Please find below our Investment Market Update as at 29th October 2021. Today’s is written by Andrew Dunn (known as Gus) as Gary is away.
Blue Sky Investment Market Update
There is a great deal happening, but the main theme remains the same being the connectivity between inflation and interest rates with the knock-on effect to economic growth and asset prices.
We are all experiencing inflation and indeed Rishi Sunak is expecting this to run at twice the level that the Bank of England would like to see as a long-term average (2%). The debate on the longevity of elevated inflation continues, only time will tell of it’s long-term impact. The challenge for Central Bank’s is to navigate an even course that demonstrates to markets that they can keep economic growth and recovery intact. This is partly why we are seeing more signposting, especially in the USA, as to the likely direction of policy so as to be seen being proactive and manage expectations. Most of us don’t like unexpected, unwelcome surprises and this is equally true of markets.
All these machinations have seen world stock markets grind gently upward this week. This is largely attributable to strong corporate results, most notably in the US with Tesla reaching a market valuation $1 trillion and Apple smashing their own third quarter earnings record. There is a good deal of positive expectation for continuing good earnings built into markets, but recent results have reassured investors that companies have been able to take supply chain issues, inflation and a slowdown in the Chinese economy in their stride. There is no doubt future increases will be harder, with the inevitable tightening of Government spending, which makes our conviction to focus on companies with strong balance sheets and good pricing power even more compelling.
With so many headlines around the Budget in the last few days, this will be a brief summary focussing on the key points for investors. The Budget was largely about spending, with very little about personal tax; nothing new on income, capital gains (other than an extension of the time limit on which to pay tax on property gains) or inheritance tax, and no changes to pension tax relief or lifetime/annual allowances.
ISA limits remain the same but will be linked to Consumer Price Inflation from next year. The lack of change for now is welcome, with bigger fish for the Chancellor to fry, but there is no doubt the temptation to raise taxes, and hopefully simplify some the complexity of our tax system, will prove very tempting next time around. It also must be remembered that a few changes to tax were previously announced being the rise in National Insurance for Social Care and the increase to dividend tax rates.
Despite rising inflation, the Chancellor announced that our economic recovery from the pandemic will be better and faster than previously estimated, with our economy getting back to where it was by the end of this year. Economic growth for 2021 has been uprated to 6.5%, 6% for next year and then smaller rises for the following 3 years. It is notoriously hard to predict the future but this is an encouraging outlook.
Turning to inflation, the Chancellor cited rising energy prices and supply chains as the main culprits and that both were “shared global problems” and that it “would be irresponsible for anyone to pretend that we can solve this overnight”. He went on to explain that he has written to the Governor of the Bank of England to reaffirm their mandate to focus on keeping inflation low and stable. This is code for a likely interest rate rise, should inflation persist, as indeed the Governor himself alluded to a few days before. More of the foreshadowing we have spoken about.
In summary, the UK stock market on Budget day was unmoved by what was announced, indicating there was neither much new to worry or jump for joy about.
As you will know, Sustainability is at the heart of Blue Sky’s planning both as a Company and how we deploy clients’ money. Royal London and of course our friends at Foresight and LGT Vestra are key to our investing strategy. The following are Phoebe Stone’s (LGTV) thoughts on the upcoming conference in Glasgow.
The 26th UN Climate Change Conference brings together the 197 UN member states who signed the UN Framework Convention on Climate Change. As well as leaders, there will be thousands of negotiators, climate experts, scientists and activists. COP 26 is a 2-week event and will assess what has or has not been progressed since the 2016 Paris Climate Change Agreement. The first week will focus on issues such as enhancing rules for carbon markets, securing funding for countries vulnerable to climate change, beefing up net zero policies and the need for nature based solutions. In the second week it is expected that leaders will start negotiations and agree targets.
COP 26 has four specified goals:
- Secure global net zero by 2050 to keep 1.5 degrees within reach
- Adapt to protect communities and natural habitats
- Mobilise finance to fund this
- Work together to deliver solutions
If we are to limit temperature rises to what was agreed in the Paris Agreement, we need to see some radical action. We need global leaders to be bold in taking decisive action by setting more ambitious pledges and bigger regulatory steps. This COP must highlight the huge amount of commitment still needed to limit carbon emission production and slow global warming, as it is seen by many as the last opportunity to avert a climate catastrophe.
LGT Vestra have two representatives attending COP and we look forward to sharing their experience.
In addition to Phoebe’s thoughts, it was interesting this week to read a quote from Larry Fink, who runs Blackrock which is the world’s largest asset manager. Larry said “it is my belief that the next 1,000 unicorns — companies that have a market valuation over a billion dollars — won’t be a search engine, won’t be a media company, they’ll be businesses developing green hydrogen, green agriculture, green steel and green cement”. This reinforces our firm conviction that investing sustainably is the right approach on many levels.
Artificial Intelligence (AI)
Please don’t worry that you are now reading the New Scientist by mistake, as until a few years ago my knowledge of this was limited to Harrison Ford in Bladerunner.
The definition of AI is the development of computer systems to perform tasks previously requiring human intelligence. At Blue Sky one of our core investment philosophies is to invest client money in areas that companies and governments are supporting and spending their money on. This has led us to Sustainability, Technology and Artificial Intelligence. The latter features directly in our Momentum, Global Themes and more broadly in our core managed portfolios.
I thought it would be useful to try and bring this area to life a little and outside of the realms of science fiction. It is already a part of daily life and has very successfully been applied in so many areas including industrial processes, shopping, smart phones and finance. One growing trend is healthcare and a further example of why we are so keen. For instance, at present about 50% of coronary heart disease is only discovered when someone sadly dies. Our NHS has a tool, ‘Heartflow Analysis’, which uses AI to turn a CT scan into an interactive 3D model to help diagnosis. Cardiologists can use this to assess potential problems and NICE (the UK’s National Institute for Health and Care Excellence) has calculated that it represents a near £400 saving per patient for the NHS and will improve outcomes for patients.
Healthcare and developing new drugs is very expensive, with the average cost of a new drug being nearly a billion pounds to bring to market. When you then see that 90% fail somewhere between early trials and regulatory approval (data from the United States) you can see both the challenge but also the opportunity for improvement.
This expensive process has led many companies to focus on refining existing approved drugs rather than focussing on new solutions. It is to be hoped that AI can continue to help doctors and scientists refine and improve medicine for everyone. This is why we see AI as not simply a concept but a positive, real world way to invest some of your portfolio. The Sanlam fund that we use in Momentum has gained 139% over the last 3 years and we feel has further potential to grow.
I’ll leave you on that positive note.
Have a great weekend.
Andrew Dunn (Gus) 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.