Please find below our Investment Market Update as at 29th April 2022.
Blue Sky Investment Market Update
Looking forward with optimism
I’ve mentioned on numerous occasions how it’s important to keep perspective. Very difficult, I know, amongst this avalanche of negative news flow and I know I’ve given you plenty over the last couple of weeks.
However, this week we are going to step back from what the International Monetary Fund (IMF) say, what the economists are deliberating about and the conjecture emanating from fund management houses. Not to say we are ignoring their rhetoric, quite the opposite, but it’s also important to evaluate what is being experienced on the ground, by everyday businesses and the public.
Cash reserves are high
Whilst everyone will feel the squeeze of higher inflation and interest rates in some way shape or form, we must bear in mind that both consumers and businesses have created significant cash reserves. A banker I was speaking to this week stated that currently they are seeing a real momentum in consumers and businesses placing money in savings accounts.
Consumer confidence versus business confidence
Something I’ve written about recently is the dichotomy between consumers and businesses with regards to confidence.
Recent figures from the Office of National Statistics found that UK retail sales fell by 1.4% last month as news emerged that consumer confidence has reached near record lows. Not really a surprise with all the talk of interest rate rises in response to 40-year high inflation.
Yet, when I speak to businesses up and down the country, every business owner is saying they are rammed, to the extent that many are finding it challenging to cope with demand.
I spoke yesterday to the Dorset Chamber Board, as I do every quarter about the main dynamics economically and the likely impact on investment markets. The feedback from everyone around the table was that business confidence is high. Granted, these are mainly local businesses with up to 100 employees, but global companies are also represented. Such feedback provides an interesting insight to what’s happening on the ground.
Recession… it’s all bananas!
I wrote a few weeks back about the likelihood of recessions over the next couple of years and Legal & General Investment Management (LGIM) provided us with their views on the percentage possibilities of recessions occurring, across different regions. However, we must be careful that we don’t talk ourselves into a recession and exaggerate the very thing we are worried about!
It’s encouraging that consumers and business in general terms have been building up cash buffers. The pandemic created a change in behaviours. Only three years ago financial commentators were bemoaning that most households didn’t have sufficient cash reserves. At least in these uncertain times, many have now.
Of course, it’s all a matter of confidence.
Let me share with you a story sent to me this week by LGIM. It was all about bananas.
I know, understandably, you are wondering what bananas have got to do with anything. Let me explain:
In the late 1970s, the economist Alfred Kahn was an adviser to President Jimmy Carter. He was reprimanded by Carter for talking too frequently about the risk of a recession. Carter feared that just discussing a recession would dampen animal spirits in the private sector and make a downturn more likely. Kahn’s response to this restriction was to simply replace the word ‘recession’ with the word banana in his public statements to Congress. He said things like “unless inflation is brought under control, we’re heading for a big banana”.
We’ve been on banana watch in the UK and Europe particularly, since the Russian invasion of Ukraine. The spike in natural gas and Brent oil prices is a huge shock to consumer real incomes that needs to be monitored closely.
All things considered though; European data has held up relatively well. The latest flash PMI data (Purchasing Managers Index) published this week remains consistent with an economy growing at a fairly healthy rate.Recent communication from the European Central Bank also suggests that their banana-ometer is not flashing red!
Good news for exporters
I’ve seen many reports commentating that the pound has fallen to a four-year low against the dollar. It’s been reported in a negative tone, yet this weakness has a silver lining. It means exports will be cheaper for those looking to buy UK goods.
I spoke to a steel construction company the other day and they commented that their export book is picking up strongly.
Incidentally, it’s no surprise to see the dollar strengthening with all the projected interest rate rises. The UK whilst also increasing rates are not expected to be so aggressive with monetary tightening. The Bank of England must be careful as the US economy is expected to be able to absorb rapidly changing monetary policy much more than the UK.
Against the euro, the pound has remained relatively strong because European interest rates aren’t expected to rise as quickly as in the UK. If you are going on holiday, you will get more for your money if you holiday in Europe rather than the US.
Mergers and acquisitions (M&A)
With the changing world over the last two years, we are seeing a huge increases in activity for merger and acquisitions in the UK. As long as capital is readily accessible, this is expected to continue.
I remember a M&A lawyer in London contacting me during the pandemic and he thought he may lose his job (and his lifestyle) as activity slowed to a stand-still. Quite the opposite to the frenzied activity we are now seeing in this space.
Of course, a weakness in the pound versus the dollar also makes many UK companies more attractive to buy than they were before.
Don’t underestimate central banks and governments!
Whilst central banks in the western world aren’t in the same position as they were in the pandemic and can’t loosen monetary policy, other parts of the world like China, the second biggest economy in the world, have greater flexibility.
Overnight the Hang Seng gained 3.2% after a statement from China’s politburo according to ft.com. China promised to “strengthen macro adjustments and achieve full-year economic and social development goals”. It also said it would ensure the “stable and healthy” operation of capital markets.
Earnings season has been stronger than anticipated
There was some trepidation about the results from quarter one of the earnings seasons, especially in Europe. However, encouragingly, 75% of companies have beaten profit expectations, according to Barclays. As reported again on ft.com, Barclays commented “amid highly volatile markets and rising macro worries, corporate earnings remain supportive of equities”.
Part of this relative success can be explained by a heavy fall in the value of the euro against the dollar which flatters the domestic value of overseas earnings but, nevertheless, good news overall.
US equities post the best returns for seven weeks
The Dow Jones and the S&P 500 record their best day in seven weeks as tech stocks rally as reported in MarketWatch this morning.
US stocks finished sharply higher yesterday as investors piled into technology stocks following results from Facebook parent Meta Platforms which weren’t as bad as initially feared. At the same time, investors brushed off fears around data which showed that the US economy contracted unexpectedly in the first quarter. Perhaps the news flow and sentiment becoming a self-fulfilling prophecy!?
The Dow Jones finished up 1.85%, the S&P 500 2.47% and the Nasdaq 3.06%. This doesn’t mask the losses in these indices this month but it gives an indication of how quickly dynamics can change.
Don’t underestimate the ability of companies to innovate
Energy resilience has been brought into question more acutely of late, and down the line, we are expecting food resilience to grow on governments’ agendas in the coming years. LGT Wealth Management gave an example of how Deere & Co are investing heavily to create a solution across the food industry: they are investing into artificial intelligence systems and precision farming to monitor crop health and weather patterns via satellite and drone imagery which allows data analysts to understand and predict impacts on crop lifecycles.
Farmers will then be able to optimise growth and reduce fertiliser usage, safeguarding their businesses financially but also minimising the consumer health risk associated with chemical usage and doing less harm to the environment to boot. The technology deployed by Deere & Co has led to 80% less usage of herbicides and pesticides across their farms.
There you go, some refreshingly upbeat news.
Don’t underestimate how quickly companies and governments can find solutions to issues. The pandemic being a case in point. When we are in times of turmoil, as uncomfortable as it might feel, it’s worth remembering that many great companies have been born in times of difficulty.
The pandemic has left many businesses in a more streamlined state and nimbler than ever. In general, those companies that have significant amounts of capital at their disposal and are ready to deploy will thrive off the opportunities that will inevitably present themselves. It’s just a matter of timing and confidence. Downturns in economic activity are often when strong companies further leverage their competitive advantage.
Have a great Bank Holiday.
Gary and the Blue Sky 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.