Beaufort Analysis No. 310 - A day is a long time in politics
Harold Wilson once said that a day is a long time in politics. If this past week has shown us anything, it is that even an hour can be a long time in politics. The week began with Theresa May intending to put her withdrawal agreement to Parliament for a vote, but by mid-morning on Monday, Number 10 had announced that the vote scheduled for Tuesday evening was being abandoned. The news broke early on Wednesday morning that fellow Conservative, Sir Graham Brady, had received the 48 letters required for a vote of no confidence in Theresa May as prime minister. Later that evening, the vote followed and Mrs May was successful in holding her post. She remains leader of the Conservative Party with no question of confidence for another year.
A bellwether indicator for confidence in the UK political climate is the sterling/dollar exchange rate, which reached a 20-month low of $1.25, a level not seen since the Brexit vote. Holiday-makers heading off to the States for festivities can expect an even lower rate at airport exchanges, who are offering a meagre $1.05 for each £1 to those purchasing currency at the terminal.
After a busy week at home fighting for her position in the party, Theresa May travelled back to Brussels to meet with other EU leaders to further negotiate her deal. President of the European Commission, Jean-Claude Juncker, has said there will be no more negotiations, only clarifications to the agreement.
At the European Central Bank, Mario Draghi has announced the end of the ECB’s quantitative easing programme. The Bank started to taper this programme in September this year, from €30bn of bond purchases a month, down to €15bn a month. It has also downgraded its growth forecast for 2019. The previous forecast was 1.8% and has been revised down to 1.7%.
As we all wind down for the festive period, we can still expect uncertainty from politics and the markets as we move ever closer to Brexit.
However, 2019 is a new year and fresh beginning so the festive period is always a time for hope and optimism. Wishing you a Merry Christmas and a Happy New Year.
Beaufort Analysis No. 309 – En Marche! (Towards Year-End Turbulence)
Wall Street finished last week with a bout of increased volatility with the S&P 500 down -2.3% on Friday in US Dollar terms; this resulted in the worst week for US equity markets since March. Conversely, US Treasuries experienced their greatest weekly rally in three years with the 10 Year US Treasury Yield finishing the week at 2.85%. Both of the aforementioned market movements point to investor anxiety about the increasing possibility of an imminent US recession. More and more sections of the US ‘yield curve’ (the difference between the interest rate on long-term and short-term US Treasury Bonds) are now inverted. 2 and 3 Year yields are now above 5 Year yields, while the gap between 2 Year and 10 Year Yields is at its lowest in more than a decade.
In Europe the turbulence is evident not only in financial markets (with the Eurostoxx 600 down -3.4% for the week), but on the boulevards of Paris. The election of President Macron in 2017 was heralded as marking France as an island of stability and common sense as Brexit, Trump and Italian populism reigned in other countries. With an approval rating of 23%, Macron's position is now looking increasingly precarious as the ‘Gilets Jaunes’ take to the streets, often with violent consequences. Their list of 25 demands are both left and right-wing in nature, illustrating how the République is far from immune from populist protesters driven by high unemployment and stagnant living standards.
In Britain, along with Christmas jingles, the airwaves are consumed with Brexit and the upcoming vote in parliament on Theresa May's deal this Tuesday. While it is very difficult to predict the outcome, and financial markets do a poor job of efficiently pricing binary political outcomes, it is worth noting that Sterling derivatives markets are pricing a great deal of volatility on a 3-month horizon - with implied 3-month volatility rising to 14% last Thursday.
Further afield, we have seen a sustained fall in global government bond yields - with Canadian 10 Year yields falling over 50bps since 5th October as fears grow about the housing market and wider economy. The Chinese economy faces a number of headwinds, namely the ongoing trade negotiations with the US. In addition, the economy must now contend with the spectre of deflation as data released over the weekend showed slowing consumer confidence and producer price indices. While Chinese policymakers have a variety of levers to pull to stimulate their economy, the main concerns faced by investors are a co-ordinated global slowdown in tandem with increased political risks in key countries.
Beaufort Investment finalist in Best Model Portfolio Service category - Professional Adviser Awards 2019
Fast on the heels of being named a finalist in the ‘Best Network’ category of the Professional Adviser Awards 2019, the judges have now confirmed that Beaufort Group’s Beaufort Investment is a finalist in the ‘Best Model Portfolio Service’ category.
Entries were taken from every corner of the industry and finalists are selected as standout examples of firms helping to move the industry forward.
Derrick Dunne, CEO of Beaufort Investment commented: “We started this year with one big intention: to take our investment proposition to the wider IFA market. We have a tremendous team, led by Shane Balkham, and have an enviable 14-year track record. Being recognised in this category is testament to the hard work of our exceptional people.”
Now in their 14th year, the awards recognise the best adviser firms in financial services, along with the best in multi-asset investing, platform provision, adviser support and client engagement as well as crowning the Paraplanner of the Year and Adviser Personality of the Year.
The winners will be announced at an awards ceremony on Thursday 7th February at The Brewery, London.
Beaufort Analysis No. 308 - Weather Forecast
“Earlier on today, apparently, a woman rang the BBC and said she heard there was a hurricane on the way…well if you’re watching, don’t worry, there isn’t!” The famous words of Michael Fish’s 1987 October forecast. What followed the very next day was a hurricane, with winds up to 110mph, causing over £5bn of damage in today’s money. Last week, both the Treasury and the Bank of England released statements on their possible scenarios for the UK economy when we leave the European Union. Both have modelled possible effects to the UK economy based on different Brexit outcomes, with the Governor of the Bank of England, Mark Carney’s most extreme prediction that the UK economy could suffer an 8% drop and be in the worst position since World War II.
Worst case scenario sees unemployment rising to 7.5%, house prices would drop 30% and inflation could reach 6.5%. The following steps would see the base rate hiked to over 5% to temper inflation. There has been much criticism of Mark Carney and the Bank of England for his predictions, as his comments could be seen to not be independent and walking into politics. The Bank of England was made independent to ensure policy and the economy are not influenced by government or politics. The Central Bank has previously criticised its own forecasts made ahead of the Brexit vote, as the UK economy remained stronger than they anticipated after this historic referendum.
This weekend saw another resignation over Brexit, as Sam Gyimah, Universities Minister and MP for East Surrey, quit over the proposed deal and encouraged Theresa May to consider a second referendum. This week, Theresa May is expected to come under pressure from many other parties to publish the Brexit legal advice.
Whatever your views on Brexit may be, the markets don’t like uncertainty. Whilst a possible scenario or forecast may seem like some certainty as it gives a vision for what may happen, Michael Fish is a prime example that forecasting is not always accurate. We maintain that continuing with your investment strategy and maintaining a well-diversified portfolio will provide the best outcome for you as investors.
Beaufort Analysis No. 307 – Between Scylla & Charybdis
Market volatility continued over the course of the last week leaving the MSCI USA Equity index down -3.0% in USD terms for the month to date, while the MSCI All Country Global Equity index is down -1.6% in local currency terms. By Tuesday of last week, the "FAANGs" group of tech stocks, Facebook, Apple, Amazon, Netflix and Google, had lost more than $1trn of their market value since their highs of this year.
In other asset classes, credit spreads have widened as investors’ fears about the level of corporate indebtedness mount. High yield bond spreads are now at their widest for two years, while the prices of leveraged loans are at their lowest since 2016.
10 Year US Treasuries yields entered the Thanksgiving weekend at eight-week lows, giving up 1.6 basis points on Friday to touch 3.04%. Bank of America Merrill Lynch’s rates team is now forecasting an inverted yield curve next year, while their credit team forecasts widening credit spreads.
In the UK, the withdrawal and future relationship agreement negotiated by Theresa May was ratified by the leaders of the European Union at the weekend, after some opportunistic posturing by Spain over Gibraltar. The Prime Minister now faces the Homeric task of steering the agreement through the House of Commons, beset by threats on both sides.
With the Brexit standoff ongoing, budget frictions between the Italian government and EU Commission and lack of progress in resolving the US-China trade dispute, investors are now considering the possibility that the Federal Reserve might slow its planned path of interest rate increases, the so-called "Fed Pause". A widely followed measure of financial conditions, the Goldman Sachs Financial Conditions Index, has risen to its highest level since early 2017 denoting tightening monetary conditions. One of the Fed's primary reasons for raising rates is so that it can lower them again to stimulate the economy should there be another significant economic slowdown; this is particularly important given the high level of government debt and the constraints that places on fiscal stimulus.
Against this backdrop, oil prices have slid precipitously. On Friday, the price of Brent crude dropped 6% to below $60 per barrel. Low energy prices are a key policy goal of President Trump, and he has been putting pressure on his Saudi Arabian counterpart to achieve this. This drove quick declines in the equity value of the major oil-producing companies and will have contributed to widening credit spreads on the debt of shale producers in the US mid-west. As in so many other circumstances (eg the tariff war), President Trump has to walk the tightrope between something that is beneficial for his support base (higher energy prices for shale and coal producers) and what is beneficial for the wider US economy (lower energy prices as an input cost).
Beaufort Analysis No. 306 – You can’t make a silk purse out of a sow’s ear
There was only one story last week. The delivery of the much-anticipated draft Brexit agreement from Prime Minister May.
The 585-page withdrawal agreement has now been published detailing what the UK and EU’s future relations will look like. The planned transition period for the UK to leave the EU is 21-months from March 2019, with a financial settlement from the UK expected to be in the region of £35bn-£39bn. The initial political response has been extremely negative, causing the pound to fall c.-0.7% intraday, but rallying +0.15% at US close, following Cabinet approval.
The Irish border solution has been one of the main sticking points during talks to which the Government has proposed a backstop for the whole of the UK. This means customs checks would be avoided between Northern Ireland and the Republic of Ireland in the event of a UK exit. Dominic Raab, Brexit Secretary, who initially signed up to the proposed Brexit deal, resigned from his post citing the backstop arrangement as one of his key reasons. This was followed by another resignation from Esther McVey, who was the work and pensions secretary. While resignations came from the Cabinet, business leaders, Chancellor Philip Hammond and Greg Clark, Business Secretary were supportive of May’s agreement, despite its “imperfections”.
May’s focus will now be on the House of Commons, where it is thought she has very little support. Scotland’s Brexit secretary, the DUP and the Labour party have also confirmed they will vote against the deal. Lead Brexiteers, Boris Johnson, David Davis and Nigel Farage were also furious with the contents of the agreement. Jacob Rees-Mogg, Chairman of the European Research Group, is also backing a vote of no confidence in May, in a letter to the Conservatives’ 1922 committee. 48 letters are required to trigger a vote of no confidence and Rees-Mogg fully expects this support will come.
Financial market access could also be in question; under the terms of the deal, UK asset managers could face restrictions on EU markets. The UK currently enjoys unrestricted access to EU markets, which is extended to countries who have a comparable regulatory regime, however, this only covers a limited range of market participation; as an example, UCITS vehicles are not included.
European Commission President, Donald Tusk has confirmed a special summit will be held on 25th November to sign the Brexit agreement barring an extraordinary event. If a deal cannot be reached by 1st December, the focus will be on plans for a no-deal scenario.
Beaufort Analysis No.305 – The Economic Consequences of the Peace
Following an October that witnessed significant downside volatility in financial markets, global equity markets have staged a modest recovery in local currency terms, with the MSCI ACWI up +1.9% to the end of last week (+0.13% in GBP terms). Beyond the short-term gyrations of the past weeks, the 100th anniversary of the Armistice at Compiègne provides us with the opportunity to reflect upon the longer-term market and geopolitical events that drive global returns.
The renowned economist John Maynard Keynes is best known for his work The General Theory of Employment, Interest and Money – written in response to the Great Depression and which gave rise to the economic doctrine of Keynesianism. His earlier and less well-known work, The Economic Consequences of the Peace is (in this author’s opinion) his greater and more prescient work. It outlined the folly of imposing harsh economic sanctions on a defeated Germany to satisfy political aims. This is potentially worth a read by Messrs. Macron and Juncker as they seek to make clear the economic cost of leaving the EU to the UK.
More recently, economists Stephen Broadberry and Mark Harrison of Oxford and Warwick Universities respectively, recently published a collection of papers – The Economics of the Great War: A Centennial Perspective. In this, they further elaborate on the economic parallels between then and now. One of the most interesting points they highlight was how the outcomes of the war depended on each country’s self-sufficiency. Just as the fortunes of the Central Powers were determined by the fact they ran out of food before they ran out of shells, the fortunes of modern economies in a period of rising trade tensions will likely be impacted by their reliance on trade. If we review the OECD data for Imports & Exports as a % of GDP, we find some potentially surprising results. Smaller countries with the most to lose from a slowdown in global trade include Ireland, Belgium and the Netherlands as exports as a percentage of their GDP is greater than 80%. At the G20 level, Germany has the most to lose with exports making up 45% of GDP – while China and the US are some of the world’s most self-sufficient large economies with 20% and 12% respectively. This is interesting in the context of who loses in an environment of slowing or decreasing world trade.
Additional themes explored by Broadberry & Harrison looked at how the war brought about an abrupt end to unfettered migration, increased nationalism in Europe and the large refugee crisis that followed long after 11th November. It is well worth remembering that the issues faced by today’s policymakers are by no means new.
Closer to home, with the noise around the Brexit negotiations reaching a crescendo, it is worthwhile taking a step back and evaluate the underlying structure of the UK economy. Recent Q3 GDP growth came in strong at +0.6%, indeed outpacing that of the economies of France and Germany. Unemployment remains at a record low and, with the avoidance of any turbulence, the Bank of England should begin steadily raising rates. The UK will remain a hub for technology, financial services and biosciences offering plenty of investment opportunities for the medium to long-term investor after this latest European agreement is concluded.
The World In A Week - Elephant In The Room
Last week, ISM data was released, this is a measure of new orders, production, employment, supplier deliveries and inventories; in essence, a measure of productivity. The key number to be cognisant of is 50, above 50 indicates an economy is in expansionary territory, below 50 indicates contraction and potential recession. Data for US and China did not make for happy reading, with German manufacturing data especially worrying, falling to 45.7 from 47.
While contraction has been evident for several months in bond markets, it has taken some time for this to filter through to equity markets, which had a negative week; in Sterling terms, most indices fell sharply midweek, limping back towards positive territory by Friday. In the US, ISM data plumbed the lowest depths in 3-years, heightening expectations of a further interest rate cut of 25bps this month, and a fourth rate cut probability of 50-50 by year-end.
On the tedium that is Brexit, there was little news. The next key date in the Brexit calendar is 19th October, when a deal must be agreed by Parliament; MP’s are expected to agree to a no-deal Brexit, which we believe is highly unlikely and will result in the Benn Act being employed, which will anger hard-Brexiteers. The Benn Act was passed last month and requires the Prime Minister to ask for an extension to the Article 50 negotiating period, which would avoid a no-deal Brexit on 31st October.
Chinese equity markets reopen this week following celebrations marking the 70th anniversary of the Popular Republic. Investors will be keenly focussed on US-China statements ahead of their meeting on 10th-11th October in Washington, where trade talks will recommence.