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End Of Summer, But Not The Year

Hopefully you enjoyed a good summer break. August was another positive month for many financial markets, with one pan-European (including the U.K.) index achieving a seventh consecutive advance. Whilst 2021 started with material concerns about COVID-19 challenges, limited vaccination numbers and widespread lockdowns, progress has been made on all fronts. No doubt the late August news that seven further countries have been added to the U.K.’s green travel rules, will further boost hopes that a return to previous norms are closer.

Weekly Note

The Week In Markets – 28 August – 3 September

This week markets have offered us a carbon copy of markets last week: They generally went up, with Asian equities rising the fastest as they rebound from their mid-summer trouncing. 

Tempting as it is just to reuse last week’s note, instead I’ll expand on something I mentioned in it: central bankers’ impact on investment returns. Because the big cheeses of central banking met up at Jackson Hole last Friday (well, they did a group Zoom). There was much speculation about what they’d say, and what it would do to markets. But in the end markets shrugged, suggesting they’d correctly guessed the content (or lack of it) within the US Fed Governor’s speech. Ho hum.

But out of the proceedings did come an interesting academic paper. It helps to answer two big questions you might rightly ask: 1) Why, despite the trifling matter of a global pandemic, do share prices keep rising? And 2) why, if central bankers are creating oodles of new money through “Quantitative Easing”, haven’t we seen inflation go through the roof?

If the paper is right, then it’s because most of the new money that’s being created is going to people who already have it: Central banks inject this new money into the economy by buying assets, so it stands to reason that those with fewer assets will benefit less than those with plenty.

Then we come to something I dimly remember from A-Level economics: “The Marginal Propensity to Consume” (stay with me). Basically, the more money you have, the lower your marginal propensity to consume. In other words; if you give money to richer people, they are more likely to save it, and less likely to spend it, than someone who has less money to start with.

This is why, the theory goes, we haven’t had runaway inflation in prices of everyday goods and services, which we might have assumed would follow the creation of tons of money. If, instead of buying stuff, that money is being saved, or invested into assets like shares or property, it explains why we’ve seen high inflation in the prices of those assets. In short: there’s a lot of money swimming about, and it’s all looking for somewhere to earn a decent return, pushing up prices as it goes.

So there you go. That’s why we in the investment world focus so much on what central bankers do and say. If this paper is to be believed, their past and current actions are behind rallying stock markets, as well as other assets like homes, art and fine wine. If they stay on the current tack, there’s good reason to believe this will continue. But if they change course, it’s reasonable to believe that, well, markets will change course too. 

Here endeth the note. Less of a ‘The Week in Markets’, and more of a ‘The Decade in Markets’ this time. But hopefully, with the summer holidays ending, we can get back to shorter-term gyrations, which are less brain-bending than the long-haul stuff, and easier to digest of a Friday afternoon.

Until then, 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 – 21 – 27 August

It’s been a benign week for global stock markets, led higher by Asia’s partial rebound from its preceding weekus horribilis.

Given the lack of action in the immediate past, most commentators have turned instead to the immediate future. Specifically, they’re commenting on what they imagine might be said at the Jackson Hole meeting of central bankers today (Friday), and what they imagine markets might do in response. I haven’t yet seen any comment about what they imagine central bankers will do in response to the markets’ imagined reaction to their imagined meeting though. I suspect that’s because, much as it reflects what happens in reality, it sounds silly in a newspaper.

We’ll come back to that meeting, because it will matter, and it does feel like this week’s drifting markets has been a holding pattern, with investors waiting to see what’s said later today.

Not everything drifted though. Shares in UK supermarkets have had a bumper week – so much so that my mum emailed me for the inside line. Sadly, she emailed the wrong person: my speciality is picking good fund managers, who then pick the stocks for me. But I can read the FT as well as the next man, and it seems it’s due to speculation that there’s a takeover spree heading their way.

WM Morrison is already the subject of a spiralling series of bids, and this week it was Sainsbury’s turn to take centre stage, with takeover rumours causing its share price to spike by more than 15% on Monday. So, who is buying them? The answer, certainly in the case of Morrisons, is private equity.

The term “Private Equity” is bandied around a lot, but perhaps not all of us know exactly what it is. The simplest answer is what it’s not: “Public Equity”, which is shares that are listed for anyone to buy on a stock exchange. So private equity is, instead, shares in companies, or often the whole company, held off the market by individuals or, in this case, funds run on behalf of individuals.

Which brings us back to those central bankers who will be chinwagging (albeit virtually) at Jackson Hole today. Loads of money has flown into private equity funds in recent years, just as loads of money has flowed into almost every financial asset you can think of (including ones that have only just been invented, like cryptocurrencies). This coincides with central bankers creating loads of money through quantitative easing (“QE”) which they use to buy financial assets.

I use the word “coincides” with a wink, because it’s no coincidence: Their actions are pushing up asset prices everywhere. Hence the focus on their comments today – any indication that they might stop QE, or even slow it, may mean less future money to buy stuff and push up prices. Now I’m speculating on imagined future events myself – something I promised myself I wouldn’t do (at least not publicly, anyway) – which means it’s time to stop imagining and get back to real life.

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 – 14 – 20 August

In markets the hardest thing to get right (to the point of being impossible) is timing. So, I’m pleased to report that fortune has smiled on me this month: my recent two-week break coincided with possibly the dullest run for markets since records began – squeezing out two interesting weekly summaries would have been a tough ask. So, if you, like me, were taking a fortnight’s break from the 24-hour financial news cycle, you can relax – you missed nothing.

The last week has been a little wobblier though. You’d be forgiven for thinking this was due to the news coming out of Afghanistan, which has been bleak. But to the best of my knowledge that hasn’t been the cause. It has, instead, been the usual to and fro on the inflation-vs-deflation tug of war, which is all that markets can think about for now.

In this case, the very mild sell-off in equities, and corresponding rise in ‘safe-haven’ assets (such as government bonds or the US dollar) was caused by suggestions from US Federal Reserve officials that they may begin to taper their asset purchases by the end of this year. I could spend the rest of this note trying to explain exactly what “tapering asset purchases” is. But you wouldn’t thank me for it, not this close to the weekend.

So, I’ll turn instead to Asia where the market turmoil caused by the Chinese government’s recent actions continues to make for more interesting reading.

Asian markets fell by more than the global average again this week, extending the starker drops I described a couple of weeks back. In essence, the Chinese government has decided it doesn’t like the concentrations of power being built up by its tech companies. So it’s nipping them, painfully, in the bud. In fact, maybe ‘bud’ is the wrong term: Having performed spectacularly well for years, the Chinese internet companies’ were in full bloom. So now their woes are having a big impact on the Asian Stock Market Index – as companies like Tencent, which has dropped 40% in the last six months, had become huge parts of the market. This week it was the announcement of measures to ban unfair competitive practices that has wiped further billions off several Chinese tech behemoths.

Such concerns are frequently mentioned when thinking about US companies too, as antitrust talk has returned to the fore of late, and their tech giants are no longer the cuddly, universally popular entities they were when we first got smartphones (ahh, simpler times). But the US government has less inclination to clip its own companies’ wings and has less power than the Chinese Communist Party to do so even if it did. So, while the “FAANGS” aren’t winning with quite the gusto of the previous ten years, they’re holding up far better than their Chinese equivalents – for now.

That’s all that mattered for markets this week. Summer is a funny time though. Usually little happens, but when it does, things can move sharply. We’ll keep watching 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. 

Weekly Note

The Week In Markets – 7 August – 13 August

With a new football season upon us, some brave managers will adopt the approach of attack being the best form of defence. It seems President Biden is taking a similar approach in his response to COVID-19, with spending and stimulus measures being viewed as the best form of defence against the havoc created by the virus.

The Senate Democrats released a vast $3.5 trillion budget resolution on Monday, which was effectively approved on Wednesday, meaning the budget could be passed over the next few weeks or months, with little the Republican opposition can do to prevent it.

The timing of the budget is interesting, given the US economy has recently returned to pre-pandemic levels following the release of Q2 GDP last week. With the economy recovering, inflation running at elevated levels and jobs being added back at an impressive pace, some will question whether such stimulus is required, or whether it should be saved for the next downturn. Will this lead to more persistent inflation? The market is clearly dismissing this scenario, with bond yields still historically low and little expectation of rate rises in the near term, even with inflation above target in US, UK and Europe. In Germany we have just seen inflation reported at 3.8% year-on-year, a 27 year high. Yet despite this, investors are still willing to lend to the German government at deeply negative rates, with the yield on the 10 year bund at -0.46%.

With rising inflation, low interest rates and low bond yields, it is strange that the gold price continues to lag, with the precious metal falling at the start of the week to circa $1745. Remember the precious metal breached $2,000 an ounce for the first time in August 2020. Gold in theory should perform well in this backdrop; falling real yields has historically been ideal for it, although we are not witnessing this at the moment. It’s rare that everything in a portfolio works at once; indeed the objective of a well-diversified portfolio is to ensure that assets perform in different ways to one another. Although gold has been lagging over recent weeks, more risky parts of the portfolio continue to perform well, with UK mid-cap equities advancing over the last week or so. UK M&A activity has been picking up, with international companies continuing to pick off UK assets. Meggitt was subject to a rival bid on Wednesday, with two US firms now battling it out for the company. While these events are great for the short-term share price, one may question the overall effects to the UK economy on a more medium-long term time horizon. 

Like every football season the months ahead will be filled with success, surprise and disappointment with various management strategies constantly analysed by fans and pundits alike. In terms of investing, like all good managers we have an eye on the defence as well as the attack and are willing to tweak the strategy along the way to score as many goals as possible while trying our hardest not to concede.

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 – 31 July – 6 August

When Raymond Jackson the inimitable cartoonist better known as JAK, who drew cartoons for the Evening Standard for 45 years, was away on holiday some lesser-known cartoonist would draw a cartoon for the newspaper and a line underneath would simply explain “JAK is on holiday.” So too, we are writing this piece informing you first of all “Simon Evan-Cook is on holiday.” He’s away next week too!

The summer months in investment markets are often viewed as quiet months, characterised by low trading volumes, as key decision-makers often take annual leave (there’s a theme developing here) and little portfolio activity takes place. This week has felt fairly uneventful in markets, despite China’s best efforts with continued regulatory pressure.

US ISM manufacturing data, released on Monday, highlighted that manufacturing activity may slow from its frantic pace earlier in the year. The slightly disappointing data had an immediate impact on the oil markets, where prices fell around 3%, driven by concerns that the pace of growth could be slowing. Despite this, US equity markets were not impacted and in fact by Tuesday had recovered to close at an all-time high.

A market that is a long way from its all-time high is China, where a series of increased regularity interventions has spooked investors. This week Tencent suffered, falling around 6% on Tuesday, as a state article described online gaming as “spiritual opium”. Given the stock’s exposure to online gaming, it was no surprise to see investors sell in droves on this news.

On domestic shores all eyes were on the Bank of England Monetary Policy Committee meeting on Thursday. Despite expecting inflation to reach 4% this year due to the strength of the economic recovery in the UK, interest rates were kept on hold, although they may need to be raised in 2022 to curb inflation. The Bank of England stated it expects UK GDP growth to reach 8% in 2021.

As is customary for the first Friday of the month, US non-farm payroll data will be published later today. It will be interesting to see the pace at which jobs have been added to the US economy over the last month. Hiring has been occurring at a healthy pace, and anecdotally there are stories of continued labour and skills shortages, leading to higher wages being offered to entice workers. Perhaps US employers would find it easier to recruit if they simply offered staff more holiday and that might mean less inflationary pressure.

If you are managing to get in a summer holiday, perhaps taking advantage of the further lifting of travel restrictions, stay safe and enjoy while we keep an eye on your portfolio.

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. 

Summer Surprises

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.

Weekly Note

The Week in Markets – 24th – 30th July

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.

Weekly Note

The Week in Markets – 17 – 23 July

This week we get all philosophical, as we explore the financial world’s equivalent of “if a tree falls in a forest, and no one’s there to hear it, did it make a sound?” 

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. 

Weekly Note

The Week in Markets – 10 – 16 July

After a brief squall last week, markets have settled back into their commentator-unfriendly malaise. To put some colour on that, global equities blinked to the tune of -0.04% over the week, while UK equities suffered a light wilt of -0.14%. As a rule of thumb, you’ll know not much has happened when I resort to two decimal places.

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. 

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