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Weekly Note

The Week In Markets – 13 – 19 November

Over recent years many of us have become accustomed to “Black Friday’” – the day after Thanksgiving where retailers offer discounts to mark the start of the Christmas shopping period. Although we are still a week away from this event, it seems the Friday before is now becoming “early Black Friday” with many discounted prices already appearing today. 

It seems fitting then that we start this week’s round-up with the consumer. Here in the UK data published today showed that consumer confidence rose in November, despite the headwind of rising inflation. This was coupled with retail sales growing by 0.8% month-on-month, bucking the trend of recent declines. Retailers have reported that Christmas trading has begun early and could be a signal of bumper spending by the UK consumer over the period. A strong consumer normally translates into strong GDP for a country, given that around two-thirds of developed-world GDP is derived from consumption. 

Staying with the UK, we once again need to mention inflation. The consumer price index (CPI) rose by 4.2% in October from a year ago, reaching a 10-year high. This figure, like the US inflation print last week, came in ahead of analyst expectations. With the Bank of England Monetary Policy Committee holding fire on raising rates at their previous meeting, attention is now turning to the December meeting where there is a rising expectation that UK interest rates may increase. However, this is not guaranteed, and it is fair to say that at least some of the inflation we are experiencing is due to pent-up demand in pockets of the economy, which will likely abate. We also need to be aware of the presence of base effects; comparing data to October 2020 when the economy was very fragile.

COVID-19 cases continue to rise in Europe, which now once again becomes the epicentre for the virus. Austria has announced a full national lockdown starting from Monday, which will run for a maximum of 20 days. Germany has announced further restrictions for the unvaccinated as infection rates hit record highs. European stock markets have proved resilient this week to the news, with investors looking through the short-term measures.

It’s been a while since we covered the Japanese economy in the weekly round-up. Japan has been a laggard this year when compared to its developed market peers from both an economic and investment returns standpoint. Mindful of the sluggish growth, benign inflation and low consumer confidence, the supposed fiscally prudent Prime Minister Kishida has announced a huge $488bn stimulus package to help offset the damage caused by COVID-19. At a time when other nations are slowly pegging back stimulus measures, Japan appears to be bucking the trend. This additional fiscal stimulus could boost prospects for the country; while we have exposure to Japanese equities in the portfolio, the Investment Committee will continue to ensure the level of exposure is suitable. 

Having recently increased US allocations in client portfolios it is pleasing to see the US market continuing to grind higher, hitting new all-time highs this week. Stellar results from chipmaker Nvidia and upbeat news from retailers helped push the US bourses to new highs. While US equities are currently a core of our equity component in portfolios, we continue to diversify across geographical regions and sectors, blending active managers with passive strategies. 

Andy Triggs | Head of Investments, Raymond James, Barbican

With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. 

Weekly Note

The Week in Markets – 6 – 12 November

The 26th UN Climate Change Conference of the Parties (COP26) continued this week, with Friday marking the final day of the conference. The positive start to the conference appears to be coming to a head today, with delegates rushing to agree on plans to cap global temperature increases to 1.5C. The fall-out from COP26 will impact the world both from an environmental standpoint but also an economic one. It’s clear that the efforts to shift to a more sustainable, green footing, will create both opportunities and threats for various sectors and companies. 

Concerns around inflation seem to have plagued markets all year and recent data out of the US has done little to dampen investor concerns. Only last week we saw markets switch and push out their expectations for interest rate rises on the back of an apparent shift in central bank positioning. However, that position was immediately challenged with US CPI reported at 6.2% on Wednesday, the highest level since 1990. The higher-than-expected number led to US Treasuries (government bonds) once again selling off and the US dollar strengthening on a global basis. High levels of inflation will prove problematic to consumers, who will face a squeeze on their real spending power. Central banks globally will be forced to act if inflation turns out to be more persistent and not transitory. 

UK equities have lagged behind US and European equities since the Brexit referendum in 2016. Despite what appear cheap relative valuations, investors have largely stepped away from the market, concerned about the increased risks Brexit has created for UK companies. However, this could be beginning to change, with the UK large-cap index hitting a 20-month high this week. The rise in the index coincided with news that the US investment bank JP Morgan had upgraded UK equities to ‘overweight’ for the first time since 2016.

It’s been a while since we covered COVID-19 in these weekly updates, however, rising cases in Europe and a three-week partial lockdown announced in the Netherlands this week mean it is back in focus for investors. The Dutch are going to be closing bars and restaurants early while sporting events will be played without crowds.

Climate risk, COVID-19 and rising inflation are just some of the issues challenging investors currently. Despite this, we have seen very resilient equity markets, with strong performance over the last month or so. Our focus continues to be attempting to look through short-term noise and focusing on long-term opportunities while ensuring there is sufficient diversification in portfolios to help protect against some of the known (and unknown) risks highlighted here.

Andy Triggs | Head of Investments, Raymond James, Barbican

With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. 

Remember, Remember The Importance of November

October was generally a positive month for global equity markets, helping to push many developed market indices to new 2021 highs. Whilst COVID-19 challenges remained material and new concerns about gas prices, petrol availability and general delivery concerns became more apparent during the month, so far the average third-quarter corporate earnings season number has been taken well. However, most fixed income markets have continued to struggle this year, even if many 10-year bond yields have not yet returned to levels seen earlier this year.

Budget Newsletter

Less than eight months ago, Rishi Sunak presented a Budget that was anticipating the ending of the pandemic’s impact on the UK economy. He announced extensions and end dates for the furlough scheme, the self-employed income support scheme, reduced VAT for hospitality and the £20 a week uplift to Universal Credit. To finance some of that expenditure, the Chancellor also revealed a 6% increase in corporation tax, deferred until 2023.

The Month In Markets – October 2021

October can be a stormy month for markets, but not this year: Global equities strolled to a 4% return in a calm and orderly fashion. In the absence of headline-grabbing tempests to describe then, I’ll instead use the month’s movements to set out one of the two key debates that currently vex us as we discuss and shape your portfolio.

If those two debates had titles, they’d be: “Stock Markets: Take the Money and Run?”; and “Inflation Vs Deflation”.

We’ll look at the first this month. Stock markets have had a cracking October, that much is clear. Making 4% while your bank account pays nothing is a great result. And it’s not just this month. So far in 2021 global markets have made nearly 20%. Extend that to two years, to now include the worst global pandemic since the Spanish Flu of 1918, the same markets have returned a head-scratching 38%. While if you’d invested ten years back (no mean feat, as back then the world was fretting over the eurozone crisis), you’d be sitting on a return of 261% today.

These are exciting numbers. But we’ve all been around too long, and been to too many parties, to assume we can enjoy that much gain without real-life dishing out some pain to balance things out. In investing terms, this instinctively makes us want to take profits and (in theory) reduce risk by cutting your exposure to equities, and adding more to defensive assets, such as cash or bonds.

And yet we haven’t. Not yet, anyway. We’ve actually been having the exact same debate for the entire (admittedly short) life of the branch; for all that time markets have been sat atop incredible gains (albeit marginally less incredible than today’s). But we decided, thankfully, to stay put. Why?

I think it helps to compare how different this decision is today to 15 years ago. If you’d have had this uneasy, vertiginous feeling at the tail end of 2006, you would still have faced a tricky choice, but then the only cost of running to cash was the cost of a missed opportunity.

The world has changed: in 2006 there were decent, obvious, and risk-free alternatives to shares – most obviously cash (Icelandic banks aside). If you’d have sold your equities and kept the cash, you still would have earned interest of around 5% (unimaginable today, but that was the UK’s base rate as 2006 ended).  At the same time, the UK’s inflation rate (CPI) was only 1.6%. So, very roughly, even if equities continued to rise (which, for at least another six months, they did), your wealth would, based on those numbers, still grow by about 3.4% per year (interest less inflation).

Now compare that to today. The base rate is 0.1%, which is basically nothing. So that decision to switch to cash, had you made it last month, would have meant you missing out on the equivalent of 40 years of interest, which is what global equities made in October.

Furthermore, the latest CPI number was 2.9%. So you can assume that, instead of growing, your cash-based wealth has actually shrunk by about 2.8% over the last year (interest less inflation again). And, as long as inflation remains higher than interest rates, it will continue to shrink too. Just as it would have done for the lion’s share of the last 13 years, during which time inflation was persistently higher than interest rates.

This is why we don’t take this decision lightly. Much as our conservative instincts make us cautious after a long rally, we’re also wary that putting you into cash today could be a trap: that we’d be condemning you to an uncomfortable spell on the sidelines, watching as the spending power of that cash ebbs while the value of other assets – that you no longer hold – rises.

Against this, however, is the truth that, much as we think equities are the best place to invest over the long term, they offer no guarantee, much less comfort, that they won’t stumble along the way.

2020 illustrated this rock-and-a-hard-place problem neatly. Take yourself back to the start of that pandemic-ridden year. If two advisers had approached you, one predicting markets would crash by more than 25% within the next 12 months, while the other forecasts a total return of +12% for the year; which one should you have gone with?

Well, they were both right: markets plummeted by 26% in March as lockdowns took hold, but by the end of the year they had more than recovered, finishing with a return of 12%. (The actual answer to that question, though, is you shouldn’t have chosen either of them: if any adviser tells you precisely what the next year will hold, you should run like the wind. But that’s another story.)

That, in a nutshell, is the conundrum we face today. We all agree that – over the long term – equities offer not just the best opportunity to beat inflation, but to actually grow the spending power of your wealth too. But, in the short term, they are susceptible to lurching and entirely unpredictable drops in price, which will put you through the emotional wringer (something we are obviously keen for you to avoid).

But we can also all see that, while many of the classical ‘safe-haven’ assets, like cash or bonds, might protect you from massive waves in the short term, over the longer term they put you at serious risk of slowly sinking, as your wealth’s spending power is eaten away by inflation.

It’s our job to balance those considerations, and with them your portfolio. It’s no use us putting you in the best returning investment over the next 10 years if the ride is so unbearably rough that you abandon ship along the way (that’s the last of the nautical metaphors, I promise). In doing our job we consider and balance many factors, such as the valuations of different asset classes and the wider economic and social environment, and then marry those to your own personal need for returns and appetite for risk.

So that’s what we’ll continue to do. After a bumper month like October, you can assume we’re more likely to reduce risk than add to it. But it’s a team decision, and it’s never as simple as “markets have gone up, so sell”. That would be too easy: markets, like life, aren’t that kind.

Simon Evan-Cook
(On Behalf of Raymond James Barbican)

 

Risk warning: Opinions constitute our judgement as of this date and are subject to change without warning. With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. Raymond James Investment Services Ltd nor any connect company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this article. Past performance is not a reliable indicator of future results.

Weekly Note

The Week in Markets – 23 October – 29 October

Right. I didn’t want to do this, but we need to talk about gilts. Because in a week in which most market movements were all a bit “meh”, gilts (a.k.a. UK Government Bonds) stand out as having had an unusually dramatic run. What happened?! I hear you gasp. Well – hold onto your hats – on Thursday the UK’s 10-Year Gilt yield dropped by 0.13%!

Yes; you’re right. It is odd what passes for drama in the investment world. It’s hardly Cup-Final penalties, is it? This is why I avoid writing about gilts. It takes me back to the confusing days when I was learning my trade, sat next to grizzled professionals who’d take an apparently bland statement like that and read a Nabokov novel’s worth of meaning into it (I just nodded and kept quiet).

But today I grasp that nettle. Firstly the size of the move: It doesn’t sound like much, but when you start with not much, not much can make a big difference. And the gilt yield started the day at 1.11%, and dropped to 0.98%. That equated to a c.2% move in the gilt index over the day – the largest part of an almost 4% move over the week. Remember that bonds are supposed to be the tortoises to the hares that are shares (now there’s a Dr Seuss book just begging to be written). But UK equities only shifted by 0.9% on the week, a polarity reversal that tells you something unusual happened.

That was the size of move, now let’s talk direction. Yields falling sounds like bad news, right? We don’t like it when things fall. But “yield” is on the other side of a simple equation to “price”. So when yields have dropped, it means prices have risen (the third part of that equation is “income”, which in gilts’ home world of fixed income is – as the name suggests – fixed)(unless it’s an index-linked gilt, but let’s not go there). So, can we take it that prices rising by 4% in a week is actually good news?

Nope. OK; it is if you hold gilts. But one of the main reasons for holding gilts is that their prices go up when a piece of bad news makes most other markets go down. This is because, in a recession, they’re seen as a safer place to park cash than shares, so if they think there’s trouble ahead, investors sell shares and buy gilts. So when you see that gilt yields have fallen, and therefore that their prices have risen, you can usually assume it means bad news.

So this was bad news after all? Well, maybe. Thursday was Budget day, so we might assume that markets hated the budget, believing it’s more likely to hurt economic growth than help it. I think there’s some truth to that: UK shares, whose prices do drop on bad news, fell on the day. However, it’s not that simple (I’m really sorry about this). Rishi Sunak also announced that, because economic growth had been better than he’d feared (good news!), he wouldn’t need to issue as many new gilts as he’d thought, thereby reducing their supply (economics 101; lower supply equals higher prices).

So, there you have it (clear as mud): Hopefully (but not entirely) a one-off technical thing, which means I can return to the usually-more-interesting, and simple, movements of share prices instead.

Have a great weekend,

Simon Evan-Cook
(On Behalf of Raymond James Barbican)

 

With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

Weekly Note

The Week In Markets – 16 October – 22 October

Instead of headlines proclaiming “10% wiped from value of computer giant”, “S&P closes at record high” was the headline splashed across many investment outlets on Friday morning. 

After ebbing and flowing for the last six weeks, the US S&P 500 index closed at a new all-time high on Thursday evening. It may surprise many to learn that this was actually the 55th all-time high of 2021 for the large-cap bourse. Investors have been encouraged by a strong start to Q3 earnings season, with most companies that have reported beating earnings estimates. It wasn’t the case of “a rising tide lifts all boats” however, as IBM’s share price fell around 9.5% on Thursday after missing revenue targets. 

Data released on Wednesday showed that UK inflation slipped to 3.1% in September, from 3.2% in August. The slight dip has done little to deter investors’ from believing that the UK will be the first major central bank to lift interest rates. While many of us have become accustomed to falling rates over the last decade or so, 2021 has bucked that trend with countries such as South Korea, Norway, Brazil and Chile already hiking interest rates. 

Evergrande, the Chinese property behemoth which caused turbulence in markets in September, returned to the forefront of investors’ minds this week as its proposed $2.6bn asset sale was abandoned, stoking fears of the company’s ability to meet debt obligations without this injection of cash. While the exposure to China in our portfolios is minimal, China is now the second-largest economy in the world and therefore what can appear as domestic issues can spill over into global markets and as such a situation we continue to monitor.

With inflation fears and a more optimistic growth outlook returning, bond yields continued their march higher this week. Despite the moves, the German 10-yr bund still has a negative yield of around 0.08%, although this is the highest level it has been over the last 12 months. 

As we look ahead to next week the big news on domestic shores is likely to come from the Autumn Budget, taking place on 27th October. The budget can create volatility in UK stocks, particularly if there are unexpected announcements. It is something we will follow closely and look forward to covering next week. As always, we will be looking behind the headlines to get to the detail and understand the impact.

Andy Triggs | Head of Investments, Raymond James, Barbican

With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. 

Weekly Note

The Week in Markets – 9 – 15 October

If you find discussions of employment rates and wage inflation uninteresting or even dare I say it boring you have our sympathy. I’ve heard that many people in the Treasury have a similar view. However, their importance to the global economy and in turn to our clients cannot be underestimated, so I would ask you to persist and read on.

With that in mind, we will start with the UK; unemployment dropped to 4.5% and average weekly earnings were 7.2% higher compared to 12 months ago. Many believe this will be enough to force the BoE to raise interest rates, possibly as soon as December. However, the slight complication here is that these figures are skewed by both the furlough scheme, which closed at the end of September, and the fact that we are comparing wages to last year when they were heavily impacted by COVID-19. The reaction to this data in bond markets was muted and we have seen yields fall (prices rise) this week across most developed nations following a period of rising yields. Staying with the UK economy, GDP data highlighted that the economy grew by 0.4% in August and is now only 0.8% below the level it was pre-COVID in February 2020.

Inflation has been a topic we have covered frequently over recent weeks and Wednesday’s US CPI figure of 5.4% means we need to spend a bit more time on the subject. If we drill down into what was contributing to the higher than expected inflation print this week, we can see that rent and food costs were key drivers. For the average person, this can pose problems as both shelter and food are typically necessity goods that consumers simply must buy. Higher prices here will mean many people need to cut back spending in other areas of the economy. It may also encourage individuals to push for higher wages or look to move to higher-paid jobs to make sure their spending power keeps up with inflation.

The International Monetary Fund (IMF) released their latest World Economic Outlook report this week. For readers that like detail, the full report can be found on the IMF website – but be warned it is 172 pages long! In brief, the IMF still see the global economy in recovery mode, even if the delta variant has caused COVID-19 induced problems to persist. They did slightly downgrade their world growth expectations for 2021 from 6% to 5.9%, citing COVID-19 and supply disruptions as two causes. On the positive side of things, a firmer commodity pricing environment should see better than expected growth from the commodity-exporting nations.

In this data-heavy week, we have seen most global equity bourses move higher. The UK market has been particularly strong, driven by a firming commodity price environment as well as a high weighting to financials, which have performed well on the prospect of interest rate rises. Our portfolios are global in nature, and while we are exposed to markets such as the US and themes including technology, we also have meaningful exposure to the UK market and include themes like resources, which have been strong this week.

Andy Triggs | Head of Investments, Raymond James, Barbican

With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. 

Weekly Note

The Week in Markets – 2 – 8 October

The challenge in writing a weekly note is that most subjects don’t start and finish in a seven-day period; economies and markets are fluid and continuous, with events taking weeks, months or even years to play out. Over the last couple of weeks, we have written about inflation and its effect on bond markets, of rising gas prices and of a lack of direction in equity markets and these subjects are still as relevant this week. For good measure, we can now also add to the mix a Facebook blackout and US debt ceiling concerns to the headlines.

New Chief Economist for the Bank of England (BoE), Huw Pill, warned this week that inflation in the UK may be higher and last longer than originally anticipated, in part driven by rising energy prices and a continued global supply shortage. Earlier in the year investors assigned around a 10% probability to UK interest rates rising by March 2022, this week the probability had risen to around 90%. The likelihood of two interest rate hikes by May 2022 has moved from less than 10% just four months ago to around 80% today. Whether we are witnessing a structural shift to sustained higher interest rates and inflation, or whether this will be a short-term hiking cycle (more akin to 2018) is unclear currently. As investors, we need to think carefully about portfolio construction and the mix of assets we would want to hold if the 30+ year bull market in bonds is finally over.

Facebook has evolved into so much more than just a social-media company and while a few hours break from Facebook, Whatsapp and Instagram may have been welcome by many, it was a source of lost revenue not only for the company, but for many businesses who use their platform for sales and marketing. It is estimated that it cost the technology giant around $100m in lost revenue as well as wiping off nearly $50bn of equity value at one point. The outage interrupted business, Government communications and, in some developing countries blocked access to the wider internet. It was interesting to read that due to the firm’s work from home policy many remote engineers were not able to communicate with the staff in the data centres and caused the crisis to drag on longer than it should. Some reports suggested that the outage even locked staff out of buildings and data rooms as the system linking door security to work permits failed. The domino effect both locally and globally should be a wake-up call.

On Friday we woke to the news that the US Senate voted in favour of extending the debt ceiling, allowing the nation to meet its liabilities and continue to borrow. Janet Yellen was vocal in the run-up to the vote, stressing that if the debt ceiling was not extended it would have severe implications for the US economy.

US non-farm payroll jobs data was released on Friday afternoon. The data showed 194,000 jobs had been added to the economy in September, below estimates of 500,000. Unemployment in the US fell to 4.8% and with a considerable amount of job openings coupled with elevated consumer demand we can expect unemployment to fall further over the remainder of 2021.

Further East (or West depending on which direction you are travelling and from where) China and Russia both appear to continue to be influencing a rise in gas prices. Russia is rumoured to be restricting gas supplies as part of a strategy to encourage EU countries to approve Nord Stream 2; their new Baltic Sea pipeline. Gazprom, Russia’s gas export monopoly supplies a staggering 35% of European gas needs. It’s alarming how reliant Europe has become on one nation (Russia) for its gas needs. In January, China recorded its lowest temperatures since the 1960s leading to widespread power cuts. To avoid it happening again this winter, the Xi government has ordered its state-owned energy firms to secure gas supplies for this winter “at all costs” which is fuelling the energy price crisis across the globe.

This week’s news and recent events highlight the increasing reliance we have on the Superpowers of China, Russia and the US as well as the superpowers of the technology giants; something we need to keep a watchful eye on as individuals, business owners and investment managers.

Andy Triggs | Head of Investments, Raymond James, Barbican

With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. 

THE WORLD AWAKENS

As we sit atop our prosperous peak, admiring the views of the fastest economic growth since 1984, the best start to a bull market, and the record-breaking quarter of earnings growth, it’s wise to remember that not too long ago we began our uphill journey from the depths of the COVID-19 ravine. Often, the best views come after the hardest climbs. So now it’s time to catch our breath and peer over the horizon at what’s to come as we begin our descent from this peak. However, just as the summit of one mountain can become the base of another, the investment landscape goes on indefinitely, which makes adhering to a disciplined investment strategy of the utmost importance.

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