Investment Management –
Our Co-CIO, Gregory Perdon shares insights from across the globe, key market developments and recent Investment Committee decisions.
It’s finally happening. The Fed is reaching for the punchbowl, not to refill cups but rather to start taking it away. Last week, they published the minutes from the December meeting: “Almost all participants agreed that it would likely be appropriate to initiate balance sheet run-off at some point after the first increase in the target range for the federal funds rate”. What does that mean in plain English? $8.3trn in Treasuries and Mortgages is just too big! So just like when your kids head off to university, it’s time to downsize. Bond yields rose and conversely the price for US Treasuries dropped. Tech shares also dropped while oil and financial stocks continued their run up.
And for those of you who are fearing a jump in inflation, here’s the bad news: The US economy added a record 6.4 million jobs in 2021, rebounding strongly from unprecedented losses in the year prior due to the pandemic. It is a good sign of economic recovery but will probably add to wage pressures. What’s the new rate? The unemployment rate fell to 3.9% in December while private payrolls rose by 807,000 – the strongest gain since May. How about the internals? A record 4.5 million Americans quit their jobs in November while openings remained elevated, highlighting persistent turnover in the labour market – I guess it’s a case of No Fear.
And finally, we all love a good PMI reading… US manufacturing printed 58.7 down from 61.1 in November. It’s down, but that’s still a great print (anything north of 50 is a positive read). How about services? Slightly cooler but still red hot. December declined to 62 from 69.1 a month earlier. What does all this mean? Omicron is negatively impacting the economy, but it remains strong all the same – c’mon guys, we will get through this.
It’s not equity markets which make the world go round, it’s the credit market. If you want to look under the bonnet of an economy, then start with the stock (outstanding), flow (volumes), and quality of credit – and it’s no different at home. When demand for credit is expanding – it’s generally because borrowers/consumers are optimistic about the future and want to take risk. The good news is that consumer credit data from the Bank of England showed a rise of £1.2bn in net borrowing in November 2021, increasing total credit by 0.4% versus the same month relative to the previous year. This marks the first annual increase since coronavirus hit the UK and while we appreciate one data point shouldn’t be relied upon in isolation, it is encouraging all the same.
Staying on the theme of domestic affairs, the housing market continues to bring it home with almost one-third of houses in England and Wales selling above their asking price last year – twice the average over the previous decade according to Hamptons International. This highlights both the strength of the market but perhaps also the impact of a shortage in stock, not to mention the purchasing power of house hunters. Thumbs up and special thanks to QE infinity.
Divergence is the theme because inflation is ripping through Europe too but the ECB members are keeping their cards closer to their chest. What was the number? Eurozone inflation rose to 5% in December, reaching a two-decade high and fuelling angst in the market. Will the ECB follow in the footsteps of the Fed and reduce stimulus? I doubt it and most economists agree (at least those polled by the FT) who believe net asset purchases will continue for another two years – the QE train continues in Europe.
One of the challenges Europe faces is the interplay between the trend to decarbonise and the supply of fossil fuels – a conundrum we highlighted in our recent UK talking series which we delivered around the country. And we are not alone in highlighting this issue. Isabel Schnabel, the ECB executive responsible for market operations has recently opined that the transition away from fossil fuels to an economy characterised by lower carbon “poses measurable upside risks to our baseline projection of inflation over the medium term”.; No major shift will be easy, especially this one and it’s for this reason we don’t expect a drop in the price of oil in the near term.
Consumer sentiment in Japan deteriorated in December, down for the first time in four months. Despite dampening consumer sentiment, Japan's manufacturing activity grew for an 11th straight month but at a slower pace than in the prior month. What was the exact reading? Japan Manufacturing Purchasing Managers' Index (PMI) in December fell to 54.3 on a seasonally adjusted basis, easing from the previous month's 54.5. How about services? It expanded at a slower pace in December dropping to a seasonally adjusted 52.1 from the prior month's 53.0, which was the highest reading since August 2019. Finally, core consumer prices in Tokyo rose at the fastest pace in nearly two years in December as electricity and fuel costs surged due to higher global energy prices, demonstrating that Japan is facing some of the same challenges as some of their other developed markets peers. But never fear, the fiscal and monetary one-two punch will stay firmly front-and-centre, hence part of the reason we remain optimistic on Japanese equities.
The Chinese have been resisting launching too much stimulus, and probably correctly so. They are all too aware of the mistakes which the US made going into the Global Financial Crisis and the excesses in credit markets which contributed – so they have been a bit contrarian in their policies of late, in an attempt to avoid a credit crunch. Now a growing number of economists are predicting the People’s Bank of China will cut banks’ required reserves as well as policy interest rates in the near term. Why? Fresh COVID outbreaks, weak consumption, and problems in the property markets will be contributing factors. Could we also witness some extra fiscal spending in 2022? Perhaps, as China attempts to counter-balance the US withdrawal of QE. In fact, I think that’s good wager to make.
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