Financial Focus - Bull Market

Published March 2023 in Distinctly Winkleigh

Disclaimer: The author is an active, regulated Director and the founder of Moor Independent Financial Advisers Ltd, a local, independent financial planning and investment management firm serving private clients and trustees. This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of investments may go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.

A global rally in December across global markets led to some muted price action in the first month of the year. Bearish commentators began to rumble about the chance of a market correction, or a fall of up to 10%, occurring imminently. Other participants were more upbeat and took positions anticipating a good year ahead. Views on the health of the global economy appear healthily divided at present, with a range of views being expressed across media platforms. February, however, has proven to be a remarkable month in more ways than one.

Following results announced after the markets had closed the previous day, on Thursday, 22nd February, Nvidia added $277Billion in stock market value in a single trading session. This is Wall Street’s largest one-day gain in history, coming after the heavyweight chipmaker’s quarterly report beat expectations and reignited the rally fuelled by optimism about Artificial Intelligence. The company soared 16.40% to close at a record high of $785.38, lifting its market capitalisation to $1.96Trillion. The knock-on effect of this momentous move of the stock that Goldman Sachs has cited as the most important in the world, fuelled global stock markets, including Europe’s STOXX 600, Japan’s Nikkei and the US S&P 500, to close at record highs as investors sought to trade in companies affiliated to the move and optimism flooded the trading floors. Reuters reported that Short sellers betting Nvidia's stock would fall rushed to close those trades on Thursday and lost $2Billion on paper, taking their declines to more than $6.8Billion so far this year. Whilst many are suggesting the US stock market rally is becoming overdone and that a correction is due, many others remain firmly in the bull camp. There is general optimism in the US about the strength of the US economy, the global macroeconomic backdrop and the anticipation of looser monetary conditions as interest rates are potentially cut in the US and across many developed nations.

Japan has defied the bears and the stock market has closed at record highs this quarter, surpassing a peak last seen in 1989. Japan seeks to exit a deflationary environment and is now seeing signs of inflation at its target of 2% persisting and the BoJ is citing rising wage growth. In addition, many market participants have commented that company valuations do not seem stretched yet and that the market rally appears sustainable. Others disagree and currency traders have cited that the carry trade on the Yen, where participants may borrow the Japanese Yen at around 0% and invest the money within interest-bearing assets in other currencies, continues unabated. In February, the Yen touched its weakest for three months against the Euro and dropped by the same margin on sterling to hit its lowest since late 2015 at 190.83. It also made nine-year nadirs on the Australian and New Zealand dollars. It has fallen 6.3% against the dollar this year and is the worst performing currency of the G10. It has also been highlighted that Japan slipped into recession in the last quarter of 2023; Japan's gross domestic product (GDP) fell an annualised 0.4% in the October-December period after a 3.3% slump in the previous quarter, confounding market forecasts for a 1.4% increase. Therefore, it does not necessarily follow that interest rates will rise in the near future at all. Some analysts are warning of another contraction in the current quarter as weak demand in China, sluggish consumption and production halts at a unit of Toyota Motor Corp all point to a challenging path to an economic recovery. Meanwhile, the Nikkei powers on.

India continues to grow apace and India’s blue-chip Nifty 50 is smashing new record highs almost daily, making five of them in consecutive sessions during the third week of February. A report by Nikkei Asia in February revealed that Google plans to commence production of its Pixel smartphones in India by next quarter. The U.S. tech giant has been striving to diversify its supply chain away from China amid U.S.-China tensions, whilst seeking to capitalise on the booming smartphone market in India, the report added. This comes after the news last year that Apple was moving the production of its iPhone15 to India as the company sought to move away from Chinese production. "Indian equity markets will continue to do well due to underlying strength in the economy, acceleration of business activity, strong corporate profitability and sustained domestic inflows," stated Pankaj Murarka, director and chief investment officer at Renaissance Investment Managers, in a recent Reuters article. India’s business activity accelerated to a seven month high on solid demand in February.

In the UK, a series of positive updates from blue-chip firms have quietly been reported so far this quarter, while data points to strong growth for domestic services firms and showed business optimism at a two year high. UK markets are underperforming European and US markets this year predominately due to their focus on commodities and energy in the larger firms that compile the FTSE 100, alongside a lack of technology stocks.

In the Eurozone, France has proposed starting an EU Markets Union with a small group of countries, to unify national rules on bankruptcies, prospectuses, taxation of capital gains and so forth. "I have been trying for more than six years to build a capital markets union. My conclusion is that starting with the 27 member states is a non-starter," French Finance Minister Bruno le Maire told reporters.

Jonathan Cotty, Chartered FCSI 

Financial Focus - Goldilocks

Published November 2023 in Distinctly Winkleigh

Disclaimer: The author is an active, regulated Director and the founder of Moor Independent Financial Advisers Ltd, a local, independent financial planning and investment management firm serving private clients and trustees. This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of investments may go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.

This quarter saw the commencement of open warfare in the Middle East, with Israel striking back after the slaughter imposed upon its citizens by Hamas. However, market reaction to these events has been muted; the focus for global financial market participants continues to be inflation and the dawning of the realisation that inflation and, consequently interest rates, will not reverse as quickly as initially forecast. Thus, the narrative has been that interest rates are likely to remain ‘higher for longer’.

Market reaction to good news this past quarter has varied quite unpredictably. Sometimes, good company results were cheered and the market rose; other days good data simply served to offer an additional opportunity for market participants to engage in further self-flagellation, with markets nose-diving at the thought of interest rates remaining elevated.

A correction is defined as a 10% fall from the high and this has been the overriding theme of the quarter. The S&P 500 completed a correction from its 31 July high of 4588 to hit 4117, the FTSE 100 retreated from a high of 8012 in February to hit 7291, having previously corrected to these levels twice already this year. The FTSE All-Share followed the same pattern, from 4377 to a new low for this year of 3933, a drop of 444 points or 10.14%.

A market correction is not an unusual event and, in this instance, appears to broadly reflect general uncertainty about the length of time interest rates will remain at current levels, alongside concern this will start to have an impact upon growth if it persists. This, in turn, is due to the concern that if interest rates remain elevated, this will increase the cost of regular repayments for those who owe money, especially if they initially borrowed it at lower levels of interest, alongside increasing costs for those looking to raise new money for a purchase or expansion. This includes mortgage holders, existing borrowers and companies looking to raise finance in order to grow, alongside bigger corporates rolling over larger debt burdens into a very different interest rate environment. Naturally, this is exactly what interest rate rises undertaken by central banks are often intended to do – cool the economy and prevent it overheating.

However, interest rates were initially raised into a fairly weak economic outlook in many cases; in the UK a year ago, on 3’rd November 2022, the BoE was predicting that the worst recession since records began was due to unfold over the forthcoming twenty-four months. Followers of financial news channels have also since been treated to a procession of different experts predicting a recession for the US during 2023. More broadly, there was concern that the series of interest rate hikes initiated to battle inflation would ignite a serious, worldwide recession.

Now, we find ourselves in a very different place. Interest rates are high across much of the developed world, but individual fortunes vary greatly. The US is powering ahead, with US GDP reported in Q3 as having grown at an annualised 4.9%, the highest rate of growth since 2021. In the UK, British business confidence grew in October after a drop in September and company bosses plan to boost their prices and their hiring, according to a recent survey. Nationwide reported in November that UK house prices rose by 0.9% month on month in October, confounding predictions of a 0.4% fall. In contrast, the Eurozone is struggling badly, with data on 31’st October showing gross domestic product contracting slightly quarter-on-quarter and the year-on-year growth rate slowing sharply.

Whilst a prolonged period of higher interest rates may act as a dampener on economic growth over the forthcoming year, whether or not that may prove to be a serious problem may also depend upon your starting point.

As an example, if you are currently staring down the barrel of anaemic growth and predictions of a recession, whilst inflation appears unlikely to abate, next year may prove to be very challenging. The above scenario may lead to a stagnant economy struggling amidst an inflationary environment, a condition known as stagflation, which effectively simultaneously knee-caps the Central bank. This is because raising interest rates may assist in lowering inflation but push citizens into serious economic hardship, whilst lowering interest rates may help the economy to recover, but is likely to make the inflation problem even worse.

In contrast, much of the US is now whooping about ‘Goldilocks’ as its most likely scenario. ‘Goldilocks’ refers to a soft landing, implying the economy is neither too hot (inflationary), nor too cold (recession). This would imply that they are not currently concerned about stagflation, although the threat of a US recession in 2024 remains a real one. Current sentiment reflects a strong economy and the fact that the interest rate rises to date initiated to battle inflation, may also have served to prevent a substantial overheating of their economy. Looking ahead to 2024, this may offer a very different set of options for their Central bank; the option to raise rates again if required to cool the economy and/or battle inflation, or lower rates if required to stimulate growth over the course of next year.

With an unpredictable year on the horizon, exciting opportunities for the medium and long-term investor are likely to materialise. Indeed, some are already in evidence. With many market participants still apparently in disarray, other professional investors may be forgiven for looking forward to 2024 immensely.

Jonathan Cotty, Chartered FCSI 

Financial Focus - Fractured Markets

Published August 2023 in Distinctly Winkleigh

Disclaimer: The author is an active, regulated Director and the founder of Moor Independent Financial Advisers Ltd, a local, independent financial planning and investment management firm serving private clients and trustees. This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of investments may go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.

The global economic growth story has continued to fragment over the past quarter, with countries and regions faring quite differently over the course of the year to date. For example, China has been disappointing so far this year and some economists consider it will miss its self-imposed growth target of 5% by year end, which would be the second consecutive year the growth target has not been achieved, whilst in India growth remains buoyant with a full-year growth estimate revised upwards to 7.2% in a recent Reuters poll.

One big story of the quarter in the stock markets has been Artificial Intelligence (AI). AI technology uses computer algorithms and the software programs aim to mimic the human ability to learn, interpret patterns and make predictions. The newest forms of AI can also generate content. One example of this technology, ChatGPT, uses AI to produce humanlike responses to search queries, based on data it has collated from the internet. Ask it to solve a complicated mathematical question and it may complete it in seconds. It can instantly translate a foreign language text into English. You can give it an inventory of what is in your refrigerator and it can produce more than a dozen recipes from those contents. The possibilities are almost endless; however, although sophisticated AI systems, such as ChatGPT, were released some months ago, it appears that the potential impact these systems could have across multiple sectors is only beginning to become fully understood and, more importantly, priced in, by the marketplace. For example, drug companies are now using generative AI to design properties or functions of protein models that target diseases. Many technology experts also predict huge changes to the way internet search engines will operate in the future, meaning that AI offers a potential for serious disruption to the big players, such as Alphabet (Google). The explosion of interest in the technology has recently driven huge gains within the S&P 500.

Closer to home, the UK is starting to feel the effects of consecutive interest rate rises, with house prices tumbling 3.8% in July, the biggest fall since July 2009, whilst UK factory output is also down sharply, as reported on August 1, 2023. Mortgage rates have eased from their peaks this year however, with a two-year now 6.81% and a five-year averaging 6.34%. Some are reading this as a sign that we have reached a pivot point, or the peak of the rate rising cycle, with the forthcoming BoE rate decisions expected to be either no change, or a revision downwards. Inflation also dropped to 7.9% in June which surprised many economists anticipating a reading of 8.2%, according to Reuters. Whilst the BoE may pause or reverse its interest rate increases moving forward, others believe it is not yet finished raising interest rates.

In the United States, which continues to defy the recession predictions echoing from earlier in the year and continuing to this day in many quarters, an announcement was made on 10th July by Michael Barr, the Federal Reserve’s vice-chair for supervision. He declared that the USA’s largest banks would have to increase capital by “two percentage points”, which we understand to mean that their capital-to-risk-assets ratios will have to rise by 2%. Whilst the aim is to strengthen the big banks prior to the losses they may incur in a forthcoming recession, unfortunately this potential benefit is bought at the certain cost of causing banks to restrict risk assets in the short term; this may be interpreted to mean further restricting of lending to companies and people and reducing the availability of credit. The unintended effect of this statement may therefore be to increase the risk of a recession in the first instance and potentially compound the effects of any recession that may yet occur.

Overall, the global financial picture is becoming increasingly complicated as different countries slow down whilst others continue to grow. As China falters, Malaysia, Vietnam and other ‘frontier’ economies continue their own growth stories. The US also defies recession, as does the UK, whilst the Eurozone is already in recession. The macro picture is the global economy is anticipated to grow by 2.5% - 3.0% this year. However, for amateur and professional investors alike, it remains an exceptionally difficult investment environment to navigate as beneath the macro picture, the complications persist.

As an example, at a glance the S&P 500 grew well in the first half of the year, up 16.9% - but 73% of that growth was driven by just seven companies. These seven firms gained $4tn+ between them in the first half of 2023, more than the GDP growth of Japan (third largest economy). Apple’s market capitalisation alone now exceeds that of the entire Russell 2000 index. In short, if you were not invested in technology to some degree, the S&P 500 rally of 2023 may have more or less completely passed you by.

A reactionary, fractured and uncertain global marketplace almost certainly offers scope for opportunity, but should be approached with caution. A long-term approach to investing at these junctures may pay dividends. Independent, professional financial and investment advice which offers the freedom to diversify selectively across the marketplace without bias is widely considered invaluable in this type of environment, to ensure you may potentially capitalise on opportunities as they arise.

Jonathan Cotty, Chartered FCSI 

Financial Focus - Liquid Money

Published May 2023 in Distinctly Winkleigh

Distinctly Winkleigh is a quarterly publication, with a print run of one thousand copies, distributed free of charge to all homes in the Parish of Winkleigh, Devon, UK. It is also sent free of charge to paid-up members of the Winkleigh Society who live outside the Parish.

This article is for information purposes only and does not constitute financial advice, which should be based on your individual circumstances.

One feature of a busy quarter has been a splitting of minds over the future direction of the US economy. The Bears are certainly getting themselves heard at present, but the actual underlying figures are not nearly as bad as many would like to have us believe. The resilience of the US economy is probably not a surprise to all of us, but it continues to confound many economists who have been predicting a US recession for some considerable time now. Watching the financial news daily, many continue to insist it will come to pass towards the latter half of this year. However, with inflation falling, employment growing and, according to USA Today, only 17% of corporate economists citing falling sales over the past three months, the Bulls still have a good case as supply bottlenecks continue to ease. The US, for now, powers on.

Power is certainly proving troublesome in the UK, as our reliance on wholesale gas for electricity generation remains an obstacle to economic recovery. The ONS reports electricity prices in the UK rose by 66.7% and gas prices by 129.4% in the twelve months to March 2023 and were some of the main drivers of the annual inflation rate. The potential over-tightening by the Bank of England, or the continued raising of interest rates beyond a sensible level, is also a hot topic. There are increasing calls to resist over-tightening, given the effects of rate rises on the real economy are delayed and household finances remain under extreme pressure. The Bank of England, traditionally held in high regard, have in recent years lost some credibility and this persists. On the 26th April Huw Pill, chief economist at the Bank of England on a salary of £180,000, went on record to state people ‘need to accept’ they are poorer. Confidence in the BoE’s ability to manage a genuine crisis is becoming a more fundamental concern. Meanwhile, the government has actually borrowed less than predicted over the last financial year and Reuters report that many are predicting Hunt will announce a package of tax cuts ahead of a likely general election next year as a result.

Changes in the budget to pension rules have been widely reported upon, affecting those who can afford to save more than £1,073,100 into their individual pension scheme/s. This tax break has been introduced alongside a reduction in the Annual Exemption Allowance (AEA), relating to Capital Gains Tax, reduced from £12,300 to just £6000 this tax year and due to be halved again to £3000 next year. Further cuts have also been confirmed to the Dividend Allowance which stood at £5000 in 2018; now just £1000 and next fiscal year a mere £500.

Taking advantage of all your annual tax allowances has become imperative and many are now seeking independent financial advice for the first time.

For example, one client we recently onboarded was widowed years ago and, for convoluted reasons, had her deceased husband’s offshore pension paid out as cash. She has been using her annual ISA Allowance ever since, but now has accumulated Capital Gains of circa £57,000 in her General Investment Account, whilst the underlying investment portfolio needs attention. The changes in taxation policy mean that selling down her existing portfolio (at current levels) without incurring a capital gain liability would now take eighteen years, instead of five! An independent financial advice and investment management firm may ensure an over-arching, tax-efficient plan is devised, potentially retaining holdings with an excessive capital gain within a suitable, bespoke portfolio.

In other news, Japan announced a review of their long-term policy of deliberately keeping the yen depressed. An increase in the value of the yen is likely to cause a repatriation of monies back to Japan and, with Japan’s insurers and pension funds alone holding $1.84 Trillion in foreign assets, it is potentially a seismic shift in wealth. Japanese investors are also the biggest holders of US Treasuries, or US government debt, owning over $1 trillion of them and they also own almost 6% of Australian bonds and 4.1% of French debt, according to Deutsche Bank. This shift in monies will not happen overnight, but the implication that it will happen has created ripples across the globe.

Looking ahead, global liquidity remains on the radar. When Quantitative Easing (QE) is reversed, as is happening now, money is sucked out of the real economy as banks look to purchase the assets now being sold by the government/s who initially bought them. The effect is generally to reduce the amount of money banks want to lend to businesses and private individuals. This is happening whilst Central Banks increase interest rates (to combat inflation), also making borrowing more expensive. As cash becomes harder to borrow and increasingly expensive to repay, this in turn stifles economic growth. At present, it looks like access to capital, both for investment and refinancing, will remain expensive for some time to come, in turn inferring a global slowdown is unavoidable.

However, as proven by recent supply bottlenecks choking the US, a global slowdown does not a recession make and there are various routes to raising capital nowadays that exclude banks completely. US sentiment bottomed on June 30, 2022 at 50.00 and has risen every month, bar one, since that time. Currently 63.50, many concur the next couple of months will be telling…Up or down?

Jonathan Cotty, Chartered FCSI 

Financial Focus - The Inflation Genie

Published February 2023 in Distinctly Winkleigh

Distinctly Winkleigh is a quarterly publication, with a print run of one thousand copies, distributed free of charge to all homes in the Parish of Winkleigh, Devon, UK. It is also sent free of charge to paid-up members of the Winkleigh Society who live outside the Parish.

This article is for information purposes only and does not constitute financial advice, which should be based on your individual circumstances.

Following over a decade of rock-bottom interest rates, the rise in interest rates in December 2021 offered some comfort to millions of savers. Sadly, this relief proved short-lived. By July 2022, savers were staring aghast at an inflation level unprecedented for forty years and recent predictions (from a poll of global asset and hedge fund managers published by Reuters in January 2023) are for inflation to remain elevated globally, persisting throughout this year. Given there can be little comfort in locking monies into a cash savings plan offering 4.5% whilst inflation is running at more than twice this level, the question that continues to prey on the minds of many private individuals is where best to put their money.

One alternative to cash savings plans, or Cash ISAs, is to invest those monies into other assets, such as Equities (stocks and shares), Bonds, Commodities and so forth. Every individual may invest up to £20,000 into an ISA each tax year and it is also possible to retain an historic Cash ISA ‘wrapper’ and move those monies into an Investment ISA. However, alternatives to cash are likely to carry varying degrees of risk and volatility which many people are reluctant to embrace. One recognised way to potentially mitigate the risk is to hold an investment portfolio that is diversified across many different types of asset class, often referred to as a ‘multi-asset’ approach.

Whilst a multi-asset style may potentially be advantageous, creating a portfolio by purchasing a random selection of different asset types simply to create ‘diversification’ is unlikely to yield good returns over the longer term, particularly as external macroeconomic factors change. To explain this further, consider there are a number of different assets one may hold in the hope of weathering, countering or even profiting from an inflationary environment. These may include Consumer Staples as a sector within the equity space or inflation-linked bonds in the debt sector, possibly exposure to commodities, agriculture and infrastructure may be considered. A diversified portfolio that will potentially thrive in an inflationary environment may be drawn up - but what happens when the economic cycle moves on?

One answer may be to hold a diversified portfolio that has been created entirely deliberately to profit in differing types of economic conditions. This type of approach is often called a ‘Total Return’ style because the portfolio or fund is aiming to generate a return in all but the worst of economic environments. As the economy moves through a series of cycles, the aim is to ensure different assets within the portfolio take turns to benefit in greater proportions than others.

Another consideration may be to make use of a ‘risk-targeted’ portfolio or fund. Risk-targeted funds or portfolios differ from others because they target an explicit level of risk which is transparent and fixed. The set parameters defining each risk level, such as ‘Defensive’ or ‘Cautious’, are normally tight. Therefore, having selected the risk level they are comfortable with, investors within a risk-targeted strategy can feel secure in the knowledge their monies will remain invested over the long term within the risk parameters they have agreed to accept. The investment manager may adjust the underlying assets and components, but must constantly ensure that the level of risk remains within its set target range. (A risk-targeted approach should not be confused with a ‘risk-rated’ fund or portfolio, which has simply been assigned a risk level based on a snapshot of its holdings at any one point in time. Risk-rated funds have not necessarily committed to remaining within set parameters relating to risk.)

A benchmark is defined as ‘a standard or point of reference against which things may be compared’. A risk-targeted approach enables investors to easily compare returns from different investment managers because the level of permitted investment risk remains a constant, thus acting as a benchmark for performance comparison. However, most funds are not risk-targeted and will display their performance against a benchmark of their choosing. As the chosen benchmark may have very broad parameters (some permit anything from 40% to 85% Equities within the one benchmark), it is possible that numerous different risk levels may all be contained and measured against the one benchmark, potentially rendering the chosen benchmark an ineffective performance comparison tool when considered in isolation against the one fund or portfolio.

A clear, over-arching investment strategy does not need to be fiendishly complicated or contain complex derivative strategies to be very successful over the long term. A word of caution with respect to derivatives - there may be potential ramifications associated with these strategies, so prior to investment always ensure you completely understand your risk exposure and why the derivatives are being employed, alongside associated costs, repurchasing frequencies and so forth.

If you are paying for ongoing advice and/ or portfolio management, ensure you make the most of the regular review meetings that you are being offered and question any of the regular portfolio updates you do not understand.

Difficult economic times frequently serve to focus the minds of private investors. If you find you have unanswered questions, wish to explore your options for cash on account or you simply feel uncomfortable with your current setup, it may be a good time to review your affairs with a suitably qualified professional.

Jonathan Cotty, Chartered FCSI