Please find below our interim Investment Market Update as at 10th September 2021
Blue Sky Investment Market Update
“It’s too good to be true!”
This was a comment made by a client the other day. They weren’t doubting our integrity, but more they were confused as to why their portfolio had soared in value.
On further questioning, they admitted they don’t read my updates as they leave it to us to run the money, but the by-product of this is that they have been worried about what may have happened to their portfolio, latterly because of the situation in Afghanistan. The reality proved to be way ahead of their expectations and, of course, I explained that Afghanistan was a minor hiccup at the moment, in investment market terms.
I encouraged them to save themselves some pain and anxiety by reading my updates, if only to skim through. I know many of you do this anyway!
“Surely, the markets can’t keep doing this?”
Another casual comment this time by a friend and client who has a sizeable amount on deposit. Having enjoyed really good returns, he’s now wary of investing.
The first thing to comment on is what do we mean by “the markets”? In this context, he was talking about equities but it’s so important not to just think of the investment markets in this context. There is always somewhere to invest as different assets respond in different ways to the economic cycle, changes in policy and events. Equity wise, I have commented many times about this likely being a shorter economic cycle than most, but a dynamic cycle it is with huge stimuli boosting specific sectors. It makes sense to be a part of it in our eyes and not watch from the side-lines unless one is completely risk averse.
Not a question of will they taper, but when?
I’m talking about central banks here and their withdrawal of quantitative easing. A term we became familiar with in 2008/09.
Equities have been a tad choppy over the last few days. The week started off with European stocks posting their best day for some six weeks on hopes for sustained stimulus. Chinese shares also responded positively as the Vice Premier said Beijing will back private business despite a regulatory crackdown across the technology and educational sectors. The CSI 300 index of mainland Chinese stocks rose by circa 2% as a result.
As the week progressed, equities became nervous as to what the ECB May propose. Government bonds also softened, and the dollar strengthened in anticipation that the Federal Reserve may begin the tapering of bond purchases.
This should not be a surprise for anyone as this has been well signalled.
As reported in FT.com, after a brief recession last year, the Eurozone economy grew faster than expected by 2% in the second quarter, prompting our move here at Blue Sky to hold more European stocks. Consumer price inflation has hit a decade high of 3%.
“The lady is not for tapering”
Yesterday, ECB President Christine Lagarde echoed the well-known quote of former British Prime Minister Margaret Thatcher that “the lady’s not for turning” as she assured a press conference that the unanimously agreed shift to a slower pace of purchases, is not tapering.
It was reported in FT.com that most analysts agreed the ECB’s decision is different to other central banks’ tapering because the ECB is not planning to end its bond-buying yet and was only “recalibrating” its pace.
“This is not a tapering decision,” said Elga Bartsch, Head of Macro Research at the BlackRock Investment Institute. She continued; “asset purchases look here to stay as the new policy framework paves the way for looser for longer monetary policy in the euro area.”
In contrast, the US Federal Reserve and the Bank of England have said they plan to start tapering asset purchases this year. Central banks in Canada, New Zealand and Australia have already started to do so. Lagarde said the ECB’s decision to slow bond purchases reflected that the “rebound phase in the euro area economy is increasingly advanced” with 70% of adults having been vaccinated.
UK still looks attractive:
- Overseas demand for UK gilts has never been higher
- Offshore private equity firms are competing for a deep pool of attractively valued businesses
- The UK has some of the highest free cash flow yields in the world and companies are beginning to return capital to shareholders.
Source: Investment Week and James de Uphaugh of Majedie Asset Management
Combined, these are firm signs that confidence in the UK is returning. Businesses are largely in good shape, the post-Brexit, post Covid outlook is brightening, and the stock market continues to trade at a discount to many of its global peers. Further encouragement comes from the fact that Britain is expected to grow faster than its G7 counterparts this year helped by the vaccination programme.
National Insurance rise to help pay for social care
This has been at the forefront of the news flow this week as the government achieved sufficient votes in the House of Commons.
Employees, employers and the self-employed will all pay £1.25p more in the pound for National Insurance (NI) from April 2022. However, from April 2023, National Insurance will return to its current rate, and the extra tax will be collected as a Health & Social Care levy. This levy, unlike National Insurance, will also be paid by state pensioners who are still working.
Quality of life
Now, I don’t wish to stray into politics but to me, it makes sense to pay extra taxes to help improve the quality of life for people. The problem most of us have is whether this money will be spent wisely!
This got me thinking about quality of life in general. Denmark supposedly is one of the best ranked countries in the world, second in fact to Switzerland. Here is a country that asks its population to pay high taxes.
The quality of life assessment includes the essential ideas of broad access to food and housing, to quality education and health care and to employment that will sustain us. It further measures quality of life which include intangibles such as job security, political stability, individual freedom and environmental quality.
On the subject of the environment, the transition towards improving the quality of life for us all gathers pace.
LGT Vestra reported the following this week:
- Government to ban single-use plastic cutlery
The government has announced plans to ban single-use plastic cutlery, plates and polystyrene cups in England as part of what it calls a “war on plastic“. Ministers said the move would help to reduce litter and cut the amount of plastic waste in oceans.Scotland, Wales and Northern Ireland already have plans to ban single-use plastic cutlery, and the European Union brought in a similar ban in July, placing pressures on ministers in England to take similar action. Ministers are also hoping to introduce measures under its Environment Bill to tackle plastic pollution, such as a deposit return scheme on plastic bottles to encourage recycling and a plastic packaging tax. Read more here.
- Toxic leaded gasoline production ends as last refinery shuts down
Production of leaded gasoline has ended worldwide now that the last refinery has exhausted its supply of the fuel that’s been poisoning the air for almost a century. The end of the toxic fuel follows intense diplomatic efforts by the US and the United Nations over the past two decades.The global ban will prevent about a million premature deaths annually from heart disease, strokes and cancer, as well as protect children, who are particularly vulnerable to it. Leaded gasoline was used mainly in Africa and in other low-income countries. In 2002, more than 100 countries were still burning the fuel.It’s also a major step forward in greening transport. The poisonous fuel has caused more exposure to lead than any other product worldwide, according to the World Health Organization. Leaded gasoline contaminates air, dust, soil, drinking water and food crops. It has contributed to dangerously high levels of lead in human blood, which causes decreasing IQ in children as well as lower academic achievement. Read more here.
- Octopus Energy helps Severn Trent to hit net-zero pledge
Severn Trent and Octopus Energy Group, the fastest growing energy supplier in the UK, have together pledged to develop renewable energy projects across the Midlands. It is the first time two major utility companies in the UK are teaming up to produce renewable power generation. The two companies have agreed to explore potential opportunities to generate clean, green energy at Severn Trent sites and other third-party locations throughout the region.The collaboration agreement will support Severn Trent’s triple carbon pledge of reaching net zero carbon emissions using 100% renewable energy and transitioning to a fleet of vehicles that are entirely electric by 2030.Octopus Energy Group has already worked with a number of high profile companies to help them produce their own renewable energy and drastically drive down their emissions to meet net zero targets. In the Severn Trent region itself, Octopus Energy Group has been able to supply businesses in Leicester and Warwick with cheaper locally-sourced renewable energy and to provide the energy for iconic venues such as the National Space Centre and the Richard III Visitor Centre.In May, Severn Trent revealed plans to invest £565 million over the next four years to help the environment and improve infrastructure across the Midlands, as well as to create 2,500 new jobs as part of an ambitious Green Recovery programme. It also announced earlier in the year that it has joined forces with Birmingham 2022 to help deliver the first ever carbon-neutral Commonwealth Games, where it will be responsible for delivering a series of initiatives that help offset the carbon generated by the Commonwealth Games and hopes to leave a positive social and environmental legacy of sustainability in the West Midlands. Read more here.
Quite a lot to absorb this week!
On a lighter note, I’m undertaking my own version of the ‘green recovery’ this weekend… I will be at the BMW PGA Championships on Saturday and golf in Wales on Sunday and Monday. Thinking about it though, I’m not sure this will be much of a rest!
Have a great weekend.
Gary Neild and the Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.