasion of Kuwait, and 9/11. The impact of these events on the markets, and indeed the economy, were much more fleeting than their significance in modern history.

Stock markets tend to look forward and may start to anticipate less fear and stability in sentiment before it might be obvious in the white heat of news flow. So, while stock markets are likely to remain volatile in the short term, this may be more to do with ongoing concerns about inflation and interest rates. The longer-term outlook for the global economy and equities remains positive as the pandemic-related headwinds reduce, with job and wage gains becoming more common and company balance sheets robust enough to see through a challenging period.

February 2022 - Everybody’s talking about inflation

Those hoping for a more sedate political and market environment regrettably found that 2022 has started in turbulent fashion. At the forefront of investors’ minds remains the implications of surging inflation, and thus the pace at which central banks will look to tighten monetary policy in an effort to avoid further economic overheating. Both factors have the potential to weigh on economic growth at a time when government support for the economy has reduced.

What’s happening in the US?

Turning to the US first, the Federal Reserve’s preferred inflation measure of Personal Consumption Expenditure (PCE) rose 4.9% over the year to end of December (excluding food and energy). For core PCE to be hitting the Fed’s target, the more widely followed Consumer Price Index should be at 2.3%. Currently it is 7%, but as the very high price increases of last summer eventually drop out of the numbers, there is hope that we may be close to the high water mark. The good news is that the market believes the Fed will get inflation under control eventually. Using inflation linked bond yields as a barometer, the market expects inflation to average 2% for five years starting in five years’ time – arguably almost too low but basically where they should want it to be, within an appropriate margin of error.

What’s happening in the UK?

In the UK, inflation is also the main narrative on all news streams with this prompting the Bank of England to move interest rates to 0.5% and warn about the need for moderation. Central to the UK inflation push are energy prices, be that for transport or heating.

So, inflation is the main point of concern, why are economists and longer term focused investors so sanguine about the situation?  The central case is that there have been unusual supply circumstances – be those constraints on the ability to supply due to COVID or be that business responses to the lockdown demand changes – and that these should normalise.  The catalyst for normalisation takes two forms which we will call price incentive and spending habit normalisation. 

Price incentive

Price incentive is worth focussing on first as this captures commodities like oil and gas. What has happened to the oil and gas sector – and has rippled elsewhere, is that there has been no incentive to invest in new capacity for some time. 

For oil and gas, new investment faded in 2018 as the oil price peaked at just under $80 and spent most of the next few years on the backfoot with ESG and energy transition considerations an accelerating influence on investment, not to mention the initial COVID related drop in demand.  But the recent jump in oil to c$100 per barrel is likely to prompt investment in improving supply.

Most of the large multi-national oil companies have a cashflow breakeven in the region of $55 and many national operators will be below that level. Similar trends can be seen in semiconductors where TSMC and Intel have added new capacity incentivised by shortages and high prices (that had a knock-on impact on a range of retail areas, not least cars). So, at a simple level, increased supply should at least start to limit price increases, making year on year comparisons moderate, and in time might put downward pressure on some of these commodities.

Spending habit normalisation

Spending habit normalisation is also likely to be helpful.  In a supply constrained world, the only way to secure product was to 'pay up' and in lock down many consumers saw savings build as their typical spending on holidays and commuting was added to their bank account.  This created a perfect storm – why not pay up, after all I need or deserve this in the circumstances I face! As restrictions ease and Omicron hints at the severity of illness reducing, greater confidence in returning to more normal living and therefore spending habits seems likely, aided in no small way by some of the ripples of inflation that the lockdown period caused.

In conclusion

2022 seems set to be a year of transition. This will be uncertain at points and therefore volatility seems likely to continue but, in time, it should start to fade as some of those inflationary pressures fade too. Periods like this can be unnerving but they serve as a reminder why, in investment terms, we ask people to take a long-term approach supported by well-planned financial circumstances.

January 2022 - Hopes that change will bring opportunity

Uncertainty and fear at the start of the year but hopes that change will bring opportunity

Another year has passed, and most investments performed well, but the year was certainly not without incident! The context for everything that happened in 2021 was the ongoing battle against Coronavirus and feeling our way on a path toward 'normal'. Omicron took the baton from Delta and with it changes to severity and spread. Businesses and governments have had to adapt to challenging working conditions, but vaccines have allowed a lighter touch approach to managing the virus which, away from much prised personal freedoms, has allowed the economy, profits and share prices to continue the recovery path.

The economic recession caused by COVID-19 and lockdowns was unprecedentedly harsh but also narrowly focused, mostly on the physical customer-facing service sectors. Demand for physical products and digital services boomed as consumers found themselves rich in time and cash from reduced commuting and socialising, while a combination of enhanced unemployment benefits and rising pension fund values in the US seemed to incentivise people to leave their jobs. Therein lay the beginnings of the huge demand and supply mismatch of 2021, which caused shortages of goods and employees but soaring demand for many products, actively fuelled by economic stimulus. Many companies also misjudged demand and reduced inventory accordingly. Shortages of semiconductors caused knock-on shortages of vehicles, sending used car prices soaring. Across the spectrum of energy resources supply was tight everywhere. Oil production had been reduced by OPEC+ which was reluctant to raise supply again when emerging COVID-19 strains could undermine transport demand in unpredictable ways and of course ESG considerations has also moderated investment in Oil and Gas projects.

2021 ended with a focus on inflation, knock on concerns about the impact on interest rates and future  bond yields and the impact that this might have on the discount rate on the valuation of growth companies. Consequently, markets have hit a bit of volatility at the start of 2022, and beneath the surface there has been some more pronounced turbulence in individual names, regions and sectors.  

Somehow, the headline-style indices fail to capture the stock picking challenges which have beset fund managers for the last few months. Over the course of last year, five large cap technology-based stocks (Meta (Facebook), Apple, Amazon, Microsoft and Alphabet) contributed a third of the 29% return on the S&P 500. What unites them is size and liquidity and there was a feeling in markets that the latter was particularly important as investors fled bonds. Away from this most of the worst-performing stocks came from the disruption or high growth technology stocks; Zoom, Crowdstrike, Snap Inc, Peleton, Zillow, Pintrest and Wayfair fell double digits with others like Salesforce, Etsy and Moderna way off highs recorded. This year, though, the dispersion in performance within just the technology-enabled companies has been stark but the overspill is something that investors will have to deal with too. It's another reason why we ask investors to be patient and long-term as you can have periods where the value in change is hard to reflect. 

What is happening in the US?

The start of 2022 feels very much like Markets are hanging on every word of the Federal Reserve. The December policy meeting showed Fed officials were concerned about inflation, saying the pace of price increases and supply bottlenecks could continue well into 2022. Together with a tight labour market, the Fed might need to raise interest rates and reduce its holdings of Treasury bonds and mortgage-backed securities sooner than expected. With US consumer price growth above 7% for December, this served only to stoke the flames and Fed Chair, Jay Powell, has warned “high inflation is a severe threat to achieving maximum employment” and reaffirmed the Fed’s willingness to move away from the highly accommodative policy that have underpinned the pandemic recovery. Despite the potential for inflation to upset the employment applecart going forward, the US unemployment rate continues to drop and fell by another 0.3% in December to 3.9%, close to its pre-pandemic level of 3.5%. All eyes will be on March where it seems likely that the first US rate hike will happen, and economic stats should have moved away from the initial Omicron shocks.

What is happening in the UK?

It is a similar story in the Eurozone and UK with higher-than-expected 5.0% inflation in the EU in December, a new record high. Energy prices were 26% higher than a year earlier, although this was a slight slowdown from the previous month The latest data could add pressure on the European Central Bank (ECB) to raise interest rates and make strides away from negative bond yields. In the UK, house prices surged 9.8% in 2021 though, with the Bank of England having already tightened policy with a modest but noisy rate hike in December. It seems likely that the Bank of England will take account of overseas monetary policy movements as it formulates what next.  

Against a background of uncertainty regarding inflation, interest rates and valuations you might think that it’s a time to be fearful. However, if 2020 showed anything it is that change brings opportunity and we expect that theme to continue in 2022, albeit with more noise and volatility in the short-term.

December 2021 - Hope for a peaceful festive period

It was a stormy end to November in many ways with weather warnings and stock markets both in the red. Market sentiment shifted dramatically with progress on growth and focus on improving inflation trends, trumped by a glimpse of renewed pandemic panic. There is certainly a sense of déjà vu with Christmas plans once again at the mercy of COVID-19. The emergence of the Omicron variant bumped the pandemic back up the list of investor concerns, denting cyclicals with aviation, energy and hospitality stocks once again at the mercy of news flow around the new variant, its transmissibility and vaccine efficacy.

Initially, the market reacted particularly poorly to the news of the inevitable first case in the US, triggering a 3% intraday swing into losses on the day. There are also cases in China and given Beijing’s zero tolerance approach thus far, this could have an outsized impact on the global economy supply chain issues, particularly through port closures. While this raises the potential for Omicron to intensify some of the inflationary issues we are already facing, work from home is typically a deflationary factor. Latest figures show US inflation already running at 6.2% year over year – the highest level since 1990. It’s a similar story in the Eurozone which recorded an annual rate of 4.9% in November, the highest level since relevant records began in 1997. That said it is worthwhile highlighting these figures are backward looking.

All this leaves central bankers in a quandary – accelerate policy tightening to counter inflationary pressures or hold back to help protect the economic recovery through the impending Omicron wave?

What is happening in the UK?

There is growing speculation that the Bank of England will hold off on raising interest rates this month because of the uncertainty about Omicron. Meanwhile, it appears the government is becoming increasingly concerned about the spread of the variant and may look to implement new restrictions, though these could be limited in scope and may prove a tough sell in light of the rumbling allegations of Downing Street Christmas parties last year.

What is happening in the US?

In the US, interest rate expectations fluctuated through the month before spiking back up as Chairman Powell informed Congress that the Fed would discuss whether they should bring forward the tapering of monetary policy support. Bond purchases are currently scheduled to end in June 2022, but Powell told a Senate committee that given the strength of the economy and inflationary pressures, it was appropriate “to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner.”

Away from macro-economic factors, companies remain in very good health on the whole, the exceptions to this being businesses with supply chain issues or where improvements in operational gearing are required (particularly relevant to hospitality where volumes help offset fixed costs).

US companies led the way in terms of earnings ‘beats’with a wide range from Estee Lauder to Intuit showing sales and profits above expectations. Closer to home, housebuilder Berkeley highlighted the strong trading environment with sales back to pre-pandemic levels despite many investors' fears about apartment building and the London focus of the company. IRN-BRU manufacturer A G Barr may have used COP26 as an opportunity to sell to overseas influencers, but it was domestic trading that positively surprised. While very different businesses, both benefit from strong balance sheets and have had the ability to invest in the pandemic period which is differentiates and is an advantage that has paid dividends in the reporting period.

Looking forward

While the pandemic has returned to the front pages, we usher in 2022 with a degree of cautious optimism. Vaccines and advances in treatments offer protection and some solace against the threat of a new variant, as do early studies from South Africa which point to less a severe health outcome. We have seen a quick recovery in markets as the initial wave of panic has subsided and though not a straightforward path, the global recovery continues.

November 2021 - COP26 Special Report

As the clocks roll back in the UK, the world’s attention turned to Glasgow and the 26th UN Climate Change Conference of Parties (COP26) in search of solutions that would potentially limit or indeed roll back the climate challenges that we face.

At the time of writing, pledges on deforestation, methane emissions and coal use, have all been announced to a mixed reception. The good news of course is that pledges are now aligned with temperatures rising by 1.8 degrees this century rather than 2.7 degrees as had been the case before the conference. It’s not the 1.5% which was targeted back in Paris, but it is progress. India’s 2070 net zero target is more significant than it may sound – to date they have refused to set goals - and the 2030 Methane pledge is a positive step.

In terms of the bad news though, there were still not enough pledges to meet the $100 billion of climate finance needed for the developing world. Also, there were hopes for more definitive action on eliminating the use of coal, whilst the much lauded deforestation pledge has slightly unravelled since being announced, with Indonesia and Brazil back-tracking. The glaring absence of Russian and Chinese leaders who opted to stay away (much to the chagrin of President Biden) has also undermined efforts.

With no small irony, US diplomatic efforts were split between COP and trying to persuade OPEC+ to increase crude production to limit the financial impact of oil price increases. However, OPEC+ refused to increase production by more than the planned 400,000 barrels arguing the world is in fact well stocked and the higher oil price is less to do with shortages and more in sympathy with higher coal and gas prices.

What is happening in the UK?

Rising energy prices combined with unprecedented government borrowing, supply chain disruption, and surging inflation forecast to reach 4.4% next year, formed the backdrop for Rishi Sunak’s autumn budget. Yet, with economic growth forecasts more optimistic than six months ago, Sunak moved away from the March budget’s focus on protecting people’s jobs and livelihoods to one of investing in public services and infrastructure.

After already freezing tax thresholds and increasing national insurance and dividend tax rates, the Chancellor spared investors and pensioners from further tax hikes. At the same time, he proposed new fiscal rules that would commit the government to balance the books and reduce national debt. Though the budget might have been positioned for higher interest rates, expectations have since been pushed out after the surprise news the Bank of England’s Monetary Policy Committee voted against tapering and rate hikes.

What is happening in the US?

Meanwhile across the Atlantic, things did go according to market expectations with the Fed confirming tapering will commence mid-November with asset purchases reducing by $15 billion per month. Fed Chair, Jay Powell was keen to stress that tests for rate rises differ from their taper tests – perhaps to dampening expectations that a rate hike will follow in short order. If jobs data continues to surprise on the upside, however, and the US economy continues to strengthen, Powell may not be able to fight the tide for much longer.

In markets, long awaited congressional approval for Joe Biden’s infrastructure plan lifted US equities to record highs with energy and materials leading the way in this phase. The other catalyst for performance was Q3 earnings season where the news has generally been good. Sales growth has been in the main strong although some specific examples have exposed the pandemic sales boost as unrepeatable (Peloton). More often the focus has been on capacity and the extent to which it will impact price or even sales through lack of availability. Amazon sounded positive on stock availability but were more cautious on labour costs. Some retailers have continued to warn of potential shortages and encouraged consumers to shop early, although such warnings are somewhat self-serving.

What is happening internationally?

Elsewhere, Fumio Kishida is on a roll after ascending to the role of Prime Minister just over a month ago, he now has not only the backing of his party, but also of Japanese voters, winning big in the recent election to solidify his position. This should embolden Kishida to ramp up stimulus efforts and markets reacted positively to proceedings. In China, economic output markers have been strengthening but the Chinese government’s more interventionist approach has investors mainly on the side-lines.

What is to come?

Looking ahead, returns over the coming quarters may be more subdued compared to those outsized returns enjoyed by equity investors since this bull market began. That said, we still believe it is too soon to be certain that the global equity market has hit a peak. Corporate profits will likely keep going up on the back of a strengthening global economy and earnings momentum from change.  The main challenge to the positive equity environment is the duration of this pocket of inflation seen around the world, any extension of expectations is likely to lead to volatility. 

October 2021 - Petrol panic, inflation jitters and tight supply chains– has Halloween come early? 

In September, the toilet roll hoarders of 2020, turned their attention to the petrol station forecourts with jerry cans at the ready, as Government pleas not to panic buy fell on deaf ears. Captain Mainwaring of Dad’s army fame would be spinning in his grave! Away from the detail of this news noisy event, this is another example of tight supply chains which is something that will take time to adjust to, so it is wise to expect more and, as has been highlighted at the Conservative Party conference this week, the government are open to higher wages being an acceptable outcome in these cases.

This inflation anxiety has created some concerns about companies’ earnings, so those who are proving adept at delivering despite challenges and protecting margins are faring better than most. Ferguson, the world's leading specialist distributor of plumbing and heating products, issued good results reflecting the company’s strong pricing power. Others continue to benefit from the return of high street retail with Next and Greggs increasing profit guidance. Despite being well established both have been restless and have invested heavily during the last two years and are examples of the opportunities for growth from change even in the most challenging of sectors

China crisis continues as the gap between rich and poor expands

Inflation jitters aside, another cause of angst has been the unfolding debt crisis in China. Property construction helped China reach its historic growth ambitions, but property speculation has contributed to the widening gap between the Chinese rich and poor. Underpinning much of this is China’s giant property developer, Evergrande. Back in 2017 Xi Jinping announced that houses were for living in, not speculation. Since then, the business has not changed continuing along an expansionary path in contradiction to political messaging.
We know that the Beijing recognises Evergrande as systemically important and the authorities have already shown, by the way that they handled the default of Baoshang Bank in May 2019, that they can step in to prevent contagion. Though the global impact of the crisis may be limited, it has spilled over to the supply chain with the likes of lift maker, Kone, a beneficiary of office and apartment block building in Chinese cities on the back foot recently.

US swerves disastrous default and bond yields continue to creep up

With Halloween around the corner, headlines from the US warning of defaults must have left some hiding behind the sofa! All is not as it seems, however, and related to political wrangling over the need to raise the debt ceiling by mid-October. Ultimately, Senators have decided to kick the can down the road by agreeing to a temporary ceiling lift until early December ensuring a disastrous default is avoided… for now. It has been an unwelcome distraction for the Biden administration as they look to push on with two key pieces of legislation – the $550 billion hard infrastructure package and $3.5 trillion social spending bill which are gridlocked in Washington.

On the economic footing, treasury yields have been rising for the past two months partly because the Fed has brought forward its rate guidance with inflation proving to be stickier than had been assumed. The Fed has since raised its rate projections despite downgrading its expectations on growth. If we see decent economic growth over the next couple of quarters, it would not be surprising to see the Fed raise its rate projections further. This should see US bond yields continue to edge higher and the rising yields is already weighing on the relative performance of growth vs value.

Nightmare negotiations for a new German chancellor

It’s not just the US and UK living under the cloud of inflation. Germany reported its highest figures in almost 30 years (4.1% in September) with supply chain issues and imported energy prices likely to give the inbound chancellor a few headaches. But who will that be? Angela Merkel’s party, the Christian Democratic Union, now lead by Armin Laschet, suffered a humbling defeat at the hands of Olaf Scholz’s Social Democrats. With lengthy coalition negotiations ongoing, it appears Sholz is edging closer to the top job.

Can Japan’s new PM make it past November?

It was a more cut-and-dried affair in the race to be Japan’s new PM, meanwhile, as the Liberal Democrat Party leadership race concluded with former foreign minister, Fumio Kishida seeing off rival Taro Kono. Before he gets too comfortable, Mr Kishida will have to go to the public in a new general election in November, and the incumbent will be hoping that improving vaccination rates can help avoid another winter dogged by COVID outbreaks.

Bumps expected

Whilst the added volatility in markets has made for an uncomfortable September, this may well represent a healthy pullback in risk-appetite. However, weak sentiment, high cash levels and a still robust economic outlook leave equities in relatively good shape though bumps in the road are to be expected as we head through the autumn.

September 2021 - A change of season and a change of pace for economies

As the verdant leaves of summer begin to take on the auburn hues of autumn, the economic recovery looks to be following a similar path to the seasons, with surging growth through spring and summer beginning to turn slightly as we enter September and economic indicators roll over. The PMI’s (Purchasing Managers Index), a closely tracked set of forward looking economic data, showed a moderation in the rate of growth in August. The composite PMI's, which include both manufacturing and services, dipped more than the consensus expected continuing a trend of deteriorating economic surprises that has been playing out of late.

What is happening in the US?

In the US, manufacturing new orders declined, but what stood out most was the sharp decline in the services PMI, following on from a big decline in consumer confidence. Part of what is driving the decline in US growth momentum is the fact that the country is going through another serious COVID wave, and with more limited vaccine protection than other developed nations  wrestling with Delta. It is not inducing the mitigation measures that we saw in previous waves, but it is clearly hurting confidence in the very short term.
With this Covid backdrop in mind, US Federal Reserve Chair, Jerome Powell, used his long anticipated speech at the Jackson Hole symposium to signal that while the central bank could begin dialling back its support for the economy later this year, interest rate hikes are still a long way off. The Fed has repeatedly stated that it will maintain its pace of asset purchases until it sees ‘substantial further progress’ towards its goals of 2% inflation and maximum employment. On Friday, Powell said the first of these thresholds has been met, and clear progress has been made on the second.

Powell reiterated his view that the recent rise in inflation will prove temporary, and insisted that any tapering of economic support would not be a direct signal to increase interest rates. (Higher interest rates are a headwind for stocks because bond yields rise, making stocks look less attractive in comparison.) US stocks responded positively, and the S&P 500 and the Nasdaq hit new record highs at the end of the month. August was the S&P 500’s seventh consecutive month of gains – its longest winning streak since a ten-month run ending in December 2017. The rally was broad based with 10 of the 11 sectors rising and valuations underpinned by stellar corporate earnings growth.

Afghan crises continues

Meanwhile, the Afghanistan crisis grabbed the headlines and despite widespread criticism of the timing and execution of the withdrawal of troops, the operation has now concluded with Joe Biden unwilling to extend the deadline for extraction despite pleas from other G7 leaders. The hurried exit brings to an end the US’s 20 year military presence in the country, signalling a shift in US foreign policy away from the nation building efforts of the past two decades. At home, pressure has been mounting on Dominic Raab, who was on holiday in Crete as the crisis in Afghanistan escalated and has since acknowledged that “with the benefit of hindsight” he would have returned home sooner.

What is happening in the UK?

On the domestic front, we saw fairly sizeable drops (albeit from highly elevated levels) in the leading components of both the UK manufacturing and services PMIs, following on from data that showed retail sales rolling over. But the data hasn't been all disappointing in the UK. Order book volumes hit a multi decade high and employment indicators remain strong. While it's true that these indicators have been propped up by supply bottlenecks and lack of labour supply, they also are indicative of a strong demand backdrop. Evidence of the supply side issues can be seen in UK supermarkets who are warning of food shortages which could jeopardise Christmas stock with the ongoing dearth of HGV drivers disrupting supply chains. Despite the near term challenges facing the sector, private equity firms are eyeing deals with Morrison’s accepting a takeover offer from US firm, Clayton, Dubilier & Rice whilst Sainsbury’s is also rumoured to be a takeover target.

What is happening internationally?

Business activity in the eurozone continued to grow in August at one of the strongest rates of the past two decades, despite supply chain delays. Growth in the services sector overtook that of manufacturing for the first time since before the pandemic, as lockdown restrictions continued to ease. In Asia, Japan wrestles with another major COVID wave, with cases surging to an all-time high. The Nikkei index fell to an eight-month low earlier in August, due in part to news from Toyota that it was slashing global production by 40% next month, before rallying on the news that Yoshihide Suga would be stepping down as Japan’s prime minister after just a year in office. His popularity plummeted after failing to control the pandemic, despite staging a successful Olympics, all things considered. The news pushed Japanese stocks higher as traders bet that the change of leadership may lead to greater stimulus measures.

In China the regulatory clampdown continued with authorities releasing a five-year plan to strengthen regulatory control over key sectors of the economy. The plan describes the need for additional legislation to govern the technology and education sectors and resolve antitrust issues. It also allows the government to scrutinise foreign stock listings and anti-competitive practices. The plan was closely followed by the issuance of new regulations for sectors such as smart cars and online insurance. It follows the country’s recent crackdown on the technology and private education sectors, which has knocked billions of dollars off the valuations of some of China’s largest technology companies. Hong Kong’s Hang Seng fell into bear market territory as the index fell to a level more than 20% below its mid-February peak.

Looking forward

So, the global recovery continues but at a reduced pace and at different rates across the globe. With some of the initial exuberance behind us, it may not just be the autumn weather that turns blustery, with bouts of equity market turbulence a possibility. However, it is worth highlighting that businesses are in much better financial shape and many still have the benefit of change and investment made last year to come.

August 2021 - Nations watch eagerly as the UK reopens in the face of the Delta variant

As we move into August, European markets have seen their momentum checked by risk aversion stemming from China. It leaves most developed markets roughly flat over the month of July, during this typically more volatile time of the year we can be satisfied with that but reflecting the source of concerns, Asia has had a much more challenging time.

The centenary celebrations of the Chinese Communist Party took place earlier this month in a potentially pivotal moment for policy. China has achieved extraordinary growth for three decades since the reforms of Deng Xiaoping, but now Xi Jinping has a broader agenda which encompasses financial stability, national security and more equal distribution of wealth and income.  He has already begun to exert influence on the e-commerce sector with announcements from China's antitrust regulator around pay guidelines for food delivery platforms, like Meituan, whilst Tencent announced it has suspended user registrations so it can upgrade systems to align with regulations.

Headwinds for Asia extend beyond domestic China as, across the region, there are still low levels of vaccination due to a combination of hesitancy, scarcity and complacency. Where vaccination rates are higher there are concerns over the efficacy of the Sinovac vaccine which China has used to win hearts and minds in the region. This is believed to be lower than foreign equivalents and its resilience against the delta variant is unclear. So, the Covid experience in the east stands in contrast to that of the west where the data continues to suggest that the latest wave of UK infections has peaked. The reopening in the UK in the face of the Delta variant has been eagerly watched by other nations and hopefully evidences that heavily vaccinated regions can tolerate higher infections briefly without overloading healthcare systems.

What is happening in the UK

At home, the growth outlook remains strong though labour and materials shortages have impacted businesses, whilst concerns remain over operating difficulties because of the ‘pingdemic’, where people are unable to work because they have received notification on their phone saying they have to self-isolate. Under pressure, the UK government changed its stance and said some double-jabbed staff at some critical organisations would be allowed to take tests to keep coming to work, rather than self-isolating. Still, the EY ITEM Club forecasts that the UK will see GDP growth of 7.6% this year, the fastest growth since 1941. It forecasts 6.5% growth in 2022.  Developing this further, it said the expectations of a bounce-back in consumer spending and supportive macroeconomic policy contributes to the largely positive economic outlook. But EY adds that questions remain over inflation prospects. It said inflation will be 3.5% by the end of 2021 which is above the Bank of England’s long-term target. With inflation concerns rumbling on in the background, sentiment at the Bank of England turned slightly more hawkish with Deputy Governor Dave Ramsden announcing he could see “the conditions for considering tightening being met somewhat sooner than I had previously thought”.

What is happening in the US?

In the US, the S&P 500 hit all-time highs earlier in July as US Treasury yields dipped back to levels last seen in February. Of course, the lower bond yields go, the better it is for financial assets.  This is partly because they reduce financing costs and partly because they increase economic activity, but largely because they expand valuations. In a low interest rate environment, the lack of ways to preserve wealth is supportive of stocks. Lower bond yields particularly benefit those assets where a large share of the returns they generate come later in their lives – i.e. growth. So, we have seen some healthy outperformance of growth, technology and the US market (which is rich in growth and technology) on that basis.

In this supportive environment, and with earnings season in full swing, companies are typically reporting well ahead of analyst forecasts. However as is sometimes the case with the stockmarket there was a case of travel and arrive in some share prices.  Prominent technology names reported bumper numbers with Microsoft and Amazon’s cloud businesses, Amazon AWS and Microsoft Azure, both growing and effectively stretching their leads in this key area of infrastructure.  Stat of the earnings period was that Apple’s Air pods generated more revenue in 2020 than Spotify and Uber combined. The earnings bonanza extended beyond the tech leaders as a raft of companies including Johnson & Johnson, Union Pacific and Verizon, beat expectations. To be fair favourable comparisons from the equivalent quarter of 2020 has helped but encouragingly cash generation and balance sheet strength showed through.  From here it is reasonable to expect the rates of like for like growth to moderate, but there are still high hopes for the rest of the year and beyond as change and investment implemented meets improving consumer activity and confidence.

July 2021 - Freedom day and beyond

As we pass the half-way point in 2021, the pandemic lingers on with the first 'Freedom Day', 21 June, pushed back to 19 July. Ahead of this, the UK Government has ramped up efforts to get as many adults double jabbed as possible with the link between new cases and subsequent new hospitalisations dramatically weakened when people are fully vaccinated.

Indeed, though the Delta variant continues to proliferate through the country as lockdowns have eased, it appears the vast majority of cases are amongst younger age groups, and whilst this remains the case, any return to greater restrictions appears unlikely.

That would certainly appear to be the message Sajid Javid was keen to project after replacing Matt Hancock as Health Secretary, using his first speech to Parliament to say, “we know we cannot simply eliminate it; we must learn to live with it”.

Furlough measures too are beginning to be wound down with the Government now paying 70% of wages instead of 80%, with the 10% gap now the responsibility of employers.

Inflation increase causes a stir

Though still an important factor, Covid-19 has been supplanted by inflation expectations as the key determinant of market movements with jitters around potential overheating of the economy, rampant inflation, and central bank policy weighing on investor sentiment.

The US core personal consumption expenditures price index, an important inflation gauge, rose by 3.4% in May from a year ago – the biggest increase since 1992. The Bureau of Economic Analysis said headline inflation, which includes volatile food and energy prices, rose by 3.9% from a year ago – the biggest increase since August 2008, just before the worst of the financial crisis hit. The increase partly reflected base effects from a year ago, when prices were supressed by the pandemic, as well as supply chain disruptions and growing demand as the economy reopens.

Markets rise to all-time highs!

Despite this, global equities rebounded towards the end of June after more dovish comments from the US Federal Reserve whilst Republican and Democratic senators reached a bipartisan agreement on a new US infrastructure package.

The c.$1tn infrastructure package allocated to roads, bridges and broadband over the next 8 years is well below the original $2.3tn proposed in March but represents a win nonetheless for President Biden who is putting into action his promise to work across the aisle and attempt to put an end to the polarisation which stymied progress in the past.

With this backdrop, the Vix volatility index – a measure of investor fear – has tumbled to the lowest levels seen since COVID-19 started to rattle markets with the S&P 500 and the Nasdaq reaching new all-time highs to close out the first half of the year (the second best first ½ year since the dot-com bubble!) Interestingly, while the S&P 500 rose 14.4%, the more economically sensitive Russell 200 index increased 17.1%.

Sector wise YTD, Energy led the pack in the US +42.4%, followed by Financials +24.5% and Real Estate +21.7%, which is indicative of the vaccine driven relief rally these industries desperately needed.

What’s happening in the UK?

The UK’s FTSE 100 was also lifted by the Bank of England’s assertion that while inflation could reach 3% in the coming months, this would prove to be a temporary phenomenon. The Bank’s Monetary Policy Committee indicated it would prefer to allow the inflation wave to break and recede rather than intervene at this stage, voting unanimously to retain interest rates at 0.1%.

Are they right to keep things unchanged or will outgoing Chief Economist, Andy Haldane’s predictions of 4% this year, be proved right in the fullness of time? For now, markets appear happy to accept what monetary policy makers are telling them with sentiment echoed by the European Central Bank, boosting the pan-European STOXX 600.

What is happening internationally?

Over in Asia, with the much maligned and delayed Olympics just around the corner, Japan’s vaccination drive is gathering pace though potential supply constraints could derail progress and with business activity still in decline, the near term outlook remains uncertain.

China’s central bank increased its injection of short term cash into the financial system for the first time since March amid growing demand for liquidity. Meanwhile, President Xi marked the 100th anniversary of the founding of the Chinese Communist party with a nationalistic address in Beijing. He praised the importance of the party and rigorously defended sovereignty, warning that any interference would be met by a 'great wall of steel'.

The FT recently reported that US & Japan have been secretly discussing methods of repelling a potential Chinese invasion of Taiwan, and it was notable that President Xi stated that unification with Taiwan remained “a historic mission and unshakeable commitment of the Chinese Communist party”. While the mood at the centenary was celebratory, Chinese domestic markets were less enthused by the presentation, as there were expectations of more supportive rhetoric.

June 2021 - Market momentum - the UK recovery continues

Investment markets have been particularly kind during the first four months of the year. No doubt there will now be much discussion in the press of selling in May, going away and coming back on St Ledger’s day! Looking at Macro economic factors, February’s bond yield spike, and the associated volatility, seems distant and the last two months have been unexpectedly calm with interest rate messaging remaining highly supportive. Looking at fundamentals, equity volatility has been a little elevated, as the earnings season produced an overall picture of results ahead of expectations but with some 'travel and arrive' share price movements within this, particularly in the US. 

What is happening in the US

Staying with the US, in addition to the $2.2 trillion stimulus package and the much debated $900 billion package passed under President Trump last year, Joe Biden has added to the fiscal arsenal with the $1.9 trillion package passed into law in March. This was followed quickly by two further proposals, with the key difference from the first three packages already passed, being that the spending is meant to be paid for by tax hikes. The first proposal - the American Jobs plan - amounts to $2.2 trillion in new spending. It’s focused on hard infrastructure (bridges, roads, etc.) which Biden plans to pay for via corporate tax hikes. This was followed up by a 'soft' infrastructure proposal - the American Families Plan - totalling $1.8 trillion.  Included in this package is spending on education, childcare, and paid family and medical leave which Biden plans to pay for with tax hikes on high earners and wealthy individuals.

A better outlook for corporate profits

The increased taxation burden led to concerns over the impact it would have on the markets. However, a better outlook for corporate profits, as more regions reopen their economies and some of the pent up demand gets deployed, suggests a recovery in earnings has further momentum and will help support valuations. Developing the comments touched upon above about the positive earnings season, the trend is perhaps best illustrated by looking at the outcomes at two different high-profile businesses; Unilever’s Q1 revenue growth was ahead of target, lifting fears about emerging market economies and, underlying the confidence, the company announced an unexpected $3 billion share buyback. Amazon was one of the most obvious lockdown winners, but the company posted another strong set of numbers benefitting from the cloud computing revolution which helped offset tough like for like sales comparisons.

What is happening in the UK

Back in the UK, Labour suffered a thumping loss in the Hartlepool by-election in a continuation of trends established in the 2019 General Election with traditionally solid Labour seats in the North of England falling to the Conservatives. Results from English council elections also captured a Tory swing which goes against the conventional wisdom whereby the party in Government takes a beating in the local elections. Despite the Government being in power for 11 years and recent pressure over cronyism and the PM’s flat refurbishments, Labour failed to win back working-class Leave voters and pressure is mounting on Sir Kier Starmer with the route back to power looking a long way off.

Scotland’s constitutional future

In Scotland meanwhile, the SNP increased their representation in the Scottish Parliament and, with pro-independence Greens also doing well, there is on the face of it an overall majority in parliament in favour of a new referendum on Scotland’s constitutional future. However, the same was true in the previous parliament and the UK Government will point to the SNP’s failure to gain an outright majority as justification to kick “indyref 2” demands into the long grass. How long this remains a tenable position could depend on the speed and shape of the COVID-19 recovery with Nicola Sturgeon looking to kick off a fresh independence debate as soon as the immediate crisis has abated.

UK Economy: Bank of England forecasts highest growth rate in 70 years

In purely economic terms, it appears that the UK recovery is gathering pace, with the Bank of England upgrading its growth forecasts for the UK to 7.25% for 2021 (previous estimate was 5%) which would mark the highest growth rate in 70 years. Governor, Andrew Bailley confirmed inflation is likely to remain under control over the longer term though they expect a spike towards the end of the year. Rates remain on hold at 0.1% with any talk of negative rates now in the rear view mirror.

Internationally: Coronavirus surges through India and Japan

As the reboot in the UK and US gains momentum, other major economies continue to stall. India is reeling from a savage surge in Coronavirus cases which overwhelmed health services, with PM Narendra Modi coming under increased criticism over his handling of the second wave. Japan, just weeks away from hosting the Olympics, is itself struggling though a third wave of infections which has impacted relative equity performance as investors gravitated towards countries further ahead in terms of vaccinations and recovery.  A big issue is that after a series of scandals over the past 50 years, vaccine scepticism is Japan high. As such, the Japanese government has moved cautiously on the approvals front in order to build confidence among the public. The downside to that approach is that Japan’s vaccination rate is well behind that of the rest of the developed world.

A record leap for China’s economy but tension continues over human rights

On a more positive note, Chinese economic output leapt 18.3% year on year – the fastest rate on record – as global activity rebounded. That said we have seen a steady stream of headlines emphasising the new tensions that exist between China and the rest of the world. This includes terse statements coming from the G7 criticising China over human rights, accusing it of undermining democracy in other countries and pointedly recognising Taiwan (the EU refused to ratify an investment agreement which had been reached at the end of 2020 citing the same issues).

April 2021 - The UK Government‘s reopening plan is well under way

What is happening in the UK

As an action packed first quarter draws to a close, investors will be hoping that the dark months of winter marked the nadir of the Coronavirus Pandemic with brighter days ahead. In the UK, latest studies show that half the population now have COVID-19 antibodies as the vaccine roll out continues at pace, though lumpy supplies could slow progress in the short-term.However, with most of the vulnerable population now inoculated and hospitalisation figures continuing to fall, the UK Government’s reopening plan is well under way with rules around outdoor gatherings loosened and non-essential shops and hospitality venues beginning to reopen. In tandem, Chancellor Rishi Sunak’s eagerly awaited Budget focused on keeping business afloat in the interim, with furlough measures extended out until the autumn and any tax rises to deal with the mounting public debt pushed out until 2023 with Corporation Tax rising from 19% gradually to 25%.

Savings soar for UK households but uncertainty for some sectors continues

With this supportive fiscal backdrop, investors are watching economic signals for clues as to the shape of the recovery. Recent data from the Office of National Statistics showed the UK household saving ratio (average percentage of disposable income that is saved) rose to a record high of 16.1% in the final quarter of 2020, fuelling hopes that economic growth will receive a welcome boost, lifting cyclical stocks, which had been out of favour through much of last year. Interestingly appetite for Deliveroo’s long anticipated IPO has fallen flat, perhaps partly due to concerns over worker rights and corporate governance though investors keeping their powder dry may also point to potentially weakening demand as post-lockdown consumers return to bars and restaurants. The travails of Deliveroo strike a chord with the wider rotation from the tech/growth winners, which dominated last year’s recovery, into those areas worst hit by the pandemic and which stand to benefit the most from an end to restrictions. Some sectors however remain in the dark with travel and aviation facing continued uncertainty as the UK wrestles with easing foreign travel restrictions in the face of rising cases on the continent and the threat of new variants to progress at home.

What is happening in Europe

Europe’s sluggish vaccination programme continues to be plagued by supply issues and concerns over the safety and efficacy of the AstraZeneca jab. Though given the all clear by the European Medicines Agency, misgivings remain, with Germany suspending use of the jab in under-60s whilst blood clot concerns are investigated. Meanwhile, case numbers continue to head in the wrong direction prompting France’s President Macron to announce new lockdown measures, denting short term growth expectations.

What is happening in the US

In the US, hot on the heels of his $1.9tn covid recovery package, President Biden has unveiled his latest plans to reshape and revitalise the US economy following the pandemic, with a $2tn infrastructure spend announced alongside corresponding corporation tax rises (increasing the rate to 28%). His ambition was clear, calling it the biggest public investment programme since the creation of the interstate highway system and the Space Race of the 1960s. As usual however, this sets the stage for weeks of delicate negotiations on Capital Hill, given Democrats hold slim majorities in both chambers of Congress.

A balancing act for the US Federal Reserve

Biden will be pleased with the continued signs that the US economy is gradually recovering, as ADP private payrolls increased 517,000 in March, the most in six months, while the Conference Board Consumer Confidence reading for March was 109.7, well above consensus estimates. With US economic data strengthening, concerns over inflationary pressures linger on, pushing treasury yields higher and catalysing the rotation from growth to value. Fears that the mountain of monetary and fiscal stimulus could cause an already strengthening economy to overheat will keep the Federal Reserve on its toes, with Chairman, Jay Powell, reaffirming the Fed’s commitment to low interest rates and a more flexible approach to inflation targets in an effort to assuage market concerns.

China flexes its muscles

Biden’s spending plans have been cultivated with a view to redressing perceived competitive advantages built up by China which has stolen a march on western economies over the past year having successfully supressed Coronavirus. Tensions between the world’s two largest economies remain high with Nike one of a number of companies to face the wrath of Beijing after airing their concerns over the treatment of Uighur Muslims in Xinjang. H&M faced a similar backlash whilst individual sanctions have been imposed on vocal critics of the Chinese regime, including former Tory leader Sir Iain Duncan Smith. With China flexing its muscles, there is a renewed focus on global supply chains and the recent blocking of the Suez Canal and the global shortage of semiconductors has given ammunition to those who argue globalisation has gone too far.

March 2021 - UK seeks a hopeful Spring!

March has heralded a start to some very small steps along the pathway toward 'normal' as we mark the anniversary of the World Health Organisation declaring COVID-19 to be a global pandemic. Few people would have foreseen the turmoil of the past year which has sadly seen over 125,000 British lives lost to Coronavirus whilst the UK economy shrank by 10% in 2020 with millions of jobs put in jeopardy. However, with vaccinations now reaching the arms of over a third of the UK population, the path to escape the clutches of this deadly virus, for now, remains on track.

The UK continues to enjoy a prominent position in the great inoculation race and emboldened by this progress, UK Government has signalled they will seek to end all Coronavirus restrictions by 21 June. Only time will tell whether Boris Johnson has made a rod for his own back or not but with the vaccination programme starting to have a meaningful impact on hospital admissions and deaths amongst the elderly, the country appears to be moving from the depths and despair of a long winter into a more hopeful spring. The same cannot be said for our European neighbours where case numbers are once again rising and vaccination programmes have been stymied by contractual and manufacturing delays, providing an early test for post-Brexit relations.

What is happening in the UK?

The UK government’s economic focus has shifted to an expansive agenda for a global United Kingdom beyond the pandemic, with the G7 and UN Climate Summit earmarked as important platforms for this message. Closer to home, Rishi Sunak presented his much anticipated Budget, with notable relief that pandemic support will remain in place for many months to come, and the inevitable tax increases needed to pay the COVID-19 bill have been deferred, for now. Inheritance Tax, Capital Gains Tax, and pensions remained unchanged in the Budget, with thresholds frozen until 2026 alongside income tax, which will be frozen for the same period after this year’s previously announced threshold increase. One big mover is Corporation tax, which is set to rise to 25% in April 2023, up from the current rate of 19%, for companies earning > £250,000. However, the Chancellor was quick to point out that 70% of businesses will be unaffected, and that the UK would continue to have the lowest corporation tax of the G7. In summary the Budget was tilted toward tax receipts benefitting from a recovery in incomes and values.

What is happening in the US?

In the US, President Joe Biden has made strides progressing his own agenda and to make the all-important impression of momentum in the first 100 days of office, pledging to vaccinate the adult population by mid-May. The debate in the US at present sits around the extent of and the reach of future stimulus for the economy from Government in addition to Central Bank support. Whilst the debate will likely continue for some time one thing seems certain - the approach of the Federal Reserve and others will be to keep interest rates lower for longer. Though Fed Chair, Jerome Powell, reiterated these assurances in his recent testimony to Congress, markets are concerned about the impact the proposed $1.9 trillion fiscal stimulus package could have on inflation. Worthwhile pausing on that number for little time -

One million seconds equal 11 and 1/2 days. One billion seconds equal 31 and 3/4 years. One trillion seconds equal 31,710 years.

There could well be many more correction phases to come in the months ahead, but it will probably take the Fed to start flagging a more hawkish stance before the equity bull market comes up against more sustained resistance. In the meantime, value stocks have outperformed in recent weeks, partly driven by the growth pullback, with investors taking profits in Tech and clean energy, but also by economic optimism. Banks, which are the biggest value sector, have really responded to the rise in bond yields recently. And with investors worried about high valuations, global banks are attracting inflows. Energy has also outperformed recently but this has been fairly weak in light of the big surge in the oil price, which probably reflects investor concerns around the long-term outlook for oil and gas companies.

What is happening internationally?

Away from the influences in the UK and US, China remains a point of reference and interest for stockmarkets and politics. Having been one of the global growth bright spots of the last 12 months, China is now showing signs its recovery is cooling, as the high-flying PMIs continue to roll over. However, the Government has recently emphasised its economic confidence, signalling a target of at least 6% growth this year at the National People’s Congress. The Party’s also signalled a renewed focus on achieving 'self-reliance' in a number of critical technology sectors as well as ambitious environmental goals, including reaching peak carbon dioxide emissions by 2030 and net-zero emissions by 2060.

Though these environmental aims are to be welcomed, wider debates about China’s approach to Rights, Governance and associated matters persist.  In this respect President Biden, and the wider international community, have a different challenge and will need to consider an alternative approach to that adopted by prior administrations if they want to encourage change.

February 2021 - The great inoculation race

As we move through the first quarter of 2021, it is a balance of acknowledging the societal impact of Covid which has been immeasurable and the heightened containment restrictions with the forward-looking news of the vaccine.

The widespread lockdown measures dramatically accelerated the digital revolution, with a shift to remote working, online shopping, digital entertainment, and even virtual exercise classes. This narrative was extended in extreme by recent coordinated movements of retail investors aiming to put a squeeze on short selling hedge funds by driving up the price of beleaguered stocks such as US retailer GameStop. Though the strategy was ultimately folly, with many smaller investors burned amidst the volatility, this erratic behaviour, and the move from GameStop to trading in the price of silver has prompted fears that Animal Spirits are on the rise.

Meanwhile, the collective effort by the scientific community in not only producing and rolling out approved vaccines but also increasing the potential choice of vaccines and combined outcomes has been extraordinary. The UK is leading the pack in the great inoculation race which offers the potential for a relaxation of restrictions. The same cannot be said for our European neighbours who have been stymied by contractual and manufacturing delays, providing an early test for post-Brexit relations. Global equities looked beyond near term doom and gloom to end the rollercoaster year on a positive note, with many markets around the world reaching record highs.

What is happening in the UK?

Sentiment has been buoyed further in recent weeks with the Bank of England and US Federal Reserve anticipating a sharp recovery in activity and employment once vaccination levels reach critical mass. A return to normality cannot come soon enough for struggling leisure and tourism businesses with UK government support measures, such as the furlough scheme, slated to end in Spring. The toll of the pandemic has already claimed several high profile victims with Debenhams and Arcadia leaving a large hole in UK high streets. The purchase of their various fashion brands, and jettison of their physical stores, by online competitors, Boohoo and ASOS shows the changing nature of retail in the UK in a microcosm.  In simple terms Boohoo and ASOS have the financial strength to take risk and invest at this point and this confidence hasn’t been restricted to these names but is starting to show through in a pickup in merger and acquisition and IPO activity. With regard to the latter the UK stockmarket welcomed, with some enthusiasm, Dr Martens and Moonpig as new entrants in the last month despite their “retail” narrative.

What is happening internationally?

In the US, President Joe Biden has made strides progressing his own agenda and to make the all-important impression of momentum in the first 100 days of office. The debate in the US at present sits around the extent of and the reach of future stimulus for the economy from Government in addition to Central Bank support.  Whilst the debate will likely continue for some time one thing seems certain - the approach of the Federal Reserve and others will be to keep interest rates and bond yields lower for longer even if this means accepting some higher levels of temporary inflation or unintended side effects such as the GameStop circus which would be much less likely in a world of lower restrictions and higher interest rates.

Away from the influences in the UK and US, China remains a point of reference and interest for stockmarkets and politics; economic activity remains robust and much above that reasonably expected in the circumstances, but this is balanced by events like the Ant Financial debacle and wider debates about China’s approach to rights, governance and associated matters.  In this respect President Biden, and the wider international community, have a different challenge and will need to consider an alternative approach to that adopted by prior administrations if they want to encourage change.

January 2021 - New year, new hope

As we enter 2021, you will be forgiven for wanting to quickly forget the previous year. The societal impact has been immeasurable and the heightened containment restrictions have been met with dismay.

That said, the collective effort by the scientific community in producing and rolling out approved vaccines has been extraordinary, while global equities defied the doom and gloom to end the rollercoaster year on a positive note, with many markets around the world reaching record highs.

The widespread lockdown measures dramatically accelerated the digital revolution, with a shift to remote working, online shopping, digital entertainment, and even virtual exercise classes. This has led to innovative, healthcare and technology centric businesses thriving, while economically sensitive industries have experienced a challenging environment.

What is happening in the UK?

In the UK, after years of negotiating, a last-minute Brexit deal was confirmed on Christmas Eve. This was broadly welcomed as it avoided the dreaded 'no-deal'; however, it has been criticised for “selling out” UK fishermen and leaving UK financial services without full access.

In addition, while expected, the increased bureaucracy will be a headache for businesses already on life-support from the effects of the pandemic. Despite this, the new set of ‘certainties’ should allow businesses to plan, and importantly invest, for the future which is positive. The government’s focus has shifted to an expansive agenda for a global United Kingdom, with the G7 and UN Climate Summit earmarked as important platforms for this message.

Closer to home, earlier this month Rishi Sunak announced an additional £4.6 billion support package for struggling businesses affected by the greater restrictions, with particular focus on retail, hospitality, and leisure companies. This has been received positively, but many have cautioned that the Chancellor must remain wary of a cliff-edge scenario in the spring as support measures such as the furlough schemes are ended.

What is happening internationally?

The big news in the US was the announcement of Joe Biden as the clear winner of the 2020 US presidential election. At the time of writing President Trump continues to challenge the result, and recent events in Capitol Hill have been concerning.

In Georgia, two Democrats have captured the incumbent Republican seats within the Senate. This is hugely significant as when confirmed, will result in a divided Chamber, with 50 seats for each party. As a result, Kamala Harris, the vice-president-elect, will have the power to cast the decisive vote.

The materialisation of the ‘blue wave’ gives Joe Biden the platform to implement his progressive agenda. In the near-term, expect greater fiscal stimulus to combat the pandemic, while longer term, spending may focus on infrastructure, clean energy, and education.

Away from the presidential election, on a geopolitical level, after taking a backseat, trade tensions resurfaced last year with the US Government laying the blame for the creation of the coronavirus squarely at the door of their Chinese counterparts, as well as Donald Trump targeting Chinese software companies deemed a risk to national security. While Joe Biden is expected to have a hard-line approach to relations with China, Beijing is hopeful that their relationship will be more predictable.

It will be interesting to see the evolving health of the US economy, particularly with concerning COVID-19 data, although, there was notable relief with confirmation of a new stimulus deal despite political tribalism.

A positive landscape for investors

As worrying as this outbreak remains, the prospects for 2021 appear brighter. If the past year has taught us anything, it is that predicting the course of a pandemic is difficult, however; effective roll-out of the vaccines, alongside continued technological innovation and a recovery in global economic growth should provide a positive landscape for investors.

Challenges remain, however, and the path to recovery is unlikely to be a straightforward one. Amidst such ongoing uncertainty, it is important to remain focused on the longer term picture, investing in a diverse range of assets across different geographies, whilst staying alert to opportunities, pitfalls and changing investment trends in the near term.

December 2020 - A new President Elect and a new vaccine ready to roll, makes for an action-packed December

It has certainly been an unpredictable and eventful year and December was no different to what had come before!

What’s happening internationally?

The protracted and divisive US Presidential Election appears to have reached the end game with Joe Biden announced as the clear winner, becoming President Elect until January when he gets the keys to the White House.

At the time of writing, a concession from President Trump has been suggested but has not officially materialised and thus far his litigious attempts to dispute the results, on the basis of voter fraud and irregularities, have failed to gain any traction and are not expected to overturn the current consensus of a Biden win.

Though Trump’s tenure appears to be coming to an end, one thing is clear - the pollsters once again underestimated his appeal and both he and Biden have amassed record numbers of votes with turnout at a dramatically higher level than has been seen in recent times. Consequently, the projected Democratic Sweep of the House, Senate and Presidency does not look likely to transpire, meaning any legislative ambition from the new president is likely to be stymied. The initial reaction was that this should be positive for Tech stocks, such as Facebook and Google, who feared a raft of new regulation if the Democrats took control of all three governmental branches.

The new political landscape in the US may also be detrimental to efforts to get a new fiscal stimulus package ratified in the near term, with Trump remaining in office until January, and the Republican-led Senate unwilling to agree to the larger package proffered by the Democrats. Joe Biden will be hoping both parties can begin to coalesce around a deal sooner rather than later. One thing that is clear and has helped markets push higher is that political risk and uncertainty seems to be reducing from the extreme levels that were reached at times in the Trump administration.

Timing is everything they say and news that Pfizer, Moderna and AstraZeneca are ramping up vaccine production and delivery following successful trials will be a timely boost to the President Elect but it will have the incumbent cursing his luck. Positive vaccine news flow has been heralded by global markets who reacted euphorically to growing hope that a return to normal life could be within sight, something that had seemed a little more distant as the nights draw in.

What is happening in the UK?

Indeed, the UK has become the first nation to give the green light for the Pfizer vaccine to be rolled out and the Government is turning its attention to the logistical headaches of mass inoculations. In the meantime, Governments at home and abroad will continue to walk the tightrope between economic harm and damage to public health. The widescale lockdowns in the UK of the past month have helped bring virus numbers back under control but further dented UK economic output in the run up to Christmas. This proved to be the final straw for Topshop owner, Arcadia, and Debenhams who collapsed into administration, becoming the highest profile casualties of the crisis and demonstrating that those brands who fail to move with the times, do so at their peril.

One positive has been that the Furlough Scheme has been extended through until March, marking a significant change of tact from Chancellor, Rishi Sunak. Perhaps an inevitability given his less than optimistic assessment of the UK’s economic outlook in his Spending Review which warned the UK economy is likely to shrink by 11.3% this year and unemployment could hit 7.5% (2.6 million out-of-work) next spring. As the Chancellor ponders how to pay for the Governments fiscal support with tax rises in his crosshairs, one measure has already been announced – the measure of inflation used to calculate index linked gilt repayments will be revised downwards from 2030, reducing the Government’s liabilities whilst denting investor returns with the lower based CPIH measure replacing the more favourable RPI.

In order to provide market stability central bank support remains abundant with the Bank of England voting unanimously to increase purchasing of UK Government bonds by a further £150 billion in early November (bringing the total quantitative easing program to £875 billon). The Bank kept interest rates at 0.1% and discussions of negative interest rates have been rebuffed for now.

What sectors have performed well?

One of the by-products of the Vaccine news is that this has changed the narrative and leadership within stockmarkets.  Whilst some of the online beneficiaries of lockdowns, such as Ocado in the UK, have fallen back as a result, big winners include the beleaguered aviation industry with British Airways owners, IAG, and engine makers, Rolls Royce surging following the announcement as investors eye an uptick in economic activity.  Notably, both announced equity finance to shore up their balance sheets prior to this news.

A further point of note is that recent failures of Debenhams and Arcadia are private businesses without equity finance options and where balance sheets were stretched at the start of the year. There has also been a change in the performance of markets, with positive momentum lifting the S&P 500 to all-time highs.  The more economically sensitive UK has outperformed the US and the more cyclical plays in Europe and Emerging markets have started to produce gains that many thought improbable.

Looking forward

Whether or not the vaccine can be rolled out quickly remains to be seen and UK stocks remain at valuations well below pre-COVID levels. However, it is important to remember that if a vaccine is distributed effectively, it could lead to a surge in activity in forthcoming quarters, as economies reopen. Through the year is almost over, we shall see what else 2020 can deliver in terms of newsflow and change!

November 2020: November brings fireworks and not just for the UK!

In what has already been an action-packed year, November managed to open with a bang!

What is happening internationally?

The protracted and divisive US Presidential Election appears to have reached the end game with Joe Biden announced as the clear winner, becoming President-elect until January when he gets the keys to the White House. At the time of writing, President Trump has not conceded defeat, disputing the results and filing lawsuits in relation to allegations of voter fraud and irregularities, a process which is not expected to overturn the current consensus of a Biden win. Though Trump’s tenure appears to be coming to an end, one thing is clear - the pollsters once again underestimated his appeal and both he and Biden have amassed record numbers of votes with turnout at a dramatically higher level than has been seen in recent times. Consequently, the projected Democratic Sweep of the House, Senate and Presidency does not look likely to transpire, meaning any legislative ambition from the new president is likely to be stymied.  

Positive news for Tech?

The initial reaction was that this should be positive for Tech stocks, such as Facebook and Google, who feared a raft of new regulation if the Democrats took control of all three governmental branches. The new political landscape in the US may also be detrimental to efforts to get a new fiscal stimulus package ratified in the near term, with Trump remaining in office until January, and the Republican-led Senate unwilling to agree to the larger package proffered by the Democrats. Joe Biden will be hoping both parties can begin to coalesce around a deal sooner rather than later. One thing that is clear and has helped markets push higher is that political risk and uncertainty seems to be reducing from the extreme levels that were reached at times in the Trump administration.

High hopes for a vaccine and return to normality

Timing is everything they say and news that Pfizer are ramping up vaccine production following successful trials will be a timely boost to the President-elect but it will have the incumbent cursing his luck. Pfizer’s announcement has been heralded by global markets who reacted euphorically to growing hope that a return to normal life could be within sight, something that had seemed a little more distant as the nights draw in. We should find out more at the end of this month but for now, Governments at home and abroad continue to walk the tightrope between economic harm and damage to public health.

What is happening in the UK?

Hopes of avoiding widescale lockdowns in the UK have been dashed as cases continue to climb and new England-wide restrictions have subsequently been introduced, further denting UK economic output in the run up to Christmas. One positive in this scenario has been that the Furlough Scheme has been extended through until March, marking a significant change of tact from Chancellor, Rishi Sunak.  However, unemployment figures – a lag indicator - continue to rise, and redundancies for the three months to September were a record 314,000. In order to provide market stability at this point Central bank support remains abundant with the Bank of England voting unanimously to increase purchasing of UK government bonds by a further £150 billion in early November (bringing the total quantitative easing program to £875 billion). The Bank kept interest rates at 0.1% and discussions of negative interest rates have been rebuffed for now.

What sectors have performed well?

One of the by-products of the Vaccine news is that this has changed the narrative and leadership within stock markets. Whilst some of the online beneficiaries of lockdowns, such as Ocado in the UK, have fallen back as a result, big winners include the beleaguered aviation industry with British Airways owners, IAG, and engine makers, Rolls Royce surging following the announcement as investors eye an uptick in economic activity. Notably, both announced equity finance to shore up their balance sheets prior to this news. There has also been a change in the performance of markets, albeit over a period of days, rather than a more deep-set trend. The more economically sensitive UK has outperformed the US and the more cyclical plays in Europe and Emerging markets have started to produce gains that many thought were highly unlikely.

An encouraging outlook

Whether or not this vaccine turns out to be the silver bullet remains to be seen and these stocks remain at valuations well below pre-COVID levels. However, it is important to remember that if a vaccine is developed and distributed effectively, it could lead to a surge in activity in forthcoming quarters, as economies reopen. We shall see what else 2020 can deliver in terms of newsflow and change!

October 2020: There really is less than 100 days ‘til Christmas!

With less than 100 days ‘til Christmas, yes really, it is worthwhile reflecting on what has happened in a busy 2020.  At the start of the year, stock markets continued their inexorable rise against a backdrop of US-China trade negotiations, Brexit, and challenged global growth. Then, as we moved through February and into March, the impact of the Coronavirus took hold, dominating the personal and economic landscape thereafter and affecting almost every sector of the economy. With a dramatic monetary and political response it did not take long for markets to shrug off the worst of those concerns, with the leader of that momentum the US S&P 500 which reached record highs at the end of August – the second fastest post-sell-off rally recorded since 1950. This narrative, however, betrays the fact that the recovery has been uneven, in what has been dubbed the K shape period.

On the downside, economically sensitive areas of the market such as energy and aviation were left reeling by plummeting demand and an uncertain economic outlook; this was most vividly seen through rights issues at British Airways owner IAG and more recently Rolls Royce. During the initial crisis in Spring, Shell announced it would cut its dividend for the first time since the 1940’s and has recently announced 9,000 job cuts and a renewed focus on the transition to green energy. Added to this, as has been widely reported, the retail sector has seen an accelerated change.

What sectors have performed well?

Such travails have been masked by the stellar gains in the technology sector, with these high growth stocks benefitting from secular tailwinds including the accelerated adoption of tech solutions at home and the workplace to help navigate lockdown restrictions. The seemingly inexorable rise of big tech has, however, lost momentum through September with investors wrestling with valuations and the uncertainty brought about by the looming US Election and a resurgence in virus cases. Tesla has seen its share price appreciate by 10x in the past year but underwhelming announcements at Elon Musk’s “battery day” event dampened investor expectations though it remains the world’s largest car company by market capitalisation having toppled Toyota earlier in the year.

What is happening in the UK?

The Bank of England kept interest rates at 0.1% and whist discussions of negative interest rates have been rebuffed for now the subject remains a point of debate. The Job Retention Scheme, due at the end of this month, will be replaced by a new scheme which will shift some of the burden onto employers. Unemployment figures, once the more comprehensive furlough scheme is withdrawn, will give a firmer indication of the health of the consumer and the trajectory for the UK economy but with daily case rates above even the highs of the initial wave, and Brexit negotiations stalling, the path towards economic recovery is more clouded than you would hope for at this point.

What is happening Internationally?

As the presidential debates get under way in the US and with the election fast approaching, widespread social unrest and criticism of the President’s handling of the pandemic have seen Trump’s Democratic rival, Joe Biden, take a commanding lead in the polls. Meanwhile, tensions with China have increased, though the ‘Phase 1’ trade deal signed in January remains intact. This despite Chinese imports of US goods – a key part of the deal - falling short of expectations. Fears that a second wave in winter could derail progress have seen the US Federal Reserve strike an increasingly dovish tone, signalling interest rates are likely to remain in their current 0-0.25% range even in the event of temporary inflationary pressures. This more flexible approach to inflation management represents a marked departure from decades-long monetary policy and caused the yield-curve to steepen with longer dated Treasuries selling off to account for potentially higher inflation eroding real returns over time.

In Japan, Shinzo Abe was replaced by Yoshihide Suga as Prime Minister and although the world’s third largest economy continues to struggle with deflationary pressures and a worse than expected contraction in GDP, the initial stockmarket reaction to this change has been positive. The broader macro-economic trend of deglobalisation also looks set to negatively impact the Japanese economy which is heavily reliant on exports. In Europe, meanwhile, the passing of the EU support package following weeks of fraught discussions between the Coronavirus-stricken southern nations and the so-called “Frugal Four” added ballast to the bloc’s recovery, supporting the typically more economically sensitive European stockmarkets, already buoyed by dovish central bank policy

With global cases continuing to rise, the fate of the global economy remains inextricably linked to the path of and response to COVID-19. History has shown it is better to ride out near-term volatility and wait for markets to recover, aptly demonstrated by the equity market recovery we have seen since the lows in March, with the Nasdaq 100  reaching record highs and global economic data moving in the right direction. However, we are under no illusion that this will be a straightforward upward path, and indications of further restrictions or lockdowns are concerning. In the meantime, it is important to remember that if a vaccine is developed, the delayed economic activity can give markets a significant boost further down the line, as it will lead to a surge in activity in forthcoming quarters, as economies recover.

A lot has happened already in 2020 we wait with anticipation to see how the remainder of this unprecedented year unfolds.

September 2020: Changing consumer habits forces retailers to reduce their high street presence and move trade online 

Amazingly it’s the third quarter already and it is worthwhile reflecting on what has happened in a busy 2020. At the start of the year, stock markets continued their inexorable rise against a backdrop of US-China trade negotiations, Brexit, and challenged global growth. Then, as we moved through February and into March, the impact of COVID-19 took hold, dominating the economic landscape thereafter and affecting almost every sector of the economy. It did not take long for markets to shrug off concerns, however, with the US S&P 500 coming full circle, reaching record highs at the end of August – the second fastest post-sell-off rally recorded since 1950.

What sectors have performed well?

The recovery has largely been driven by the technology giants with Apple’s valuation topping $2 trillion (doubling in just two years) and Microsoft benefitting from increased demand for its software as the working from home revolution gathered pace. While growth has dragged the market higher, there have been high profile casualties such as energy as demand for oil fell off a cliff due simply to a lack of activity across the spectrum, from industrial manufacturing to commuting. Exxon Mobil, the largest company in the world as recently as 2013, has now been kicked out of the (representative, rather than size weighted) Dow Jones Industrial Average Index – a telling sign of the changing economic landscape in the US.

There have been diverging fortunes within sectors too, with traditional retailers left reeling from lockdowns as online competitors took market share and supermarkets surged. The latest update from M&S acknowledged the need to accelerate plans to reduce their high street presence and move trade online to account for changing consumer behaviour with 7,000 jobs to go. Within the beleaguered aerospace sector, Rolls-Royce has taken steps to shore up its balance sheet, consolidating operations and cutting 9,000 jobs as grounded planes slashed engine servicing revenues. 

What is happening in the UK?

The bounce-back in fortunes for the wider market has been underpinned by unprecedented government and central bank support across the globe. Both have stepped in with quite extraordinary coordinated fiscal and monetary stimulus to date and it is likely more will be required to sustain the recovery going forward. The Bank of England kept interest rates at 0.1% and discussions of negative interest rates at this stage remain just that. The UK Government meanwhile embarked on an unprecedented programme of fiscal stimulus, including the Job Retention Scheme, which currently supports the wages of 9.6 million workers. This is due to be unwound in October and, as the UK economy is weaned off life-support, investors will be looking to economic data for signs of life.

Though retail activity returned to pre-COVID levels in July, economists have warned this recovery could be short-lived with the spike in sales driven by pent up demand as lockdowns eased. Unemployment figures, once government support is withdrawn, will give a firmer indication of the health of the consumer and the trajectory for the UK economy.

Despite the subdued outlook, further muddied by stagnating Brexit trade negotiations, the pound - usually a barometer for the health of the UK economy - has held up remarkably well against the dollar. However, the Sterling recovery has coincided with more general greenback weakness as risk aversion (which tends to lead the $ higher) subsided. The dollar index has fallen 10% since 20 March and, with interest rates at record lows and twin deficits exacerbated by increased fiscal measures to prop up the US economy, dollar weakness looks set continue in the near term. Against the Euro, Sterling has been more range bound.

What is happening internationally?

As the presidential election swings into focus, and with Trump firmly lagging Democratic rival Joe Biden in the polls, tensions with China have increased, though the ‘Phase 1’ trade deal signed in January remains intact. This despite Chinese imports of US goods falling short of expectations with President Trump perhaps looking to keep his flagship international trade policy on track ahead of the November poll.

Away from the geopolitical fractions, COVID-19 cases in the US are approaching 6 million but daily rates are once again trending downwards after a spike in southern states threatened the economic recovery. Fears that a second wave in winter could derail progress have seen the US Federal Reserve strike an increasingly dovish tone, signalling interest rates are likely to remain in their current 0-0.25% range even in the event of temporary inflationary pressures. This more flexible approach to inflation management represents a market departure from decades-long monetary policy and caused the yield-curve to steepen with longer dated Treasuries selling off to account for potentially higher inflation eroding real returns over time.

In Japan, Prime Minister Shinzo Abe confirmed he will step down due to ill health, increasing uncertainty at a time when the world’s third largest economy continues to struggle with deflationary pressures and a worse than expected contraction in GDP as a result of COVID-19. The broader macro-economic trend of deglobalisation also looks set to negatively impact the Japanese economy which is heavily reliant on exports.

In Europe, meanwhile, the passing of the EU support package following weeks of fraught discussions between the Coronavirus-stricken southern nations and the so-called 'Frugal Four' added ballast to the bloc’s recovery, supporting the typically more economically sensitive European stockmarkets, already buoyed by dovish central bank policy.

With global cases continuing to rise, the fate of the global economy remains inextricably linked to the path of and response to 
COVID-19 and volatility is likely to persist until promises of effective vaccinations or treatments can be delivered. A lot has happened already in 2020 we wait with anticipation to see how the remainder of this unprecedented year unfolds.

August 2020: Holiday chaos: leisure and travel scramble to salvage what’s left of the summer season

As we move through the third quarter, it is worthwhile reflecting on what has happened in a busy 2020. At the start of the year, stock markets continued their inexorable rise against a backdrop of US-China trade negotiations, Brexit, and challenged global growth. Then, as we moved through February and into March, the impact of COVID-19 took hold, dominating the economic landscape and affecting almost every sector of the economy. At the epicentre, energy has been, perhaps, the most high-profile casualty as demand for oil fell off a cliff due simply to a lack of activity across the spectrum, from industrial manufacturing to commuting. Though a semblance of normality is beginning to return to some countries, demand for crude thus far remains stubbornly low.

Despite lower fuel prices, the leisure and travel industries were devastated by initial lockdown measures and the recent reinstatement of quarantine for UK holidaymakers returning from Spain and further dented consumer confidence leaving the likes of TUI and Easyjet scrambling to salvage what’s left of the summer season. The slump in global air travel has had a knock-on effect on engine-makers, Rolls-Royce, who announced a £1.5 billion share issue to help bolster its finances.

What sectors have performed well?

Whilst oil and travel have struggled, other sectors have staged a remarkable recovery since the lows of March. The US S&P 500 index (which has much less oil exposure) is now hovering at pre-crisis levels, buoyed by better-than-expected bounce-backs in employment and consumer spending data (though unemployment remains at levels not seen since WW2). Notable beneficiaries through the turmoil include healthcare due both to the short-term crisis at hand and renewed focus on how governments will look to safeguard their health services in future. Tech has also performed well as the adoption of online solutions in the workplace, online retail and social media accelerated. There are signs that the rally is running out of steam with the tech-heavy NASDAQ index pausing for breath in July. This could be a signal that tech is not immune to the woes of the wider economy, as exemplified by Microsoft’s latest results which hinted at softer end-customer demand despite impressive growth.

The key to the initial turnaround in sentiment following the March sell-off was the approach taken by governments and central banks around the world. Both have stepped in with quite extraordinary coordinated fiscal and monetary stimulus to date and it is likely more will be required to sustain the recovery going forward.

What is happening in the UK?

The Bank of England kept interest rates at 0.1% and discussions of negative interest rates at this stage remain just that. The UK Government meanwhile embarked on an unprecedented programme of fiscal stimulus, including the Coronavirus Job Retention Scheme (CJRS), which currently supports the wages of 9.5 million workers. This is due to end in October and, as the UK economy is weaned off life-support, investors will be looking to economic data for signs of life. Though data has generally been surprising to the upside globally, that trend has been distinctly less positive in the UK than other regions. Unemployment figures, once government support is withdrawn, will give a firmer indication of the health of the UK economy, and the time it will take to return to pre-COVID levels of activity.

Despite the subdued outlook, further muddied by Brexit trade negotiations, the Pound – (usually a barometer for the health of the UK economy) has rallied in recent weeks versus the dollar. However, the Sterling recovery has coincided with greenback weakness as risk aversion (which tends to lead the $ higher) subsided.

What is happening internationally?

The Euro meanwhile has rallied against both, riding the European recovery wave, buoyed further by the passing of the EU support package following weeks of fraught discussions between the Coronavirus-stricken southern nations and the so-called “Frugal Four”. The strength in the Euro has been mirrored by European stockmarkets which are typically more (globally) economically sensitive by composition. There are also more encouraging signs about returning to work adding to momentum provided by central banks and the aforementioned stimulus package.

In the US, any goodwill that appeared to be building with President Trump and President Xi signing a ‘Phase 1’ trade deal in January, quickly evaporated as the pandemic took hold. As the presidential election swings into focus, and with Trump firmly lagging behind Democratic rival Joe Biden in the polls, tensions with China have increased with the US withdrawing Hong Kong’s special economic status and closing the Chinese consulate in Houston. Away from the geopolitical fractions, COVID-19 cases have surpassed 4 million and continue to rise across the southern states. Fears that a second wave could dampen the recovery have seen the US Federal Reserve strike an increasingly dovish tone, signalling interest rates are likely to remain in their current 0-0.25% range for the foreseeable. Fed Chair, Jerome Powell, has urged warring Democrats and Republicans to coalesce around a new fiscal support package to ensure Americans can weather the storm.

With global cases continuing to rise, the fate of the global economy remains inextricably linked to the path of COVID-19 and volatility is likely to persist until promises of effective vaccinations or treatments can be delivered. A lot has happened already in 2020 we wait with anticipation to see how the second half of this unprecedented year unfolds.

July 2020: Crude oil vulnerable as transition to a low-carbon world gathers pace 

With the second half of the year upon us, it is worthwhile reflecting on what has happened in a busy 2020. At the start of the year, stock markets continued their inexorable rise against a backdrop of US-China trade negotiations, Brexit, and challenged global growth. Then, as we moved through February and into March, the impact of the coronavirus took hold, dominating the economic landscape thereafter and affecting almost every sector of the economy.

At the epicentre, energy has been, perhaps, the most high-profile casualty as demand for oil fell off a cliff due simply to a lack of activity across the spectrum, from industrial manufacturing to commuting. Though a semblance of normality is beginning to return to some countries, demand for crude thus far remains stubbornly low. This has impacted expectations for oil majors and FTSE 100 heavyweights BP and Shell who were forced to revise their strategies and longer term forecasts for oil prices as the transition to a low-carbon world gathers pace.

What sectors have performed well?

Whilst Oil has struggled, other sectors of the market have staged a remarkable recovery since the lows of March with the US S&P 500 index – which has much less oil exposure - hovering at pre-crisis levels, buoyed by better-than-expected bounce-backs in employment and consumer spending data.

Notable beneficiaries through the turmoil include tech as adoption of online solutions in the workplace, online retail and social media accelerated. Healthcare too has performed well due both to the short-term crisis at hand and renewed focus on how governments will look to safeguard their health services in future.

What is happening in the UK?

Underpinning the turnaround in sentiment and markets has been the approach of governments and central banks around the world. Both have stepped in with quite extraordinary coordinated fiscal and monetary stimulus. The Bank of England kept interest rates at 0.1% and discussions of negative interest rates at this stage remain just that. However, the Bank has remained active in providing liquidity to markets through its purchase of assets scheme.

As lockdown eases, somewhat counter intuitively, the rate of equity issuance in the UK has picked up again with issues from Easyjet, Youngs (pubs) and Unite high profile examples of a notable trend. The desire for equity is in the main to provide either a sure financial footing or to gain access to capital to expand. The return of Brexit uncertainty meanwhile has dampened the medium-term outlook for UK equities, however, with just six months before transitional trade arrangements cease, there is renewed optimism on both sides that a compromise can be found to avoid a cliff-edge come year’s end.

What is happening internationally?

In the US, any goodwill that appeared to be building with President Trump and President Xi signing a ‘Phase 1’ trade deal in January, quickly evaporated as the coronavirus pandemic took hold. As the presidential election swings into focus, and with Trump firmly lagging Democratic rival Joe Biden in the polls, expect the noise to increase and tensions between the two countries to build. Away from the political fractions, Federal Reserve Chair, Jerome Powell, warned in his address to Congress in June that the path ahead remains extraordinarily uncertain having earlier retained interest rates in their range of 0-0.25%. Working in tandem, the US Government has unleashed fiscal stimulus measures in excess of $3 trillion which are still filtering through investment markets but have made a notable impact on the bond market thus far with US Treasury yields tumbling to record lows.

Despite challenges in Germany to the monetary policy approach adopted by the ECB, signs of recovery filtered through stock markets. Typically, European stock markets are more (globally) economically sensitive by composition and more encouraging signs about returning to work have added to momentum provided by central banks and local level stimulus. Wirecard provided Germany with a first it would rather not have with the payments company being the first Dax (the premier exchange in Germany) constituent to go bust. 

Hopes of economic recovery have also aided Asia and Emerging Market stock markets but the latter remain out of favour as they typically lag when the dollar is strong due to the need by countries or companies to borrow in dollars and the increase cost that dollar strength brings.

One major caveat to the continued recovery remains the spectre of a second wave of coronavirus cases which could cause economies to falter once more. A recent surge in America’s southern states and outbreaks in Germany have given investors pause, and with global cases continuing to rise, volatility is likely to persist until promises of effective vaccinations or treatments can be delivered. A lot has happened already in 2020 and we wait with anticipation to see how the second half of this unprecedented year unfolds.

June 2020: Early signs of economic recovery? 

As we draw toward the mid-point in the year it is worthwhile reflecting back on what has happened in the first six months of 2020. At the start of the year, stock markets continued their unstoppable rise against a backdrop of US-China trade negotiations, Brexit, and challenged global growth.

Then as we moved through February and into March it’s fair to say that the impact of the COVID-19 has been felt across almost every sector of the economy but at the epicentre, energy has been one of the most high-profile casualties. Demand for oil fell dramatically due to a lack of activity worldwide such as industrial manufacturing and commuting. In addition to this, Russia and Saudi Arabia came to blows over output.

While some countries are starting to return to a form of normality and tensions of Organisation of the Petroleum Exporting Countries (OPEC) have eased, demand for crude remains stubbornly low. Reflecting this Shell is planning to cut its dividend for the first time since the 1940s as it signalled to investors that it needed to adopt a different approach.

What sectors have performed well?

Some sectors have performed well amidst the turmoil such as tech which has benefitted from accelerated adoption of online solutions in the workplace, online retail and social media. Healthcare has also performed well because of the short-term crisis at hand and the renewed focus this has brought on how governments will look to safeguard their health services over the longer-term.

Key to the turnaround in sentiment and markets has been the approach of governments and central banks around the world. Both have stepped in with quite extraordinary coordinated fiscal and monetary stimulus.

What is happening in the UK?

During May, Chancellor Rishi Sunak announced that the furlough scheme, which currently supports the wages of 8.4m Britons, has now been extended until October. The Bank of England kept interest rates at 0.1% - the lowest in the central bank’s 325-year history – but discussions of negative interest rates at this stage remain just that.

The bank has remained active in providing liquidity to markets. This together with some clarity on finance from companies and where required equity funding through placings and rights issues, has put the FTSE100 on a firmer footing. Notable within this was the owner of the Premier Inn brand Whitbread, where humble pie was served with the rights issue given that the company had carried out a meaningful share buy back at the end of last year at levels materially higher.

What is happening internationally?

In the US, any goodwill that appeared to be building with President Trump and President Xi signing a ‘Phase 1’ trade deal in January, quickly evaporated as COVID-19 took hold. One development brewing that is worth paying attention to is whether Chinese companies like Alibaba will move their secondary US listing to Hong Kong as the tensions between the countries rise. With the election likely to swing into greater prominence as the US moves back to normal, expect the noise to increase. 

Away from the political fractions, the Federal Reserve retained its interest rate range of 0-0.25% to combat the pandemic. It has also announced extensive measures to support financial markets, including a fiscal stimulus package in excess of $3 trillion which is still filtering through investment markets but has made a notable impact on the bond market.

Despite challenges to the monetary policy approach adopted by the ECB in Germany, signs of recovery filtered through stock markets. Typically, European stock markets are more (globally) economically sensitive by composition and more encouraging signs about returning to work have added to momentum provided by Central banks and local level stimulus. 

Hopes of economic recovery have also aided Asia and Emerging Market stockmarkets but the latter remain out of favour as they typically lag when the dollar is strong due to the need by countries or companies to borrow in dollars and the increase cost that the dollar strength brings.

A lot has happened already in 2020 and while the worst is hopefully behind us, we expect there will be more newsworthy stories and influences on markets as this unprecedented year progresses.

Our Financial Planning team

Phil Smithyes
0118 959 7222
Thames Valley
Miles Clarke Adrian Crowe 
020 7842 7187
London
Richard Dean
01242 234421
Cheltenham
Aron-Gunningham    Aron Gunningham
0118 959 7222
Thames Valley
Julian Hanrahan
01622 767676
Maidstone
Dharmesh-Upadhyaya
Dharmesh Upadhyaya
 
020 7842 7325
London
 
 

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