News

Investment company assets reach £200bn milestone

Assets managed by investment companies have surpassed £200 billion for the first time. An investment company often referred to as an investment trust, is a form of a collective investment fund. It has a closed-end structure, which differs from unit trusts or open-ended investment companies OEICS), where new units are created and cancelled based on investor demand.

With an investment trust, a fixed number of shares is in circulation, with the share price fluctuating based on the underlying value of assets and investor demand for the shares.

This closed-end structure makes it easier for investment trusts to invest in illiquid or less easy to trade assets, as the fund manager can take a longer-term view. Shares in investment companies are traded on a stock exchange, just like other listed companies. Each has an independent board of directors, who are responsible for looking after the interests of investors.

An interesting feature of investment companies is their ability to borrow money to invest. This is known as ‘gearing’ and can result in additional profits from investing, once the cost of borrowing is covered. The investment company sector passed the £2bn milestone to record assets under management of £200.3 billion on 31st July 2019. It’s been an impressive run for assets in the sector during the past few years.

Assets have doubled in less than seven years, after reaching £100 billion at the end of January 2013. Nearly half of this growth during the period has come from investment companies investing in alternative assets, rising from £34.7 billion on 31st January 2013 to £80.3 billion on 31st July 2019, a rise of 46%.

Investment companies can invest in a much more extensive range of assets than other types of investment funds. They set out their approach to investing in their investment policy.

It’s good news that the investment company industry is growing strongly, reaching a record £200 billion of assets at the end of July. This growth demonstrates the adaptability of investment companies, which have been helping investors meet their financial needs for more than 150 years.

It reflects growth in mainstream investment companies which are investing in cutting-edge opportunities such as technology, healthcare, frontier markets and venture capital. As investment companies are the natural home for illiquid assets, it is not surprising that a significant part of this growth has been in the alternative sectors, which are often invested in assets that are harder to sell such as property and infrastructure.

Investment companies’ income advantages have also come to the fore in the current low interest rate environment. Many investment companies have increased their dividends for decades, making them highly sought after in recent years.

Ian Sayers, Chief Executive of the Association of Investment Companies (AIC)
Jon DoyleInvestment company assets reach £200bn milestone
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Fix the roof when the sun is shining!

How vulnerable are your finances to the next economic recession?

Nobody knows for sure when the UK economy might next enter a period of recession. Based on historical economic cycles, we do appear to be long overdue a recession; various technical indicators and some commentators have suggested that the process has already begun.

New research by the Resolution Foundation has concluded that the income squeeze that followed the global financial crisis has left low and middle income households more vulnerable to the next recession than they were in 2008.

In their new report, A problem shared?, Resolution Foundation analysed the distributional impact of economic recessions following the financial crisis.

Ten years of low-income growth has meant lower-income families are more vulnerable today than they were when the global financial crisis hit back in 2008.

This vulnerability is the result of having less scope to reduce non-essential
spending should incomes fall again.

There is also a higher proportion of families today, compared to 2008, with no savings on which to fall back should a recession hit and cause a loss of jobs.

Based on this analysis, and warnings that the risk of recession is now at its highest level since 2007, the Resolution Foundation is calling on the new Chancellor to prioritise preparations for recession.

Received wisdom ahead of the 2008 global financial crisis was that lower-income families bore the brunt of recessions. This was demonstrated in the 1980s when unemployment rose by 1.9 million and the distribution of this unemployment rise was distributed towards lower-income households.

Lower-income households experienced six times more unemployment back then when compared with the highest-income households.

By way of contrast, the economic impact of the 2008 recession was more evenly distributed, with workers across the board losing out. Average real earnings fell by £32 a week between 2008 and 2014, demonstrating a lasting impact from this most recent recession.

According to the research, it was the social security safety net, which played a crucial role in protecting lower-income households during the last recession.

The lowest-income households benefited from the tax and state benefits system more than offsetting their loss of employment income.

But it’s the longer-term impact of the last recession that has fascinated the researchers at the Resolution Foundation, who found that lower-income households were hit hardest over the longer-term.

It was lower-income households who were forced to retrench their spending habits following the global financial crisis, and they are yet to shake off this impact, in preparation for the next round.

The bottom quarter of the income distribution cut spending by £61 a week between 2008 and 2014, compared to the average spending cut of £20 a week.

Something else that changed following the last recession was allocation of spending towards essentials, with a far higher proportion now directed at essential spending. This means there is less scope to cut non-essential spending in the face of a new recession.

With limited cash savings available to help weather the next economic storm – nearly 60% of lower-income households have zero cash savings – the research raises some worrying findings as the current economic cycle draws to a close.

The Foundation is calling on the government to ensure that any policy response to prepare the country for the next recession takes households across the income distribution into account.

It notes, for example, that a fiscal policy response focused on income tax cuts would overwhelmingly benefit higher-income households, even though lower-income households are likely to need the most support.

Britain is facing the highest risk of recession risk since 2007, and we know from previous downturns that it is lower-income households that bear the brunt of economic downturns when it comes to their living standards.

The deep income squeeze that followed the last financial crisis may have been more equally shared than previous recessions. But its depth and length has had a disproportionate impact on the resilience of lower income households, who now have less scope to reduce non-essential spending or draw down on savings to weather a further recession than they did after the 2008 crisis.

The global slowdown and continued Brexit uncertainty are making recession preparedness even more urgent. In its response, the government should consider policies that limit and mitigate the effects of the recession, particularly for the most vulnerable in society.”

James Smith, Research Director at the Resolution Foundation, said:

From a Financial Planning perspective, the best time to fix the roof is when the sun is shining. Now is the ideal time to review household budgets, cut back on debt, and boost cash savings, all in preparation for the next recession.

By working with a Financial Planner, it’s possible to model potential economic scenarios, including a cut in income or a temporary fall in the value of investment markets, to understand the impact of these events on your longer-term financial objectives.

Jon DoyleFix the roof when the sun is shining!
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It’s official. We are going nowhere fast

It’s official. The UK economy has shrunk in size for the first time in seven years. According to the latest official figures from the Office for National Statistics (ONS), the British economy contracted during the second quarter.

Economists were already predicting a weak second quarter, with an average forecast of 0%. Instead, the official figures point to a 0.2% decline in the gross domestic product (GDP), placing the UK economy on a recession footing. The technical definition of a recession is two consecutive quarters of GDP decline. We won’t know for sure whether this level has been breached until after the end of September when the ONS publishes their first estimate for the third quarter. If a recession transpires, it would be our first since the global financial crisis more than a decade earlier.

But what’s behind the economic decline experienced in the second quarter? Predictions of a weak second quarter were driven by stockpiling by companies ahead of the original Brexit deadline. The manufacturing sector, in particular, contributed to the decline, with some factories scheduling their usual summer maintenance shutdown for earlier in the year, immediately following the original March Brexit deadline.

This stockpiling and shutdown combination resulted in the fastest rate of contraction in the manufacturing sector since its deep recession of 2009. Also, the services sector grew at a more modest rate than usual. It was the weakest growth in the service sector in three years. Among this doom and gloom, household spending appeared to hold up in the second quarter.

Growth in household spending was broadly the same as during the first quarter of the year. So are destined to enter recession in the third quarter, just as the UK prepares to leave the European Union, with or without a trade deal?

A new survey of economists suggests they expect the British economy to grow by 0.3% in the third quarter, reversing the second-quarter decline and resulting in a slightly larger GDP. But a considerable amount will depend on how businesses respond to the direction of Brexit between now and the end of October. Business confidence could be crushed by a political event, including a snap election, that results in more uncertainty.

On the face of it, this first contraction in GDP in almost seven years is a surprise. But the fall in output in the second quarter is largely due to the impact of the scheduled date of 29 March for the UK to leave the EU.

Some manufacturers, especially carmakers, brought forward their annual shutdowns to April rather than the summer and this contributed to a large drop in manufacturing output in the second quarter.

In addition, stocks built up in anticipation of a March EU exit were likely run down in the second quarter, dragging growth down further. There is likely to be a rebound in activity in the third quarter and so we do not expect the UK to enter recession, despite fears of this being expressed.

But economic confidence has been dented here in the UK, as our last Q2 edition of our Global Economic Conditions Survey (GECS) showed. The message from the GECS continues to be moderate growth, restrained by stagnant business investment spending held back by Brexit uncertainty. Consumer spending, supported by rising real incomes, will help support modest economic growth in coming months.

As for the global economy, GECS points to a slowing global economy with significant downside risks reflected in weak confidence. The biggest risk to the global economy remains a significant further escalation in the US-China trade war. A sharp slowdown in China and a no deal Brexit are additional downside risks.”

Commenting on the latest economic figures, Michael Taylor, chief economist at ACCA (the Association of Chartered Certified Accountants)

What’s always worth keeping in mind, during times of economic downturn, is the usual lack of correlation between a declining economy and a falling stock market. A recession does not guarantee investments will lose value, especially when you hold a well-diversified portfolio with global exposure.

Investment values do tend to fluctuate in the medium term, which is why investors should stay focused on the long-term outcome of investing money and how investment decisions made today ultimately affect their long-term financial objectives.

Jon DoyleIt’s official. We are going nowhere fast
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Liquidity is the new king of investing

When it comes to investing money, liquidity should be highly significant consideration.

Liquidity is the ability to get access to your money when you need it. An instant access cash deposit account with a bank or building society is a example of a liquid investment, as are stocks traded on a listed equity market, such as the London Stock Exchange.

But not all stocks or investment funds are entirely liquid, resulting in investors having their money tied up when they need or want access. The recent debacle surrounding Woodford Equity Income is a good case in point and the continuing issues crypto-currencies face.

In this example, investors in the fund are unable to sell units due to a dealing suspension, because the fund manager held illiquid, unquoted company shares in his portfolio, which because of a higher proportion of the overall fund when the other, liquid holdings were sold.

Investors in Woodford Equity Income are not alone when it comes to being trapped within their investments.

New research, carried out by Experience Invest, found that 25% of UK investors currently hold investments they wish to liquidate, but cannot.

Nearly a third of the 800 UK investors surveyed for this research had attempted to exit an investment during the past five years but decided to stay put after learning they would incur exit fees.

And nearly two-thirds believe investment providers need to offer better education about strategies for exiting investments.

Unsurprisingly, 80% of investors want investment providers to be more transparent with their customers when it comes to how and when they can liquidate an investment holding.

“It’s reassuring to see that the vast majority of investors in the UK are
thinking carefully about their exit strategies before making an investment.
But there are still many who don’t. It is surprisingly common to hear of investors who, several years into an investment, are unsure of exactly how they can get their money back out. Indeed, our research underlines how many investors get stuck with assets they cannot liquidate – both they and the investment providers must be diligent in ensuring potential exit strategies are clearly explained. In light of this issue, it’s easy to understand why assets such as property – which can be sold in a relatively straightforward manner on an open market – remain so popular with investors. Nevertheless, all investments should be made with a clear exit strategy in mind; doing so will enable the investor to manage his or her portfolio effectively.”

Jerald Solis, Business Development and Acquisitions Director at Experience Invest

When making any investment, it’s crucial to consider your exit strategy. The right time to understand how and when you can leave an investment is before you invest, rather than when you wish to go.

Liquidity is a critical factor for modern investments, with the absence of any exit charges or penalties something investors should look for too.

Knowing when you may need to access your cash and what part of your portfolio is liquid is key.

At Juniper Wealth Management liquidity is a key factor in assessing investment suitability for our clients. This is especially important when working with buy-to-let business owners who have illiquidity built in to large parts of their wealth.

Jon DoyleLiquidity is the new king of investing
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Lessons from the suspension of Woodford Equity Income

It’s been a busy old month in the world of investing, following the suspension of Neil Woodford’s flagship £3.7bn Equity Income fund and the fallout on companies such as Hargreaves Landsdown.

A high level of withdrawals, combined with some illiquid assets within the fund, forced Woodford to impose the suspension, which leaves investors in limbo until trading can resume.

In this blog post, I explore background of this rare fund suspension, and some of the lessons we can learn from the experience.

Some background

Neil Woodford is one of a handful of so-called ‘star fund managers’, heralded for his decades of superior investment performance, particularly during the 2008 Financial Crisis.

Investment fund managers rarely pick up this ‘star’ title, but when they do, it’s often used as a marketing tool to accelerate the profile and attract new investor monies to their funds.

Woodford’s first came to prominence whilst he was an investment manager at Invesco Perpetual.

He moved there in 1988, becoming responsible for their Invesco Perpetual Income and Invesco Perpetual High Income funds, with £10.3bn and £13.6bn of assets under management respectively.

These funds, along with the institutional investment mandates he ran, performed very well relative to similar funds in the sector.

Towards the end of his tenure with Invesco, he managed around £30bn of investor money across the various funds and mandates.

By 2012, the press were fawning over Woodford and his star manager status, with headlines saying things like “Neil Woodford turned £10,000 into £114,000 in 20 years – can he do it again?”

Resignation and relaunch

In April 2014, Woodford left his role as head of UK equities at Invesco Perpetual, to establish his own fund management group, Woodford Investment Management, and to launch the LF Woodford Equity Income fund.

A year later, in April 2015, he launched the Woodford Patient Capital Trust.

This fund launch set a new record for the largest ever fundraise by an investment trust, with £800 million of subscriptions. Investing primarily in small and unlisted companies, which also became a feature of Woodford’s first fund, albeit with a 10% cap on non-listed stocks.

He subsequently launched another third investment fund in April 2017, the LF Woodford Income Focus fund.

Each of his funds went straight into “Best Buys” lists with platforms such as Hargreaves Landsdown , a move that has faced significant criticism since about the validity and value of such lists.

“Woodford believes that being an active investor means doing something different from the market and adding value through the investment process. It is also active in engagement with company management teams to help understand the long-term aspirations of the company. Its long-term approach to investment management is encapsulated in a patient capital investment style.”

What Investment March 2017

In the same article, he addressed criticism of recent poor performance, reflecting on the challenges of taking a contrarian approach to investing and saying:

“Certainly I have been on the receiving end of a lot of criticism in recent months and it is incredibly uncomfortable. It is not just uncomfortable for me, it has been uncomfortable for the business around me and for everybody who supports me at work. It has been a really challenging time.”

Neil Woodford

But Woodford stuck to his guns, believing his strategy would continue to be proven right over the longer term.

Trading suspension

In June, trading in his largest fund, the Woodford Equity Income Fund, was suspended following large withdrawals by investors.

The run-up to this suspension appears to have started following the EU Referendum in 2016.

At this time, Woodford took the view that British stocks with prospects linked to the UK economy would recover in value, but this play seems to be taking longer than expected. Instead of the value stocks bouncing back, it’s growth stocks driving market returns since the UK voted to leave the EU.

This call to back British value stocks has resulted in a 27.6% fall in the value of the Woodford Equity Income fund since its peak in June 2017.

There have also been specific stock-related issues within the fund, prompting some of his principal backers, like Jupiter Asset Management, to pull out.

Woodford was forced to sell his holding in pension provider and investment broker AJ Bell, as a result of a growing weighting in the rest of the fund to unlisted stocks, which turned out to be lousy timing; AJ Bell announced its plans to float on the stock market shortly afterwards.

With more investors disappointed with the performance of the fund and withdrawing their investments, Woodford took the unusual move earlier this year of transferring some unlisted stocks from the investment fund to the investment trust, in return for listed shares held in the latter.

Another unusual move followed; Woodford listed some of his shares in unlisted companies on the Guernsey stock exchange.

His fund, once valued at £10.2bn, had fallen in size to £3.7bn.

He was then forced at the start of this week to suspend trading in the fund, to give himself time to sell illiquid holdings and make cash available to pay those investors who want to leave.

Extremely sorry

Woodford stated the suspension, saying he was ‘extremely sorry’ after suspending the trading, and explaining the move was ‘necessary to protect investors’ interests’.

One prominent investor who wanted to get their money out of the fund was the Kent County Council pension fund, who have a £263 million holding in the fund.

After deciding to pull the investment, they discovered trading had been suspended, and they were tied up in the fund for the foreseeable future.

Paul Carter, leader of Kent County Council, told the BBC:

“The money invested in Woodford represents about 4% of our total pot of £6.5bn of money invested. Hopefully we will get our money out with no reduction. But that remains to be seen.”

During his apology statement, Woodford said:

“As difficult a decision as this is, and clearly frustrating for you, our investors, we felt this was necessary to protect your interests.”

Lessons to learn

There are a few issues to unpick here.

Firstly, from a regulatory perspective, the Financial Conduct Authority appears to be keeping a close eye on the situation, issuing a statement this week to say:

“The FCA’s rules provide for suspension in dealing in the units of open-ended funds where, due to exceptional circumstances, it is necessary to protect all the investors in a fund and Suspensions are recognised as a legitimate tool internationally via IOSCO guidelines.

“We expect all firms involved to uphold their obligations to act in the best interests of all investors and to ensure the fund’s assets are sold in an orderly manner. A suspension should last no longer than necessary to allow the fund to build up sufficient liquidity to meet redemptions again.”

The FCA also commented on the decision to list some of the unlisted shares on the Guernsey stock exchange, explaining it “has been deemed an ‘eligible market’ by Link Fund Solutions.”

According to their statement:

“The FCA was not informed, and would not have expected notice, of any decision to list the fund’s assets prior to their listing.”

The second lesson from this fund suspension concerns the popularity of Woodford as a star fund manager, and his ability to attract massive sums of money to his investment funds quickly.

Looking back at press commentary around the time of both fund launches, the media had a significant role to play in hyping up Woodford. The BBC even referred to him as “Britain’s very own Warren Buffett.”

In a June 2015 profile piece, the BBC ran the headline, “Neil Woodford: The man who can’t stop making money.”

Woodford Investment Management was also heavily backed by a large investment broker, who reportedly generated a third of the assets channelled into the investment manager’s funds.

This investment broker has subsequently removed Woodford Equity Income from its ‘best buy list’, and has agreed to stop charging investors in the suspended fund for their platform fees, encouraging Woodford to do the same in respect of his investment management charges.

What next?

It’s hoped that a period of trading suspension will allow Woodford to get out of his unquoted holdings, creating the liquidity needed to meet redemption requests when trading resumes.

Trading suspensions like this are not entirely unheard of when it comes to open-ended investment funds. The issue arises when the open-ended fund structure is combined with hard to sell assets, such as unquoted shares and commercial property.

Following the Brexit referendum in 2016, we saw trading suspended in several UK property funds. This suspension happens when fund managers need to balance the demand for investor withdrawals with the availability of cash within the fund.

It’s what has to happen when you combine relatively illiquid holdings (it’s quite hard to sell a large commercial property) with the ability to buy and sell units in the open ended investment fund daily.

Illiquid holdings, like commercial property and unlisted stocks, are probably better suited to closed-ended investment companies, investment trusts, where underlying assets can remain invested, and the share price fluctuates based on investor demand, generating a premium or a discount to the net asset value.

For investors in Woodford Equity Income, it’s natural to feel a little concerned following the suspension.

Investors in the fund who were unaware of the possibility of such suspended trading, especially those who bought into the fund directly through an investment broker, and without the benefit of financial advice, will have learnt a valuable lesson from their experience.

The trading suspension might also cause some investors to question the wisdom of following star fund managers. Instead, when selecting suitable investment funds, it makes sense to choose funds that do what they say on the tin, in conjunction with consistent risk-adjusted returns, and low costs.

It’s always a good rule of investing to look out for hype and actively avoid it.

When the press, investment brokers, and others are hyping up a fund, it’s no bad thing to be a contrarian like Neil Woodford, and do something else altogether.

Jon DoyleLessons from the suspension of Woodford Equity Income
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Modern Monetary Theory branded ‘rotten’

Many organisations have made a case for Modern Monetary Theory (MMT) in recent years. In simple terms, MMT is an argument that nations that issue currencies, like the UK and Pound Sterling, can never run out of money in the same way individuals or corporations can.

It hinges on the claim that governments can print currency to fund substantial government spending to deliver full employment. With economists coming out in favour of MMT, and many arguing against it too, a neoliberal think tank the Adam Smith Institute has attempted to break it down in a newly published paper.

They claim that MMT advocates are driven by Utopian thinking, wanting massive unaffordable public spending programmes, the cost of which never have to be repaid through higher taxes.

According to the Adam Smith Institute, advocates of MMT claim that government spending can activate substantial unused economic capacity, but this claim is false. In practice, the impact of MMT is inflationary and hyperinflationary.

Despite being a fringe economic theory, MMT is gaining mainstream support in areas of political activism, including the Green New Deal and Jeremy Corbyn’s People’s Quantitative Easing. But the economic collapse experienced by Venezuela, following years of spending fuelled by a deficit, should bring an end to any belief that deficits don’t matter to the economy.

As a result, the Adam Smith Institute believes MMT needs critical thinking and debunking before it starts to influence government policy in a major Western country. With the economic idea of MMT gaining ground among heterodox economists and left-wing politicians in the UK and US, the Adam Smith Institute is arguing the theory is powerfully wrong. Lead author of the report, Professor Antony P. Mueller, has drawn comparisons between MMT and the flat earth movement.

Mainstream economists have rejected MMT, with a poll carried out by the University of Chicago’s Booth School of Business, speaking to 50 elite economists, finding that not a single one believed governments don’t need to worry about deficits. None of the economists surveyed found it possible to fund as much government spending as desired, only by printing more money.

“MMT promises politicians almost limitless cash to spend on their pet projects. But if something sounds too good to be true it probably is. The state cannot print money without risking crippling inflation. More cash chasing the same amount of goods inevitably leads to sellers increasing their prices. When inflation spirals out of control it has disasterous consequences from the Weimar Republic to Zimbabwe to now Venezuela. MMT may just be wishful thinking today – the danger is that tomorrow a politician is stupid enough to follow its prescriptions.”

Matthew Lesh, the ASI’s Head of Research

The Adam Smith Institute argues that MMT ignores ignorance on the part of politicians and government actors with no price incentive or competition to counterbalance political prejudice. Instead of treating MMT as a serious economic theory, the Adam Smith Institute argues the growing political support for MMT should be viewed as a sign of growing tolerance for debt and deficits.

The report argues that the absence of fiscal restraint for public spending means massive public spending programmes lose their legitimacy. This includes projects like the ‘Green New Deal’, ‘free’ university education, renationalisation, and considerable increases in infrastructure spending, all of which can be launched with enthusiasm.

“Old wine in new bottles is a recurring phenomenon in economics, particularly if it is the bad wine of economic ideas that failed in the past. Modern Monetary Theory (MMT) is neither modern nor a theory – it is the attempt to sell something as new which is spoiled and rotten. “While promising to cure all kinds of economic woes, MMT is the poisonous elixir that will ruin those who take it as it has happened before.”

Professor Antony P. Mueller, the paper author
Jon DoyleModern Monetary Theory branded ‘rotten’
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The World In A Week 19 – The UK / US Alliance

Last week the US and UK commemorated and celebrated their historic alliance and friendship. The week included the rarity of both the D-Day commemorations of World War Two as well as the US President’s State Visit.

Both occasions demonstrated the continuing bond between the two countries. One focused on humanity and the enormous courage and personal sacrifice made to defeat Nazi tyranny, and the other focused on their relationship and their bilateral approach going forward.

Much can be written about the importance and the success of both of these occasions. For the investment community though, there was one stand-out development.

At his press conference the President emphasised his keenness for a free trade deal with the UK.  He claimed there could be ‘2 and 3 times of what we’re doing right now’. This builds on his previous comments that his administration would ‘work on it very, very quickly.’

This will be very welcomed by investors in the UK, especially at a time when many are concerned with Brexit, as this demonstrates the UK’s trade appeal and thus the potential for such trade deals to be replicated globally too.

It should be noted; the UK and the US are the largest investors in each other’s countries (as measured by total Foreign Direct Investment). For example, as at 2017, the UK had invested $541bn in the US and the US had invested $750bn in the UK.

Regarding trade, as at 2018, the UK had a $5.4bn goods deficit with the US and a $14.5bn services deficit too thus an overall trade deficit of $19.9bn with the US. This is likely to be something the UK will aim to address in any free trade agreement.

It was a successful and welcome week for both countries that also demonstrated the importance and enjoyment of good relations.

Content courtesy of Beaufort Investment Management

Jon DoyleThe World In A Week 19 – The UK / US Alliance
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The World In a Week 18 – Mexican Standoff

Markets faced a tough week as a risk-off environment prevailed. The Pound Sterling fell against all major global currencies. Bond markets rallied across the world, with the Bloomberg Barclays Global Aggregate Index (hedged to GBP) returning +0.63%, while Sterling Denominated Investment Grade Bonds returned +0.27%. Equities suffered across the globe. The MSCI ACWI Index of world markets returned -1.20% in GBP terms, this was led by the US market, which fell -1.91%. Value stocks underperformed growth stocks -1.54% vs -0.87%.

This downside volatility was driven by a number of events, most of which stemmed from the Oval Office. The continuing trade tensions between China and the United States spurred a move out of Equities and into perceived safe assets. The German 10 year Bund yield traded at -0.16% on Tuesday, with the 10 year US Treasury yield touching a fresh two-year low on Friday. In what Bloomberg described as a “true black swan event”, President Trump suddenly threatened to slap a five percent tariff on all Mexican imports unless it stepped up efforts to stop illegal migration. Tariffs are increasingly being employed by the President as a weapon of policy, across multiple fronts.

In spite of the bluster from 1600 Pennsylvania Ave, US stocks remain very much in favour on a global basis. The gap between the valuation of US Equity markets and the rest of the world is at record highs. As a result, many investors are looking for ways to protect against a falling dollar and/or falls in the value of the Equity market itself. Local Currency Emerging Market bonds may offer such protection and are becoming increasingly popular with GBP based investors.

Content courtesy of Beaufort Investment Management

Jon DoyleThe World In a Week 18 – Mexican Standoff
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The World In A Week 17 – All By Myself

We have seen an uptick in volatility. Hostilities between the US and China show no signs of abating. The US Federal Reserve minutes indicate that it is unlikely there will be rate moves of any kind for some time and, the UK have no leader, following the tearful resignation of Prime Minister, Theresa May, on Friday. It would be an understatement to say that last week was anything less than eventful with the Bank Holiday weekend in the UK providing some welcome respite for all.

On Friday, Theresa May resigned as the Prime Minister after failing to deliver her Brexit deal in her 3-year tenure. Mrs May’s departure will now lead to a chaotic Conservative race, where staunch ‘no-deal’ Boris Johnson is the clear favourite to succeed her; a new Prime Minister will be in situ by the end of July. Further compounding May’s sadness was the Conservatives defeat in the European Elections, which were held in the UK last Thursday. It was expected that the results would be disastrous for the Conservatives and they did not disappoint; Nigel Farage Brexit Party secured the majority vote of c.31% followed by the Liberal Democrats and Labour with c.20% and c.14% respectively. Conservatives limped in to 5th, behind the Green Party, with c.9% of votes. The UK, politically, will remain in an uncomfortable limbo.

Turning to trade wars, the question is; who is really winning? There is only one measure that shows if Trump is ‘winning’ and that is the bilateral trade balance, and while the global superpower that is the US is still lagging by a huge margin, to March this year, the trade deficit has narrowed. While all equity markets suffered last year, Chinese equity markets tumbled by fourfold that of the S&P 500 in 2018 by more than 25%, this had a knock-on effect to the Chinese economy, which slowed more notably than that of the US. However, it’s not all bad news for China; import tariffs imposed by Trump do not affect the Chinese consumer, as many are a tax on industrial inputs and not end-use products, whereas the opposite is true for the US. The US are also missing out on investment from China with foreign direct investment slumping by more than 80% between 2017 and 2018; in the US, investment in China fell marginally by c.7.5%. We will call this a draw.

One thing that is for certain; is that markets do not like uncertainty and while there is political limbo in the UK, UK equity markets will continue to be hindered and uncertainty over trade wars is likely to be more costly than trade tariffs themselves.

Content courtesy of Beaufort Investment Management

Jon DoyleThe World In A Week 17 – All By Myself
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The World In A Week 16 – Taking matters in to your own hands…

In what was a short week, owing to the bank holiday weekend, Brexit news was light; cross-party talks between Conservatives and Labour continue to progress, reducing angst over a Brexit deadlock. There was a variety of data releases last week from the UK and the Eurozone; the UK continued to show a 44-year low in unemployment in February while wages are at a decade high thanks to an upward revision to January’s data. The picture in Europe, as we have mentioned previously, is mixed; the ZEW economic sentiment survey moved in to optimist territory, hitting a 1-year high while opinion on the blocs’ current economic conditions continued to decline.

The title of this week’s note is aimed at Russia, who have passed a bill to allow the country to create an autonomous internet. Known as  “Runet” (Russian Internet), the bill will allow Russia to keep its domestic internet running even when disconnected from non-Russian root servers. The premise is that Russia believes their national security to be at stake and the bill is aimed at countering “aggressive character of the US strategy on national cybersecurity”. Over 300 lawmakers in the lower house voted for the bill, with 68 voting against the bill. To become law, the Federation Council, the upper house of Parliament, must approve the bill, which would come into effect on 1st November 2019. This move has been met by anti-isolation protests in Russian cities.

Chinese GDP data surprised last week as figures showed that the economy continues to grow by 6.4% year-on-year in the first quarter of 2019; although it is important to treat Chinese GDP data with caution. This figure seems particularly impressive when compared to G10 countries; a group of 10 advanced economies, which, over the same period, showed growth of c.1.7%. While annual growth in excess of 6% seems high, by historic standards, this is certainly not the case; looking back to as recently as 2006, Chinese GDP growth was in excess of 15%, one of the highest levels in the country’s history. The ‘surprise’ however is that 6.4% beat the consensus forecast of 6.2% and was due to a jump in industrial production; jumping to 8.5% in March from 5.7% in February. This exceptional increase came from infrastructure projects and 5G production, a trend we expect to continue.

Jon DoyleThe World In A Week 16 – Taking matters in to your own hands…
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