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October Investment Review: The Paradox of Irresistible Force

by Adam Jones, Researched by Alex Hulkhory


As a foreword to this month’s investment commentary, we wanted to acknowledge the ongoing crisis in Israel and Gaza. Whilst we would never want to downplay the immeasurable social and humanitarian costs of the hugely tragic events over the past month, this is not our area of expertise. In our role as custodians of our clients’ assets, our focus is always through the lens of how any events are likely to impact global asset markets.

Much of last month’s blog centred around inflation, and the ongoing risks this presents to asset prices. Although this remains an important issue, as with markets, our attention this month is focused on the ongoing strength of the US economy. In our view, consumers globally have faced increasing headwinds as extreme inflation and rising interest rates have – in theory – reduced their spending ability.

Unstoppable force, meet immovable object.

Post the Global Financial Crisis in the era of ultra-loose monetary policy and quantitative easing, the old edict “don’t fight the fed” became almost gospel to many market participants. In short, the path of monetary policy drives the overall performance of risk assets. Indeed, against a backdrop of significant tightening in 2022 this adage rang especially true. Asset prices – not just equities – suffered significantly.

Investment markets are forward looking and beyond the impact of changing discount rates, we saw the idea of an impending recession in 2023 creeping into the minds of investors. In our view, this was one of the most widely anticipated recessions in modern history. [i]Bloomberg economics had predicted a 100% percent probability of a US recession by October 2023. Comparing this to the latest figures released by the [ii]Bureau of Economic Analysis, which showed US GDP accelerated to an annual rate of 4.9% in the third quarter of 2023, something doesn’t quite add up…

The investment truism “never bet against the American consumer” has returned to the fore with a bang. We can certainly include ourselves in the list of market participants that have been surprised by the ongoing resilience of US consumer spending. In our view, this strength has been the backbone that has propelled equity markets and US GDP this year. One potential explanation has been the level of COVID savings that were accrued whilst we were all in lockdown. However, we feel this is finite and there are clear signs the US consumer is beginning to feel the pinch. The personal savings rate  [iii]  continued to decline through September, falling to a rate of 3.4%. Whilst we are inclined to side with the Fed, only time will tell who will win out in this battle.

What’s been happening in markets?

October heralded Q3 earnings season, an eagerly anticipated look into many of the big tech names that have propelled markets. Touching on the colloquially named ‘Magnificent 7 (The tech-focused, seven largest constituents of the S&P500), we felt that broadly their earnings were impressive. However, it was perhaps an insight into just how high expectations – and valuations – have become!

Alphabet, the parent company of Google, was an excellent example of this. Despite delivering a meaningful [iv]beat on both earnings and revenue, the stock was punished with a bruising 9.5% fall on the day of results. This was also evident for the companies delivering exceptional results with, at best, anaemic upward movements.

This weakness was also reflected in the broader markets with the [v]S&P500 joining the Nasdaq in official correction territory from the highs reached earlier this year. October was a difficult month for markets generally, with most asset classes delivering negative returns. One particular standout was [vi]gold, up 7.4% over October. As a safe-haven asset this reflects recent increases in geo-political tension.

Looking slightly closer to home it was difficult month for the UK market, which was down more than 3% over October. This may in part be driven by sector composition. Energy is not an insignificant component of the UK market and the sector fell by 8.7% over the month. The economic back drop also remains challenging with [vii]ASR’s Nowcast showing continued deceleration along with PMI’s firmly below 50. In our view, one saving grace is that equity valuations here in the UK remain among the most compelling in the global equity universe.

Return of the bond vigilantes…

Another interesting development has been taking shape in bond markets over the past month. Longer dated bond yields have continued to climb, with US 10-year treasuries almost touching 5% on the October 19th. Despite the implied equity risk premium – the extra return investors demand for holding risk assets relative to government bonds – being at near [viii]historic lows of only 30bps, markets have been unwilling to purchase treasuries en masse. This has no doubt been exacerbated by the current Fiscal position in the US where significant deficits exist alongside exceptionally low levels of unemployment, which we believe to be an unsustainable aberration over the long term.

Given significant levels of indebtedness, large fiscal deficits and an apparent desire to reduce the scale of public sector balance sheets an important question is being asked by markets. Who, ultimately, is going to buy the bonds that DM governments so clearly need to issue? With the need for issuance to cover significant government spending over the coming years, in our view there have been growing fears that yields may have to move meaningfully higher for demand to meet supply. This could partly explain why investors’ appetite for bonds has been lacklustre despite their apparent attractiveness relative to riskier assets such as equities.

Whilst we have seen yields come down at the margin, we expect investors to be more sensitive to changes in fiscal policy and the resulting issuance as we move forward. The “Bond vigilantes” – a term famously coined by Economist Ed Yardeni to describe fiscal hawkishness by markets – are back!

How have central banks responded?

In a break from the new normal, central banks broadly left rates unchanged this month. Much of this is wanting to assess the impact of the rises we have seen over the past two years. However, the previously highlighted [ix]rise in bond yields will also have a meaningful impact in tightening financial conditions, doing a lot of work on behalf of the major central banks.

In what was largely seen as a sleepy month for policy makers, the Bank of Japan provided a point of interest. With the Japanese Yen trading below ¥150 to the dollar – the historic level at which the BoJ has intervened – many had speculated that we could see a shift in policy. [x]Given its influence on global bond markets this could have especially meaningful consequences, particularly if this drew significant levels of liquidity out of bond markets!






[i] https://www.bloomberg.com/news/articles/2022-10-17/forecast-for-us-recession-within-year-hits-100-in-blow-to-biden?leadSource=uverify%20wall

[ii] https://www.bea.gov/news/2023/gross-domestic-product-third-quarter-2023-advance-estimate

[iii] https://www.bea.gov/data/income-saving/personal-saving-rate

[iv]  https://www.barrons.com/articles/alphabet-google-earnings-stock-price-4890483f?mod=md_stockoverview_news


[v] https://www.ft.com/content/839d42e1-53ce-4f24-8b22-342ab761c0e4


[vi] Absolute Strategy Research Investment Committee Briefing – October 2023

[vii]  Absolute Strategy Research Investment Committee Briefing – October 2023


[viii]   https://www.reuters.com/markets/rates-bonds/soaring-treasury-yields-threaten-long-term-performance-us-stocks-2023-10-26/


[ix]  https://www.reuters.com/markets/us/fed-poised-hold-rates-steady-despite-economys-bullish-tone-2023-11-01/


[x] John Authers – points of return 31/10/2023

September Investment Review: Pause for Thought

by Tim Sharp,

As the summer months draw to a close, and the cooler temperatures begin to set in, September saw the Fed pause, signalling that the sustained period of interest rate rises may also be approaching an end. Indeed, officials are hoping that policy is now ideally positioned to cool the sweltering inflation we have seen over the past 18 months, without strangling the economy.

Following the rapid rises in interest rates over the past two years, that has seen the FOMC hike 11 times and an incredible 14 consecutive rate increases from the Bank of England, this month potentially indicated a shift in central bank policy.

Looking at the Cleveland Fed’s inflation nowcast (an estimate of current inflation) suggests that core CPI in the US is running at 4.17% YoY[i]. Whilst this is certainly too high for comfort, it does represent a marked decrease from the highs of 9.1% reached in 2022. UK inflation remains a relative outlier in developed markets, with the latest CPI print at 6.3%.

If inflation is still a problem, why pause?

Whilst central banks have taken their foot off the gas…for now at least! We see the messaging as clear; the fight against inflation is far from over. Interest rate increases have a lagged effect, and it does take time to filter through to the broader economy. In our view, this along with greater uncertainty has convinced policy makers that pausing to assess the impact on the economy is the best course of action.

We feel that although rates are unlikely to rise much further from here, the overall tone of policymakers was hawkish. This was in large part due to greater emphasis that rates aren’t going to be coming down anytime soon. Given the continued resilience of the consumer – to the disbelief of many – and the ongoing inflationary risks, we think that central banks have been trying to persuade markets that rates will remain elevated for the foreseeable.

What does all this mean?

With regards to the current higher for longer narrative, we’re not entirely convinced. This will largely hinge on the ongoing strength of the economy. A central assumption being that economic growth will remain robust enough to justify the current rate environment. In our view central banks trying to regain their credibility after the rampant price increases of last year and aiming at all costs to stop higher inflation expectations becoming embedded.

We see signs that longer term expectations are shifting with longer dated government bond yields climbing and the yield curve beginning to steepen. The performance of treasuries over the month was a good example of this, with yields on the 10Y up 10% compared to only 4.1% for the 2Y. This in turn should further raise borrowing costs, tighten financial conditions, and ultimately help cool the burgeoning demand that has driven prices higher in our view.

This can also be seen in currency markets with the dollar continuing to strengthen. The Japanese yen notably continuing its weakness – down 2.35% over the month and 13.49% YTD – as the BoJ pursues a “golden opportunity to dispel the deflationary mindset”.[ii]

So, prices should start to come down?

A significant amount of progress has been made in bringing inflation back towards the two percent target, set by most central banks. However, we see two big ongoing risks that that will keep policy makers awake at night. Wages and energy costs! Meaningful inflation that persists over long periods – as was seen in the 70’s – has historically been driven by elevated wage growth, evolving into a vicious wage-price spiral.  The latest data show’s UK wage growth at 8.5%[iii], a figure that we expect will certainly concern the BoE.

Adding fuel to the fire, the ongoing efforts of OPEC to avoid a capitulation in the oil price have been taking effect. Over the past three months WTI crude oil prices are up over 30%. Where falling energy prices had been a detractor for much of the year, they are now a meaningful contributor.

Whilst a win in the battle against inflation, the most recent PMI figures will provide little consolation. September services PMI data for the UK came in at 47.2[iv] – a figure below 50 representing contraction – with similar figures seen around the Euro area. The US marginally managed to buck this trend, with the PMI’s coming in at 50.2, showing continued expansion.

How does this affect markets?

Looking more closely at markets, September has been a challenging month. Except for the UK, all major equity markets are down over the period. History tells us that rising rates are usually bad news for asset prices. As was seen in 2022, if markets are digesting higher rates over the longer term, then the future profits companies can return to us as shareholders, have a lower value when discounted back to the present.

This is notable when looking at the dispersion of returns over the month. The fast growing, tech heavy Nasdaq has been the worst performer in September – down 4.97% at the time of writing – this makes sense, given much of the value these companies will be able to return to shareholders is likely to be captured far in the future.

The painful performance has not solely been confined to technology with many other broader equity indices and geographies suffering. The S&P 500, DAX and Nikkei delivered -5.22%, -4.33% and -0.93% respectively.

In addition to this, as the return offered by lower risk assets becomes more attractive, investors may be incentivised to de-risk their portfolio’s, we believe this could provide a headwind to risk assets going forward.

This all sounds quite gloomy?

Storm clouds have been gathering on the horizon for some time now and given investors plenty of reason to be cautious. Our positioning has reflected this. However, we see much of the strong performance of markets this year having been driven by the enduring resilience of the economy. Indeed, the Fed more than doubled their 2023 GDP projections from 1% to 2.1%[v]. This is a stark contrast to the 100% percent probability of a US recession by October 2023 forecast by Bloomberg economics last year.[vi]

Markets are forward looking, and although sentiment has been improving, a lot of good news is reflected in prices. US valuations are high by historical standards. The CAPE Shiller PE – a cyclically adjusted ratio for the price multiple on earnings – currently stands at 29.5 for the S&P 500, compared to a historic average of 17.1[vii].

Conversely, in the UK where investor sentiment is particularly negative, we believe valuations are far more reasonable. Whilst the backdrop remains challenging globally, there continue to be companies that offer value. We are confident that attractive returns are available to long term investors through a disciplined and diversified approach.


References, research by Alex Hulkhory:

[i] https://www.ons.gov.uk/economy/inflationandpriceindices

[ii] https://www.boj.or.jp/en/mopo/mpmsche_minu/opinion_2023/opi230728.pdf

[iii] https://tradingeconomics.com/country-list/wage-growth?continent=g20

[iv] https://tradingeconomics.com/forecast/services-pmi

[v] https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20230920.pdf

[vi] https://www.bloomberg.com/news/articles/2022-10-17/forecast-for-us-recession-within-year-hits-100-in-blow-to-biden?leadSource=uverify%20wall

[vii] https://www.multpl.com/shiller-pe

September Strategy Meeting 2023 – Markets Priced for Perfection

Author: Tim Sharp

Researcher: Jack Williams

Published: September 22, 2023


Another month has passed in the markets, bringing a reversal of sorts with technology leading indices lower, mixed bags of data and an oil price pushing towards $100.

Inflation surprised to the downside, although any optimism was quickly sapped by Jerome Powell’s hawkish rhetoric at the Jackson Hole symposium increasing the odds of future rate hikes from the Fed despite the deflationary data incoming.

In Europe and the U.K inflation data has been more stubborn while both flash PMI’s and retail sales came in much weaker than expected. US manufacturing and services PMI’s also fell into contractionary territory, and we think this will inevitably have some impact on risk assets.

Substantial monetary tightening measures in developed nations may now be taking a toll on economic activity. So far, the key pillar supporting the notion of a robust consumer has been the accumulation of surplus savings resulting from the pandemic, stimulus measures, and reduced opportunities to spend discretionary income during quarantine. However recent data suggests these excess savings could be very close to being depleted.

Our cautious investment strategy has resulted in our abstention from participating in the AI driven rally that swept through the markets during the first half of the year. Nonetheless, we remain optimistic about the potential vindication of our quality-driven, defensive stock selection approach in the latter half of the year. This optimism is underpinned by the fact that valuations continue to remain elevated when compared to long-term historical averages. Moreover, there are ample reasons to maintain a cautious and sceptical stance as an investor in the current market environment.

The US has seen the use of fiscal policy, boosting onshoring through the CHIPS act and seeing an uptick in construction due to the IRA (Inflation Reduction Act), that may have underpinned growth in the shorter term while unemployment remains low, although recent moves in Treasury yields suggest there could be a turning of tides on the horizon.

With bond yields on the rise, this has provided a headwind for equities made worse by the deteriorating landscape in China for investors which earlier in the year was being looked to as the tide that could lift all boats.

Consumer confidence within China remains weak, the countries dismal reopening following extremely tight Covid policies, currently being further amplified by slowing economic momentum.

Many are of the view that policymakers will have to inject some form of stimulus into the economy to avoid a complete collapse in confidence as the nation toils with a spiralling property market, a reversal in globalisation and erosion of geopolitical relations.

We continue to keep a close eye on the deterioration of US/China relations, noting the recent push to increase the number of countries associated with the BRICS (Brazil, Russia, India, China and South Africa) trade group, along with the notable empty chair of the Chinese Premier at the G20 summit as it appears to be distancing itself from western developed nations.

As US influence wanes and developing nations continue to align themselves to alternative regimes and trade groups, the possibility of a dual centred global economy rises. We believe this would be a significant headwind for future global growth through the inefficient use of resources while also increasing uncertainty with regards to security and the obvious increase in geopolitical risks.

We believe the rally seen to date this year within equity markers has been supportive of our earnings trough thesis, with gains in this rally driven near completely by PE expansion rather than growth in earnings.

The question of whether bond yields have returned to mean or will fall in line with inflation and interest rate expectations may determine sector rotation amongst equity allocators. Recent rises in bond yields saw cyclicals come under pressure as risk appetite reduced, however should this reverse and yields back off from their 16-year highs sectors such as Technology, Healthcare and Food Retailers could enjoy a move to the forefront of investors attention.

Guidance from US companies has weakened notably, with margins falling back to non-recession lows and quality of cash flows deteriorating to a point where some are now reducing the size of their buybacks schemes with the worst affected sectors being Technology and Industrials. A recovery in buybacks will probably require an increase in profits growth which looks unlikely to us at present. Financing costs have soared, especially for small and medium sized companies, and debt levels across markets have risen, providing increased headwinds for a market that is priced for perfection. Interestingly buybacks in Japan continue to increase providing a tailwind to equity markets there and underlines our positive stance towards Japanese equities.

Andrew Bailey, Governor of the bank of England revealed rates in the U.K are probably near the top because a “marked” drop in inflation was likely as we move through the year. The surprise drop in August inflation data led to the Monetary Policy Committee voting to leave rates unchanged at its September meeting against market expectations.  The front end of the yield curve reacted positively bringing 2-year Gilt yields lower although the longer end remains cautious due to a rise in oil prices along with resilient earnings.

On a relative basis Gilts appear cheap compared to Bunds and US Treasuries, ASR (Absolute Strategy Research) note in an environment where growth slows, and inflation declines Gilts seem fairly priced given U.K fundamentals.

In our overarching investment strategy, we maintain a favourable stance toward a defensive asset allocation framework. This approach underscores our emphasis on high-quality defensive equities while adhering to a relatively conservative equity allocation in comparison to alternative assets and fixed income instruments. This strategy reflects our commitment to prudent risk management and capital preservation, aligning with our long-term investment objectives.



Absolute Strategy Research Investment Committee Briefing – August 2023

August Investment Review: Jackson Hole takes Centre Stage

by Haith Nori


August was a rather volatile month this year for global markets. The Bank of England continued to increase interest rates. US Federal Reserve Chair Jerome Powell made his speech at the annual Jackson Hole Symposium, reiterating his approach to fighting inflation and the need to endure on the path of increasing interest rates until the 2% inflation target is reached. US debt has been downgraded by Fitch Ratings from AAA to AA+. The Bank of Japan has signalled an end to negative interest rates at the start of next year. Nvidia Corp continues to increase in share price and CEO Jensen Huang comments on the latest partnership with Google. Economists are continuing to downgrade their views on growth projections for China, worsening the outlook for China.

On 2nd August, Fitch Ratings, one of the three big American credit rating agencies, made the decision to downgrade the US debt rating ’from the highest AAA rating to AA+, citing “steady deterioration in standards of governance.”’ [i] The downgrade was a result of US lawmakers taking their time and negotiating continuously until the final deadline with the issue of the debt ceiling, having placed them on a ratings watch since the start of May when governance worries began. The rating change highlights a slightly higher expectation of default risk from the lowest possible level, albeit still implying a very remote probability.

Following the rate hikes in July by both the US Federal Reserve and the European Central Bank, the Bank of England started off the month (3rd August) by hiking interest rates in the UK by 0.25% to 5.25%. This was their 14th hike in a row and leaves interest rates at 15 year highs, with the Bank of England stating that ‘high inflation meant it was unlikely to stop rates any time soon’[ii]. Sterling continued to depreciate after the release of the news, remaining at a lower level for the rest of August. Like Sterling, UK equities also took a negative fall after the release of the news and continued to fall before regaining some of the lost value in the last week of August. Between April to June this year basic wages in the UK rose at their fastest rate of 7.8% which, whilst promising for the general public, also boosts the chances of the Bank of England continuing to increase interest rates. The next meeting for the European Central Bank, US Federal Reserve and the Bank of England will be in mid-September.

On 10th August US CPI data was released for the 12 months ending in July of 3.2% slightly higher than the June data of 3.0%. Whilst this is a slight disappointment US data is still the closest to the 2% inflation target. On Wednesday 16th August UK CPI data was released for the 12 months ending in July of 6.8%, down from 7.9% in June, exactly as predicted by analysts. In the Eurozone CPI figures were 5.3% for the 12 months ending in July, down from 5.5% in June. Whilst these figures have been promising all round, Central Banks have stressed the need for interest rates to remain high until inflation is under control. This was the key takeaway to come from Jackson Hole, which took place between 24-26th August. US Federal Reserve Chair Jerome Powell ‘once again reinforced the “higher for longer” mantra’[iii] in terms of his approach to interest rates and stressed that the committee remain determined to reach the 2% inflation target and are unwilling to stop until the job is done.

The Bank of Japan’s board member Naoki Tamura stated in a speech to Japan’s business leaders, that Japan’s inflation is in clear view of their target and has been ‘signalling the chance of an end to negative interest rates early next year.’ [iv] The comments have been the most compelling as an indication that the Bank of Japan will take action to phase out its unique approach to ultra-low interest rates. Along with the other developed market central banks, the Bank of Japan has a 2% inflation target. Tamura suggests that timing will be important and any such change will be dependent on the conditions of the economy falling into place.

Nvidia Corp, the best performing stock in the S&P 500, currently up 234% since the start of the year, on 31st August was blocked from selling its A100 and H100 chips to certain areas in the Middle East. This follows an announcement from US President Joe Biden expanding the initial restrictions that were placed on selling to China. Clarification on which specific countries in the Middle East the restrictions have been extended to has not yet been announced. Nvidia stock has continued to increase in share price over the month and the chipmaker has announced (29th August) a partnership with Google to increase the distribution of its artificial intelligence (AI) technology. This will allow google customers access to the technology that is created by the H100 GPUs. Nvidia CEO Jensen Huang stated “Our expanded collaboration with Google Cloud will help developers accelerate their work with infrastructure, software and services that supercharge energy efficiency and reduce costs”. [v]

Overall, August has been volatile in terms of performance within asset classes. Brent Crude, after the gains made during July remained relatively flat during August. The UK 2-year, 10year Gilt yields and US 10 year Treasury yield have all returned to levels seen at the start of the month following initial increases in yields during August. Sterling continued to depreciate against the US Dollar and Gold also returned to a similar level at the start of the month.

[i] https://edition.cnn.com/2023/08/01/business/fitch-downgrade-us-debt/index.html

[ii] https://www.reuters.com/world/uk/view-bank-england-raises-rates-14th-time-2023-08-03/

[iii] https://www.reuters.com/markets/us/global-markets-view-usa-pix-2023-08-28/

[iv] https://www.reuters.com/markets/asia/boj-policymaker-signals-chance-policy-tweak-early-next-year-2023-08-30/

[v] https://www.cnbc.com/2023/08/29/nvidias-stock-closes-at-record-after-google-ai-partnership.html


August Strategy Meeting 2023 – Inflation’s Grip is Loosening

Author: Tim Sharp

Researcher: Jack Williams

Published: August 24, 2023

It has been an eventful month with markets, surprising the bears once again.

Asia ex-Japan was the best performing region, the Hang Seng rose 6.1% during this period as market participants overlook weak factory and services data, choosing instead to concentrate on Beijing’s latest measures to stimulate consumption and kickstart what has so far been a lacklustre covid recovery.

We remain somewhat sceptical of China as an investable market with geopolitical tensions, slowing growth (albeit still at a higher rate than the majority of nations) and the commercial property downturn continuing.

As of writing this publication, stories of Country Garden (2007.HK) another real estate behemoth in China missing interest payments and scrapping plans to inject cash into the business emerge, sparking renewed fears of a smaller scale Evergrande calamity or economic downturn in the region as the government struggles to regain confidence.

As a team we are very intrigued by the landscape of LATAM equities currently as we seek to benefit from the downturn in rates and a potential rotation back into equities following a period of elevated rates in the region.  The Brazilian Bovespa index gained 3.3% in July following the BCB’s first rate cut of 50bps, Chile too cut rates the week before with their central bank moving to cut by 100bps and minutes from their July meeting suggesting another 75-100bps could be cut in August.

Global fixed income was flat to marginally weak with credit and emerging market bond index spreads falling slightly more, in line with a risk on environment. Listed infrastructure and real estate recovered 4% during the month, although this was mixed at a subsector level and could well be perceived as bargain hunting at these discounted levels. At the time of writing news is emerging of Buffet moving Berkshire into the housebuilding sector, accumulating stakes worth over $814mm in three US names, Dr Horton (6mn Shares), Lennar (152,572 Shares) and NVR (11,112 Shares).

To our relief, and somewhat in-line with our own expectations, the vice-like grip of inflation eased across markets with EU, UK and US readings all surprising to the downside, U.K headline reached 7.9% while core hit 6.9%.

While still extremely data dependant, it is encouraging to see inflation heading in the right direction and adds weight to the argument that within developed markets we could be close to terminal rates and a pause by central banks (excluding Japan) is likely from here while they seek to assess the stickiness of their remaining inflation. Until recently the soft-landing argument was sneered at by many market participants, however this is now being priced as the most likely outcome.

The BoJ continues to run very loose monetary policy stimulating inflation, although this has been favourable for Japanese equity markets with investors looking for value and positive earnings momentum. We continue to find ourselves attracted to Japanese equities due to the favourable mix found within markets. Japan offers attractive valuations on companies engaged in some of the most pioneering industries to which globally we could be at the inflection point of mass adoption, think Robotics, Technology, AI, Automation, Japan has had a foot in this camp for many years now and this could well be a very interesting period for the region. We see the opportunity mix alongside valuations as a big reason for the Nikkei making 33-year highs back in May.

While the committee kept S.A.A unchanged we took this moment to re-visit some of our inflation beneficiaries including an overview of the  food retail sector. We reviewed the razor-sharp margin nature of the businesses, increased governmental and societal pressure for lower food prices and valuation extensions on equities within the space to P/E’s in excess of 30x. . Falling inflation and persistently tight labour markets also present a significant challenge for these businesses. In summary we see better value and opportunity elsewhere in areas such as UK Pharma.

We have also noticed a growing concern amongst market participants and economists that the ECB could be drastically close to a policy misstep. Many believe the economic picture within the Eurozone economy is not as rosy as it is currently being painted by the central bank, combine this with their aggressive tightening regime and could yield a hefty blow to businesses, individuals and equity markets within the region.

A.S.R (Absolute Strategy Research) undertook a comparison of the global financial crisis and the economy post pandemic; it would seem several of the mistakes witnessed amidst the GFC have not been repeated. Post GFC compared to post pandemic saw a major difference, whereas stimulus in the GFC was removed to be replaced by years of austerity leading household incomes and assets to shrink, following the pandemic fiscal stimulus has remained looser for longer replacing what was a long-term deflationary threat with this new inflationary environment.  ASR expect a slower pace rate of cuts than expected, weaker growth and higher for longer interest rates which could spell volatility for investors given current market expectations.

ASR see the current forecast of rates falling while the economy slows as overly optimistic, siding with central bankers. We see the yield curve inversion being solved by principally falling short term rates. Long dated bonds are also pricing in continued falling inflation, however, if inflation surprises by staying higher for longer (it wouldn’t be the first time sticky inflation has caught investors off guard) then there could be a case to be made for long term yields to remain elevated over a longer term, meaning the unwinding of the curves inversion may unfold in a different manner to that of the general consensus. Long term yields are also likely to remain elevated in the presence of high budget deficits which will require funding through an increase in the issuance of coupon securities.

Advancements in technology along with a strong consumer are two clear reasons the market has performed well this year, however as a team we question the underlying statistics leading many to this outcome. The excess savings figure we see as highly subjective and continue to advocate for the study of credit flows to assess strengths and weaknesses within consumer behaviours.

Despite strong returns year to date, earnings on a forward basis are flat, leaving P/E ratios vulnerable. ASR believe any significant upside in the SPX from these current levels would need EPS growth in excess of 15% or forward P/E’s of 20X, which would see equity indices looking stretched to say the least. Now investors can achieve 5.5% on 3-month cash rates and the trailing earnings yield of the SPX is at 4.16%, we question whether investors are being fairly compensated for the any risk taken when risk free options seem so attractive in these times. When compared to bonds ASR state Global Equity Risk Premium is the lowest since 2007 and US ERP is at a 19-year low. Even with the optimism being created by investors, equities look expensive on a relative basis and are generally priced for perfection in our view. This creates an awkward dilemma for any companies trading on elevated multiples that cannot live up to the image valuations have painted. Any disappointments in earnings or guidance would likely be met with a fierce market reaction.

In aggregate we remain underweight equities, overweight short-dated fixed income and overweight alternative strategies.

July Investment Review: Possibility of a soft landing?

by Haith Nori


July saw global markets deliver positive returns. The encouraging news of inflation reducing in the US, Eurozone and the UK has rippled through global equity markets leaving a progressive outcome. Despite the good news, Central Banks have continued to increase interest rates, factoring the latest data into their plans, with the exception being the Bank of Japan who have maintained their stance on ultra-low interest rates. Half-way through the year, second quarter earnings have so far been encouraging and fears of a recession are slowly fading with the idea of a soft landing seeming to be more plausible. Ukraine has, for the time being, not been allowed to join NATO while the war is still active. The trade war between the US and China is levelling up once more and Russia has pulled out of the UN Grain Deal brokered by Turkey last year in retaliation to what they believed to be an attack from Ukraine.

At the beginning of July, China announced that from August they would impose export restrictions on gallium and geranium to US, which are crucial elements for semiconductors and computer chips used in electric vehicles and military equipment. The news came just before Independence Day. China’s decision was ‘widely seen as retaliation for U.S. curbs on sales of technologies to China’[i].  The US announced that they would stop sales to China of high-tech micro-chips in July, as they feel these should not be used by Chinese Military. The retaliation from China could be the beginning of increased tensions between the two countries. Janet Yellen, US Secretary of the Treasury, travelled to China to meet with Premier Li Qiang, in an attempt to repair economic relations between the two countries, stating China had unfair economic practices but China wanted her to meet them in the middle with the development of trade ties. However, whilst Yellen achieved some success talking with some of China’s main economic policymakers, no trade, investment or technology matters have been agreed.

Russia pulled out of UN Grain deal brokered last year by Turkey called “The Black Sea Grain Deal” set up last year after blasts to the Russian bridge connecting to the occupied Crimean Peninsula by what Russia thought to be Ukrainian Seaborn drones. Their decision ‘raised concern primarily in Africa and Asia of rising food prices and hunger’[ii]. Russia has retaliated by targeting grain infrastructure striking the Ukraine grain port of Odesa.

A NATO summit was held in Vilnius, Lithuania on 11-12th July where the idea of Ukraine joining the NATO was raised. Whilst the thirty-one members of NATO are supportive of Ukraine being part of the alliance, the US has posed strong opinions that they will not ‘let a warring country into NATO and give too firm a timeline commitment’[iii]. It was indicated that Ukraine would be able to join NATO once the war was over. The leaders of NATO have also declared that the future of Ukraine laid in the hands of NATO’s military relationship. Neither Zelenskyy nor Putin were happy with the outcome.

On 12th July US CPI data was released for the 12 months ending in June of 3% beating expectations of 3.1%. This has come a long way since its level of 9.1% in June 2022! On Wednesday 19th June UK CPI data was released for the 12 months ending in June was 7.9%, beating expectations of 8.2% and marking a steady reduction. The positive news gave a boost to UK Equities, with housebuilders benefiting the most as market participants believe that upward pressures on interest rates (and thus mortgages) could be abating. In the Eurozone CPI figures were 5.5% for the 12 months ending in June, down from 6.1% in May. Whilst these figures have been promising, Central Banks are still attempting to control inflation.

On 26th July the US Federal Reserve made the decision to hike interest rates by 0.25% (as expected) to 5.25%-5.50%, the eleventh time in the last 12 meetings. The last time the Federal Reserve had raised rates this high was in 2007 when there was a housing market crash. Jerome Powell has suggested that this is perhaps not the end and will review if rates are to be raised again in September stating ‘We’ll be comfortable cutting rates when we’re comfortable cutting rates, and that won’t be this year’[iv]. Powell still believes there is a pathway towards a soft landing, which is where inflation falls without a recession being caused as a result. On 27th July the European Central Bank continued their path by increasing interest rates by 0.25% to 3.75%, this being the ninth consecutive hike in a row and has taken them to twenty-three-year highs.

On 28th July the Bank of Japan’s Governor Kazuo Ueda decided not to change their ultra-low interest rate policy, maintaining overnight interest rates at -0.1%. He also made the choice to marginally loosen their yield curve control (YCC) by buying 10-year Japanese Government Bonds at a rate of 1.0% in fixed-rate operations, rather than the previous 0.5% rate, shocking markets. By promising more flexibility in the YCC, this is their method for controlling long-term interest rates as ‘This effectively expands its tolerance by a further 50 basis points, signalling the BOJ would let the 10-year yield rise to as much as 1.0%.’ [v] The next meeting for the Bank of England will be at the beginning of August where markets are expecting a 25 basis point hike.

Overall, July saw a positive performance across asset classes. Brent Crude, after starting the month at levels of c.$74 per barrel, increased to over c.85 during the month. UK 2year Gilts have reached a yield of over 5%, with the 10-year yield reaching highs of c.4.65% and US 10-year Treasury note c.4.048%. During July Sterling continued to hit its highest levels over this past year, reaching over c.1.31 against the US Dollar. Gold also regained some of its lost value in June.

[i] https://www.reuters.com/markets/commodities/chinas-rare-earths-dominance-focus-after-mineral-export-curbs-2023-07-05/

[ii] https://www.reuters.com/world/europe/russia-carries-out-air-strikes-second-night-ukraines-odesa-port-governor-2023-07-18/

[iii] https://www.cnbc.com/2023/07/14/zelenskyy-absurd-comment-how-nato-pressured-ukraine-to-show-more-gratitude.html

[iv] https://www.reuters.com/markets/rates-bonds/fed-poised-hike-rates-markets-anticipate-inflation-endgame-2023-07-26/

[v] https://www.cnbc.com/2023/07/31/strategist-boj-should-move-to-new-normal-sooner-current-policy-is-very-harmful.html


June Investment Review: Federal Reserve takes a pause

by Haith Nori

June saw global markets deliver mixed performances, albeit generally reacting positively to the US Debt ceiling issue being resolved at the end of May. A key aspect during this month has been central banks taking their next steps to control inflation. Japanese equities have reached their highest point since August 1990, up c.29% since the start of 2023 with Warren Buffet spotting value in the country and increasing the size of his existing positions in several of Japan’s largest firms. Back in the US, Apple has now reached a market capitalisation of over $3 trillion for the first time ever, assisting with the continued technology rally since the beginning of the year.

On 13th June US CPI data was released for the 12 months ending in May of 4%, 0.9% lower than that of April, still on the downward trend since June 2022 (9.1%). US. Federal Reserve Chair Jerome Powell is still fixated on achieving a 2% inflation target. On 16th June Eurozone CPI data was released for the 12 months ending in May of 6.1%, a reduction from April’s 7.0%. On 21st June UK CPI data was released for the 12 months ending in May remained at 8.7%, unchanged from April, missing expectations of 8.4%.

On 14th June the US Federal Reserve made the decision to keep interest rates unchanged at 5.00%-5.25% following ten consecutive meeting hikes. Global markets reacted positively to the news with many participants believing a pause was a sensible idea given the huge increase in base rates over the past year. On 15th June the European Central Bank also continued on its path, increasing interest rates by 0.25% to 3.5% (this being their eighth straight hike in a row). ECB president Christine Lagarde suggests further hikes are likely in July’s meeting. This is the highest level of interest rates in 22 years for the European Central Bank. Following suit, on 22nd June the Bank of England also made the decision to increase interest rates by 0.5% to 5% from 4.5% being the 13th time in a row that the Bank of England has increased interest rates. This was higher than the expected rise of 0.25% and is the largest rate increase since February. The Bank of Japan kept their ultra-low interest rates unchanged. At the European Central Bank Forum on Central Banking in Sintra, Portugal (26th-28th June), policy makers were keen to stress that market participants should not anticipate any interest rate cuts for at least a period of one to two years.

US Secretary of State Antony Blinken made the long-awaited trip to China on 19th June to meet with President Xi Jinping in Beijing’s Great Hall of People (which is usually reserved for meetings with heads of state). The purpose of the trip was to attempt to ease tensions between the two countries. The initial meeting was planned for February but delayed after the US shooting of the suspected Chinese spy drone. During the meeting ‘China and the United States agreed on Monday to stabilize their intense rivalry so it does not veer into conflict, but failed to produce any major breakthrough’[i]. Both leaders of the two countries, US President Joe Biden and China’s President Xi Jinping cited the meeting as progress as concerns were able to be raised and channels of dialogue were opened. Whilst at this time, no firm plans have been put into action, the face-to-face meeting with US Secretary of State has begun a journey for the two countries to communicate further.

On 21st June, US Federal Reserve Chair Jerome Powell testified before the House of Financial Services Committee to deliver his semi-annual report to both Chambers of Congress. The next day he appeared in front of the Senate Banking Committee. After US markets had benefited from the Federal Reserve keeping interest rates unchanged, Powell ‘hinted at the likelihood of further interest rate hikes’[ii] leading to further sell offs in US equity markets.

On 22nd June, the Prime Minister of India, Narendra Modi, made his first official state visit to Washington D.C. to meet with President Joe Biden. The purpose of the meeting for Modi was to raise the status of India and strengthen ties with the US and ‘the two countries announced agreements on semiconductors, critical minerals, technology, space cooperation and defence cooperation and sales’[iii]. One deal that has already been signed off is with General Electric to produce jet engines in India for their military aircrafts with an agreement with Hindustan Aeronautics. Further deals are being planned between the two nations and no doubt will be a boost for the economy in India.

On the weekend of 24th June, Yevgeny Prigozhin, the boss of private mercenary army Wagner, led an ultimately brief rebellion starting in the city of Rostov-on-Don, Russia, moving north towards Voronezh following the path towards Moscow. ‘Wagner fighters have taken control of all military facilities in the city of Veronezh, about 500km (300 miles) south of Moscow’[iv] with which Putin made an announcement accusing Wagner fighters of “treason”. After the initial ambush Prigozhin ordered his army that was advancing on Moscow to stand down to avoid any further casualties. Whilst this has been short lived the act made a large impact calling for countries to prepare a quick response if the situation was to escalate further and ending with a tougher response from Russia on its attack on Ukraine. Mr. Prigozhin was exiled to Belarus in exchange for the criminal case being dropped against the Wagner Group.

Overall, June saw mixed performance across asset classes. Brent Crude, after starting the month at levels of c.$74 per barrel, remained at a similar level throughout the month. Japanese equities have reached a 33-year high and UK 2 year Gilt yields reaching a level of over 5%.UK 10 year Gilt yields reached highs of 4.49% and US 10 year Treasury yields 3.839%. During June Sterling also hit its highest level at c.1.28 against the US Dollar over the past year and gold slightly fell in value.

[i] https://www.reuters.com/world/china/blinken-wrap-up-rare-visit-china-may-meet-xi-jinping-2023-06-18/

[ii] https://www.reuters.com/markets/us/futures-muted-ahead-powells-congressional-testimony-2023-06-21/

[iii] https://www.reuters.com/world/biden-modi-strengthen-ties-with-defense-trade-agreements-2023-06-22/

[iv] https://www.reuters.com/world/europe/how-mercenary-revolt-has-gathered-pace-russia-2023-06-24/

May Investment Review: Dancing on the Ceiling

by Haith Nori

May saw a mixed performance across global markets. In equity markets across Europe, including the UK there was a slight decline in overall value. However, US technology stocks continued to increase, as did Japanese Equities. Elsewhere in the US equity market performance was more mixed. Yields increased on both UK 10-year Gilts and US 10-year Treasuries. The US Debt ceiling has been a key focus over the course of the month, with the House of Representatives finally passing the bill at the end of May. The US Dollar, after a weak start to the year, regained value over the month of May. Tayyip Erdogan has now been elected for 5 more years as the President of Turkey, having already been in power for 20 years. The G7 Meeting also took place in Japan where global leaders met face to face and Ukraine’s President Mr. Zelensky continued to request support from other developed countries around the world.

On 3rd May 2023, the US Federal Reserve made the decision to increase interest rates by 0.25% from 5.00% to 5.25%, marking the highest level of interest rates reached in the past 16 years. On 5th May the European Central Bank also raised interest rates by 0.25% to 3.25%, this being the seventh straight hike in a row and with the previous three rate hikes all being 0.50%. Following suit, on 11th May the Bank of England also made the decision to increase interest rates by 0.25% to 4.5%, this being the 12th time in a row that the Bank of England has increased interest rates. The UK bank rate is now the highest it has been since 2008. The next meetings for the Federal Reserve, the European Central Bank and the Bank of England will be in June 2023.

On 10th May, US CPI data was released for the last 12 months ending in April. Headline inflation came in at 4.9%, 0.1% lower than that of March of 5%. Previous figures were 6.0% in February, 6.4% in January, 6.5% in December and 7.3% in November, highlighting inflation’s gradual decline since June 2022 (9.1%). On 17th May, Eurozone CPI data was released for the last 12 months ending in April of 7%, slightly up from March’s 6.9%. On Wednesday 24th May, UK CPI data was released for the last 12 months ending in April of 8.7% compared to 10.1% for March, 10.4% in February, 10.1% in January. This is down from its peak of 11.1% in October. Whilst this did not meet consensus expectations of 8.2%, it is the largest reduction in CPI data since the pandemic and has dropped below 10% for the first time in 8 months.

Ukraine’s President Volodymyr Zelensky has been requesting support across Europe before arriving in the UK on Monday 15th May. The UK Prime Minister Rishi Sunak said ‘Britain would provide Ukraine with hundreds of air defence missiles and further unmanned ariel systems, including new long-range attack drones with a range of more than 200km’[i]. The delivery is expected in the following months and will be combined with Britain beginning training of Ukrainian pilots this summer. In addition to the UK, Germany has vowed to send up to $3 Billion worth of arms and France pledged to train and equip Ukrainian battalions with dozens of armoured vehicles.

The G7 meeting was held between 19-21st May in Hiroshima, Japan where members stood united on various global issues including support for Ukraine, nuclear disarmament, China, clean energy economies, economic security, and climate change. US President Joe Biden has pledged $375 million in a military aid package with other G7 leaders pledging their continued support. Concerns over China were raised, including Beijing’s military activities against Taiwan and its use of economic coercion for its political gains. The G7 heads expressed their desire to work with China constructively but the existing issues needed to be addressed. However, ‘Beijing’s foreign ministry said it firmly opposed the statement by the G7’ and ‘said it had summoned Japan’s ambassador to China in a pointed protest to the summit host’[ii] highlighting the intensity of frustration and China’s newspaper the Global Times dubbing the G7 summit an “anti-China workshop”.

The US debt ceiling, which is the limit set by the US Congress on the amount of Government debt that can be accrued, has been in critical negotiations in May. Ever since the legislative cap was created in 1917, a majority vote is required by both the House of Representatives and the Senate. The vote raises the upper limit of how much the government can borrow. Since 1960, the debt ceiling has been raised 78 times but never reduced. The Democrats want the debt ceiling to be raised but the Republican leaders wish for spending cuts to be agreed first. President Biden is arguing that issues regarding government spending are separate from the issue of raising the debt ceiling.  Currently, the nation’s debt ceiling is $31.4 trillion and a deal is needed to be struck as Treasury officials estimated that if they were to continue spending at the current rate the US could run out of money by Monday 5th June. Finally, on Wednesday 31st May, The US House of Representatives passed a bill suspending the debt ceiling which will need to be signed by Joe Biden in order to be put into law. ‘The legislation suspends – in essence, temporarily removes – the federal government’s borrowing limit through Jan. 1, 2025’[iii] setting aside the issue until after the next US Presidential Election in November 2024.

Overall, May has seen mixed performance within asset classes. Brent Crude, after starting the month at levels of c.$80 per barrel, decreased over the course of the month ending at c.$73 per barrel. UK 10-year Bond yields and US 10-year treasury yields both continued to increase. Gold fell in value whilst the US Dollar rose.


[i] https://www.reuters.com/world/ukraines-zelenskiy-meet-british-pm-sunak-2023-05-15/

[ii] https://www.reuters.com/world/china/china-summons-japanese-ambassador-over-actions-g7-2023-05-22/

[iii] https://www.reuters.com/world/us/us-debt-ceiling-bill-faces-narrow-path-passage-house-2023-05-31/

April Investment Review: Light Relief

by Haith Nori

April delivered some light relief following the volatility witnessed over the first quarter of the year. There has been a flurry of Merger & Acquisition deals within the financial industry, including Rathbones buying the UK arm of Investec and Deutsche Bank agreeing to buy London based investment bank Numis. JP Morgan Chase have had their offer accepted on First Republic Bank after being in a bidding war in the final week of April following the Federal Deposit Insurance Corporation (FDIC) reaching out to big banks in the US.

On Tuesday 4th April, the ‘US unveiled $2.6 billion worth of military assistance that includes three air surveillance radars, anti-tank rockets and fuel trucks, the Pentagon announced’[i]. Countries are still providing support to Ukraine as the war has still not reached a resolution. In the UK, Jeremy Hunt, Chancellor of the Exchequer, confirmed that an additional $500 million in guaranteed loans would be provided by the UK on 13th April.

On 4th April, Rathbones agreed to buy the UK Wealth arm of Investec in an ‘all-share deal that values the unit at 839 million pounds ($1.04 billion)’ [ii]. If the deal goes to plan, a very large wealth manager will be created with approximately 100 billion in assets under management. On the flip side, Investec will own 41.25% stake in the combined firm. The deal is still subject to the necessary regulatory approvals and is estimated to be completed in the final quarter of 2023.

On Friday 28th April, Germany based Deutsche Bank announced that it ‘had agreed to buy Numis Corp (NUM.L), a London-based boutique investment bank, for about 410 million pounds ($511 million) as the German company continues to deepen its links with British corporate clients’[iii]. This is a cash consideration deal valuing Numis at 350 pence per share and is Deutsche Bank’s largest acquisition in more than a decade. The deal will provide Deutsche Bank with strong links to the UK and Ireland which it intends to combine its existing corporate finance business in these areas with Numis, a leading UK corporate broking and advisory house. The deal is again expected to be completed during the final quarter of 2023 subject to regulatory approval.

First Republic Bank, the third bank to fail since March after Silicon Valley Bank and Signature Bank, saw several bidders trying to capitalise on the bank’s demise. The bank had been seized by regulators and the Federal Deposit Insurance Corporation (FDIC) was subsequently appointed the bank’s receiver. In the last week of April, the FDIC had been reaching out to other big banks in the US to gauge interest in acquiring its assets. On Sunday 30th April, the race had reduced to just four competitors after the FDIC informed potential investors to input their final bids by a deadline of noon. JP Morgan Chase were one of the bidders and had dedicated the task of due diligence on First Republic Bank to over 800 employees. The deal was later accepted by the FDIC and announced in the early hours of Monday morning, where ‘JP Morgan will pay $10.6 billion to the U.S. Federal Deposit Insurance Corp (FDIC) as part of the deal to take control of most of the San-Francisco-based bank’s assets and get access to First Republic’s coveted wealthy client base’[iv]. US President Joe Biden praised the deal, announcing his evaluation that JP Morgan was helping make the US banking system more secure. The deal has received all the necessary regulatory approvals and has since closed.

On 12th April US CPI data was released for the 12 months ending in March of 5%, down from 6.0% in February, 6.4% in January, 6.5% in December 2022 and 7.3% in November 2022, continuing its gradual decline since June of last year at 9.1%! This is the largest decrease seen for a while, and lower than expectations which shows some positivity. On 19th April UK CPI data released was 10.1% for the 12 months ending in March, compared to 10.4% in February and 10.1% in January. A decline has been seen but the headline rate remains above double digits and is now back to the levels achieved at the start of the year. There has been a 1% decrease since October’s 11.1% and there is still a long way to go if the Bank of England is to achieve their overall inflation target of 2%. The next meetings for the Federal Reserve, Bank of England and the European Central Bank will be held at the beginning of May where they will once again address the decision of whether to change interest rates.

In other asset classes the UK 10-year Bond yield started the month at c.3.429%, ending at c.3.718% showing an increase in yields, returning to levels last seen at the end of February and beginning of March. On the other hand, the US 10-year Treasury yield started the month at c.3.432% and ended at c.3.452% showing little gain (and unlike the UK 10-year bond has not returned to its levels at the beginning of March). The price of Gold, which increased in March, saw little movement during April remaining at high levels. GBP continued to gradually strengthen against the US Dollar over the course of April ending the month at its highest level since the beginning of the year. Global equity markets closed marginally higher in April. In the UK house prices have increased by 0.5% ‘following seven consecutive falls going back to last September’[v].

Overall, April has seen less volatility than has occurred since the beginning of the year within asset classes. Brent Crude, after starting the month back at levels of c.$85 per barrel, increased slightly over the course of April and subsequently fell, ending the month at c.$80 per barrel. UK 10-year Bond yields were higher than US 10-year treasury yields.


[i] https://www.reuters.com/world/us-pledges-another-26-billion-weapons-aid-kyiv-statement-2023-04-04/

[ii] https://www.reuters.com/markets/deals/rathbones-investecs-uk-wealth-arm-merge-deal-valued-839-mln-stg-2023-04-04/

[iii] https://www.reuters.com/markets/deals/deutsche-bank-buy-institutional-stockbroker-numis-511-mln-2023-04-28/

[iv] https://www.reuters.com/business/finance/california-financial-regulator-takes-possession-first-republic-bank-2023-05-01/

[v] UK house prices rise after seven months of falls; factory downturn deepens; eurozone inflation rises to 7% – business live (theguardian.com)

March Investment Review: Increased Volatility

by Haith Nori


March has seen a continuation of heightened volatility across global markets. Central banks across the developed world are considering more aggressive tactics for increasing interest rates as they are not yet achieving the desired result of reducing inflation quickly enough. Some find themselves re-assessing their originally estimated limits. The collapse of Silicon Valley Bank has created great uncertainty and fear within global markets as no one will want the history of the 2008 financial crisis to repeat itself. Governments acted quickly to prevent a financial crash. The Swiss National Bank stepped in to bail out Credit Suisse with a lifeline of $54 billion. Furthermore, UBS went on to merge with Credit Suisse.

At the beginning of March, at the Congressional Testimony, a hearing of the US Senate Banking Committee and House of Financial Services Committee, Jerome Powell suggested the possibility that interest rate hikes still have a long way to go, signalling that further, larger rate hikes may be needed. Markets reacted negatively to the announcement, sending equity markets lower. After an initial increase in bond yields, over the course of March these fell significantly.

On Friday 10th March, Silicon Valley Bank (SVB), the 16th largest bank in the US, collapsed, delivering the largest commercial bank failure since the 2008 financial crash. The bank was based in the Santa Clara region and at the end of 2022 had around $209 billion in assets. The main contribution to the collapse appears to have been a failure of management to properly manage the numerous risks that arise on bank balance sheets during periods of rapidly rising interest rates. The issue was further compounded by SVB’s concentrated exposure to the start-up and venture capital space, an area which has recent faced its own challenges which drove many of these companies to draw down on their deposit balances. The bank was heavily invested in long-dated Treasury Bonds whose value, as the Federal Reserve raised rates, markedly decreased. Silicon Valley Bank’s failure is the largest since Washington Mutual went bust in 2008, a hallmark that triggered a financial crisis that hobbled the economy for years’[i] leaving an uncertain atmosphere for many investors. Global markets in both equity and fixed income have reacted negatively to the news with Joe Biden promising to seek stronger regulations for banks in an attempt to reassure the public on the state of the economy. Nearing the end of the month, on 27th March, First Citizens bank ‘bought about $72bn of the assets of the failed bank at a discount of $16.5bn’[ii] leaving c.$90bn of securities and other assets with the Federal Deposit Insurance Corporation (FDIC). First Citizens are taking over the running of 17 Silicon Valley Bank branches and also acquiring all $119bn in deposits and loans, which were set up post the collapse of Silicon Valley Bank. Finally, the FDIC have stated the collapse may well lead to $20bn of losses for its deposit insurance fund, which is paid for by banks themselves through sector-wide levies.

On 14th March, US CPI data was released for the 12 months ending in February of 6.0%, down from January 6.4%, December of 6.5%, 7.3% in November, continuing its gradual decline since June (9.1%)! This is a more promising decrease since January showing progression has picked up again. On 22nd March, the US Federal Reserve made the decision to raise interest rates by 0.25% to a range of 4.75% to 5%, taking interest rates to their highest level since 2007 and marking the ninth consecutive month of interest rate hikes in the US. This is despite the situation of the Silicon Bank Valley collapse where analysts predicted a potential halt in altering interest rates. In the UK CPI data released was 10.4% for the 12 months ending in February, a slight increase from 10.1% in January. This is slightly disappointing as the figures had been showing a decline each month for the past several months: 11.1% in October, 10.7% in November and 10.5% in December. On 23rd March, in the UK the Bank of England announced another 0.25% increase in interest rates to 4.25% from 4%. Also, on 16th March the European Central Bank (ECB) announced a 0.5% increase in their interest rates to 3.0% as they had originally signalled.

On Wednesday 15th April, Jeremy Hunt the UK Chancellor announced the 2023 UK Budget making various changes. Notably, the UK Pension allowance has increased from £40,000 to £60,000 per annum effective from April 2023. Energy price support will continue at the current rate for the next three months to June 2023, limiting typical household bills to £2,500 per annum and corporation tax will increase from 19% to 25% from April.

On 16th April, the Swiss National Bank swooped in to provide a $54 billion bailout to Credit Suisse in order to ‘shore up liquidity and investor confidence, after a slump in its shares had intensified fears about a global banking crisis’[iii]. A few days later UBS came to Credit Suisse’s further aid as the bailout from the Swiss National Bank was not enough, and ‘UBS will pay $3.2 billion for 167-year old Credit Suisse and assume at least $5.4 billion in losses from unwinding its portfolio of derivatives and other risky assets’[iv]. This leaves the Swiss Nation with only one universal bank; UBS Group AG.

In other assets, there has also been increased volatility. During March Gold reached its highest level for several months, Brent Crude dropped sharply at the beginning of the month to c.$73 and has since recovered slightly to end the month c.$79.77. The Dollar, after initially showing signs of strength, has decreased in value against the UK Pound, the Euro and the Yen. Both US 10 year Treasury notes and UK 10 year Gilts followed the same pattern of starting the month at strong levels reducing in yield to then slightly recover at the end of the month but still c.0.5%/0.4% lower in yield.

Overall, March continued the volatility witnessed in February across asset classes. The news of the Silicon Valley Bank collapse shocked global markets yet most Central Banks continued with planned interest rate hikes. Both Silicon Valley Bank and Credit Suisse have been bailed out. Brent Crude dropped sharply below $75 per barrel having started the month at c. $84 per barrel but recovered some of its losses by the end of March. Since the start of March, 10 year bond yields have generally fallen.


[i] https://www.reuters.com/business/finance/global-markets-banks-wrapup-1-2023-03-10/

[ii] https://www.theguardian.com/business/2023/mar/27/silicon-valley-bank-bought-by-first-citizens

[iii] https://www.reuters.com/business/finance/credit-suisse-borrow-up-54-bln-it-seeks-calm-investor-fears-2023-03-16/

[iv] https://www.reuters.com/business/finance/ubs-swallows-doomed-credit-suisse-casting-shadow-over-switzerland-2023-03-20/

February Investment Review: Volatility in the Air

by Haith Nori

February saw a continuation of increases in equity markets in Europe after a positive start in January, while US markets have moved in the opposite direction. At the beginning of February many central banks including the Federal Reserve, the Bank of England and the European Central Bank all increased interest rates once more. After an initial drop in yields, US and UK 10 year bond yields at the beginning of February have recovered to levels higher than seen in January as many other 10 year bond yields have reached highs not seen in years. The US Dollar has once again strengthened as the price of gold has fallen. Global tensions continue to rise as Russia’s invasion of Ukraine reached its one year anniversary (24th February). Rishi Sunak is also attempting to push forward Brexit negotiations, having delivered the ‘Windsor Framework for Northern Ireland and Great Britain’.

On 1st February, the US Federal Reserve made the decision to raise interest rates by 0.25% to 4.75%, marking a notable reduction in pace from their previous increase of 0.5%. Markets responded positively to the news, with the Technology sector in particular outperforming others, however February saw a more general decline alongside US Equity indices. On 14th February we received a Valentine’s gift. US CPI data was released for the 12 months ending in January of 6.4%, down from December of 6.5% and 7.3% in November, continuing its gradual decline since June (9.1%)! Whilst this is still a decrease it is much lower than expectations and suggests a long-awaited slowing in the rate of progression. On Thursday 2nd February, in the UK the Bank of England announced an 0.5% increase in interest rates to 4%. As expected, they did not follow the US in targeting a reduced pace of 0.25%. Furthermore, in the UK CPI data released was 10.1% for the 12 months ending in January down from 10.5% in December, 10.7% in November and 11.1% in October. On this occasion, this was softer than consensus expectations and the reduction pattern is continuing in the UK. Also, on 2nd February the European Central Bank (ECB) announced a 0.5% increase in their interest rates to 2.5%, and the ECB have ‘pre-announced another increase of the same size for March 16’[i]. The ECB continues to  present itself as being particularly hawkish under the stewardship of Madame Lagarde.

In Bond Markets, ‘Germany’s 10-year yield, the benchmark for the euro area, rose 7 basis points (bps) to 2.66%, its highest since July 2011’[ii] and the same has been seen in both France and Spain where yields have hit their highest levels in many years. Both the UK 10 Year Gilt and US 10 Year Treasury Note yields have surpassed their January levels, both increasing to just under 4% after an initial drop at the beginning of February. The US Dollar has regained its losses from January against Sterling, the Euro and the Japanese Yen. Gold, after reaching a high level at the beginning of February has returned to levels at the start of January. Prices for gold at the end of February ‘were headed for their biggest monthly decline since June 2021 as a stronger dollar and fears that the U.S. Federal Reserve would keep raising interest rates weighed on the non-yielding asset’s appeal’[iii]. We are seeing a very uncorrelated performance from assets including what was once considered the safe havens.

On 11th February, Fumio Kishida, Prime Minister of Japan, nominated Kazua Uedo as the next Governor of the Bank of Japan, who is set to take the reins after 8th April when Haruhiko Kuroda steps down. This has come as a surprise as originally the Deputy Governor Masayoshi Amamiya was viewed as being the front runner.

After several countries, including the UK, the US and Germany agreed to send military battle tanks to aid Ukraine in January, President Volodymyr Zelenskyy of Ukraine has been touring Europe in an attempt to drum up more military support. Firstly, he flew to the UK to meet with Prime Minister Rishi Sunak whom, after their meeting, is providing NATO-style training to thousands of Ukrainian soldiers and marines from the UK. Rishi Sunak is also considering his options to offer fighter jet planes. Zelenskyy then flew to Paris meeting with Emmanuel Macron and Olaf Scholz before flying to Brussels where he addressed the European Parliament, meeting with twenty-seven heads of state asking for European Unity. In the run up to the one-year anniversary of Russia’s invasion of Ukraine (24th February), US President Joe Biden travelled to Kyiv on Monday 20th February and later met with NATO leaders on the eastern flank to highlight geopolitical tensions. We are seeing clear escalations in the Russia invasion of Ukraine.

On 27th February a new Brexit deal was signed by the UK and European Union known as the Windsor Framework, which attempts to deal with the problems created by the Northern Ireland Protocol, binding international law obligations. One of the key issues has been checks on goods travelling from Great Britain had created a border with Northern Ireland and hence certain goods were no longer able to reach them. The Windsor Framework will, as Rishi Sunak has said, ‘ease trade between Britain and Northern Ireland, firmly root the province’s place in the United Kingdom and give lawmakers there a say in whether they must implement EU law, with London having a veto’. [iv] There is a long way to go and this needs to be approved by all parties but is a positive step forward for Brexit and will hopefully open up more lines of trade.

Overall, February has been reasonably volatile across various asset classes, with Large-Cap UK Equities in particular having hit an all-time high. Brent Crude fell sharply in value at the beginning of the month (below $80 per barrel) but has since recovered to c.$84 a barrel. 10 year bonds are increasing in yield, with various countries now having reached all-time highs. The US Dollar has gained strength back from its lows of January against Sterling, the Euro and the Japanese Yen. Geopolitical tensions are rising with Russia’s invasion of Ukraine.

[i] https://www.reuters.com/markets/rates-bonds/hawkish-ecb-comments-push-up-rate-hike-expectations-2023-02-17/

[ii] https://www.reuters.com/markets/global-markets-wrapup-1-2023-02-28/

[iii] https://www.cnbc.com/2023/02/28/gold-faces-worst-month-in-nearly-two-years-on-us-rate-hike-dread.html

[iv] https://www.reuters.com/world/uk/risk-taken-uks-sunak-announces-windsor-framework-2023-02-27/

January Investment Review: New Year Bounce Back

by Haith Nori

January has seen an increase in global equity markets after a slightly volatile December. Central Banks are hosting their next interest rate meetings at the beginning of February, giving January a little rest. China has continued to open up after intense lockdowns with a release of 3% GDP growth in 2022, the second slowest rate of economic growth since the 1970s. Many emerging market economies are also coming back into the limelight offering lowly valued equity markets and attractive sovereign bond yields.

On 12th January, promising data presented itself for US inflation which, for the 12 months ending in December, came in at 6.5%, down from 7.3% in November and continuing its gradual decline since June, marking the sharpest monthly fall in US CPI figures since mid-2020! Furthermore, in the UK CPI data released was 10.5% for the 12 months ending in December, down from 10.7% in November and 11.1% in October. Whilst progress is slower than in other parts of the world, a trend is beginning to emerge in the UK inflation data. The next meeting about interest rates will be 31st January – 1st February for the US Federal Reserve and 2nd February for both the European Central Bank and the Bank of England. Global markets are waiting with bated breath to see how Central Banks approach their next steps in controlling inflation and if we are to see a reduction in the scale and frequency of hikes. ‘UK wages grew at the fastest rate outside the pandemic period at the end of 2022’[i] up 6.4% on an annual basis, marking the largest increase since 2001. The rise in wages strengthens the case for the Bank of England’s Monetary Policy Committee to keep raising interest rates, although any further hikes should be finely balanced in the context of weaker economic growth expectations and a more challenging housing market. Whilst wage growth is good news for households in the UK, figures have still failed to keep up with inflation. Both the US 10 Year Treasury Note and the UK 10 Year Gilt have decreased in yield since the beginning of January 2023. On Wednesday 18th January, the Bank of Japan made no policy changes as expected, keeping its yield curve control targets in place (0% for 10year yield and -0.1% for short term interest rates).

Emerging market debt has come back onto investors radar screens following a difficult period in which the US dollar rose strongly. When the dollar rises, many developing countries local currencies tend to depreciate given typically high external debt positions, which are most often financed in dollars. They will see higher imported inflation with food and oil prices. Dollar strength tightens financial conditions for some emerging market countries and can affect the availability of credit. ‘The dollar has depreciated 7% since its highs in October, pushing EM assets higher’ [ii] as the two have historically have an inverse relationship. Analysts have suggested there could be room for further outperformance from emerging markets as the dollar may continue to depreciate. Many of the emerging market countries began increasing interest rates early in 2021, long before the Federal Reserve and many other Central Banks of developed countries across the world, which has resulted in many emerging market countries offering some very attractive yields. Examples, of where some 10 year Government Bonds are yielding are: Brazil c.13.19%, Mexico c.9%, Egypt c.20.1%, Zambia c.30.19% and Turkey c.10.7% to name just a few.

The CBOE (Chicago Board Options Exchange) Volatility Index (VIX), which is a real time index representing market’s expectations for volatility over the coming 30 days, has been on a steady decrease since October which coincided with the US dollar’s all-time high. Gold has also been on a steady increase in price since October. Both Sterling and the Euro have increased against the dollar steadily since the end of September 2022. China has continued to show positive signs of growth since it began to re-open after lifting its zero-covid policy. This has been especially helpful for business over the period of Chinese New Year.

The International Monetary Fund (IMF) on Tuesday 31st January raised its Global Growth outlook for 2023. This is due primarily to demand in the US and Europe, alongside China’s re-opening and a significant easing in European energy costs. The IMF has ‘said global growth would still fall to 2.9% in 2023 from 3.4% in 2022’, [iii]  however this is an improvement from the October 2022 prediction of 2.7% with the warning of the world tipping into recession. Following the 2023 prediction, the IMF has also stated that global growth would accelerate to 3.1% in 2024. Whilst progress is slow, there is at least some positivity that can be taken from their outlook, in which they revised China’s growth forecast much higher for 2023, from 3% to 5.2%.

Many countries have been answering the calls of Ukraine for additional support in the ongoing crisis with Russia. Germany made an announcement on 25th January to supply 14 military battle tanks and encouraged other European countries to do similar The US later that day also declared further aid with the supply of 31 tanks. Finland, Poland, the United Kingdom, Spain, the Netherlands and France are also considering making contributions. This is a major development in the situation.

Overall, January has welcomed back some positivity within global markets. Brent Crude dropped sharply in value at the beginning of the month but has recovered its value above the December highs, ending at just under $85 per barrel back up from the lows of December ($76.10). US and UK bond yields continue to fall and are becoming less attractive relative to some emerging market bonds, which have the potential to deliver very attractive real returns to investors.

[i] https://www.ft.com/content/b25fd8d7-f7bd-4501-8a32-21d338846f85

[ii] Look who’ emerging as the biggest star of 2023–Points of no return, John Author’s

[iii] https://www.reuters.com/markets/imf-lifts-2023-growth-forecast-china-reopening-strength-us-europe-2023-01-31/

December Investment Review: Central Banks Attempting to Restore Calm

by Haith Nori

Global equity markets in December saw a slight decline from their November highs in the run up to the holidays. Central Banks have hinted at slowing their interest rate hiking programme with the FOMC, BOE and ECB all raising interest rates by 50 basis points, lower than previous interest rate hikes of 75 basis points. This may pave the way for a potential end in sight. China has been easing lockdowns, re-opening areas around the country and lifting international travel restrictions. China’s re-opening should be better for business globally. The Bank of Japan also made a surprise announcement to change its bond yield control policy.

The US Federal Reserve made the decision to increase interest rates by 0.50% on 14th December 2022 which confirmed what the markets were expecting. This is the first 0.50% increase as the past four consecutive meetings, the US Federal Reserve have increased by 0.75%. Promising data has presented itself for US inflation for the 12 months ending in November 2022 of 7.3%, continuing its gradual decline since June. The decision to opt for a 50 basis point hike shows positive signs that inflation is reducing and confirmed that the beginning of a reduction in the pace of policy tightening has started. For the first time UK CPI data was encouraging, releasing a figure of 10.7% for the 12 months ending in November. Whilst this figure is still very high, we have seen a reduction from October’s figure of 11.1%. On 15th December 2022, The Bank of England also decided to raise interest rates by 0.50% to 3.5%, as analysts had been expecting, which, like the US, was also a reduction from the previous hike of 0.75%. On the same day the ECB made the decision to join the interest rate train by also increasing interest rates by 0.50%, pledging ‘further hikes and laid out plans to drain cash from the financial system as part of its fight against runaway inflation’[i]. Global Equity Markets reacted negatively to the interest rate news, which was all released in two consecutive days. The UK 10 year Gilt yield, the US 10 year Treasury Note yield and the 10 Year Bond yield all increased after the news was released and ended the month higher than at the beginning of the month. Global Markets reacted negatively to the Central Bank announcements in December 2022 but had a late surge, or Santa Rally, in the run up to the Christmas holidays. Sterling continued to decrease for the latter half of December against the dollar following the interest rate decisions, whereas the euro, after an initial decline, recovered to the end of December. Reaching the end of 2022, the US equity markets have had their worst year since the financial crash in 2008.

Elon Musk made an astonishing announcement that he would generate a survey amongst his 122 million followers as to whether he should step down as CEO of Twitter and pledged he would honour the decision of the results of the poll, be it negative or positive. A total of c.57% voted yes and Musk has since stated that he will step down once a suitable replacement is ready to take the reins.

On 20th December 2022, The Bank of Japan shocked markets ‘with a surprise tweak to its bond yield control that allows long-term interest rates to rise more, a move aimed at easing some of the costs of prolonged monetary stimulus’[ii]. Following the unexpected news, Japanese shares reacted negatively whilst both Japanese bond yields and the Yen increased. This caught many investors off guard given that analysts widely expected no change to yield curve control, especially in the run up to Governor Haruhiko Kuroda stepping down in April 2023. The decision was meant to ignite the dormant bond market. Hopefully, stability will be restored.

In the UK, manufacturing has seen a decline as there is less demand for new business. December saw the fifth consecutive month of contraction, as ‘British manufacturers are starting 2023 on the back foot, after they reported one of their sharpest falls in activity since the 2008-09 recession last month, reflecting a sharp fall in new orders and ongoing job cuts’[iii].  Unemployment rates have also risen in the UK as there are less vacancies available.

With China coming out of lockdown and ending their Zero-Policy Covid restrictions the country is seeing stocks improve in price on the basis that business, both domestic and international, will hopefully resume. Travel restrictions have been lifted allowing international travel from China but many countries including the US, the UK, Italy, India, Israel, Spain, Canada, South Korea, and France are all imposing the need to have a negative Covid Test and in Spain’s case, proof of vaccination. This is a positive step forward as ‘China may finally return to normal as the nation joins the rest of the world in learning to live with the virus’[iv]. There is still a long road to recovery ahead for China, but Global Markets will benefit from the good news and the new opportunities it will present.

Overall, December has still been slightly volatile for Global Markets but did not experience too many significant market shocks. Brent Crude continues to trade below $85 having dipped to a low of c.$76.10. The Federal Reserve has hinted at maintaining lower levels of interest rate hikes whilst the ECB stated there is still a large fight against inflation to go. Central Banks are continuing action to bring inflation down but at a calmer pace. The re-opening of China brings positive news to Global Markets. Japan has made a surprise move in its control of bond yields causing a shock. Bond yields have increased since the start of the month following the interest rate decision release.

[i] www.reuters.com/markets/europe/ecb-slow-rate-hikes-lay-out-plans-drain-cash-2022-12-14/

[ii] https://www.reuters.com/markets/rates-bonds/japan-set-keep-ultra-low-rates-doubts-over-yield-cap-grow-2022-12-19/

[iii] www.reuters.com/markets/europe/uk-manufacturing-ends-2022-low-orders-shrink-pmi-2023-01-03/#:~:text=LONDON%2C%20Jan%203%20(Reuters),orders%20and%20ongoing%20job%20cuts.

[iv] https://edition.cnn.com/2023/01/02/china/china-2023-lookahead-intl-hnk-mic/index.html

End of Year Investment Review: In Search of Optimism

by Adam Jones

As 2022 draws to a close we wanted to briefly highlight the exceptional uncertainty in investment markets as we head into 2023. We retain a cautious stance in portfolios overall but also see compelling arguments as to why things might turn out to be far less gloomy than seems widely expected.

Despite global PMI’s stabilising but still being in contractionary territory in November, December ISM Services data pointed to a very robust US consumer, whose confidence in spending has apparently yet to be curtailed by tighter monetary policy. Except for housing there appear few signs of restraint in broader US activity, giving rise to suggestions that the lag in monetary policy effectiveness may be longer than originally thought (and may not be evident until the end of H1’23). Recent declines in both oil prices and headline inflation data might also provide additional support for ongoing strength in consumption trends.

Source: Hottinger Investment Management / Refinitiv Datastream


In China, zero-covid policies have weighed on economic sentiment so much that recent street protests have led to a relaxation in policy that saw the Hang Seng index in Hong Kong become the strongest performing equity market in November, although most of these gains have since been erased given the recent uptick in new cases. On the economic front, one of the metrics we follow closely is known as the ‘credit impulse’ which simply measures the growth in new credit being provided to an economy relative to its GDP. In China the credit impulse has risen materially over the past few months and has historically led expansions in the global monetary base as defined by M2 (a measure of money supply which includes both cash deposits and instruments which are easily convertible into cash). While we do not consider ourselves to be explicit monetarists, it is interesting to note that expansions in global M2 have themselves tended to lead many of the major business cycle indicators such as manufacturing and output.

Should inflation continue to dissipate as global economies stabilise, this dynamic could turn out to be very supportive for risk assets in general. In this scenario investors, whose perspectives are almost universally bearish according to some measures of sentiment, are potentially at risk in being under-allocated to global equities.

This is the period when strategists and economists publish their forecasts for 2023 and Absolute Strategy Research (one of Hottinger’s key research partners) are not alone in believing that core inflation in US and Europe will be below 3% by the end of next year. Supply chains have generally normalised, the tightness of the labour market has not led to a wage spiral, falling commodity prices, and falling housing costs all combine to create a disinflationary trend. Central banks tend to be slow to cut rates, preferring to see consistently worse data and we believe there is a possibility that there are demographic changes involving retiring baby-boomers that could keep the labour market tighter than expected and over a longer transition period.

Source: Hottinger Investment Management / Refinitiv Datastream


Looking at corporate bond markets we also note that despite US high yield credit outperforming investment grade credit this year (even while lower-rated credit spreads have doubled), overall spreads remain well below levels witnessed in prior periods of forthcoming recession. We believe part of the explanation for this dynamic is that many businesses took advantage of exceptionally low refinancing rates post-Covid in 2020 to lock in lower rates over longer time frames (and hence significantly extended the maturity profile of their debt). If this is the case, then it stands to reason that a tighter monetary policy environment is likely to exert less of an effect on the corporate sector than it may have done historically.

The counterargument to this more optimistic view of 2023 is that savings rates in the developed world have now fallen back to (and in some cases below) pre-Covid levels in many countries. When coupled with recent witnessed spikes in credit card spending data this suggests a growing need for consumers to supplement the cost of living through short term finance. This is not typically a sustainable trend over any reasonable period, and we speculate may be a contributing factor to the weakness in US November retail sales last week.

Source: Hottinger Investment Management / Refinitiv Datastream


So, while global equities may have rallied approximately 10% over the last 2 months our baseline view remains that this represents a bear market rally. Equity and credit markets appear unwilling to price a more recessionary earnings outlook and cyclical sectors have barely underperformed more defensive sectors. It is only government bond markets which strongly suggest a forthcoming recession, with the yield curve having now inverted by more than 70bps (that is to say that 2yr bond yields are now greater than 70bps lower than 10y yields). In our opinion there are inconsistencies in 2023 forecasting based on the idea that investors have no reliable evidence of the monetary policy lag that will likely catalyse recession.

At the crossroads there are several scenarios, ranging from a soft landing to long and variable monetary policy lags causing a deep recession in 2023. The distribution of potential outcomes remains exceptionally wide due to high levels of prevailing uncertainty. Indeed, the last time an inflationary environment required so decisive a tightening cycle as that we have recently witnessed was back in the early eighties. We would argue that the global economy has evolved markedly since then in terms of demographics, labour market structure, global trade, technology, information dissemination and the implementation of monetary policy itself (forward guidance as an example). Such comparisons are therefore difficult and potentially misleading.

We remain cautious at this point, with an asset mix in favour of quality over cyclical growth, a preference for strong balance sheets, high cash flow yields and low levels of gearing with an overweight position in cash and government fixed income, where rates have become attractive for the first time in many years. We believe that despite a level of prevailing pessimism the spectrum of potential outcomes may lead to increased volatility and swift market reactions that would make disengaging from markets in a meaningful way a risky strategy for the long-term investor.

November Investment Review: Return of Confidence

by Haith Nori

November has welcomed back some much-needed positivity within the Global Equity Markets. In China, c.412 million people have further been affected by lockdown measures, due to their zero Covid policy, as cases have increased rapidly. There is civil unrest as people are protesting against President Xi Jinping and demanding that he resigns due to the handling of the current Covid situation. Russia continues to attack Ukraine, attempting to target their energy infrastructure, and has reportedly left Kyiv without running water or electricity. In the UK, the Autumn Budget was finally released announcing a number of significant changes. In the US, the FOMC have signalled a reduction in the pace of its aggressive interest rate hiking cycle. COP 27 has embraced world leaders once again who are attempting to act collaboratively to reduce climate change.

Since the start of November, sterling has strengthened against the dollar. The dollar has also weakened against both the euro and the yen as well ‘after U.S. economic data provided further evidence that inflation was starting to ease, improving investor appetite for riskier assets and reducing demand for the safe-haven greenback’[i]. Bond yields have begun to decrease with the US 10 year note, now offering a yield of c.3.6% and the UK 10-year Gilt offering c.3.1%. This is a dramatic change when just a few months ago, they were both yielding above 4%! Interest Rates are still increasing and in theory, the yield should increase but we are seeing an unusual correlation. The Federal Reserve is hinting at slowing the interest rate increases to reduce over tightening. After the minutes were released 23rd November from the Federal Reserve’s November meeting, European stocks went on to hit three-month highs. The US Federal Reserve increased interest rates by 0.75% for the fourth consecutive time which takes them to the highest levels since 2008. Jerome Powell has hinted at a change in policy at the next meeting or two. In the UK, the Monetary Policy Committee voted 7-2 to increase interest rates by 0.75% to 3%, the largest rate hike since 1989. On Thursday 10th November, the US released CPI data for the 12 months ending in October of 7.7%, which was lower than expectations and lower from September of 8.2%. This is positive news as, even though we are seeing small changes over the past 5 months, there has been a clear decrease: 9.1% in June, 8.5% in July, 8.3% in August, 8.2% September. There is still a long way to go for the CPI figure to reach the overall target of 2% but finally a positive trend has been witnessed. In the UK, the CPI data released November 16th for the 12 months ending in October was 11.1%, the most since October 1981, up from 10.1% in September, and 9.9% in August. The main driver of the headline figure has been ‘surging household energy bills and food prices pushed British inflation to a 41 year high’[ii]. The data was released one day before Jeremy Hunt released the Autumn Budget where the hope is that his tax hikes and plans to reduce spending will assist in reducing the CPI figure. The next meetings for the FOMC, BOE and ECB will all be held in mid-December where they will assess whether to increase interest rates once again.

The delayed UK Government’s Autumn budget, announced on 17th November, saw changes to the National Living Wage, several Tax changes and the cap on energy bills increasing to £3,000 from £2,500 for 12 months from April 2023. The key points that will have a significant impact in the new tax year (6th April 2023 to 5th April 2024) are the reduction in the Capital Gains Tax Allowance, Dividend Tax Allowance, and the Additional Rate Income Tax threshold. For individuals the Capital Gains Tax Allowance will be reduced from £12,300 to £6,000 and for most trusts from £6,000 to £3,000. The Dividend Tax Allowance will be reduced from £2,000 to £1,000 and, finally, the Additional Income Tax Rate threshold will reduce from £150,000 to £125,000. Effectively, these measures are an attempt at creating a budget tightening of £55 billion to restore the country’s credibility under new Prime Minister Rishi Sunak’s Government with Jeremy Hunt announcing these measures as being ’tough but necessary’[iii].

COP 27, which concluded on 20th November, saw a number of global leaders agreeing to work together once more to combat climate change. One key take away is that nations have, for the first time, agreed to establish a fund which is dedicated to providing pay-outs for developing countries that experience damage from issues relating to climate change, such as, storms, floods, and wildfire. China and the US have rekindled their relationship as China’s President Xi Jinping met with US President Joe Biden in Indonesia agreeing to ‘restart cooperation on climate change after a months-long hiatus due to tensions over Taiwan’[iv].

China has become a point of discussion around the globe. Over this past year China has been in and out of lockdowns both national and local due to its Zero Covid policy. After the latest surge in Covid cases and new lockdowns put in place, anti-lockdown protests rallied in multiple cities around China. Finally, at the end of November the Chinese Government have announced they are now attempting to ramp up their efforts to vaccinate the elderly. On the back of the announcement the Hang Seng closed 5% higher on Monday 28th November.

Overall, November delivered some positive returns for global equity markets, which are now up 11% from the October 12th lows. Brent Crude has returned to trade below $90 per barrel having fallen from c.$98 per barrel at the start of the month. Sterling has ended the month trading c1.21 against the dollar which is a significant rise since its tumble after Kwasi Kwarteng’s budget announcement at the end of September. Both the Yen and the Euro have also strengthened against the dollar since the beginning of November. Bond yields are decreasing whilst central banks hint at slowing the pace of interest rate hikes to hopefully give a soft landing at the beginning of 2023.

[i] www.cnbc.com/2022/11/15/forex-markets-federal-reserve-interest-rate-hikes-inflation-japan-yen.html

[ii] www.reuters.com/world/uk/uk-consumer-price-inflation-hits-111-october-ons-2022-11-16/

[iii] www.reuters.com/world/uk/uk-consumer-price-inflation-hits-111-october-ons-2022-11-16/

[iv] www.reuters.com/business/cop/key-takeaways-cop27-climate-summit-egypt-2022-11-20/