Investment Management –

Market Musings

Our Co-CIO, Gregory Perdon shares insights from across the globe, key market developments, and recent Investment Committee decisions in this year-end edition. 

USA

I’ll admit, I find news stories predicting impending doom and gloom due to US government shutdowns boring. It always feels like unnecessary political drama. Case and point - the Senate passed a short-term government funding bill and sent it over to the White House for a good old ‘John Hancock’ by Joe Biden. The bill gives the Democratic majority authority to increase the borrowing limit.  In other words, the federal government will stay up and running, which is good news for markets but definitely no surprise for this old hand.

But the real action is taking place a few blocks away at the Federal Reserve (Fed) where the big cheese (Chair, Jerome Powell) is saying the US central bank will act more quickly to dial back monetary support. Why? They are concerned about inflation persisting into next year. It appears the term ‘transient’ inflation (which was previously delivered with such confidence) is now out of the lexicon! All eyes are on the forthcoming meeting (14-15 December) for clues on the rate and scale of the reduction of bond buying, otherwise referred to as tapering.

And finally, let’s close on employment because it really does matter for markets. The US economy created far fewer jobs than expected in November, but the overall unemployment rate fell sharply to 4.2% from 4.6%. This is good news and just what the Fed wants to see as it prepares to reduce stimulus and eventually hike interest rates.

UK

“Keep ‘em guessing” is that the strategy being employed by Michael Saunders (external Monetary Policy Committee (MPC) member) as it relates to whether the BoE will raise rates in December? What is holding him back, even though the inflation figures are way beyond expectations? The uncertainty around Omicron. My two cents - raising rates by 15bps (to 25bps) can easily be digested by the markets (and borrowers) so let’s not make this too dramatic. The reality, however, is that a hike is now off the table as the government has actioned Plan B and we’re all back ‘working from home’.

But could Omicron drive prices ‘higher for longer’ as the shift back to service from goods takes more time? This is the concern expressed by Catherine Mann, who joined the MPC of the BoE as an external member in September. Maybe she’s right but I don’t think we need any more doves in the halls of the BoE as inflation will probably persist into the new year.

Finally, UK housing continues to rally without looking back, despite the tax breaks on buying coming to an end… What’s the number? House prices up 10% from a year ago and almost 15% above March 2020 levels when the pandemic struck, not bad. Just please don’t forget to send a Christmas card to the QE factory called the BoE for the helping hand!

Europe

Inflation is on the up-and-up in the Eurozone, rising to 4.9% in November - a record high since the single currency was created more than two decades ago. It’s a sharp jump from expected inflation of 4.5% and will almost certainly put pressure on the European Central Bank (ECB) to act.

So, what does the ECB have to say about it? Not much! Christine Lagarde has commented that the ECB is unlikely to increase interest rates next year, calling the current rise in inflation a passing “hump”. I think that’s overly and unnecessarily brave. It’s difficult enough to predict three months in the future, never mind 12. I just hope for her sake she won’t have to retract her words. We remain underweight the Euro.

Japan

More confident talk from another central banker – this time, Kuroda – the boss of the Bank of Japan when he was quoted as saying, “I’m quite sure that Japanese economy would overcome the impact of Covid-19 in coming months and would be on the recovery - and growing-phase within a couple of months.” I admire his confidence!

This as GDP was reported to have contracted by an annualised 3.6% in the three months through September. The market was only expecting a 3.1% slide, which begs the question: is the impact of the virus lingering longer than expected?

That said, the Japanese jobless rate fell to 2.7% in October and finally the services Purchasing Managers Index (PMI) rose to a seasonally adjusted 53.0 from the prior month’s 50.7, which is all very encouraging. We remain overweight in Japanese equities.

China

The first big trend of note out of China is around the sell-off in the tech sector, spurred by increased regulations and more recently, the announcement that ride-hailing company Didi will start the US delisting process. Many investors, including our Investment Committee, are circling the sector looking for upside. The second area to keep an eye on is the property market. There was an official default by the property company Evergrande - finally. The agency Fitch cut their rating over its failure to meet two coupon payments after a grace period expired. This begs the question, should we be looking east for a potential buying opportunity in Asian high yield? I think yes.

Finally, what does Berkshire Hathaway’s Charlie Munger has to say about Bitcoin? “I wish they’d never been invented,” he said. “And again, I admire the Chinese, I think they made the correct decision, which was to simply ban them [cryptocurrencies]. In my country, English-speaking civilization has made the wrong decision. I just can’t stand participating in these insane booms, one way or the other.” I don’t agree with Charlie, but I certainly do listen.

 

In closing, on behalf of all of us at Arbuthnot Latham we would like to wish those celebrating a happy Christmas, a joyous holiday season, and much success in 2022!

 


Arbuthnot Latham in the Press

Our views on the ending of Quantitative Easing as reported by Bloomberg: https://www.bloomberg.com/news/articles/2021-12-06/boe-reaches-end-of-road-for-qe-unloved-tool-with-uncertain-fate

We speak with the Wall Street Journal about the trading opportunity in currencies such as the British Pound and Japanese Yen: https://www.wsj.com/articles/falling-dollar-shows-resurgence-of-infamous-carry-trade-11638268315

ALIM’s views on the impact of the Omicron variant on markets in the Financial Times: https://www.ft.com/content/5b8ab241-09d9-4435-996f-ec2c708fbc6e

 

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Author -

Gregory Perdon

Gregory Perdon

Co-Chief Investment Officer, Arbuthnot Latham

gregoryperdon@arbuthnot.co.uk

+44 (0)20 7012 2522

Gregory Perdon has served as Arbuthnot Latham’s Co-Chief Investment Officer since 2011. He is Co-Chair of the Investment Committee, specialising in managing global cross asset mandates. He is also responsible for the firm’s Thematic Investment Research. He is regularly quoted in the financial press, guest hosts on Bloomberg Radio & TV and frequently serves as moderator, panellist or speaker at investment conferences in the UK and abroad. Gregory started his career at Oppenheimer after graduating from the American University of Paris in 1997.

Married, with four children, he enjoys raising funds for charities by climbing 4000m mountains in the Alps. Gregory holds both French and American passports, is a Chartered member of CISI and was named by Citywire as one of the Top 100 most influential wealth managers in the UK.

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