The World In A Week - Carry On, Not Carried Away
We ended last week with a strong employment number for the US Non-Farm Payroll, adding 379,000 jobs, against an expectation of only 200,000. The US Non-Farm Payroll is a monthly statistic showing how many people are employed in the US by manufacturing, construction, and goods companies. It is primarily used as an indicator for the number of jobs added or lost in the economy over a one-month period and is a broad indicator of the US economy’s health.
This boost could reflect an increasingly successful vaccine rollout and easing of restrictions in a number of US states. Texas, for example, has lifted all pandemic restrictions on economic activity, to tackle both the effects of the extreme weather and the fall in the fear of the pandemic. This will be an interesting test case for policymakers to monitor.
The imminent round of stimulus from the Biden administration looks to add further fuel to growth expectations, with a significant part of the proposed $1.9 trillion fiscal stimulus plan likely to be passed in the coming days. With substantial pent-up consumer demand ready to be spent once restrictions are lifted, it is no surprise that growth expectations for the US continue to be revised up.
This all sounds positive. However, we have also seen an increase in government bond yields over the past few weeks, as expectations for earlier interest rate hikes are priced. A strengthening economy could mean the accommodative monetary conditions are tightened sooner than expected. It was fortuitous then that the Chair of the Federal Reserve was speaking last week. Jerome Powell’s remarks said very little that was new and gave no indication of easing their monetary policy programme early. Unemployment, although reducing, is far from their full employment target and bond markets are not being disorderly.
It would seem that as we near the end of the COVID-19 tunnel, we must steel ourselves against the conflicting indicators and trust in robust and appropriately diversified investments. The budget delivered by Chancellor Sunak shows that a long-term view is needed to navigate out of this crisis, with his ‘spend now, tax later’ roadmap.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 8th March 2021.
© 2021 Beaufort Investment. All rights reserved.
The World In A Week - LatAm Shenanigans
February was generally a positive month for equity markets, but last week turned out to be quite a bumpy ride, particularly in the US, and notably within the technology sector. Albeit from low levels, we have seen a pick-up in government bond yields, with the expectation that central bank policy decisions will ultimately lead to inflation. The market has extrapolated that this will need to be countered with interest rate rises. With valuations on many technology darlings having become stressed, the market is now beginning to worry that rates and inflation could damage future growth and start taking flight into other areas of the market.
Outside of technology, stay at home themes have clearly been massive beneficiaries of the pandemic since last March, but last week saw a reversal of their fortunes with Working from Home and Stay at Home themed stocks down -8.5% and -8% respectively (source: Morgan Stanley), while more cyclical parts of the market sat comfortably in positive territory. Are we starting to see the first signs of the market leaving behind COVID-19 winners? If we look at the macro backdrop this is looking fairly robust and supported by fiscal and monetary policy. With the move up in yields, could this potentially be supportive of a shift in market sentiment? Higher rates have always been a risk to contend with but only recently have come to the forefront of investors’ minds, as the speed of the move has been sharp and fast. Investor positioning towards technology and momentum remains high, so it is something to keep a close eye on. As ever, all focus will be on the Fed and the tone of language of how they propose to manage these choppy waters.
As investors, we look for good opportunities at the right price, trying to ascertain what might be the turning point for an asset class that has previously been unloved and out of favour. As an Investment Committee, we have recently increased our allocation to UK equities as the headwinds from Brexit seem to have been removed and appear to be well-positioned in terms of vaccinating against the COVID-19 virus and potentially returning to normal. An asset class that is cheap relative to history and its peers. Sometimes, however, an asset class can be cheap and remain cheap for a reason. If we look at Latin America and Brazil as an example, these are markets that are notoriously volatile and not for the faint- hearted, which has been illustrated again over the last few days. When Bolsonaro took over the Presidency in January 2019, this was viewed as very market-friendly, and the market reacted accordingly, but last week he ousted the CEO of Petrobras and put in charge the head of the military. Truckers have been protesting about the rising cost of fuel and, with elections coming up next year, Bolsonaro does not want anything to upset his chance of re-election. This move is designed to put a control on the company and the oil price. Unsurprisingly, the Petrobras share price took a nosedive. Whilst we do not have any material exposure to the region, it is relevant in the context that politics can play an unfortunately large part on sentiment and impact markets, as witnessed by the fallout of the Brexit vote of June 2016. Watching out for opportunities and threats will always be the name of the game.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 1st March 2021.
© 2021 Beaufort Investment. All rights reserved.
The World In A Week - Dr Copper Makes A House Call
Last week saw the continuation of a reversal of fortunes for major asset classes. Having been totally unloved since 2016; UK Equities were the only equity asset class in positive territory for the week. In addition to this, tech stocks as measured by the NASDAQ index sold off heavily, while global value equities outperformed global growth equities. Furthermore, within Fixed Income, a stark divergence in outcomes has emerged since the start of the year. High Yield bonds are in positive territory, China Bonds are flat, global credit and global treasuries are down and Sterling credit and Gilts are down heavily.
The primary reason for this shift in market dynamics has been the sharp and sustained rise in inflation expectations since their trough in March of last year, and the corresponding rise in global interest rates. While it is critical to bear in mind that inflation and interest rates remain at very low long-term historical levels, the recent trends have broken the market foundation that these variables are always on a persistent downward trend. This trend has been a major factor in allowing growth equities to dominate to the degree in which they have recently.
We are seeing this play out in multiple markets. The copper market (which has been dubbed “Dr Copper” given its alleged clairvoyance for rebounds in economic activity) has hit a 9-year high. WTI Crude Oil Futures are now priced at $60 dollars a barrel, having traded in negative territory last April, and the broader-based Bloomberg Commodity index is up +9.3% for the year to date. As mentioned in previous updates, global shipping costs have also risen sharply.
Global central banks, in particular the Federal Reserve in the US, have committed to leaving base interest rates unchanged to support the economic recovery from COVID-19. The Bank of England has also shown no desire to raise rates, although the prospect of negative rates now seems very far removed, however market interest rates have risen sharply. For the year to date, the yield on a 10 Year US treasury bond is up by +49.7%, while the yield on a 10 Year UK Gilt is up a whopping +261%. Chinese 10 Year rates are up only +3.3% over the same period, which has been beneficial to our positioning.
All of the above reinforces our view that now is the time for nuanced and tactful positioning across asset classes. A relatively higher inflation and interest rate environment would be no bad thing for the Value Equity, China Bond and High Yield components of our portfolios, and would also likely be supportive of our recent decision to overweight UK Equity in lieu of the tech-dominated US market.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of [Date of Publication].
© 2021 Beaufort Investment. All rights reserved.
The World In A Week – Half-Term Home Economics
Last week saw many of the developed nations release their GDP data relating to the final quarter of 2020. The UK economy grew 1.0% in this period, beating market expectations, and meant that the UK avoided a double-dip recession. However, the annual GDP growth figures looked less compelling with the UK economy shrinking by 9.9% in 2020, the largest annual fall on record. The UK has been one of the hardest hit economies globally with the closure of the tourism and travel industries significantly impacting output, which contributes a staggering 11% to GDP.
Elsewhere, the final US GDP estimate will be released next week but the expectation is that the US grew at 4.0% in the final quarter of 2020. Revenues of companies who constitute the S&P 500 grew by 1.3% in the final three months of 2020 with profits accelerating 3.4%, beating analyst expectations. The proposed $1.9 trillion stimulus package would certainly boost consumption and reduce unemployment levels which currently sit at 6.3%. Goldman Sachs has forecasted that the proposed stimulus bill of $1.9 trillion may be reduced to $1.5 trillion, however this still equivalates to 7% of GDP.
The International Monetary Fund (IMF) also released its global outlook projections with world output expected to grow at 5.5% in 2021, with emerging markets such as China and India expected to lead the way. Markets followed this same narrative last week with Morgan Stanley Capital International (MSCI) Emerging markets returning +1.50%, outperforming the S&P 500 and the FTSE All Share in Sterling terms.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 15th February 2021.
© 2021 Beaufort Investment. All rights reserved.
Reddit, GameStop and the new retail investment army – why chasing ‘trends’ is best avoided
January saw one of the most widely covered stories for years in financial markets after a group of online retail investors clubbed together to, in their own words, “take on the hedge funds”.
The story goes like this: A retail investor and some like-minded fellow traders got chatting on popular internet chat forum Reddit, and noticed that a number of hedge funds were betting on the price of a retail business’ shares falling (a process known as “shorting”).
The retailer in question, GameStop, is a little-known business outside the US. The firm has been suffering the same as many retailers in the pandemic, with a huge reduction in customers in its stores.
The traders, fuelled as much by boredom as anything else, decided to start buying up as many shares as they could in GameStop, in one of the very few incidences ever of co-ordinated retail investor behaviour.
As the shares started to soar, more and more people flocked to join them but, crucially, the vast majority of them held on to their shares rather than sold them as the price started to rocket.
On the other side of the equation - the hedge funds that had bet on the company’s shares falling -started to lose millions of pounds as GameStop’s share price rose more than 800% in a week.
GameStop was not the only company under the microscope, with other businesses, and even commodities shorted by the assortment of hedge funds then targeted by this same army of retail investors, with similar outcomes.
Did the retail investors win?
The saga continues. Following the huge rise in share prices of these businesses, regulators stepped in to monitor the situation. The ability of retail investors to actually trade the shares via popular US platforms such as Robinhood was then curtailed as the firms halted trading of GameStop and its peers for a time.
The outcome of this was swift. From its peak price, GameStop shares crashed back down to earth, losing around 80% of their value.
However, whilst that sounds like the end of the story, a week or more on the situation is not yet resolved. Trading restrictions have been lifted on a number of platforms, and while share prices are back near where they began, there are some renewed signs of activity as traders locked out of the market are allowed back in.
Lessons learned
The big lesson here is about trends and hype. It can be tempting to jump on the bandwagon when it comes to investing, buying something because it is soaring in the hope of making a quick return.
However, the whole event flies in the face of long-term wealth building. The actual true valuations of these businesses have not been contemplated by the retail investor army buying up shares – everyone was simply jumping on the bandwagon to push the price higher.
There are examples of this time and again across markets, and more often than not the end result is the same.
The best way to approach investing is to have a clear plan, make sure your investments are aligned with your end goals, and to avoid making short-term decisions.
Your money is typically invested for the long term, and your investment approach should reflect this. Otherwise, you can end up like those unwitting buyers of GameStop shares just before they collapsed.
Early end to the tax year? Get your skates on to fulfil your allowances
The tax year ends on 5 April, but thanks to the Easter holiday, many won’t be around to process that last minute deposit this year. Therefore, now is the time to be planning this so you don’t miss the deadline.
The last day of the tax year is always 5 April, with the tax year 2021/22 starting on 6 April. But a quirk in the annual public holidays this year means that 5 April is the Easter Monday bank holiday.
On top of that, the Friday before, 2 April, is also a bank holiday. This means realistically if there is anything you need to get sorted; it should be arranged before the last working day – 1 April.
With that in mind, there are several allowances and limits you need to look at to be ready for the unusually early tax year end.
Pension - Make sure you’ve contributed as much as you can to a pension. The annual limit is £40,000 per person. If you’ve maxed yours and have spare cash, consider adding to a spouse’s annual allowance if they have spare.
ISA - Make sure you’ve topped up your ISAs to their maximum potential of £20,000.
JISA - If you have kids under 18, make sure they’ve had their full allowance contribution. The allowance was more than doubled last year from £4,368 to £9,000 – if you’ve missed that it would be easy to not realise you could add more.
CGT – Make sure if you have any investments or assets that are due for disposal that you do it ahead of the new tax year to maximise your £12,300 allowance. This is especially important in light of possible CGT changes from the government
State pension – Less well-known but still important is if you’ve missed any National Insurance contributions in the last five years and would like to make up the difference. You can do so by paying for extra State Pension entitlement. It’s important to note that this has a limit of six years for the end of the tax year for which the contributions are paid.
Marriage allowance – If your spouse earns under the annual allowance of £12,500 you can transfer up to £1,250 to them each year to spread the load. Marriage tax allowance can be claimed back up to five years assuming you qualified in each of those years.
IHT – Every year you have an allowance of £3,000 for cash gifts. If you miss a year you can carry it forward, but only for 12 months. You can also gift £5,000 to a child getting married, or £2,500 to a grandchild.
If you think you need to fulfil any of these allowances before 1 April, get in touch with your adviser right away to discuss your options.
Too late to beat the stamp duty deadline?
If you’re buying a home, time is ticking if you want to take advantage of the Government’s stamp duty holiday and save yourself up to £15,000. The tax break means that anyone buying a home worth up to £500,000 doesn’t have to pay property taxes. However, after 31 March, the threshold reverts back to £125,000, meaning you will have to pay potentially thousands more in taxes.
While anecdotal, there are some indications that the property market is cooling as the deadline looms and people abandon hope of making it across the line. Halifax Bank for instance published its latest house price figures showing asking prices suffered their biggest fall in January since April 2020. There is also a question hanging over the market as to whether Rishi Sunak will extend the holiday. At the time of writing, a chorus of voices is assembling calling on the Chancellor to extend the holiday and avoid a cliff edge.
Ways to beat the deadline
Unfortunately, we won’t know until 3 March what the Chancellor decides (read our full piece on 'what’s in store for the Budget'). With that in mind, and less than two months to go until the deadline, have you missed the boat? And what can you do to ensure that your purchase completes on time? If you haven’t already started the purchase process, then in all honesty the likelihood that you’ll beat the deadline now is slim, unless you’re buying with cash and are not part of a chain. However, if you are part way through the process, here is what you can do to speed things up.
Find a solicitor with capacity - Many property lawyers, or conveyancers, are reporting that they are swamped at the moment because of the wave of buyers looking to beat the deadline. If you don’t have a conveyancer lined up, then call around until you find a reputable one that has the capacity to complete all of the necessary paperwork by the deadline.
Book your survey as soon as possible - A survey is a vital part of the homebuying process and can’t be skipped. Like conveyancers, surveyors are likely to be very busy right now. Take the initiative and line one up as soon as you possibly can.
Stay in regular contact with your estate agent - As time is not on your side, your estate agent will be one of your best friends over the next few weeks. If you’re relying on the stamp duty savings, and are in a chain, tell your estate agent to stress to the others in that chain that it’s vitally important to work as quickly as possible. That’s a little bit out of your control, but it may inspire a bit of urgency to others in the chain.
Get expert mortgage advice - A good mortgage broker will not only find you a good interest rate, but they will also be able to tell you which lenders are suffering delays and which ones can give you an offer quickly. Ask you adviser what documents you need at the very beginning so you can save time further down the road.
Be organised and pushy - Your broker, solicitor, lender and surveyor all have a vital role to play in making sure you beat the deadline, but so do you. It’s your job to make sure that you act quickly and provide the necessary documents as quickly as possible when asked for them. And if things are delayed, don’t be afraid to apply pressure on whichever part is holding things up.
If you’re ultimately unsure at whether it is worth it to try and beat the rush or perhaps wait and see if the Chancellor gives you extra time, get in touch to discuss your options.
Spring Budget 2021: what to expect in Rishi Sunak’s financial address
Rishi Sunak delivers his second Budget on 3 March against the backdrop of record government spending and escalating national debt. There is much speculation that the Chancellor will use the Budget to balance the books and introduce tax hikes. Increases to income tax and VAT seem to be off the table, as it could hinder much-needed economic growth. However, there are a number of other lesser-known rates that he could target that would produce significant windfalls for HM Treasury – so called stealth taxes.
Capital Gains Tax
Capital Gains Tax (CGT) – the levy you have to pay when you make a profit on an asset sale –is one tax thought to be in Sunak’s sights. CGT is currently charged at 10% for basic rate taxpayers and 20% for higher rate payers. This rises to 18% or 28% respectively if you’re selling a second property. It is thought the Treasury is toying with the idea of reforming the tax, bringing it in line with income tax. That would mean raising the rates to 20% for basic rate taxpayers and 40% for higher rate taxpayers. According to a review by the Office for Tax Simplification this could net an extra £14 billion for the Treasury, and bring to an end what it calls various ‘distortions’ caused by differing rates between CGT and income tax.
Pensions tax relief
Pensions tax relief reform is something that has been discussed in political circles for some time. The relief is designed to incentivise people to save for their retirement by diverting some of the money you would have paid in tax into your pension instead. At present, higher rate taxpayers have a better deal, gaining 40% relief on their pension contributions, compared to 20% for basic rate taxpayers. It has been suggested the Treasury could introduce a flat 20% rate of relief, saving it more than £20bn a year.
Property wealth tax
HM Treasury is said to be looking at the idea of an annual property ‘levy’ or wealth tax. This would replace council tax and stamp duty completely and be revenue neutral – meaning that the treasury would not bring in extra cash from the changes. It would, however, hit hardest those people living in areas where house prices are higher, such as London and the South East. A 0.48% annual levy has been proposed. A homeowner in London with a property worth £516,000 – the average for the area – could expect to pay £2477 a year under the new system. Someone with a property worth £140,000 in North East of England would pay just £672.
One-off wealth tax
Another idea recently touted was that of a one-off wealth tax – amounting to 5% of an individual’s wealth, paid in 1% increments over five years. The plans, suggested by the Wealth Tax Commission, would see anyone with wealth over £500,000 impacted. This idea is however less likely to gain traction than others, considering the Conservative Party’s generally reticent attitude to creating new taxes, particularly on older, wealthier voters.
While these ideas have all been either leaked or touted in the press in one way or another, none are guaranteed as of yet. If you would like to discuss the potential implications of any of these changes with your adviser, don’t hesitate to get in touch.
The World In A Week - Snakes And Ladders
Some elements of investing can be a zero-sum game. When one side of an investment gains, the other side loses. For those investing in GameStop, the profits made when the stock went up was reflected in the losses made by the hedge funds who were betting on the stock going down. It is all well and good when the dice roll means you land on a ladder, but it is not so pleasant when you land on a snake.
So, it would appear that the Reddit bubble has burst and there will undoubtedly be some pain for those individuals who entered the battle late. GameStop’s share price started the week at $316.56 and finished at $63.77, representing an almost 80% drop for the week, still significantly above its 52-week low of $2.57.
From a psychological perspective, we hope that these speculative episodes do not deter true investors from taking appropriate risks for their long-term investments, as they do not affect or influence our robust investment processes.
In a world that is waiting for vaccinations to inoculate sufficient people in order to ease lockdown restrictions, knowing that central banks and governments are still committed to providing liquidity and stimulus is critical. This was underlined in the Bank of England’s Monetary Policy Committee minutes last week, where they explored the possibility of negative interest rates. However, it was stressed by Governor Andrew Bailey that while we should expect the Bank of England to have investigated all monetary options, he did not want to send any signal that it intended to set a negative bank rate at some point in the future. It is also clear that President Biden wants to reassure the US people by pushing ahead with the latest instalment in a long line of fiscal stimulus plans. The $1.9 trillion economic relief plan looks set to be pushed through, with or without the support from Republicans.
It seems that “doing whatever it takes” is the modus operandi for most central banks and governments during this pandemic, and the originator of the phrase has returned to the political spotlight. Former President of the European Central Bank, Mario Draghi, who adopted the phrase in 2012 to give reassurance that the Eurozone would not crumble, has been asked to head up the Italian government. Can he repeat his success as Super Mario and stabilise a faltering Italy?
The final person sliding down the gameboard is Jeff Bezos who announced that he will be stepping down as Chief Executive of the world’s largest e-commerce retailer. Climbing a ladder to fill those shoes is Andy Jassy, who was heading up Amazon Web Services and will have a big plate to deal with once the pandemic has receded.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 8th February 2021.
© 2021 Beaufort Investment. All rights reserved.
The World In A Week - GameStop & Match
Well, who would have thought a small US bricks and mortar video retailer would grab the attention of the world? As we keep seeing of late – expect the unexpected! We’ve not heard the term David vs Goliath being used as yet, but we’ll coin it!
GameStop is the company in question. A company sitting in a very precarious financial position and being heavily bet against by the hedge fund firm, Mervin Capital. Then, in step many private investors, fueled by social media chat on sites like Reddit, have protected the company from the “bully boys” of Wall Street. Well, what have we seen? The share price rocket over +900% this year, even though the stock price took a -70% hit on Thursday. A company in the abyss worth less than $1bn a few weeks ago, suddenly skyrocketing to a market cap over $25bn, is simply staggering! The plot continues to thicken – industry watchdogs and regulators are warning about market abuse and potentially looking to step in. The trading platform that many ‘Redditors’ use to transact Robinhood Markets has stopped taking trade orders on the stock, with many private investors now crying foul – why can hedge fund managers do as they see fit, but mom & pop can’t? Lawsuits are being threatened, but Robinhood has probably taken the right moral action, to stop the same investors losing their shirt, as highlighted by the stock price fall on Thursday. At the same time Robinhood also had to go looking for a cash injection itself, as they had to put up the collateral for these trades after they got so big!
Why should we care? Is this a real attempt to rescue the company or David trying to lay one on Wall Street Goliaths, and why if that’s the case? Woolworths, C&A, Blockbuster are just a few high street names that have fallen by the wayside. Why? Because the model had stopped working and demand shifted elsewhere. However, is this whole episode significantly more profound and a reflection of the failures that lead to the Great Financial Crisis, and the widening social and economic gaps that continue to persist under capitalism. Will this be a watershed moment?
What we have seen over the last few months is that global economic data has been much stronger than forecast, which highlights the ability of humankind to adapt (or bouncebackability as they used to say on Soccer AM) in the face of adversity.
In other news – there continues to be mud-slinging in Europe over the slow and unequal rollout of the vaccines, we’re sure many Brexiteers are sitting there saying “I told you so!”. Finally, the AstraZeneca vaccine has been given the approval in Europe, and the Novavax vaccine shows 89% effectiveness in UK trials. Normality may return…..