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Market comment 17.10.16

Posted on 20/10/2016

Soft currency

Hard-line Brexit rhetoric from the government sent the pound tumbling even further last week.

Since the referendum, trade-weighted sterling is down 15%. And that rapid devaluation is starting to flow through into the real economy. Tesco and Unilever went head to head over product pricing, leading to several staples – including Marmite – being withdrawn from the supermarket’s shelves.

Inflationary pressures are rising. Because the UK imports most of what it consumes, the cost of living is likely to climb as the pound falls. Meanwhile, unemployment is butting up against its natural rate and the Bank of England has warned that it will allow CPI to rise above target.

Another batch of UK inflation data will be released tomorrow. CPI has been rising steadily since it dipped into mild deflation a year ago. It is expected to jump from 0.6% to just below 1%.

The massive fall in the pound may have given the government pause: early today, word has leaked that the government may be open to paying the EU for continued market access for some industries – especially financial services.

A changing wind?

Chinese CPI may also be on the rise. It shot up to 1.9% in September, after slumping to 1.3% the previous month. This was driven by a large increase in the cost of food. Meanwhile, producer prices (factory gate prices) increased for the first time in four and a half years. The index rose just 0.1%, so we will have to wait and see if this is the start of an upward trend. For many years it has helped push worldwide prices lower. If the wind changes, it may start to have the opposite effect.

The Middle Kingdom has started to capture investors’ attention once again. Its quarterly GDP numbers will be revealed on Wednesday (expectations are for an annualised 6.7%). Recently, imports have fallen and exports have slumped 10%, despite the devalued renminbi.

China is a gargantuan and varied country, making it difficult to assess. It is wrong to think of China as a single entity. In reality, there are many Chinas.

There are the great manufacturing hubs of the southeast, the industrial hinterlands of the northeast and interior, the vibrant cosmopolitan cities of the east coast and Beijing. There is the ‘New China’ of consumption and technology, and the ‘Old China’ of heavy industry and the largest construction boom in the history of the world.

Therefore, setting monetary and fiscal policy is difficult. Just as the European Central Bank sets its policy to aid the weaker southern states of the EU, the People’s Bank of China has used its monetary levers to benefit struggling provinces that have been in recession for years.

Monetary policy has created a wave of liquidity in affluent China that is washing around the country’s assets. This was partly the reason for the Mainland stock market almost doubling in the first half of 2015. Like ‘Whac-a-mole’, every time the state cracks down on one bubble the money pops up elsewhere. The latest hot investment is property.

Property price inflation has ballooned in first and second-tier cities, while remaining relatively depressed in the lower tier areas. Sky-rocketing property prices in the popular cities are politically untenable, so the Chinese government will have to act. Unfortunately, the one tool most likely to solve the runaway liquidity – tighter interest rates – could destroy parts of China that are heavily geared to the past.

The Politburo is introducing macro-prudential tools to lance this problem, and it should be successful. It won’t be plain sailing for China as it moves from heavy industry to consumption, but neither is it in as dire state as some fear.


No major announcements are expected from the European Central Bank’s (ECB) committee meeting on Thursday. Earlier this month, reports of a plan to taper the central bank’s €80bn-a-month quantitative easing programme sent European bond markets roiling.

Markets have been hungry for extra stimulus from the ECB, but president Mario Draghi has not indulged them yet. Continental economic data have been ok and 10-year bund yields have risen above negative, which is arguably a good thing for the trading bloc.

Yields of US, UK and Spanish government debt rose about 10 basis points last week. Worries of inflationary pressures from China may have caused some of this move, but it seems more likely that markets are starting to bake in a 25bps hike to the US fed funds rate in December. Uncertainty about the American election is melting away as Republican candidate Donald Trump self-destructs on the campaign trail. Democrat Hillary Clinton has now built up a significant lead in the polls.

US CPI is released tomorrow: consensus forecasts say it should rise to 1.5% from 1.1%. That is followed by housing starts and average weekly earnings on Wednesday.

These releases should help paint a clearer picture of the path for interest rates.


UK 10-Year yield @ 1.10%
US 10-Year yield @ 1.81%
Germany 10-Year yield @ 0.06%
Italy 10-Year yield @ 1.38%
Spain 10-Year yield @ 1.14%

Courtesy of Rathbones

Brexit Positioning

Posted on 04/05/2016

The two most reliable indicators of how the Brexit referendum will play out continue to be the behaviour of sterling in foreign exchange markets and the betting odds.  In recent days both have shifted slightly in favour of the Remain camp, with sterling improving against both the dollar and the euro, and odds shortening for a Remain result.

However, a lot can happen between now and 23rd June, and it is interesting to note that the pound has not been the only casualty – there are growing signs that the UK economy is faltering, with weak unemployment numbers earlier in April, and slowing GDP growth.  How much of this is down to referendum worries is impossible to tell, but we know that markets and businesses dislike uncertainty, and fears about the future direction of the nation must be top of that list.

From an investment management standpoint, we continue to position portfolios to be largely agnostic about the outcome, not least because it would be risky on what is still a close-call vote to do otherwise.  If we leave the EU, the dollar and other overseas elements of our client portfolios would benefit greatly from an almost certain devaluation of sterling.  If we remain, then the UK element of portfolios would benefit from a probable uplift in the UK equity market, as well as a bounce back in the UK’s economic growth later in the year.  In either scenario, we are comfortable with our decision to reduce slightly our commitment to equity markets and hold some cash:  there will be some interesting opportunities in the coming months, and having a modest element of cash in our client portfolios will provide us with the flexibility to ensure we can benefit from these.

Courtesy of Bordier & Cie (UK) Plc

Dont Panic

Posted on 15/03/2016

The new year has started in a more challenging manner than even the hungriest bears and doomsday merchants probably expected.  Against a backdrop of weak commodity prices and a long list of worries including another recession, interest rate turmoil and a Chinese slowdown, share prices in all major markets have seesawed violently, but at the time of writing have staged a significant recovery to the point where major markets are only in slightly negative territory for the year to date.  However, this is not a time for active chopping and changing: sensible investors who want to sleep at night must stay focused on their long term aims and aspirations.

It’s hard to isolate the biggest worry besetting investors, but it is probably China, and the threat of a slowdown there derailing the global recovery.  This fear is ill founded: China is not the locomotive of global growth (the US is), and for the UK, exports of goods and services to China account for around 5% of the total.  And things are not that different in the opposite direction:  of the half million or so new jobs created in the UK last year, fewer than 5,000 were by Chinese firms.

China is slowly but surely making the inevitable transition from a construction led miracle to a more consumer driven economy.  As the Chinese economy grows in size, it is a simple inevitability that the year on year rate of economic growth will moderate to more modest numbers – straightforward arithmetic says it cannot be otherwise.

The sooner that investors realise that a lower and more sustainable growth rate in China would in actual fact be better for everyone, then the quicker this particular worry can be crossed off the list.

Courtesy of Bordier & Cie (UK) PLC

Summer Budget 2015 HMRC Notes

Posted on 09/07/2015

To download this document, please click here

Greece is the word

Posted on 03/07/2015

The twists and turns of Greece’s plight have been a significant distraction for markets this year, and as this is written the country continues to teeter on the brink of defaulting on its loans to creditors and being expelled from the eurozone. Whether it will survive or not is still too difficult to call, particularly when the leaders of Germany and France, the two most exposed countries to Greek debt, are quite rightly fighting to defend their own financial corners.  But with the authorities making further reassurances that they will do all they can to protect the financial stability for Greek citizens, and both sides seemingly wanting Greece to remain a member of the euro area, then some deal will hopefully be struck soon. 

What is the likely impact on stockmarkets?  We expect stockmarkets to remain quite twitchy as the prospects of a satisfactory outcome wax and wane.  However, these volatile conditions should allow the active stockpicker the opportunity to find cheap and attractive longer-term opportunities in a region where economic recovery is now gaining some solid momentum.  It is reassuring, for example, that since the ECB began its Quantitative Easing programme earlier this year, European markets have largely detached themselves from the unfolding Greek saga, a sign that there is a deeper determination within markets to contain any contagion.  Indeed, contagion risk is probably more psychological in nature than real: a Grexit in isolation is too small to derail the nascent recovery in Europe, and in the USA too, latest economic data point to accelerating growth.

This current bout of turbulence is not prompting us to make any changes in our asset allocation.  In due course investors will refocus on the more positive aspects of the wider eurozone’s economic revival and the generally benign outlook for world markets.

Courtsey of Touchbutton 0 Bordier & Cie (UK) Plc