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April Market Commentary

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April Market Commentary

Wednesday, April 8th, 2020

In March, the coronavirus outbreak seemed to steal all the headlines, giving us almost hourly updates as it transformed our lives, and made the word ‘unprecedented’ feel like an understatement. Inevitably, there has been a serious impact on world stock markets, which have suffered their worst quarter since 1987.

The figures that follow will not make for pleasant reading: it is scant consolation that they would have looked much worse in the middle of the month, before governments around the word rushed to put stimulus packages in place to protect their economies and businesses. To give just one example, the US government passed a near $2tn (£1.62tn) aid package, described by one US Senator as a “wartime level of investment in the economy.”

It is worth noting that markets have always recovered over time. They recovered from the crash in 1987 and they recovered from the 2008 financial crisis.

Inevitably, the impact of the pandemic overshadows this Commentary. We have, therefore, added an extra section. Optimistically titled ‘Coronavirus: Fighting Back’, it details the economic and fiscal efforts governments are making in the face of the virus.

Coronavirus: Fighting Back

As we mentioned above, governments around the world have been launching stimulus packages to help their economies withstand the shock of the Covid-19 epidemic.

In the US, the Federal Reserve initially announced a $700bn (£565bn) package of aid, which was subsequently dwarfed by a near $2tn (£1.62tn) intervention. President Trump declared the pandemic a national emergency, opening the way to yet more state aid and direct intervention in the economy. By the end of the month, he was talking of a $2tn programme of infrastructure investment to boost the US economy.

UK Chancellor Rishi Sunak delivered his Budget speech on 11th March – which now feels like several months ago – and initially announced a £30bn package of aid for business. “We will do whatever it takes,” he declared. A week later he was back, announcing a much larger package of aid which now covers small business grants, business interruption loans, help with wages, business rate reliefs and help for the self-employed.

The EU announced a €750bn (£700bn) aid package in the middle of the month and both the World Bank and the IMF pledged money to fight the outbreak and its economic impact.

Will all this be enough? The simple answer is that no one knows: as we have commented below, even with all this intervention some household names will be out of business by the time the dust finally settles. Hopefully the picture will look brighter by the end of April, otherwise we may see another raft of central bankers standing sombrely at lecterns while they deliver another round of aid packages.

UK

In any normal month, Rishi Sunak’s first Budget – and his promise of massive investment in the UK’s infrastructure – would have taken up the bulk of this section of the Commentary. As we have seen, anything the Chancellor announced on 11th March was almost immediately superseded by events and – when this is finally over – another Budget seems inevitable. Like other countries, the UK will, one day, have to pay for the rescue package and the unprecedented increase in Government borrowing.

Whether there will be a UK high street to play its part in that recovery is currently looking questionable. There are always winners and losers from crises: currently the supermarkets (reportedly busier in March than at Christmas) and Amazon are the winners, while ‘ordinary’ shops are very much the losers. Pubs and restaurants up and down the land are going to close, irrespective of how much help the Chancellor gives them with business rates. The closure of the Carluccio’s chain – putting 2,000 jobs at risk – will not be the last by any means.

John Lewis has warned that stores could close, shopping centre operator Intu has said it could go bust and even before lockdown was introduced in the UK high street, footfall was down by 8%. Goodness only knows what the figure will be now.

Marks and Spencer, and several other household names in the fashion and retail sector, are warning of closures. As one analyst put it, “You do not buy a new outfit to stay at home”.

The rest of the UK news is, inevitably, dwarfed by the impact of the crisis. You won’t be surprised to hear that both consumer and business confidence fell during March, or that the UK’s credit rating was downgraded as a result of the pandemic. Credit rating agency Fitch dropped the UK from AA to AA- as it said that the country’s economic output would fall by almost 4% this year.

Was there any good news? At the beginning of the month, Nissan announced that it was investing £400m in its Sunderland plant to build the new Qashqai – and two days later the Chinese firm Jingye completed the takeover of British Steel, safeguarding 3,000 jobs. Then, on the morning of the Budget, the Bank of England cut base rates from 0.75% to 0.25%.

None of this, of course, could do anything to stop the stock market’s slide in March. The FTSE 100 index of leading shares fell 14% in the month to close at 5,672 and is down by 25% for the year as a whole. The pound fell 3% in the month to end March at $1.2415, down 6% against the dollar for the year to date.

Brexit Negotiations

March began with the UK saying it would take a ‘hard line’ in trade talks with the US as the Government pursued trade deals around the world in the wake of leaving the EU. The first round of trade talks with the EU was held at the beginning of the month, with the intention of reaching an agreement by the end of the year. That first round of trade talks threw up ‘clear differences’ – but that was always going to be the case.

Then, in the middle of the month, came the news that the EU chief negotiator Michel Barnier had tested positive for the Covid-19 virus. A week later it was Boris Johnson’s turn, swiftly followed by Health Secretary Matt Hancock and the UK’s Chief Medical Officer.

Predictably, talks with the EU are now on hold. Equally predictably, reactions to that news depend on your original viewpoint. The two sides are either saying that a deal by 31st December is now impossible or muttering, “Have they never heard of Zoom?”

Hopefully, the situation will be clearer by the end of April. We will, as always, report back…

Europe

March was the month that Europe went into lockdown. It had started with the normal corporate news we have come to expect, with the IFO Business Climate survey saying that the German car industry ‘would face significant challenges’ over the months ahead.

A week later the whole of Europe was facing a very different challenge as Italy went into lockdown and Angela Merkel predicted that up to 70% of Germans could be infected by Covid-19.

Factories rapidly started closing all over Europe, free movement was forgotten as individual countries closed their borders and the ECB raced to implement a rescue package, scrapping its budget rules to fight the virus.  

The impact of Covid-19 on Europe could be severe and long lasting. The blow to Italy’s economy – to take just one country – could be catastrophic, especially with several Italian banks long having been widely seen as vulnerable. If the outbreak is prolonged then the fragile economies of Spain, Greece and Portugal are going to compound the problem. The German taxpayer may ultimately decide that their own country is the only priority.

In keeping with the rest of the world, March was not a happy month for European stock markets. The German DAX index fell 16% to 9,936 while the French market fell 17% to 4,396. For the year as a whole, the two markets are respectively down by 25% and 26%.

Illustrating how vulnerable some of the smaller markets might be, the Greek stock market fell 22% to 558 in March, and is down by 39% since the start of the year.

US

Total ‘non-farm payroll employment’ in the US rose by 273,000 in February, with the US Bureau of Labor Statistics reporting that the unemployment rate was unchanged at 3.5%.

The difference in March was that the figures were out of date almost as soon as they were announced. As the figures came out, the US Federal Reserve was implementing the first emergency cut to interest rates since the collapse of Lehman Brothers in 2008. As one report put it, ‘the world’s biggest economy is running scared’. Chairman of the Federal Reserve, Jerome Powell, said that the cut would be a ‘meaningful boost’ to the US economy.

A fortnight later, the Fed had to act again – effectively cutting US rates to zero and announcing a stimulus package worth $700bn (£565bn). This was subsequently dwarfed by the near $2tn package which the US administration approved by the end of the month.

But, as the old saying goes, ‘it’s an ill wind that blows no good’. No one will be surprised to hear that Amazon has gone on a hiring spree as the demand for home deliveries rockets.

Away from the economy, it is looking almost certain that the US Presidential Election in November will be between Donald Trump and Joe Biden – formerly Barack Obama’s Vice President. March saw Biden defeat Bernie Sanders in a string of primaries and go a long way to clinching the nomination.

When Donald Trump was inaugurated in January 2017, the Dow Jones index stood at 19,732. To the President’s horror, the Dow slipped below that level at one point in March, falling to 18,917. By the end of the month, it had recovered to 21,917 where it was down 14% for the month and 23% for the year as a whole.

Meanwhile, the economic news continued to worsen, with 3.28m Americans – an unprecedented number – seeking jobless benefits and American Airlines saying that it will need $12bn (£9.7bn) in state aid. The remark of UK Chancellor, Rishi Sunak – “we will not be able to protect every business and every job” – will apply just as much in the US as it will in the UK. By the end of this crisis, it may well be that many household names have ceased to exist.

Far East

The newspapers are already full of demands for there to be ‘a reckoning’ with China when the Coronavirus is over. Everyone reading this will have their own views on whether the Chinese Communist Party lied about and/or covered up the true extent of Covid-19 in the early days of the outbreak.

Whatever the truth, countries will continue to trade with China and so, for the purpose of this Commentary, the country’s economic performance remains important to both the Far East and wider world trade.

The beginning of March brought confirmation that Chinese manufacturing had fallen to a record low in February, with the Purchasing Managers’ Index down to 35.7 from the 50 it had recorded in January. At one point, exports were down by 17% as the virus had a bigger impact on Chinese manufacturing than the economic crisis of 2008.

Fast forward to the end of the month and those figures had been turned on their head, with the PMI soaring to 52 by the end of the month.

Despite this, the World Bank is predicting a year of ‘pain’ for Far Eastern economies. The Bank is now predicting that growth in China this year will be just 2.3% compared to a prediction of 6.1% made last year. This lower growth rate will inevitably impact the smaller Far Eastern economies, with the World Bank now projecting a best case scenario of 2.3% growth for the region this year, and a worst case of just 0.5%. This compares to the 5.8% growth forecast before the Covid-19 outbreak.

In the current circumstances, it is somewhat ironic that China’s Shanghai Composite Index delivered the ‘best’ monthly performance of those markets on which we report. It closed March at 2,750 from an opening level of 2,880, meaning that it was down just 5% in the month and 10% for the year as a whole.

The Hong Kong market fell 10% in the month to 23,603 (down by 16% since 1st January). The Japanese stock market fell 11% in March to close at 18,917 while the South Korean index fell 12% to 1,755. Both those markets are down by 20% for the year as a whole.

Emerging Markets

Back in 2018, Vladimir Putin won another six year term as Russian President and promptly laughed off suggestions that he would run again in 2024, when he will be 72.

But now it appears that Vladimir Vladimirovich has had second thoughts and – like his friend Xi Jinping – rather fancies being President for life. Before Covid-19 brought normal politics to an end, a Russian MP had proposed ‘resetting to zero’ the number of Presidential terms Mr Putin has served. In theory, the move will require the approval of the Russian Constitutional Court: you shouldn’t expect that to be a problem when normal service is resumed.

The Indian Premier, Narendra Modi, appears to be in rather more immediate need of reassurance. He has made a public appeal for forgiveness after making a very rapid decision to put 1.3bn people into lockdown. The situation is fast turning into a human tragedy as millions of the poorest migrant workers face walking hundreds of miles to get home, facing both rising temperatures and closed state borders.

Modi’s finance minister was also under attack after announcing an £18.8bn stimulus package for the economy: critics derided it as ‘not nearly enough.’

The Indian stock market ended the month down 23% (and 29% for the year as a whole) at 29,468. It was not, though, the worst performer in this section, as the Brazilian market fell to 73,020 – down 30% in the month and 37% for the first quarter. In relative terms, the Russian market did ‘well:’ it was down by just 10% in the month and, at 2,509, is down 18% for the year as a whole.

And finally…

We debated long and hard as to whether to include the ‘And finally’ section in the Commentary this month. In the end we decided to keep it for two reasons. First, we’ve long suspected that it is the most widely read section of the Commentary. Secondly, it’s a symbol of normal life – and a reminder, despite the fact that amusing stories were hard to find in March 2020, that we will get back to normal life one day.

And what could be more normal than the British Wife Carrying Championship? Technically we should have reported on it last month as it was held on 29th February, but sometimes even the most interesting stories take a while to make the papers.

We must add our congratulations to David Threlfall and Cassie Yates, the winners of this year’s race. Should you wish to see it, a quick search on Google or YouTube will help your self-isolation or working from home.

The event’s website certainly pulled no punches: wife carrying can be a dangerous activity, which can lead to slipped discs, broken legs and arms, limb dislocation, spinal injuries and hernias.

Nevertheless the event appears to be gaining in popularity. For any clients who may feel like participating next year, please note that ‘wives’ (not necessarily your own) must weigh at least 50kg. There are also generous prizes for anyone who might see wife-carrying as a route to the professional sports career they have long wished for.

The winner this year received a barrel of ale, the oldest ‘carrier’ won a pot of Bovril and a tin of pilchards, while the carrier of the heaviest ‘wife’ was rightly rewarded with a pound of sausages.

On that upbeat note, we’ll leave this month’s Commentary. Let’s hope the world is a more positive place when we report again in May. Until then, take care, stay safe and remember that if you need to contact us we are never more than a phone call or an email away.

How long does it take to beat a bear market?

Wednesday, April 1st, 2020

The current COVID-19 crisis has wiped billions from the world’s financial markets. In the world of investing, such markets where share prices are falling are known as bear markets. 

Beating a bear isn’t easy, but you’ll be pleased to read that in all 10 prior occasions, the FTSE All-Share has completely made up the ground in the next bull market, a market where share prices are rising. Unfortunately, it usually takes longer for markets to rise than it does for them to fall. 

Bear markets are typically nasty, brutish and short, like recessions rather than economic upturns. Again using the All-Share as a guide, the average time it has taken to recover a bear market loss is 648 days, compared to the 385-day average market downturn.

Staying invested even when markets are falling can be wise because if you sell, you own less shares that can potentially gain value when the market starts to rise again. Stock market investing is best conceived as a long term game played over years rather than months.

Watch out for the bear traps

Bear markets are littered with sharp advances which often turn out to be nothing more than small peaks before the downward turn resumes. These are perilous to investors who opt for a ‘buy on the dip’ investment strategy.

For example, during the 2000-03 bear market that followed the dot-com bubble, there were six major rallies in the All-Share that generated a combined gain of 2,030 points, even as the index actually declined by 1,649 points overall during this period. Those who piled into these market rallies would have lost out in the long run.

Nine of the ten largest single day surges on America’s S&P 500 index have been during bear markets. Beating a bear is a slow game, and those who are over-eager can suffer larger losses. 

Trying to see the bottom

Bear markets are like a murky pond – it’s impossible to see the bottom or the trough until after it has passed.

For those of us who don’t have a crystal ball, it’s impossible to foresee exactly how low markets will fall. Taking a slow and steady approach is probably your best bet to conserve your portfolio’s value. This might mean a lower return than a brash approach, but you’re not putting too much money at risk. Additional pain is suffered by those who plough lots of capital into ‘bear trap’ short term rallies.

Coronavirus – and the markets’ volatility

Wednesday, March 18th, 2020

With billions being wiped off the stock market due to the coronavirus outbreak, it’s hard for investors not to panic. Markets are extremely volatile, despite measures taken by central banks around the world, including the Bank of England, to try and reduce the impact of the pandemic.   

There are, however, a few key principles to bear in mind regarding your finances:

Stay invested

The main advice is to hold your nerve. Don’t get distracted by all the ‘noise’ of the markets lurching up and down. If, for example, you see the market jump up 600 points, only to witness it lose 1400 points and then rise another 800 points in the course of a week or even a day, you know emotion has taken over from all rational thought. In such circumstances, it’s better to wait until things calm down, no matter how long that may be.      

It would be impossible to predict the bottom of the curve so it’s better to keep your funds invested. Otherwise, by taking your money out, you could risk being out of the market on the very days it recovers and does well.  

Think long term 

The coronavirus situation is without doubt unprecedented, fast moving and deeply concerning. Yet although we might not have gone through anything like it in our lifetime, the stock market has experienced crises before and recovered. Just think of both World Wars, the Gulf War, oil shortages, the 2008 financial crisis and recession. So while in the short term your investments are likely to be affected, anyone investing in the stock market knows they should be thinking about a five to ten year period. Coronavirus will continue to unsettle the markets but volatility will always be a part of investing.   

Diversify, diversify  

It’s a good idea to use this time to review your portfolio carefully. Consider whether it is still in line with your attitude to risk. Is it balanced with a mix of different investments, including shares, government and corporate bonds, property and cash? Ask yourself if it is still in tune with your long-term goals?   

Moving money into an ISA means you don’t have to invest the money all at once and can drip-feed amounts into the markets when things may be less turbulent. Try and build some protection into your portfolio by ensuring it has a mix of cash, gold or short-dated government bonds. Make sure it’s not too concentrated on just a few funds, or on one or two particular countries or industries that could be most hard hit. 

Don’t check obsessively   

The best advice at times like these is not to sit there checking your investments on your phone, tablet or desktop all the time. Switch off your notifications as it will only make you anxious and could tempt you into making a knee-jerk reaction.  

There’s a lot to be said for the sentiment expressed in Kipling’s poem, “ If you can keep your head when all about you…” particularly when markets are plummeting.

The impact of coronavirus on stock markets

Wednesday, March 4th, 2020

Stock markets across the world have fallen sharply because of fears over the economic impact of the coronavirus as the number of cases continues to rise. The situation is changing rapidly all the time but at the time of writing the virus that started in China has spread to more than 50 countries, including the UK.

The Dow Jones was hit by its biggest ever daily points drop of 4.4% on 27th February and the main European markets also fell dramatically, with London’s FTSE 100 index down more than 3%. Shares lost almost 13% of their value, wiping £200bn from the value of companies on the index. This made it one of the worst weeks for the global markets since the financial crisis in 2008. There has been some limited recovery in the last few days but significant volatility remains likely.

Investors are concerned the situation could spark a global recession, while Mark Carney, Governor of the Bank of England, has already warned that the outbreak could result in the UK’s economic growth prospects being downgraded. 

Sectors most affected 

Not surprisingly, shares in airlines and travel companies have dropped significantly. EasyJet fell by 16.7% in the FTSE 100, while Tui and British Airways owner IAG both dropped by more than 9%. Oil prices have plummeted, with the price of Brent crude being at its lowest since 2016.    

Firms that rely on goods from China, like the car manufacturer, Jaguar Land Rover, have highlighted that they could soon run out of parts. Companies such as Nike, Apple and Walt Disney have been badly hit, with shares down more than 4%.

The prognosis

Although stock markets may be reliving the financial crisis of 2008, there is no way of knowing how the situation will play out. Previous epidemics such as SARS and MERS had a significant impact on the economy but the effect was transient. Even the worst-hit stock recovered within a year.        

Sonja Laud, chief investment officer at Legal & General Investment Management, explains that,

“What markets are trying to digest is how long this is going to go on and what the economic damage will be.” The situation may look as if it is going to go wider and deeper than investors  originally assumed but acting in panic will not help.

On the plus side, these sudden falls have come after a very strong period for shares in 2019.  So while they may appear dramatic in the short term, the starting point for quite a few markets was an all-time high.  

The best course of action?  

With sensationalist headlines in the media, panic can quickly spread. There are undoubtedly going to be mixed messages. You’ll hear some people saying it’s a good time to buy shares while they are dipping, while others will recommend you sell your shares quickly and buy government bonds instead.

It may sound like a cliché but it is a case of weathering the storm. Rather than make any sudden decisions, try and stick to your long-term investment plan. As the saying goes, it’s about time in the markets rather than timing the market. So while the dips may seem acute now, the picture could look very different over a ten or fifteen year timeframe.

If you do have any particular concerns about your investment strategy at the current time, do not hesitate to get in touch.   

Environmental investing themes for 2020

Wednesday, February 19th, 2020

Although the financial markets have seen their fair share of volatility over the last decade, there has been a growth in opportunities for investors wanting to invest in environmentally conscious businesses. If you’re looking to make a more positive impact on the world while also seeking returns on your investment, it’s important to be aware of some of the emerging trends and themes surrounding environmental investment. Let’s take a look: 

The internet of things 

New and interesting developments have arisen around technological integrations. Many appliances and devices now come embedded with sensors, software and the ability to connect to a network. This new interconnectivity in objects enables them to collect data so that manufacturers can identify areas of efficiency or inefficiency and make changes accordingly. 

However, this industry is still in its infancy, so there will be some time before it fully flourishes. With that said, it remains an attractive piece of tech for manufacturers, so there’s little doubt that the industry will continue to grow, presenting investment opportunities in both software firms and manufacturers alike. 

Electric vehicles

Many vehicle manufacturers are set to bring electric offerings to market in 2020, due to a predicted rise in consumer demand. It had been announced that the sale of new diesel and petrol cars would be banned by 2040. Boris Johnson has now brought the deadline forward to 2035, given that pressure was being put on the Government to make it as early as 2032. The increase of electric vehicles on the road may in turn lead to increased investment in charging infrastructure. 

There may also be investment opportunities in companies that produce the technology and components required to develop and manufacture electric vehicles. 

Fast fashion

The rise of the fast fashion industry has been close to meteoric. With its rise have come notable environmental concerns – the European Environment Agency lists textiles as the fourth biggest pollution after housing, transport and food. Fast fashion has a very negative impact on the environment, from the amount of water that is required to create products, to the amount of fabric that ends up in a landfill or is burned. 

As a result, opportunities have arisen around the creation of materials that are more environmentally friendly than cotton or fossil-fuel derivatives, so firms involved in the development of sustainable materials may be worth investigating. 

With concerns around climate change reaching greater heights, the need for environmentally conscious solutions become all the more vital. If you’re interested in environmental friendly investing, then make sure to get in contact for more information.  

February Market Commentary

Thursday, February 6th, 2020

China grabbed the headlines again in January, but this time not for trade. On 31st December, the Chinese authorities had notified the World Health Organisation of an outbreak of pneumonia in Wuhan City, Hubei Province. Today the country is in lockdown, the death toll is rising fast, the number of infected is rising faster. 

The trade war with the US has been pushed off the front pages and the disease’s inevitable shock to the economy is starting to kick in amid praise for how China has reacted to the outbreak compared to SARS earlier this century. 

The run-up to Brexit – and even the murmurings of the great and the good at the World Economic Forum in Davos became mere sideshows. 

As always, here are the details.

UK 

With only a few isolated bright spots – Tesco’s Christmas sales were up for the fifth year in a row: Aldi and Lidl did well – it was hard to find any good news for the UK high street over the holiday period. 

As the reports filtered through in January, they were almost all equally gloomy, with Morrisons reporting a fall in like-for-like sales, Sainsbury’s saying its sales had ‘slipped’ and John Lewis admitting it may not be able to pay a staff bonus. 

It has been estimated that the UK retail sector lost 57,000 jobs in 2019: more worryingly, there are early forecasts that the sector shed another 10,000 jobs in the first three weeks of this year. Department store chain Beales is now in administration, threatening the closure of 22 stores and 1,000 more jobs. 

Chancellor Sajid Javid will deliver his first Budget on 11th March. It will undoubtedly contain measures designed to help the high street – the recently announced £1,000 a year rate relief for small pubs is an early indication of that – but with Amazon yet again having a record Christmas, you fear it may be too little too late. 

The Eurozone had a poor end to 2019, which was the same story in the UK as factory output in December fell at its fastest rate for eight years. Slowing global demand was blamed – and that was before Coronavirus had been identified. 

UK car manufacturing was similarly down: production fell to its lowest level for ten years and is forecast to continue falling this year. We mention Tesla’s success below and the simple truth is that our car manufacturers are facing ever more threats from companies they had never heard of ten or even five years ago. It is hard to see the trend being reversed. 

There was, however, some good news as the IMF forecast that the British economy will grow faster than the Eurozone. The IMF sees growth going from 1.3% last year to 1.4% this year and 1.5% in 2021. Of the G7 countries, it is forecasting that only the US and Canada will grow faster than the UK, while Italy, France, Germany and Japan will ‘struggle to keep up’.

Big projects were much in the news in January. Crossrail is now likely to be delayed until Autumn 2021 and – despite claims that its costs are ‘out of control’ – it looks like the Government may well press ahead with HS2. They have already made one controversial decision in allowing Chinese company Huawei to be involved in the UK’s 5G infrastructure: they now look set to ignore economic and environmental objections to HS2. 

The Chancellor’s upcoming Budget is promised to be the start of a ‘decade of renewal’. Investment in the UK’s transport infrastructure will be at the top of his list and not just HS2: there will be money available to reverse some of the Beeching cuts to the rail network and – hopefully – re-invigorate local communities. 

He will certainly have some healthy tax revenues to play with, as a rise in full-time female workers pushed the UK’s employment rate to a new high of 76.3%. There are now a record 32.9m people in employment in the UK. 

The FTSE 100 index of leading shares did not, though, have a record month. Like almost all of the world’s leading stock markets it drifted lower in January as the potential implications of the Coronavirus became clear. It eventually ended down 3% at 7,286. The pound was virtually unchanged in percentage terms, ending the month trading at $1.3184. 

Brexit and the UK’s Future Trade Negotiations 

The UK voted to leave the European Union on 23rd June 2016. As everyone will now know, we finally left on Friday 31st January, just 1,317 days after the Referendum. 

There is now a ‘transition period’ with the EU lasting until the end of this year, during which time the terms of a trade agreement will – in theory – be sorted out. So for the current year, this section of the Commentary will keep you updated on the progress of those negotiations, which are currently due to start in earnest. 

Foreign Secretary Dominic Raab has said that the UK “will not be aligning” with EU rules on trade, while Boris Johnson has said there is “no need” to follow the EU’s rules to do a trade deal. Meanwhile, Irish Premier Leo Varadkar has warned against “rigid red lines” and former European Council President, Donald Tusk, has teasingly said there is “plenty of time” to get a trade deal in place before Christmas. Whilst at the same time, hinted at “empathy” for an independent Scotland joining the EU. 

As you can see, the war of words has already started. To misquote Macbeth: there will be a lot of sound and fury in the months ahead, much of it signifying nothing. We’ll do our best to sort the wheat from the chaff. 

At the same time as negotiating with the EU, the UK will also be pursuing trade deals with countries like the US and Australia. We will also keep you up to date on all those developments in this section of the Commentary. 

Europe 

The year opened with more calls for strikes in France: the CGT union called for more action after President Macron used his New Year’s address to promise to push through his planned overhaul of the country’s pension system. The protests continued throughout the month – eventually leading to clashes between French police and the country’s firemen. February began with no resolution in sight. 

Away from French unrest, it was a poor end to 2019 for Eurozone manufacturing, which contracted for the 11th consecutive month. The Purchasing Managers’ Index fell from 46.9 to 46.3 in December, with any figure below 50 indicating a contraction. Figures from the PMI showed that both orders and output were down in December. 

One thing that certainly was down was the number of Swedish people taking to the air. The number of people who travelled through the country’s airports was 4% lower in 2019 than in 2018 as ‘flight shaming’’ impacted Swedes’ travel habits. So far no other European country has reported similar figures but it is, perhaps, a sign of what we might see in the coming years.

The year also ended badly for Volkswagen: not only was it overtaken in value by Tesla (as we report below) but Canadian prosecutors were proposing to levy a £110m fine on the company. VW had imported 128,000 vehicles into Canada which violated the country’s emissions standards. 

Both the major European stock markets were down in the first month of the year: the German DAX index fell 2% to 12,982 while the French stock market fell by 3% to end the month at 5,806. 

US

January was the month when the impeachment of Donald Trump reached the Senate and – to no one’s surprise – the Republican majority there duly looked after its President. With senators blocking impeachment witnesses, the President is all but acquitted. There appears to be nothing to prevent Donald Trump running for re-election in November, with the bookmakers expecting him to win a second term in the White House. 

Away from the trial, economic data showed that both wage growth and jobs had slowed in December. The US added 145,000 jobs in the month, well down on the 256,000 created in November. This capped a year of solid – but slowing – jobs growth as the US labour market expanded for the 10th consecutive year. 

The average hourly rate of pay rose at an annual rate of 2.9%, down from the 3.1% recorded in November. 

There was, however, no slowing down at Tesla, which saw its shares reach a record high – in the process, giving it a bigger market capitalisation than Volkswagen – as the company beat Wall Street estimates of how many vehicles it would deliver in the fourth quarter. The Silicon Valley carmaker delivered 112,000 vehicles in the last three months of the year, and 367,500 for the year as a whole. 

Much less surprising was the news that Amazon had enjoyed a record Christmas, shipping ‘billions of items’, with 5m people around the world signing up for a trial of Amazon Prime or for one of the company’s other subscription services.

Apple also claimed record sales and profits over Christmas, thanks to a surge in demand for the new iPhone 11, but by the end of the month the effects of China’s Coronavirus were being felt. 

Starbucks (coffee seems to be the barometer of an economy these days) made the decision to close 2,000 outlets in China due to the virus and the Dow Jones index – which had broken through the 29,000 barrier in the middle of the month when the US/China trade agreement was signed – eventually ended January down 1% at 28,256. 

Far East 

The news in the Far East was, of course, dominated by Coronavirus. But even without the face masks, there were plenty of worries for the Chinese economy. 

Figures released in the middle of the month showed that the economy grew by ‘only’ 6.1% in 2019. While that figure is beyond the dreams of Western economies, it represented China’s slowest rate of growth for 29 years. The Government was already rolling out measures to boost the economy before the Coronavirus hit, beginning the year by cutting banks’ reserve ratios and releasing $100bn (£75bn) into the economy. The longer the virus lasts, the more the Chinese government is likely to pump money into the economy.  

Chinese investment in Europe also fell to a nine year low as the Government in Beijing increasingly focused on stimulating domestic demand. As the US/China trade dispute continued through 2019, Chinese investment in Europe fell by 40% and was down by 27% in North America. Investment in the US and Canada fell from $7.5bn (£5.68bn) in 2018 to $5.5bn (£4.17bn) in 2019, the lowest level since 2009. 

Unsurprisingly, stock markets in the Far East had risen in the middle of January as the US/China trade deal was signed, but the impact of the Coronavirus wiped out those gains and more, meaning that the four main Far Eastern markets were all down by the end of the month. 

The biggest fall was in Hong Kong, where the Hang Seng index dropped 7% to 26,313. The South Korean stock market was down 4% to 2,119 while China’s Shanghai Composite index and Japan’s Nikkei Dow were both down by 2% to 2,977 and 23,205 respectively. 

It’s worth noting that as of 3rd February, the Chinese stock market had fallen by 8% and stood at 2,746, no doubt a consequence of the Coronavirus.

Emerging Markets 

In January, Amazon boss Jeff Bezos announced an investment of $1bn (£770m) in India, to help digitise small and medium businesses so they can sell online. Announcing the investment, Bezos said the 21st Century is “going to be the Indian century.” But not everyone was pleased at the news, as retailers across the country demonstrated at what they see as a growing threat to local retail markets. 

Russian President Vladimir Putin also appeared to be making plans for the next century. He was last elected President in 2018, winning a six year term which would have seen him in power until 2024. However, he now seems to have wearied of the tiresome business of getting re-elected and January found him busy re-arranging the structure of Russian government in a move widely seen as paving the way for him to remain President for life, much as Xi Jinping has done in China. 

Despite Jeff Bezos’ investment plans, the Indian stock market fell 1% in the month to close January at 40,723. Brazil’s market was down by 2% to 113,761 but there was – at last – a market which went up in January as the Russian stock market managed a gain of 1% in the month, closing January at 3,077. 

And finally…

Last January we brought you the news of Greggs and their vegan sausage roll. This year, the company celebrated Veganuary by releasing the vegan steak bake to an expectant world – a move that proved hugely popular. The company has now announced that its workers will share in a £7m one-off payment as a special ‘thank you.’ Helped by the success of the vegan sausage roll, Greggs CEO Roger Whiteside said 2019 had been an “exceptional year”.

Clearly, though, not everyone is eating vegan sausage rolls and walking five miles a day. The BBC reported that ‘M&S sales squeezed as men shun skinny trousers’ as the mainstay of the British high street was forced to concede that it had overestimated the demand for tight-fitting men’s clothes in the run-up to Christmas. As a result, it was rushing to order more ‘regular’ and ‘relaxed-fit’ clothes. 

You can only conclude that people eat more over Christmas… who would have thought?

Let us leave this Commentary with a tale of true love, or at least what Japanese billionaire Yusaku Maezawa hopes will be a tale of true love…

Mr Maezawa – who made his money in fashion – is seeking a ‘life partner’ to accompany him on a trip to the Moon. He will be the first civilian passenger on Space X’s lunar trip, planned for 2023. He wants to share the experience with a “special woman.” 

One doubts that he will be short of potential candidates. To paraphrase Mrs Merton’s famous remark to Debbie McGee, ‘What was it that first attracted you to the billionaire Yusaku Maezawa…’

Have a great month, we’ll be back with more updates in March.

Understanding Active vs Passive investment strategies

Wednesday, January 29th, 2020

The debate about whether a passive or an active investment strategy produces a better return for investors is one that has rumbled amongst financial planners for as long as passive strategies have been in existence. For you as a client, the method favoured by your adviser can have a major impact on your investment experience, so understanding the two different approaches is important.

An active strategy is one in which the investor – possibly a fund manager or other investment professional – will make investment choices on a regular basis, buying or selling holdings when they think it is necessary, often when they believe they can make a peak profit. An active strategy is highly involved and requires constant management.

A passive strategy meanwhile is one which requires hardly any trading whatsoever. Instead, money is invested into funds linked to indexes, such as the FTSE 100, by way of just one of many possible examples. Relying on the market to make your gain, passive investing is typically seen as a longer term strategy and, although it may sound easier than active from a management point of view, there is still a lot to do in terms of selecting the right funds and creating a well-balanced portfolio of asset classes that meet client’s needs.

On the active side, proponents claim that such a strategy is the only way to generate better-than-average returns; the only way to ‘beat the market’. After all, passive strategies, though divested across indexes and asset classes, are by their very design market-linked. If the index your passive strategy invests in goes up, so will your investments, with the negative being true if the index falls. Your investment may never outperform the market but it will also never lose more than the market as a whole.

Passive proponents, meanwhile, point out that active investment strategies typically cost more in fees, with these fees potentially impacting on the ability of the strategy to produce a better return. Those who favour passive investments also point out the increased volatility of active strategies, stemming from the higher frequency of investment movements and the timing of those movements, which also produce the potential for market-beating gains.

The election result and your finances.

Wednesday, January 22nd, 2020

With the Conservative’s having won their largest majority since 1987, we thought now would be a good time to reflect on some of the pledges made during the election campaign. How will the promised reforms affect you and your finances? 

Increase of the National Insurance threshold

The NIC threshold is set to rise from £8,632 to £9,500, which will lead to savings of around £100 a year for the 31 million workers who earn above that amount. Over the long term, the Conservatives have set an ambitious £12,500 threshold which would result in a tax reduction of £500 for those who earn over that figure.  

State pension triple lock

The state pension lock is set to be maintained, which is unsurprising, particularly after Theresa May’s plans to change the system cost her voters back in 2017. Currently, under the triple lock the state pension increases year on year, in line with whichever is the highest of these three measurements: the average earnings increase, the rate of inflation or 2.5%.

Further pension pledges

The government has pledged to address a separate pension anomaly which can result in people earning under £12,500 to be denied pension tax relief, if their provider uses the ‘net pay arrangement’ approach as opposed to the ’relief at source’ method. 

The government has also mentioned that it will address the ‘taper tax’ issue that is causing many senior NHS medical professionals to turn down work and overtime, rather than risk a retrospective pension tax charge. 

Steve Webb, director of policy at Royal London, raises the concern that there is a “lack of detail” in the suggested reforms, mentioning that “the measure proposed is far too narrow and may not even work. The tapered allowance affects far more people than senior NHS clinicians and creates complexity and uncertainty in the tax system.”

More will be revealed, no doubt, when Sajid Javid delivers his budget on 11 March.  

Income tax

When he was battling for leadership of the Conservatives, Boris Johnson promised to reduce Britain’s tax burden, making the bold statement that he would raise the threshold for the 40% higher-rate income tax band from £50,000 to £80,000. This would have resulted in serious tax savings for the top 10% of earners. It appears, however, that the plan has been shelved, at least for now. 

Rest assured, we’ll keep our ears to the ground and will update you of any significant policy changes in the budget that might affect your finances. In the meantime, if you have any queries, please don’t hesitate to get in touch.

Climate change fears impact on ethical investing

Wednesday, November 6th, 2019

As pressure mounts on governments and financial institutions to do more to combat climate change, the demand for ethical investment opportunities is on the rise. 

Triodos Bank’s annual impact investing survey has found that nearly half (45%) of investors say that they would be keen to move their money to an ethical fund as a result of news surrounding the environment. When asked, investors state that they would put an average of £3,744 into an impact investment fund, marking an increase of £1,000 when compared with 2018. 

53% of respondents believe that responsible investment is one of the best ways to fight climate change and 75% agreed that financial institutions should be more transparent about where their money is invested. 

Gareth Griffiths, head of retail banking at Triodos Bank UK, said: “Many investors are no longer waiting for governments to take the lead in our transition to a fairer, greener society – they are using their own money to back the change they want to see.” 

Ethical investing isn’t a new practice by any stretch. In fact, some ethical funds have been available for the past 30 years, though they still only make up 1.6% of the UK industry total, according to research carried out by Shroders. 

That then poses the question, why haven’t they earned popularity in the past?

The old consensus was that investing ethically meant you were sacrificing performance for morality. A thought which seems to be changing, however, as research conducted by BofA Merrill Lynch found that a strategy of buying stocks that ranked well on ethical, social and governance metrics would have outperformed the S&P 500’s yearly result for the past five years. 

Further to this, a survey conducted by Rathbone Greenbank Investments found that over 80% of the UK’s high net worth individuals are interested in investing ethically. Many want to back the fight against climate change and plastic waste reduction but say that due to a lack of choice they still end up investing in fossil fuels or mining companies.   

The investment industry has recognised the change in attitude, leading to more and more fund management companies including ethical, social and governance factors in their core investment strategies. However, with the movement only just beginning to gain true momentum, it seems that time will tell when it comes to the mass adoption of ethical investment practices. 

If you have any questions about ethical investment and the impact it might have on your portfolio, feel free to get in contact. 

November Market Commentary

Wednesday, November 6th, 2019

The beginning of October brought us the Conservative Party conference and a plethora of promises and fiery speeches. Meanwhile world stock markets were tumbling on fears of a global sell-off and the US/Europe tariff war joining the US/China dispute. By the middle of the month President Trump declared himself ‘optimistic’ about trade talks with China. 

Come the end of October it looked like the World Trade Organisation (WTO) would allow China to impose tariffs on $3.6bn (£2.8bn) of US goods, a move that was confirmed in very early November.

Boris Johnson spent the early part of the month trying to persuade politicians at home and abroad to do – or vote for – a deal that would allow Brexit to happen on October 31st. By the end of the month he was preparing for a General Election – while his opposite number in the White House was facing yet more calls for his impeachment. 

Let’s look at all the events and figures in more detail…

UK

October was another month where the ‘retail gloom’ section has eclipsed all the others. Christmas is creeping up on us and reception desks in offices up and down the land will shortly be groaning under the weight of Amazon deliveries – as shops in our high streets continue to close. 

The month did start with some good news as Hays Travel stepped in to save the 555 Thomas Cook shops threatened with closure following the company’s collapse. But can Hays really save all the shops? There must be many towns where both companies have high street premises. 

Elsewhere it was the usual tale of woe as John Lewis went looking for discounts from its landlords, Bonmarché called in the administrators and Pizza Express said it was in talks to refinance a £1bn debt pile. 

A report in City AM highlighted the sharp fall in stores’ profit margins as operating costs continued to rise. Profit margins are apparently down from 8.8% in 2009/10 to 4.1% in 17/18, with retailers blaming inflexible leasing arrangements, high business rates and a 10% rise in operating costs over the last five years. 

Unsurprisingly, the BBC reported that 85,000 jobs had been lost in retail over the last twelve months, with the number of retail sector jobs falling (on a year-on-year basis) for the fifteenth consecutive quarter. 

November was, of course, scheduled to bring us Sajid Javid’s first Budget. One absolute certainty was that the phrase ‘reform of business rates’ would have featured in that speech, as the Chancellor looked to find ways to revive the national high street. With the General Election now scheduled for December 12th, any Budget is likely to be delayed into the New Year.

What of the rest of the economic news in the UK? 

There was certainly plenty of bad news in October: the Purchasing Managers’ Index in the service sector showed a ‘heightened risk of recession’. UK car sales in September were disappointing: house price growth is at its lowest for six years and UK productivity recorded its worst fall for five years. 

Meanwhile, climate change protesters Extinction Rebellion were targeting both London City Airport and the London Underground. 

Against that, figures released by the Office for National Statistics showed that the UK economy had grown by 0.3% in the three months to August. The ONS did not exactly cover itself in glory later in the month when it reported a £1.5bn ‘error in the public finances.’ Fortunately it was an error in the right direction, with the UK budget deficit being £1-£1.5bn less than the ONS had previously reported. 

By the end of the month the UK was gearing up for a December General Election – but the bad news was back, as consumer confidence dropped to minus 14 from the minus 12 recorded in September – the lowest level since July 2013. 

Perhaps this was reflected in the stock market. The UK’s FTSE 100 index was the only leading market we cover to fall in October. Having started the month at 7,408 it closed down 2% at 7,248. The pound, boosted by hopes of a deal with the European Union, went in exactly the opposite direction, rising by 5% in the month to close October at $1.2944.

Brexit: an end in sight?

For much of October, uncertainty looked set to continue as Boris Johnson tried and failed to get his new Withdrawal Agreement through the Commons. The House even sat on a Saturday – to the dismay of MPs who wanted to watch the Rugby World Cup – but it all proved futile. 

Reluctantly, the PM accepted an extension from the European Union, pushing the date of leaving the EU back for another three months. Now the uncertainty would go on until January of next year…

And then, on Tuesday October 29th Parliament finally voted for a General Election as the Liberal Democrats and SNP sided with the Government to by-pass the Fixed Term Parliament Act. 

The UK will therefore go to the polls on Thursday December 12th in – whatever anyone claims – will be an election about the future of Brexit. The battle lines are clearly drawn, and the Conservatives started the race with a 16 point lead over Labour. But the experts have been quick to point out that this will be an election where tactical voting will have a major part to play. There will certainly be ‘remain alliances’ in some seats: whether the Conservatives will eventually come to an agreement with the Brexit Party to counter that remains to be seen. 

Europe 

The big – and worrying – news in Europe was that the German economy appears to be heading for a recession, if it is not already in one. 

Figures released at the beginning of October showed that German industrial orders fell more than expected in August: this was due to weaker demand and added to signs that a manufacturing slump is pushing Europe’s largest economy towards a recession. 

Thomas Gitzel, economist at VP Bank Group, said that, “The German economy is [already] in the midst of a recession.” With the economy having shrunk by 0.1% in the second quarter, “The German government will come under pressure to give up its strict Budget policy,” added the economist.  

There was more bad news for Europe at the beginning of the month when the WTO gave the US the go-ahead to impose tariffs on $7.5bn (£5.8bn) of goods that it imports from the EU. It is the latest chapter in a 15 year battle between the US and the EU over illegal subsidies for rival planemakers Boeing and Airbus and – as Brussels threatened to retaliate – was largely responsible for the global share sell-off at the beginning of the month. 

Did October bring us the first moves towards a common European budget? European finance ministers have laid the groundwork for a shared financial mechanism, designed to be used ‘in the event of future economic shock’. Eurozone countries will be required to pay capped contributions into the fund and – presumably – be able to draw on the fund if they duly suffer an ‘economic shock.’ Countries who are struggling economically will be able to reduce their contributions by 50% ‘when necessary’. 

The end of October brought the news that Fiat Chrysler are in merger talks with PSA – owners of Peugeot and Vauxhall – to create ‘one of the world’s leading automotive groups, valued at around $50bn (£39bn). 

On the stock markets both the German and French indices enjoyed good months. The German DAX index rose 4% to close at 12,867 while the French stock market was up just 1% to close October at 5,730. 

US 

The US economy added 136,000 jobs in September as hiring continued to slow down: economists had been expecting a figure around 152,000. However, the previous figure of 130,000 reported for August was revised upwards to 168,000 and the two months taken together were enough to push US unemployment down to a rate of 3.5% – the lowest figure for 50 years. 

With Bill Clinton having famously said, “It’s the economy, stupid,” you would think – given those numbers – that Donald Trump would be a certainty to win a second term in the White House. Maybe not: November will see the Democrats continue their bid to have the President impeached, with Elizabeth Warren having emerged as the clear favourite to win that party’s nomination for 2020. 

Away from politics Microsoft was betting on ‘foldable not bendable’ as it unveiled folding devices with dual touch screens which it hailed as the future of mobile computing. There was more good news for Microsoft later in the month as it beat off competition from Amazon to win a $10bn (£7.7bn) contract from the Pentagon. The contract is for the Joint Enterprise Defence Infrastructure (‘Jedi’, obviously) and is aimed at making the US defence department more ‘technologically agile.’ 

Two companies, meanwhile, were having rather less successful months. First up was Facebook – where a host of big names were queuing up to disassociate themselves from the Libra cryptocurrency the company hopes to launch. Meanwhile Apple received any amount of flak for withdrawing an app – apparently under pressure from the Chinese government – which allowed protesters in Hong Kong to track the whereabouts of the police. To compound the misery, figures released at the end of the month showed iPhone sales slowing down. 

Perhaps Apple will be helped by the Federal Reserve’s decision to cut US interest rates for the third time in four months. As US economic growth for the third quarter slowed to 1.9%, the Fed cut rates to a range of 1.5% to 1.75%.

The Dow Jones index was up in October, but only by 129 points to 27,046 – leaving it unchanged in percentage terms. 

Far East 

October got off to a bad start for Japanese shoppers as the Government – pushing worries about a sales slowdown to one side – increased its sales tax for the first time in 5 years. The rate rose from 8% to 10%. 

But the country soon had even bigger worries, as it braced itself for Typhoon Hagibis, ‘the biggest storm for decades.’ Winds reached 140mph with some areas suffering from floods and landslides. 

China now has more ‘unicorns’ – tech start-ups valued at more than $1bn (£770m) – than the United States, but the figures for the third quarter showed the economy growing at its slowest rate since 1992. Admittedly that ‘slow’ rate was 6% – due to the continuing trade war with the US and falling domestic demand – but it was still below the government’s target of 6.1%. 

As anyone who has watched a news bulletin will know, the pro-democracy protests continued in Hong Kong and the economic consequences of the unrest were finally felt in October. With shops closed, public transport paralysed and tourists scared away, Hong Kong slid into recession in the third quarter, with the economy shrinking by 3.2% in the three months to September. That was much worse than the 0.5% contraction in the second quarter – and was well beyond economists’ worst fears. 

In common with all the major stock markets, those in the Far East fell at the beginning of the month in line with the global sell-off, but they had all – even Hong Kong – recovered by the end of October. Despite the typhoon, Japan led the way, rising 5% to 22,927 and Hong Kong’s Hang Seng Index shrugged off the news about recession to rise 3% to 26,907. The Chinese and South Korean markets were both up by 1%, closing October at 2,929 and 2,083 respectively. 

Emerging Markets

We have written previously about the economic problems in Argentina, a country that held an election in October. The winner was the centre-left candidate Alberto Fernandez in a vote inevitably dominated by economic concerns, with the recent – and continuing – crisis leaving a third of Argentina’s population living in poverty. 

It was a quiet, but profitable, month for Brazil, Russia and India as they all moved in the right direction in October. The Brazilian stock market rose another 2% to end the month at 107,220. The Russian market was up by 5% to 2,894 and the Indian market broke through the 40,000 barrier, ending October up 4% at 40,129. 

And finally…

With all this uncertainty around the world you’d be forgiven for harking back to ‘the good old days’. Shepherds in Spain did this by allowing their flocks of sheep – in their thousands – to follow ancient migration routes from the north of the country to the south for some winter grazing. What’s noteworthy about this annual event is that one of these ancient routes has, since the Middle Ages, been replaced with a large portion of the city centre of Madrid. Dodging sheep is certainly a change from their more popular running from bulls!

While we’re on animal news, rats hit the headlines when psychology professor Kelly Lambert taught them to drive. Strangely enough it was not the fact they were driving that shone the spotlight on the cruising critters. Instead, research found that driving reduced their stress levels… though they were not expected to sit a driving test.

And on that note, we wish you a great month.