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Is the US recovery about to stall?

“When the US sneezes the world catches a cold.” Most of us have heard that expression, meaning that the US economy is the principal driver of global trade and economic growth. 

Clearly China in particular and the Far East in general may now dispute that claim, but the fact remains that what happens in the US does impact growth and jobs around much of the world, especially in Europe. 

So as the world recovers from the pandemic, should we be worried about conflicting economic indicators coming out of the US? Is the recovery there about to stall? Or is this just a minor bump in the road ahead? 

To start with the bad news, consumer spending, the most significant component of US Gross Domestic Product (GDP), could be showing signs of slowing down. July retail sales which include both online and offline were down 1.1% on the previous month, led by a decline in car sales. 

Hand in hand with this went a decline in consumer confidence, as US consumer confidence in August dropped to its lowest level since February. One US official commented, “Concerns about the Delta variant [and] rising gas and food prices resulted in a less favourable view of current economic conditions and short term growth prospects.” Or, as most people would say, US consumers were worried…

Most worryingly of all, perhaps, the private sector of the US economy added just 374,000 jobs in August, well below the expected figure of 613,000. There was, though, some good news coming out of the US. The manufacturing sector strengthened, largely driven by an increase in new orders. The Purchasing Managers’ Index rose from 59.5 in July to 59.9 in August. The housing sector remained strong, with one index measuring US house prices showing a 19.1% annual increase in June 2021. 

…And remember those retail sales that fell in July? In August they were up, albeit by only 0.7%. 

The simple fact is that the picture from the US,  like so many countries, is mixed. Some sectors are doing well, some are doing badly and that is quite likely to change on a month-to-month basis. There are also other, external factors at work. Sales of cars and auto parts were down by 4.5% in August, but that was caused as much by a shortage of computer chips as it was by any unwillingness to buy on the part of the American consumer. 

So is the US recovery about to stall? The simple answer is that the recovery from the pandemic will not be smooth. Different countries will recover at different rates and likewise different economic sectors within individual countries. The US is no different although, very clearly, what happens in the US will continue to affect other economies, especially those in the West. 

We should also make one final, important point. All the figures were correct at the time of writing: clearly, in today’s fast-moving, interconnected world, they may have been updated by the time you read the article. Does that make the comments above invalid? Far from it, it simply emphasises that financial planning is a journey.

Sources
https://www.zerohedge.com/markets/goldman-cuts-its-us-gdp-forecast-third-time-one-month
https://www.investing.com/news/stock-market-news/us-economy-is-the-recovery-stalling-2606340

Are we right to be optimistic about the UK economy?

Is the glass half full or half empty? It’s one of the oldest questions (and clichés) there is. But right now you could be forgiven for thinking that as far as the UK economy goes the glass is not just half full, it’s completely full. 

The last few weeks have brought us a steady stream of good news. Post-Brexit the UK has agreed – or is very close to agreeing – trade deals with Norway, Iceland and Australia. According to recent reports International Trade Secretary Liz Truss is aiming to sign a free trade deal with New Zealand ‘by August.’ 

Manufacturing growth is at a 30 year high and even car sales – which were hit so hard by the pandemic – have recovered. The UK “optimism index” is at a six year high, and recent figures showed the average price of a house in the UK rising to record levels. 

Optimistic forecasts abound, with the CBI predicting that the UK economy will grow by 8.2% this year, up from a previous forecast of 6% and taking the economy back to pre-Covid levels. The economy will grow by a further 6.1% in 2022, the CBI forecasts, up from a previous figure of 5.2%. 

Still not convinced? The UK is now officially home to 100 “unicorns” – new tech firms with a valuation of more than $1bn (£721m). Tractable, an artificial intelligence start-up building computer vision tools became the latest, joining companies such as Skyscanner (from Scotland), Durham-based challenger bank Atom Bank and Darktrace, based in Cambridge, which uses AI to develop cyber-security solutions.

There are, of course, areas for concern. All is looking up, apart from the fact that ‘Freedom Day’ – originally scheduled for June 21st – has been pushed back. Apart from the fact that the UK could well face a third wave of the virus as the seemingly more infectious Delta variant holds sway. Apart from the fact that many UK businesses – especially in the hospitality sector – are struggling to re-open because of a shortage of staff.

The simple fact is that there is likely to be a mixture of good and bad news for the foreseeable future. This good and bad news will be reflected in stock markets, not just in the UK but around the world. So the only certainty is that regular contact with your financial advisers will be essential – and that your financial planning will need to be flexible and regularly reviewed. 

Yes, there is an increasing amount of good news but no economy – either in the UK or anywhere else – is out of the woods. We will continue to keep you up to date with developments and keep your financial plans under regular review. 

Sources
https://www.bbc.co.uk/news/business-57306596

https://www.bbc.co.uk/news/business-57314678

https://www.cityam.com/uk-car-sales-up-eightfold-as-market-recovers-from-last-years-skid/

https://www.bbc.co.uk/news/uk-politics-57347874

https://order-order.com/2021/06/08/optimism-index-at-6-year-high/

https://www.cityam.com/cbi-uk-economy-to-return-to-pre-covid-level-by-end-of-2021/

https://www.cityam.com/uk-aims-to-sign-free-trade-deal-with-new-zealand-in-august

https://www.cityam.com/unicorn-nest-uk-hits-milestone-of-100-1bn-tech-companies-more-than-rest-of-europe-combined/

https://www.cityam.com/house-prices-rise-2500-in-june-but-early-signs-suggest-market-is-slowing/

Will Biden’s huge Stimulus Package work?

When Joe Biden was inaugurated as President back in January there was much talk of his proposed stimulus package for the US economy. The figure generally talked about was $1.9tn (£1.36tn), an eye-watering sum of money. To give you a comparison, the National Audit Office in the UK is currently saying that the Government has spent £372bn on Covid-19, with £150bn of that going towards support for businesses. 

By May, however, $1.9tn was looking like small change: when Joe Biden presented his Budget he revealed $6tn (£4.3tn) of spending commitments, largely funded by tax rises for wealthy Americans and business. Unsurprisingly the spending plans were condemned by the Republicans as “insanely expensive,” with claims that they would lead to record levels of debt. 

So what is the President planning to spend the money on? How will he pay for it? And, most importantly, will the huge level of spending work? 

Joe Biden’s budget is aimed at growing the US economy “from the bottom up and the middle out.” It includes more than $800bn for the fight against climate change, free school places for all three and four year olds, two years of community college for all Americans and massive investments in both physical and digital infrastructure. 

As we have noted above the plans have been fiercely criticised, and there is a chance that some members of the President’s own party may side with the Republicans over some of the proposals. The chief criticism, though, has centred on debt, with estimates that the proposals could add $14.5tn of debt over the next decade, taking US Government debt to 117% of GDP by 2031 – a level not even reached during the Second World War. 

Will the plans work? Your opinion on that almost certainly depends on your view of Joe Biden. Republicans are fiercely critical of something they see as taking US debt to a whole new level and – very possibly – driving up inflation. The Biden administration argues that inflation will stabilise at around 2% and that the higher taxes will see the whole programme paid for within 15 years. 

In 1996 Bill Clinton famously said that the “era of big Government is over.” Joe Biden appears to have brought it back. While his plans still have to go through Congress and the Senate, it seems certain that enough of his spending commitments will remain to make the fiscal hawks in both parties wince.

Sources
https://www.bbc.co.uk/news/business-57008206

https://www.cityam.com/us-jobless-claims-fall-to-13-month-lows-as-reopening-continues-apace

https://www.bbc.co.uk/news/business-57024555

https://www.bbc.co.uk/news/business-57105363

https://www.bbc.co.uk/news/world-us-canada-57285970

https://www.cityam.com/biden-budget-sees-6tn-of-spending-and-tax-hikes-on-the-wealthy

https://www.nao.org.uk/covid-19/cost-tracker/

What to do about the ‘bulls’ and the ‘bears’

You have likely heard the terms ‘bull market’ and ‘bear market.’ A bull market is one where stock markets are rising and investors are feeling confident: a bear market is the opposite. ‘Bullish’ has even come to be used in a wider sense, meaning generally optimistic: ”I’m feeling bullish about our chances of beating United this afternoon.”

But what do the terms really mean? What have been the most pronounced bull and bear markets in history? And what are the implications of bull and bear markets for investors?

A bull market – sometimes termed a bull run in the US – is a long, extended period in the stock market when prices are rising. One common rule of thumb to define a bull market is prices increasing at least 20% from their most recent low, with signs (and investor confidence) suggesting that they will continue to rise. 

Again, a bear market is exactly the opposite. The rule of thumb is that prices are down 20% from recent highs and investors are generally pessimistic. Where a bull market might be underpinned by strong economic data on, for example, jobs and growth, a bear market will see bad news on the economy. 

The good or bad news might be confined to a single country or – in our increasingly interconnected world – relate to the wider global economy. We saw a good example of this last year, when the pandemic coincided with the trade tensions – and reciprocal sanctions and tariffs – between the US and China. 

2020 therefore saw a bear market in many countries – although it is worth pointing out that many of the world’s leading stock markets actually gained ground last year. The most famous bear market, of course, was during the late 1920s. Highlighted by the Wall Street Crash, the bear market lasted nearly three years and saw the US S&P index lose more than 80% of its value.

Generally it is accepted that there have been eight bear markets from 1926 up to the bear market of 2020, ranging in length from six months to almost three years, and seeing declines in stock market values from 21.4% to the 83.4% drop of the late 1920s. 

There have been half a dozen bull markets since the end of the Second World War, with the one starting in March 2009 (after the global financial crash) generally held to be the longest, arguably running for 11 years until Coronavirus brought it to an abrupt end. Could we see another bull market as the world ‘bounces back’ from the pandemic? Time will tell.

One thing is certain though: investor psychology plays an important part in bull and bear markets. In a bull market it is tempting to think that every penny you have should be invested – and invested as aggressively as possible – while in a bear market many investors simply want to sell everything. But no investor can time bull and bear markets perfectly: you may invest just as the market finally turns down: you may sell everything just as the market finally starts to climb again. 

Bull and bear markets are not times to abandon long-held financial plans. Rather they are times to remember that saving and investing is always a long term commitment – and to talk to your financial advisers if you have any concerns.

Sources
https://www.investopedia.com/insights/digging-deeper-bull-and-bear-markets/

https://www.ft.com/content/6b987f46-644f-11ea-b3f3-fe4680ea68b5

Could we see negative interest rates in the UK?

In February, the Daily Telegraph had a headline which must have alarmed savers up and down the land: ‘Savers face threat of negative interest rates.’ 

According to the story, the Bank of England had told the clearing banks that they ‘must be ready to introduce the policy in the next six months.’ 

What are negative interest rates? Have other countries introduced them? And are we really likely to see them in the UK? 

Negative interest rates are exactly what the name suggests. Rather than being paid interest on any money on deposit, a negative interest rate means that it costs you money to have funds on deposit. To use some very simple maths, if you have £1,000 on deposit at an interest rate of 1% you have £1,010 at the end of the year. If the interest was a negative 1% then you would have £990. Add in the effects of inflation and you would be demonstrably worse off by leaving your money on deposit.

Negative interest rates are a weapon used by central banks in a bid to stimulate economic growth. So the central banks can force the clearing banks to pay negative interest rates to savers, forcing them to spend and it can pay negative interest to money the clearing banks have on deposit, encouraging them to make loans. 

Until quite recently it was thought that interest rates could not go below zero – but this has not proved to be the case, with banks in Europe and Japan using negative rates to try and stimulate their economies. Germany – where savers have an estimated €2.5tn (£2.18tn) on deposit – is one country where savers have been battling negative interest rates. 

So could we see such rates in the UK? The British public reportedly have built up savings between £100bn and £125bn during the last year. There is reportedly a further £225bn in accounts which pay zero interest. 

Clearly if this money were released into the economy it would provide a huge stimulus – and the Bank of England is rumoured to have held conversations with more than 100 high street and online lenders. Rates have already been cut to 0.1% during the pandemic – so could they turn negative? 

Most commentators seem to think it unlikely, arguing that the six months the Bank of England has given banks to prepare for negative interest rates is long enough to see a ‘vaccine-fuelled recovery’ in the economy. 

But if 2020 taught us anything, it was that what was unthinkable at the beginning of the month was the norm by the end of it. While negative interest rates certainly seem unlikely, it might be worth considering that ‘never say never’ is truer than ever.

Sources
https://www.express.co.uk/finance/personalfinance/1393360/negative-interest-rates-uk-savings-mortgage-bank-of-Englandhttps://www.theguardian.com/business/2019/nov/22/germanys-risk-averse-savers-grapple-with-negative-interest-rateshttps://www.moneydashboard.com/blog/how-negative-interest-rates-impact-your-moneyhttps://www.cityam.com/before-the-bell-negative-interest-rates-remain-a-distant-and-unlikely-prospect/

Property Funds: The doom and gloom has been overdone

A model home on cement background, Business loans or saving money for buying or sell a real estate concept.

Many people will be familiar with property funds. Investing in commercial – rather than domestic – property, these funds have been part of many portfolios, typically providing a balance to higher risk equity funds. 

That, of course, was before Covid-19. When the UK went into lockdown in March last year many property funds had to suspend dealing. Anyone who has ever bought or sold a house knows that a physical inspection of the property – a valuation – is an integral part of the process. The same is true of commercial property. 

When the pandemic struck, valuers declared ‘material uncertainty’ – a clause meaning that a valuation has been prepared ‘under extraordinary circumstances’. That meant valuations could not be relied on, which in turn meant that many property funds took the decision to halt dealing. 

As lockdown eased in the summer, valuers gradually lifted the ‘material uncertainty’ clause, finally removing  it from virtually all UK property at the beginning of September. With funds having been suspended due to material uncertainty, it was generally assumed that they would start trading again immediately: in fact, very few reopened as soon as they could.  

With another round of lockdown in November – and the current one set to last until March – should investors remain wary of property funds in the long term? After all, there were plenty of stories of landlords failing to collect rent in the fourth quarter of 2020 – and we all know what a bad year it was for retail. Add in ‘the decline of the office’ – another recurring theme at the moment – and you could be forgiven for thinking that no sane investor would ever touch a property fund again. 

There are, though, real grounds for optimism in the economy – and that optimism may well be reflected in property funds. In its recent quarterly forecast, the Bank of England said it expected the UK economy to “recover strongly from the second quarter of 2021, towards pre-Covid levels”. 

Depending on which paper you read, ‘Brits have stashed away £100bn in lockdown’ or the ‘UK economy [will] reach pre-pandemic levels if Brits spend £125bn savings’. 

There is some doubt about the figure – and some doubt whether we have ‘stashed it away’ or cautiously saved it. What is undeniable is that we have saved money during lockdown – witness the problems the ‘sandwich’ or ‘commuter’ economy is having – and with interest rates close to zero there is every reason to suspect a lot of it will be spent as restrictions are relaxed. 

It is therefore reasonable to think that property funds will once again come to play their part in investors’ portfolios, once again balancing the higher-risk/higher-reward equity funds and giving clients portfolios which reflect their long-term financial planning goals. 

Sources

https://www.propertyfundsworld.com/2021/01/18/294566/uk-property-primed-great-2021

https://citywire.co.uk/funds-insider/news/property-funds-emerge-from-lockdown-in-need-of-a-cure/a1408738

Are ESG funds set to become the new normal?

The adoption of Environmental, Social and Governance funds has been rising steadily for some time now, and yet the question has lingered of whether they are to be a flash in the pan or the centre of our financial future. 

With ESG funds reportedly attracting net inflows of $71bn, just between April and June of 2020, there is no denying their significance. Their usage is seeing a rise that is, relative to previous years, meteoric. The transaction network, Calastone, reported data that suggests that the amount of new money invested into ESG funds between April and July is greater than the combined figure for the five years previous. 

Having been described by the Head of ESG Investments at Canaccord Genuity Wealth Management, Patrick Thomas, as a “structural trend, highly unlikely to be reversed,” at present, it would appear that that a u-turn is looking increasingly unlikely.

Why the sudden increase in ESG adoption?

Like many things, the growth of investments into ESG Funds has been accelerated by the pandemic. The impact of COVID-19 has brought into clear focus that the communities worst affected are also those that could be helped most directly by positive environmental, social and governance investment. The real life impacts of climate change, income inequality, and lack of diversity and representation are in the spotlight and investors are becoming increasingly aware of the impacts their investments have.

It’s not only the pandemic, however, that has caused the interest in ESG funds to grow. Some historically popular and profitable industries were already suffering from a fall out of favour. Oil, in particular, had been experiencing a crash on a spectacular scale even before its growth and demand on a global level was impacted by Coronavirus. It seems that investors are looking for more sustainable long term funds, and ESG funds come with the possibility to offer exactly that, with the added bonus of a boost to their reputation as progressive and ethical investors.

But, of course, it’s unlikely that ESG funds would be anywhere near as popular as they are becoming if they didn’t also offer their investors an attractive possibility of return on their investment. 

Looking forward

What can we expect to see in the immediate future of ESG funds and is the trend of their growth sustainable? The professional services firm PwC certainly seems to think so, at least in the coming years. 

Referring to ESG funds as ‘the growth opportunity of the century’ is no small prediction, and they put this prediction down to four factors: the regulatory overhaul that sees non-compliant sectors penalised, ESG’s marked outperformance, the increasing demand from investors and the fundamental societal shifts outlined by the current social, environmental and health circumstances.

Sources

https://www.fidelity.co.uk/markets-insights/investing-ideas/esg-investments/demand-esg-set-surge/
https://www.ft.com/content/e5518f78-0371-4946-b4a6-17addf7143ae
https://citywire.co.uk/wealth-manager/news/pwc-over-50-of-europe-fund-assets-to-become-esg-by-2025/a1414968/print?section=wealth-manager
https://www.ft.com/content/27025f35-283f-4956-b6a0-0adbfd4c7a0
https://www.pwc.lu/en/sustainable-finance/esg-report-the-growth-opportunity-of-the-century.html e

How the markets have reacted to the 2020 US election

After a tumultuous election which saw some unexpected results such as Georgia swinging in the Democrats’ favour, and protests at polling stations which involved chants of both “Count the votes!” and “Stop the count!” the dust has begun to settle, somewhat.

Many of President Trump’s series of lawsuits contesting results in states such as Wisconsin and Pennsylvania have now been thrown out of the courts, and he even hinted towards a concession by telling his government to cooperate with the transition to a Biden presidency.

Traditionally, 8th December is a “safe harbour” deadline where any controversy regarding election disputes are resolved, and so we can now, cautiously, expect said controversy to dwindle. With Joe Biden holding the most electoral votes, the Republicans likely holding the senate, the Democrats likely holding control of Congress, and the Republicans controlling the Supreme Court, we can expect the four branches of the government to be split between the two parties. 

So what does this mean for the markets? According to Marko Kolanovic of J.P. Morgan, “For US stocks, this is likely the best of both worlds. A potential Republican Senate majority should ensure that Trump’s pro-business policies stay largely intact, particularly the tax code and the direction the country has taken towards the center.” Biden will be unlikely to be able to enact any radical economic structuring due to constraints from the Republican senate, which may well result in confidence in lower volatility. 

In fact, the Dow Jones Industrial Average broke records by crossing 30,000 for the first time after Trump directed his aides to cooperate with Biden’s transition. This announcement helped to relieve some uncertainty relating to political risks over the winter. S&P 500 also saw gains of 1.6%, with the Nasdaq Composite rising 1.3% too. In fact, if the S&P 500 finishes this year on a high it would be the first time in history for the index to finish a year higher after falling 30% or more within that year. 

Of course, a slowdown is entirely possible, and caution is always advised when considering risk assets. As the transition from Trump to Biden continues to unfold, the markets will continue to develop their reaction.

Sources
https://www.jpmorgan.com/insights/research/market-reaction-2020-election
https://www.ft.com/content/433048a5-c489-4ddd-aebd-d56fb8f3edfc
https://www.wsj.com/articles/global-stock-markets-dow-update-11-24-2020-11606213552

How long does it take to beat a bear market?

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.

Sources
https://www.investcentre.co.uk/articles/how-long-does-it-take-beat-bear?utm_source=http%3a%2f%2fmail.investcentre.co.uk%2fajbell_investcentrelz%2f&utm_medium=email&utm_campaign=Russ_Weekly_22%2f03&utm_term=Investigating+the+histo

https://www.telegraph.co.uk/investing/shares/coronavirus-qa-does-covid-19-pandemic-mean-money-ask-investing/