The World In A Week - Media narrative vs market reality
Written by Ashwin Gurung
Following last week’s victory in the US presidential election for Donald Trump, US equities, as measured by the S&P 500, rallied +4.8% in GBP terms. The impact of this victory was especially evident in more domestically focused US smaller companies, which gained +8.8% over the week, as measured by the Russell 2000 Index, in GBP terms. Trump’s policies are considered more favourable to small companies due to proposed lower personal and corporate taxes, a looser regulatory environment for corporations such as banks, which creates a better climate for deal-making and lending, and high tariffs on foreign goods entering the US.
However, some see aspects of Trump’s policy as inflationary, with interest rates remaining higher for longer and potentially limiting future economic growth. We note that substantial research has been conducted on this issue, including studies from the International Monetary Fund. These studies indicate that, in the medium term, tariffs and reduced free trade tend to lead to lower output, decreased consumption, reduced spending power, higher unemployment, and exchange rate appreciation, all of which are deflationary forces. Ultimately, the negative long-term impact of tariffs on economic growth outweighs the initial one-off impact on prices.
Nevertheless. due to the more inflationary narrative, Trump’s victory initially had a negative effect on US government bonds. However, the losses were reversed later in the week following the Federal Reserve’s (Fed) decision to cut interest rates for the second time this year. The Fed reduced rates by 25 basis points to 4.5%-4.75%, but the Fed Chair Powell emphasised that they will remain data-dependent and noted that the election will not influence future policy decisions, reaffirming their independence. US long-dated government bonds, as measured by the Bloomberg US Treasury 20+ Years Index, ended the week up +1.8%, in USD terms.
We continue to believe that US interest rates remain elevated and that the full impact of higher rates has yet to be fully felt in the economy. Highly indebted small businesses in the US continue to face mounting financial pressures, as do lower-income consumers, as evidenced by rising auto loan and credit card delinquencies. Additionally, savings rates have fallen to very low levels, making it difficult for these consumers to sustain spending.
Similarly, here in the UK, the Bank of England (BoE) also cut interest rates for the second time this year by 25 basis points. BoE Governor Andrew Bailey indicated that future rate cuts are likely to be gradual if inflation falls as expected. Regarding Labour’s budget, Bailey stated that the BoE 'will need to see more' to assess its impact on inflation. This rate cut also supported Sterling bonds, as the Bloomberg Sterling Aggregate Index returned +0.2% over the week, in GBP terms.
While the effects of Trump’s policies and Rachel Reeves’s budget outcomes are yet to be seen, it is important for us to maintain highly diversified portfolios across various asset classes, market caps, and styles to capture opportunities while effectively managing risk.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 11th November 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - Seeking perfection
Equity and fixed income markets fell over the week. The MSCI All Country World Index fell -1.0% and, in fixed income markets, the Bloomberg Global Aggregate Index was -0.5% in GBP hedged terms.
In the UK, the FTSE All Share Index was down -1.0% over the week, with the more domestic- oriented mid and small-cap indices down even more. The UK bond market was also down, with the Bloomberg Sterling Aggregate Index falling -1.7% over the week. The negativity driving the above returns primarily came on the back of Chancellor, Rachel Reeves’, first budget where she attempted to perfectly navigate the government’s desire to raise taxes and borrow more to fund huge new spending commitments without spooking the markets. However, the eye-watering sums involved stoked fears that higher borrowing would lead the bond market to require higher yields on government debt and that the potentially inflationary impact of greater spending could hamper the ability of the Bank of England to reduce interest rates as fast as hoped going forward. The announcement of higher minimum wages and higher employer national insurance contributions, combined potentially with the prospect of interest rates staying higher for longer, was also expected to be greater felt in the pockets of medium and small businesses, hence the underperformance of mid and small capitalisation equities.
In the US, the S&P 500 index fell -1.4% over the week in local terms. The technology-heavy Nasdaq 100 index was down even further at -1.6% for the week, also in local terms. For UK investors, the declines were dampened in Sterling terms by the Pound’s weakness against the Dollar. Microsoft fell approximately 6% on the day of its earnings results while Facebook owner, Meta, fell 4% on the same day. Although current quarter earnings results were still robust, warnings of rising costs for artificial intelligence led to some dampening of future expectations. Apple also produced strong quarterly sales numbers, but the market was disappointed with the accompanying future revenue forecasts. With many leading technology and AI-related stocks trading on elevated valuations, the market will likely continue to seek perfection to justify current share prices. In brighter news, Amazon posted third quarter profit numbers that were above Wall Street estimates, helped by strong retail sales. The latest US GDP Growth data release also indicated that the US economy grew at an annualised rate of 2.8 per cent in the third quarter, supported by ongoing strength in consumer spending.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 4th November 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - “Trump Trades” and other Lazy Labels
Written by Chris Ayton
Last week fixed income markets witnessed a continuation of the selloff we have seen over the course of this month, with this sell-down largely focused on high-quality longer-dated government bonds which are sensitive to interest rates. Equity markets also became involved in the selling but are still mostly positive for the month to date in GBP terms due to a decrease in the value of Sterling, particularly versus the US Dollar.
The prevailing narrative around why fixed income markets have been selling off has been centred around the rapidly approaching US election and the growing view in betting markets that Trump’s chances of victory have been increasing. While we know betting markets often don’t reflect the eventual outcome of elections, we are also naturally sceptical about investment analysis centred around politics, particularly simplistic narratives such as the “Trump Trade” or “Harris Trade” propagated by investment banks who are in the business of generating revenues from trading and hedging activity around events.
We think this view is validated by past events, such as the aftermath of the 2016 US election. In the lead-up to that event, the popular narrative was that Hilary Clinton was the “status quo” candidate and that a victory for Trump would be a “risk-off” event which would be terrible for stocks. The exact opposite transpired. While there was a sharp drop in S&P 500 futures overnight as more and more states reported and a Trump victory became likely, by the time the market closed the day after the election, the S&P 500 index was up.
There has also been a great focus on the economic impact of Trump’s promise of much higher tariffs on imports from China and elsewhere. The conventional wisdom in much of the mainstream press is that tariffs immediately result in higher prices so they must be inflationary. However, we think this is quite lazy, headline-grabbing reporting as there is a wealth of research from groups such as the International Monetary Fund that shows what the medium-term effects of tariffs and less free trade tend to be; lower output, lower consumption, reduced spending power, higher unemployment and exchange rate appreciation, all of which are deflationary forces. In effect, the negative ultimate impact of tariffs on economic growth outweighs the immediate one-off impact on prices.
Elsewhere, in its worst result since 2009, Japan’s ruling Liberal Democratic Party (LDP) lost its parliamentary majority in the lower house elections over the weekend. This leaves the LDP desperately scrambling for new coalition partners to form a government and creates increased policy uncertainty and meaningful question marks over Prime Minister Ishiba’s future, less than a month after coming into office.
This reaffirms why we believe trying to formulate a short-term investment view based on politics and expected policies is a flawed strategy. Maintaining a diversified portfolio and staying invested, on the other hand, is a proven investment strategy that has been enduring over many decades and through many political regimes. That will continue to be the strategy employed within the YOU Asset Management portfolios.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 28th October 2024.
© 2024 YOU Asset Management. All rights reserved.
Two Minute Missive 23 October 2024
Watch the latest 'Two Minute Missive' from our Client Investment Director, Shane Balkham.
This video contains the opinions and views of Shane Balkham. Please work with your adviser before undertaking any investments.
https://youtu.be/MiutaVEmCz4?si=y3qvOSb-YZtGllky
The World In A Week - Navigating mixed signals of slowdown and acceleration
Written by Ilaria Massei
In the UK, the annual inflation rate dropped to 1.7% in September 2024, with a decline in transport costs making the largest downward contribution. This provided some relief amid concerns that persistently high inflation could limit theBank of England's ability to reduce interest rates further. UK retail sales unexpectedly increased 0.3% month over month in September, driven mainly by increased sales of computers and telecommunications equipment. Underpinning the uptick in retail sales has been the return of real wage growth and fading worries about mortgage interest rates. The Monetary Policy Committee’s August interest rate cut seems to be quickly stimulating the housing market, with the Royal Institution of Chartered Surveyors’ September survey showing UK house prices rising at their highest annual rate for 2 years. These factors contributed to the FTSE All Share's gain of +1.3% last week.
Earnings season – when a large percentage of publicly traded companies release their quarterly results, has kicked off in Europe, so far pointing to a slowdown in some key sectors and pushing the MSCI Europe ex-UK down -0.3% last week in GBP terms. Two of the region's largest stocks, ASML, a leading semiconductor supplier, and LVMH, a luxury goods conglomerate, saw their share prices decline after disappointing earnings. While ASML has benefitted from a surge in demand for AI-related chips, other segments of the semiconductor market remain weaker than expected. LVMH reported a 16% decline in sales in Asia (excluding Japan), where China is the dominant market.
Chinese consumers have reduced their spending due to concerns over their country’s weakening economic outlook and housing market. The Minister of Finance announced plans for additional government fiscal support in an effort to boost the economy, but the market was disappointed that they did not specify the level of support that would be provided and the MSCI China returned -2.5% last week in GBP terms.
While earnings were disappointing in Europe, US tech giants NVIDIA and Apple reached new all-time highs. Nonetheless, away from these dominant behemoths, smaller businesses continue to face mounting financial pressures, with nominal sales growth slowing and the average short-term bank loan interest rate hitting a 24-year high in September, according to data from the National Federation of Independent Business, a research centre that collects Small Business Economic Trends data. This highlights the stark contrast in the economic conditions faced by companies, with small businesses grappling with significant challenges while larger firms continue to prosper. On the employment front, the number of Uber drivers and couriers in the US has been on the rise since 2023. Despite positive signals from Non-Farm Payrolls, which measure the number of paid US workers outside agriculture, government, private households, and nonprofit organisations, companies like Uber appear to be taking on individuals who would typically be treated as unemployed. However, with the number of rides not rising as fast, the capacity for absorption is likely to be limited and could ultimately translate into higher unemployment in the future.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 21st October 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - A weakening backdrop
Written by Dominic Williams
In the US, markets had a positive week, with the S&P 500 index returning +1.4% in GBP terms. The latest US jobless claims data, which tracks the number of individuals filing for unemployment benefits for the first time, showed an increase of 33,000 from the previous week, bringing the total to 258,000. This figure surpassed market expectations of 230,000, with the rise largely attributed to increased claims in Michigan, where layoffs occurred in the manufacturing and management sectors, as well as the impact of Hurricane Helene. This data contrasts with recent Non-Farm Payroll figures, which have suggested steady job growth in the US economy. While the US economy has certainly been stronger than many might have anticipated, our team are mindful that the quality of many datapoints, such as the Non-Farm Payrolls, has become lower over time and there are currently many contrasting signals to be aware of.
Annual inflation figures were also released, showing a year-on-year increase of 2.4%, down from August’s figure of 2.5%. This marks the sixth consecutive month of declining inflation in the US. Investors remain confident that the Federal Reserve (Fed) will continue its rate-cutting cycle, with a quarter-point reduction widely expected at the November meeting.
In the UK, GDP growth figures for August showed a 0.2% increase, representing a rebound from the previous two months of stagnant economic growth. Output from the production and construction sectors recovered after declines in July, with additional support from the services sector. It is now forecasted that a mild slowdown in GDP growth is more likely in the second half of the year, rather than another recession.
China saw its annual inflation rate fall to 0.4%, below market expectations of 0.6%. This marks a three-month low for the world's second-largest economy and highlights the need for additional policy measures to address deflationary risks. China’s economy continues to grapple with deflationary pressures linked to its ongoing property crisis, which has dampened household spending and weakened consumer demand. On Saturday, China’s Minister of Finance announced plans for additional government support in efforts to boost the economy, but did not specify amounts that would be provided. Ahead of the inflation data, the MSCI China equity index dropped by -6.7% in GBP terms over the week, a sharp contrast to its earlier rally which followed on from the initial government stimulus announcements.
In Europe, the MSCI Europe ex-UK index returned +1.1% over the week. However, key structural challenges persist, and the broader economic environment remains subdued. Germany’s Economy Minister recently announced that the country's economy, Europe’s largest, is now expected to shrink this year, reversing earlier predictions of slight positive growth, this would be the second consecutive annual contraction for the country. This shift underscores some of Germany’s structural challenges, particularly its reliance on manufacturing and the effects of global competition. Germany also reported a decline in its annual inflation rate to 1.6% in September, down from 1.9% in August, driven by a sharp reduction in energy costs and a fall in goods prices. The European Central Bank will likely consider this data in its upcoming interest rate decision, as slowing inflation points to weakening economic activity, making another rate cut increasingly likely.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th October 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - Fear of retaliation
Written by Shane Balkham
Iran launched the biggest attack on Israel in over 50 years, coinciding with the eve of the Jewish New Year. This rapid escalation of geopolitical risks in the Middle East saw the oil price climb around 5%, the biggest weekly move in the past 12 months. This surge in oil prices came as markets braced for the possibility that Israel’s retaliation would be focused on Iran’s energy infrastructure.
While oil’s sensitivity to geopolitical risks is nothing new, broad market concerns are focused on whether the conflict will cause a significant interruption to oil supply and have inflationary consequences.
Now that the Federal Reserve (Fed) has started its rate-cutting cycle, the focus for the rest of the year is on data pertaining to the US labour market. The Fed has signalled that its focus has shifted from inflation to the strength of the US labour market. That means the market will give a lot of attention to the Nonfarm payrolls data (a key indicator of the strength of the US labour market), the latest of which was published on Friday.
Good news for Jerome Powell, the chair of the Fed, as the number of jobs created in September exceeded expectations: 254,000 jobs versus the consensus forecast of 150,000. Equally significant was a revision to July’s job figure, up to 144,000 from 89,000, and August’s revision up to 159,000 from 142,000.
Add to this that the headline unemployment rate dropped from 4.2% to 4.1%, which leads to a conclusion that the US looks to have a robust employment backdrop and reaffirms that the US economy remains strong. While the probability of a consecutive half percent rate cut at the Fed’s next meeting has been reduced to almost zero, the expectation of a quarter percent cut in November, just two days after the US Presidential Election, is still firmly on the cards.
In the Eurozone, the focus remains firmly on inflation, with the European Central Bank (ECB) hinting at a rate cut at its next meeting. Inflation for the Eurozone was below expectations on a year-on-year basis, with headline inflation dipping below 2% for the first time since 2021. A decline in energy prices helped bring Eurozone inflation down to 1.8% and should provide comfort to the ECB that further rate cuts are appropriate.
With inflation seemingly under control and the majority of central banks in a rate-cutting cycle, outside of the conflict in the Middle East, the other unknown of 2024 rests firmly with the US Presidential Election. We are only four weeks away from the US electorate going to the polls, and most forecasts continue to suggest a close race.
While the focus will be on who wins The White House, the importance of which party or parties control Congress is arguably just as important. While the President has significant power, Congress will dictate how much legislation can be passed and ultimately how much of an effect politics will have on the US economy.
The importance of having an appropriately globally diversified investment is as strong as ever.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 7th October 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - Stimulus in China
Written by Millan Chauhan
The People’s Bank of China announced a series of measures to support the economy, including cutting a key lending rate by 0.3%, the biggest reduction since 2016. The goal is to stabilise the property market and boost consumer spending to achieve a 5% annual GDP growth target. In addition to rate cuts, the bank lowered the minimum deposit requirement for second home purchases from 25% to 15%. These measures are expected to create a more positive outlook for the economy, which has struggled in recent years. The news caused a strong reaction in the stock market, with the MSCI China Index gaining +16.1% in GBP terms last week.
The positive news from China and its potential to boost Chinese consumer confidence also benefited luxury brands like LVMH and Burberry, as Chinese consumers tend to spend heavily on high-end goods. This momentum also helped the broader MSCI Europe ex-UK Index gain +2.4% in GBP terms, which has a modest exposure to luxury goods.
Meanwhile, economic activity in Europe continued to slow, as shown by a drop in the Eurozone’s Purchasing Managers’ Index (PMI), which measures business conditions. A PMI reading below 50 signals a contraction, and this month’s score of 48.9 suggests economic activity is declining. Inflation in France and Spain also came in lower than expected, increasing the chances of a rate cut by the European Central Bank at its October meeting.
In the US, the Commerce Department reported that core personal consumption expenditure (PCE), the Federal Reserve’s preferred measure of inflation, rose by only 0.1% in August, suggesting a slight easing of inflationary pressures.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 30th September 2024.
© 2024 YOU Asset Management. All rights reserved.
Two Minute Missive 26 September 2024
Watch the latest 'Two Minute Missive' from our Client Investment Director, Shane Balkham.
This video contains the opinions and views of Shane Balkham. Please work with your adviser before undertaking any investments.
https://youtu.be/IoOybv3pHUQ
The World In A Week- Markets in flux amid political shifts
Written by Dominic Williams
This past week, markets have been navigating the implications of Donald Trump securing another term as US President. With President Trump beginning to shape his administration, his policies are expected to maintain a focus on protectionism, deregulation, and tax reform, continuing the themes of his previous term.
In the US, the S&P 500 Index saw a modest decline of -2.0% in local currency terms. However, the strengthening US dollar turned this into a slight gain of +0.4% in GBP terms. The US dollar strengthened significantly, rising +2.4% against Sterling this week and gaining +6.0% over the month. Smaller, domestically focused companies performed worse, with the Russell 2000 Index down -1.6% in GBP terms. Healthcare stocks were particularly hard hit on both sides of the Atlantic, following Trump’s nomination of Robert F. Kennedy Jr. - a known vaccine sceptic - as the next US Health Secretary.
The possibility of renewed trade tensions weighed heavily on China. Trump’s foreign policy appointees have reiterated his tough stance, with proposals to impose tariffs exceeding 60% on Chinese imports. These developments weighed on investor sentiment, causing the MSCI China Index to drop -3.8% in GBP terms.
European markets also felt the pressure of potential US tariffs, with the MSCI Europe ex-UK Index slipping by -0.3% in GBP terms. Concerns about how tariffs could impact European manufacturers dampened investor confidence further as Trump’s administration signalled a more combative approach to trade.
In the UK, GDP growth figures for the third quarter were disappointing, showing an increase of just 0.1%, below the consensus forecast of 0.2%. This slowdown highlights the challenges facing the UK economy amidst weakening momentum in key sectors. Sterling bonds remained largely stable, measured by the Bloomberg Sterling Aggregate index, dipping by only -0.1% over the week. Meanwhile, unemployment figures delivered another unwelcome surprise, climbing to 4.3% in September, above the expected 4.1%. This uptick indicates mounting pressures in the labour market, particularly as economic growth falters. However, it’s important to note that these unemployment figures rely on survey data, which has seen declining response rates recently, warranting cautious interpretation.
In the US, inflation data released midweek revealed a 0.2% month-on-month increase, in line with expectations, while annual inflation rose to 2.6%, up from 2.4% the previous month. Certain components of inflation continue to weigh heavily on the overall figure. Shelter, which includes Rent and Owners’ Equivalent Rent, remains high. However, these metrics are heavily lagging indicators and may not accurately reflect current housing costs. Speaking on Thursday, Federal Reserve Chair, Jerome Powell indicated no urgency to lower rates further, a stance that weighed on bond markets. As a result, US long-term bonds, as measured by the Bloomberg US Treasury 20+ Years Index, fell by -2.6% over the week in USD terms.
Amid global market volatility, maintaining a well-diversified multi-asset portfolio remains essential for effectively managing risk.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 18th November 2024.