For most investors focused on the U.K., Europe and/or the United States, July was far from an unattractive month in all but a minority of equity sectors. This pleasingly allowed a further building of year-to-date returns. Meanwhile bond market yields generally tightened further. Although fixed income markets remain on average dull performers in 2021, performance has improved in recent months.
All the drama has been in Asia this week. Japan has hogged the sporting headlines, while China has dominated the pink pages. It’s worth understanding what’s happening in Beijing, as it provides a timely reminder that markets aren’t one-way bets, and that risks come in all shapes and sizes.
The numbers first of all: The Chinese stock market is down almost 9% on the week, having been off by 14% at worst (there’s been something of a rebound over the last few days). This has exacerbated what was already a sticky run: having rallied by 18% into late February, the market then dropped by 31% to hit this week’s trough. Given the importance of China in wider Asian and emerging market indices, these too have had a very tough week, leaving them flat for the year.
Why has this happened? One word: politics. This has been brewing for a while now, but what was made very clear this week is that the Chinese Communist Party (CCP) is uncomfortable with how much control was being gained by the private sector at the expense of the state.
The specific action that sparked this week’s rout was a crackdown on private tutoring companies, wiping billions off several companies in the process. But before that the CCP had signalled a wider discomfort with private data gathering and security, with the very clear implication that data should be the property of the state, not of private companies.
There are lots of risks investors have to consider, so many that some become forgotten, overlooked or simply not learned in the first place. This event is a reminder of the twin risks of political and regulatory risk. Perhaps blinded by the incredible returns made by Chinese tech companies in recent years, some investors loaded up on these companies, and in doing so forgot that you only “own” something in China for as long as the state says you can. Which is another way of saying that, ultimately, you don’t own it, the state does.
It is also a reminder of the benefits of diversification: even our most aggressive portfolio has considerably less than 10% exposed to Asian ex-Japan equities, while our Cautious Portfolio has less than 4%. The rest is spread across different markets and asset classes, and so actually benefited from rising share prices in the UK and Europe this week, where we have higher weightings.
And, thankfully, much of our Asia ex-Japan exposure is through one of our trusted, actively-managed fund picks: Schroder ISF Asian Total Return. Its managers, Robin Parbrook and King Fuei Lee, read the Chinese mood music months ago, and heavily reduced their exposure to China. As a result, they have seen only a modest dip in their Fund’s price, while Asian indices, of which Chinese tech companies are a large part, were walloped. Given the complexities of this situation, and the sense that there’s more to come from the CCP, we’re glad these Asian equity specialists are looking after these parts of our portfolios. They’re highly conscious of risk in whatever form it comes.
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.
Because the week’s stock market performance numbers look fairly silent: UK equities, for example, squeaked out a return of just 0.15%. But this hides a couple of noisy days, particularly Monday, which felt like one of those “here we go again!” moments, as many major markets plunged by over 2% in a single session: A big move outside of an obvious crisis.
This had the financial world bracing itself for worse to come, with the spread of the delta variant commonly singled out as the harbinger of another prolonged collapse in share prices. Then on Tuesday everything bounced back. And it’s been quiet since. So that, it appears, is that.
So, here’s the question: If a sell-off happens, but no one has time to sell, did it actually happen?
First a quick nod to pedants’ corner: Yes – obviously somebody was around to sell something, or prices couldn’t drop. But ignore that and go with me on this one – there’s a useful principle here. Which is that successful investors know that scale matters. Specifically, in this case, timescale.
In this note, I happen to be talking about a week. If that’s the timescale by which you judge your investments, then there was nothing to see over this seven-day period: it ended as it started. But if your time horizon is a day, then you’ve been through the emotional wringer. And emotions can be dangerous when investing, particularly the extremes of fear and greed: So on Monday’s drop, as the headlines turned bleak (as they always do on a red day), you might have been tempted to sell out in fear of a further drop. But, if you had, you missed Tuesday’s bounce, and locked in a nasty loss.
Now we can take this to extremes: We could shrink our time horizon down to microseconds, which some do, trading the millions of tiny moves that happen every day (if you think this is a fanciful exercise, I’d recommend a read of Michael Lewis’ “Flash Boys”, about how “high-frequency traders” rigged the US stock market).
But for that, we’d need a ridiculously powerful computer, a house inside the stock exchange, and no scruples. More relevant, then, is to consider lengthening our timescale. How long? A year? Maybe: In 2020 global equities made 12.3%. Nice. But during that year they collapsed by 26%, at which point many panic sold. They then rallied back by an astounding 63%. Those panic sellers definitely rue paying close attention: it wasn’t a problem for those who only check in every New Year’s Day.
But is a year enough? Go longer – to a decade, or several decades, or even a lifetime – and you’ll find supernaturally calm types like Warren Buffet. He is, I’m told, worth a bob or two, so maybe there’s something to be said for stretching those time horizons out a bit?
Food for thought. But, in the meantime, 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.
These numbers were despite dramatic inflation news in both the UK (a rise to 2.5%) and the US (lifted to 5.4%) – both hitting multi-year highs, and both higher than economists expected.
Another peep behind the curtain of financial commentating: watch out for the word “despite”. As in “markets fell despite good news on unemployment”. This means we, the commentariat, have caught a piece of real-world news and thought “Thank heavens! Surely that gives me something to write about!”. Only for the market to then either completely ignore it or do the stone-cold opposite of what we thought it should.
That fully applies this week. Given the efforts I’ve made to emphasise the importance of the direction of future inflation, you’d think news like this would send shockwaves through markets. Or, at the very least, cause assets that hate higher inflation, such as longer-maturity bonds, to sell off. And yet they didn’t – they actually rose as the news hit midweek.
Of all the many bewildering features of financial markets, this frequent disconnect between news and market reaction is perhaps the Queen of Bewilderers. Why does it happen?
There are lots of reasons. The chief one is that markets anticipate events well before individual commentator’s cotton onto them. This almost mythical ability to see into the future has been dubbed “The Wisdom of Crowds”. That crowds can be wise will be news to many of us, particularly after Sunday night, but there’s plenty of evidence showing that, in this respect at least, they can be. This means markets may have already anticipated, and therefore reacted to, this uptick in inflation several months back. Hence the insouciant shrug this week.
Another is that markets quickly look beyond the event itself, and instead react to the reaction to that event. Or even to the reaction to the reaction. (Picture yourself standing in front of a mirror, holding a different mirror, for a visual representation of this.) So the fact that inflation is higher than expected may mean that, instead of worrying about inflation, investors are fretting about central banks overreacting to that data, and prematurely squashing inflation (and economic growth with it) before it gets going.
Complex, isn’t it? It would be boring if it wasn’t though. It’s why we love our jobs: there’s always something happening, and tweaks to be made to portfolios.
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.
Our industry is frequently guilty of treating markets like people. Sailors do the same thing, or at least stereotyped sailors off the telly do: “The sea? Aye, she’s angry today.” they’ll mutter into their pipes, as if this massive, complex, unpredictable entity had simply woken up in a bad mood. Obviously, it’s not that, it’s an unknowable sequence of events and interactions culminating in some big waves. But it’s easier, and more fun, to give it its own personality.
Markets have that in common with seas: they too are the culmination of an unknowable sequence of events. And, just like seas, we try to pin a single motive to their actions when often there isn’t one. Sometimes, like 11th September 2001, there is an obvious cause. But more often it’s just millions of individual decisions adding up to an odd-looking move. Honest as it may be, we can’t write that in a report – it’s boring for one – so we have a go at suggesting why it went up or down.
So here goes: Looking at this week’s moves, my best guess is that more investors are worrying that the economic recovery won’t be as powerful as previously hoped. Maybe because the virus is again proving to be a trickier-than-expected pony, or perhaps because various stimulus programs are being withdrawn, meaning that high-street spending will lose some of its oomph.
Thursday was the day when the wobbles happened. It was European stock markets that fell the most, while US shares proved more resilient. Again, it’s hard to say if this is because investors collectively think Europe’s economy will be harder hit, or if it’s due to the relative fortunes of the biggest companies listed on those markets. As I mentioned last week, Europe has higher exposure to banks, energy and natural resource companies, which means its market will benefit more from a fast-growing economy. In contrast, the US market is dominated by tech companies which, as we saw in the early lockdown, cope fairly well with an economic slowdown (and in some cases even benefit from it).
Adding to these trends was the news that oil prices climbed to their highest level for almost three years. Again, not good for economic growth, as that’s more of our money sent off to overseas oil producers, and less spent on tea and buns. So that didn’t help most share prices. Thankfully, as I write this on Friday morning, shares in Europe are on the rise again, and oil’s price has stayed put. So maybe it’s all been a storm in a teacup after all.
That’s my second tea reference in just one paragraph. From this, I can infer, with one hundred per cent conviction, that it’s time to hit send and break for a brew.
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.
Americans, bored in their COVID-induced ‘bubbles,’ turned to board games for fun last year, boosting sales 300%. They rolled the dice, drew the cards, and buffed the skills of cooperation, problem solving, emotional intelligence, and reflective logic — the same competencies critical to successful investment strategies. So, we couldn’t help looking back nostalgically to our favourite games — and probably yours — as we look forward to crafting a sustainable investment game plan.
That 2% rise is a good example of the illusion I mentioned last week: Was it actually equities rising? Or was it the thing we’re measuring them with falling? Well, we’re measuring them in sterling here, and the pound has had a duff week relative to most major currencies, so most of that ‘rise’ was actually the value of the pound dropping: it was off by more than 1% last week against the dollar. It’s hard to isolate any one reason for this weakness, so I’d put it down to a general sense that the prospect of a British interest rate rise has, if anything, moved further away.
Another indicator that it was currencies moving, not markets, is that UK equities, which didn’t get the same overseas currency boost, were off the pace: only a 0.3% rise at the time of writing.
Currency, however, isn’t the only reason UK equities lagged last week. And, for that matter, why they’ve lagged for the last decade. The make-up of the British market is radically different to that of the world’s biggest market – the US (which itself constitutes over half of the total global stock market). The UK market has heavy exposure to large oil companies, mining companies and banks, while the US market is dominated by tech giants like Microsoft, Apple and Google.
So the fact that UK equities have begun to wilt again, while US equities are regaining their mojo, tells us something about the outlook for global economic growth. Oil companies, mining companies and banks all need strong, broad-based economic growth in order to flourish. So they rallied hard after November’s vaccine announcements, as this heralded the likely easing of lockdown, and with it our thirst for buying stuff and going places, all of which need oil and natural resources.
However, in recent weeks that rally has faded, and investors have been returning to the tech giants, and with them US equities. This doesn’t mean they’re suddenly expecting a recession, but does imply they believe we’re heading back to the winner-takes-all conditions that have dominated for the last decade. That means the strongest company in any industry survives and thrives, but weaker competitors struggle just to defend their slice of the pie, let alone grow it.
Note that this is all “at the time of writing”, which is Friday morning. Later today sees the release of key US employment data. If these are wildly different to what’s expected, we could see this trend either accelerate or reverse. Finally some drama then? I should be careful what I wish for…
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.
One previously reliable well of tension that has run dry is the Bank of England rate setting meeting. There used to be genuine uncertainty over its outcome: An interest rate rise? A cut? A quarter of a per cent? Or the full half? Not anymore: The BofE crew met this week, but their fiercest debate would have been their choice of biscuit, as their “no change” verdict on interest rates was all but set in stone.
They did elicit a slight tremor in the pound, however, by announcing they are relaxed with inflation running up to 3.1% for a while (their target is 2%). They expect this to be a temporary thing that will soon pass, which is exactly how I feel about my 11-year old son’s recent willingness to tidy his room.
Sterling’s wobble happened because investors are drawn to currencies that pay higher interest rates. But the BofE’s chillaxed attitude means they’re not planning on raising rates even if inflation does tick up. This obviously disappointed those expecting them to copy the US Federal Reserve’s more clenched tone from last week. So, there was some light pressure on sterling against the euro, but not so much that you’d notice in, say, the price of a tub of tzatziki.
One good thing about this market lull is it gives me a chance to expand on the inflation theme. As I mentioned last week, it really is ‘The Big Thing’ that investors markets are obsessing over. Many commentators believe we are at a historical turning point, at which the long era of falling inflation turns to a period of rising inflation. If they’re right, this polarity reversal would have a profound impact on the fortunes of different asset classes, turning winners to losers.
It also highlights another of the slipperier areas of investing: that we measure the size of one thing (returns made by our investments) using something – a currency – that also changes in value. There has, and bear with me on this, been much conjecture about the gradual shrinking of our beloved snacks, such as the Creme Egg, the Wagon Wheel or the Mars Bar (a phenomenon that itself may have diddled the inflation calculation). But, for anyone with a ruler, this is simple to measure.
But now imagine measuring the length of a Mars Bar using not centimetres, but Creme Eggs. If the Creme Egg has shrunk while the Mars Bar has stayed constant, it will appear as if Mars Bars have actually grown. This isn’t as trite as it may sound: much has been made of equities’ extended rally, but this has happened at a time when the supply of the things used to measure it – dollars, euros or pounds – has been expanded at pace. So have the prices of shares, fine wines and second homes in Cornwall all risen? Or have currencies all dropped? And, either way, will this trend continue? These are some of the reality-bending issues we continue to wrestle with on your behalf.
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.
As it happens, markets mirrored our weather this week. It was blue skies for the first half, but there was a marked change from Thursday onwards. The cause of this shift was the US Federal Reserve (“The Fed”), who indicated they might raise US interest rates a little sooner than previously expected. So now they expect a rate rise in 2023, instead of 2024.
This is exactly the kind of dull-sounding piece of financial information that may well have passed you by. But in the financial world, a shift by the Fed is the equivalent of a shift in the Gulf Stream: it will impact the returns on global financial assets for years to come.
It’s also another in a series of data points that form the big game that investors are watching closely: inflation. Specifically, after 30 years of falling inflation, have we reached a turning point? Is inflation about to start rising again? Or will it carry on falling into outright deflation? And if it is about to return, does it do so modestly, or are we heading back to the 1970s?
This matters greatly, because the kind of assets that perform well when inflation is falling, such as government bonds, are the kind of assets that will fare very badly if inflation starts rising again. Hence the avid interest: investors are trying to decide if it’s time to hop out of one kind of asset, and into its polar opposite. So any outbreaks of volatility we see in the coming weeks or months will, most likely, be caused by data suggesting one outcome is more likely than the other.
The Fed’s mild shift on interest rates was taken as a sign that inflation may well be coming back. So, big drama for the writers of financial headlines. But, actually, not that much drama in markets themselves. Markets have a way of sniffing out trends, and reacting to them, way before they reach the papers. So the corresponding drama for this particular piece of news most likely happened several months back, when government bonds dropped in price, and the prices of commodities and mining companies (which like inflation) rose sharply.
There was one notable move, however: The US dollar rose against sterling by almost 2% over the week – a big move in the often-glacial world of currencies. Under normal circumstances, this would mean that cooling beer in the heat of the Florida sun had just become more expensive. But, luckily, we’re not allowed to go to Florida, and – I’m pleased to report – a pint of warm ale under a grey sky remains unchanged.
Have a great weekend,
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 fifth month of 2021 will not go down as an important month for global investors. Most equity and bond market investors made some positive – but relatively modest – gains during May. And whilst COVID-19 vaccination progress across many countries has been notable over recent weeks, the general economic outlook across the U.K., United States and Europe has recently improved. Certainly underlying confidence for the rest of this year and into 2022 has improved over recent weeks.