Inflation news better than feared

As I began to pen a few words for this month’s quarterly report, news broke that the headline inflation in the UK dropped sharply in June. Down to 7.9% from 8.7% the previous month. This was indeed better than had been expected and the market had a strong rally, with the FTSE100 closing +134 on the day (19th July). It may however be too early to describe a drop in CPI from 8.7% to 7.9% as a decisive turning point in the UK’s battle against persistent inflation, but the data at least backs the idea that the trend is finally moving in the right direction. Only last week there was little sign the UK Inflation problems were under control, with Gross Domestic Product (GDP) figures not helping. There was no growth over the three-month period to May, essentially meaning the economy has flatlined. The Bank of England use of interest rate rises to control inflation, may be starting to have an impact, but GDP is showing little sign of improvement.
Where does this leave the Bank of England?
We must now ask, where does it leave the Bank of England. After sending a shock wave to mortgage holders and bond markets with a 50-basis point rise in June, economists now feel that the monetary policy committee is unlikely to repeat this at the next meeting on the 3rd of August. Consensus now points to a quarter point rate rise to 5.25%, with the Bank having hiked rates from their 0.1% record low at the end of 2021. The Bank of England still needs to be vigilant and act accordingly until there is a level of certainty that inflation is back under control. Some analysts are expecting the Bank to now stop hiking at 5.5%.
Effects on the market
This news pushed the FTSE 100 higher, helped by gains in interest-rate sensitive stocks, with a basket of property shares making up lost ground. While the housing market remains under pressure, with prices falling and mortgage costs higher, this reaction suggests an element of relief for the sector. Although current valuations for housebuilders share price is in an extended slump for the market, there is still ongoing demand for rental properties, and migration patterns. These are likely to back the long-term story for UK property.   If you would like to discuss your current investments or future plans we would be happy to schedule a call – Contact details for the CFM team are here and my contact details are: E: stephen.lovelock@capitalfinancialmarkets.co.uk T: 0203 6970561. Stephen Lovelock, July 2023

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How to make a million pounds after the Coronation

With the coronation upon us, I decided to have a look at how Stock markets performed during the reign of Queen Elizabeth II. She came to the thrown on the 6th February 1952 and died on 8th September 2022, 70 years!  During that period the Dow Jones Industrial Average (DJIA), the index which is most used to measure the performance of US stock markets rose by 11,700 per cent! (Eleven thousand seven hundred percent)... Paul Coffin May 2023 For the full article contact us at: support@capitalfinancialmarkets.co.uk   Clients receive a quarterly newsletter with more insights from Paul and the CFM Investment Managers. Contact Us for more details or Sign Up as a client here.

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Stock Market Review January 2023 – April 2023

The FTSE and Wall Street were flat during the last quarter. Markets had been looking for indications that interest rates would stop rising. This did not occur as inflation remained stubborn. However, it has fallen to around 5% in the US. In the UK it is likely to follow that trajectory over the next few months as comparisons to last year’s rises in gas & food prices fall...   Paul Coffin May 2023   For the full article contact us at: support@capitalfinancialmarkets.co.uk   Clients receive a quarterly newsletter with more insights from Paul and the CFM Investment Managers. Contact Us for more details or Sign Up as a client here.

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Interest rate rise

On the 23rd March the Bank of England raised interest rates to 4.25%, making it the 11th consecutive rate hike. This was against speculation that rates may not rise this time, considering the turmoil in the banking sector, caused by the collapse of Silicon Valley Bank and Credit Suisse. So, this recent rate rise means that the Bank of England has put a higher priority on tackling inflation but made comment that they will remain “vigilant” to further issues in the banking sector. The collapse of SVB and Credit Suisse was a crisis not foreseen and this gave the Bank of England additional consideration regarding the sector. With the Governor of the Bank, Andrew Bailey informing MPs that while the bank remained on high alert, he does not think that we are in the same place as in 2007. Since then, we have seen the UK banking sector in a more cautionary recovery with the European banks. So, for now the higher temperature of consumer prices in February (CPI Inflation accelerating to 10.4%), and the tight labour market are cause for concern. This is amid worries that inflation could still become embedded in the UK economy, with inflation for February forecast to be 9.9%.

Inflation and investments

Currently, we are seeing energy prices falling, which will help stop inflation running out of control. However, although inflation is starting to fall in Europe and the US, it is proving harder to control in the UK. Here, the higher-than-normal energy prices, wages, core goods and services trending up and the weak pound has been keeping core inflation figures high. The Bank of England has however stated that they expect inflation to fall sharply over the coming months, which could mean the rate hikes are coming to an end. 2022 was indeed a torrid year, in which bond funds fell in tandem with equities, yet yields effectively doubled, and the attraction is increasing. But while many commentators suggest that 2023 will be the year of fixed income - are strategic bond funds the best way to access the asset class? Is it time to increase exposure to the fixed income market this year? High inflation and rising interest rates have put markets in a volatile state, making investors nervous, with some taking a cautionary stance, by locking in a set income yield now as more attractive than taking a risk with equities. However, investors often forget that bond returns are limited to yield at purchase, if held to maturity and the bond doesn’t default, that is the return you will get and no more. Of course, having a guaranteed yield is attractive in the short term, accepting a set rate now can put investors at a disadvantage, because there is no opportunity for future growth rate. Fixed income is “fixed”, whereas dividends get paid out of nominal corporate cash flows that grow over time in line or above the level of inflation. Investment trusts focussing on companies, that have good positive cash flows which can increase dividends over time could prove fruitful.   If you would like to discuss your current investments or future plans we would be happy to schedule a call – Contact details for the CFM team are here and my contact details are: E: stephen.lovelock@capitalfinancialmarkets.co.uk T: 0203 6970561. Stephen Lovelock, May 2023

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Banking Failures

Are your confused as to why we have so recently had a series of individual banking failures? With the emergence from the Covid 19 lockdowns one might think that banks would participate in an economic recovery. With interest rates having risen from ridiculously low levels, that should be music to the ears of any banker who is slow to pass on any rate rise to depositors. In general, our domestic banks should be enjoying that backdrop and they clearly are. So why has there been a banking crisis with the failure of specialist and regional banks in the US and the end of a major Swiss bank; Credit Suisse, in that bastion of high grade international banking, Switzerland. The answer is simple, we have left the sunny landscape of low interest rates that have been such a distorting factor for so many years. Cheap money and the printing of money by central banks everywhere has led to an artificial world that engenders the miss allocation of capital. Take Silicon Valley Bank in the US. Cheap money and overvalued tech businesses led to inappropriate investments by the bank. Indeed. The 16th largest US bank went out of their way to invest in diversity and sustainability that left it unable to withstand a limited run from depositors who felt nervous. Poor capital allocation, facilitated by cheap money was the cause - and the same ills perpetuate the existence of zombie companies who eventually cannot cope when interest rates rise from unimaginably low levels. If one was picking a lame duck bank that might be in that category, then Credit Suisse was at the top of most people’s list. Of course, banking is not the only sector affected this way and it is no surprise that general insolvencies are rising as the capital miss allocation and the sustaining of zombie businesses in general is exposed.

Inflation

Now let’s turn to inflation, which has reluctantly pushed central banks into raising interest rates. It seems that the current orthodoxy as set out by the International Monetary Fund (IMF), is that we will soon return to low interest rates and all will be well. The Bank of England now forecasts that inflation in the UK will be down to 2.9% by the time the year concludes. If they are right, that is great, but why should we believe an institution that has always been behind the curve and thought that early inflation was just ‘transitory’? Sure, in the USA, inflation is down to 5%, but that is no guide for the UK. Energy induced inflation has always been much more limited in the US, as it is virtually self-sufficient in oil and gas production. The Government has seized on the Bank’s projections in its negotiations with the Health Unions and their claims for wage growth to match inflation of 10%+. It has been offering a much lower settlement for this year, sometimes with a cash sweetener and a figure around 5% for next year. This is well above the level expected by the bank which is suggesting inflation will fall back to the Bank’s 2% target range in 2024. History tells us that inflation can become more embedded in the economy, and we will have to see if these projections are at all realistic. If not, there will be lots of unhappy health workers in the NHS. I have to say I think so many of the public sector Unions are playing a political game, with sometimes excessive claims that are not backed by the facts. They seem unwilling to entertain any changes to working practices that would produce productivity gains to offset increased wages.

Pricing Power

Inflation leads inevitably onto pricing power; the ability of companies to recoup inflationary cost pressures quickly. This is a key factor that investors need to focus on. I see a whole range of companies with quite different abilities to do this. Take the simple distributor, it can be building supplies, electricals, feedstuffs for farmers and general wholesaling. If the price they pay for goods goes up, then straight away, so does the price they charge their customer. Other businesses are often less fortunate. They may have to wait a year to recover the inflation they have already seen in input costs over the past year. Competition may be too intense. They just do not have pricing power. Exclusive products that the customer really wants is the characteristics that you want to see in companies that you invest in. Moreover, the ability to hold onto those higher prices if commodities, such as energy, or steel actually fall, so margins can improve. History also teaches us that pricing power is even more paramount when economies slip into ‘stagflation’. No growth is often the product of debt-ridden economies, where inflation cannot be tamed. Investors need to watch for this risk, which in some ways can be worse than a short sharp recession which purges the system of its weaknesses.

Outlook

Despite all these troubling features, one should not forget that the UK stock market remains very cheap relative to others. Hence, we are likely to see continuing bids for UK listed companies from overseas sources. Pressure on Government finances is unlikely to be easy to manage going forward. There are plenty of cases where a combination of neglect and misallocation leaves much to do. The simple pothole problems in British roads is a fine example. Higher interest rates mean higher Government borrowing costs and we now have to face the realisation that defence spending throughout the Western world has been too low. Putin’s attitude and actions have led to an abrupt change in defence needs. We have a much smaller navy than should be the case for the new world. The army has been culled and it takes a long time to turn those weaknesses around, At least a decade in my view, in which case this sector remains one of my prime sectors for selecting shares. Returning to banks, everyone has seen the reluctance to raise deposit rates and with the constant fall in the savings free slice for interest receipts, there are good reasons to look at short dated low coupon gilt stocks. These are now offering quite attractive capital gains, which are tax-free and low running income that may be increasingly taxed. These may be a better home for cash balances and capital can be accessed very quickly from any sales in what remains the highest calibre investment in Britain.   If you would like to discuss your current investments or future plans we would be happy to schedule a call – Contact details for the CFM team are here and my contact details are: E: barrie.newton@capitalfinancialmarkets.co.uk T: 07977 784167 Barrie Newton, May 2023

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Happy New Year from all at CFM

A new year a new start and so far it is a good one. On the first day of the new quarter the FTSE 100 was trading at a 9-month high. This is partially reflecting the low price of UK stocks relative to their global peers and the concentration of oil, commodity, and pharmaceutical stocks which investors have switched to from tech stocks. In the UK there have been good trading statements about high street sales and even some bid speculation which has not been seen for a while. Oil price is down 16% this quarter. Prices at the pump have started to come down, although not quickly enough. Gas prices are down 30% this quarter. Eventually this will help disposable income as the year progresses.  

Market Review October 5th 2022 to Jan 5th 2023

Markets improved from their October lows. The FTSE 350 up 9%. The US stock markets were mixed S&P 500 up 1% and the Nasdaq which contains technology and biotech stocks down 7%. The HSBC MSCI World ETF ended the quarter -2%. In short UK stocks outperforming and global stocks slightly down. This will be reflected in your portfolios where we favour UK and higher yielding stocks.

  For more comment please see Outlook for 2023 and the three themes I see as key: Inflation and the direction of interest rates; and Technology Disruption   Paul Coffin January 2023   Clients receive a quarterly newsletter with more insights from Paul and the CFM Investment Managers. If you would like to join us as a new client you can do here Or, if you would like to talk to one of our Investment Managers please email: support@capitalfinancialmarkets.co.uk

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Inflation and Interest Rates

The market is still expecting further interest rate rises in the UK, US and Europe. The US and EU central banks have both said that they will continue to raise interest rates. The UK is also minded to. In the UK post-Christmas trading statements for Next and B&M are strongly indicating that the consumer still has money to spend. This may be because although we are all finding it hard, a lot of people still have savings from Covid.   Paul Coffin January 2023 For related comment see Stock Market Review, Volatility is also an Opportunity & Inflation, Cost Push, Strikes, Wars et al   Clients receive a quarterly newsletter with more insights from Paul and the CFM Investment Managers. If you would like to join us as a new client you can do here Or, if you would like to talk to one of our Investment Managers please email: support@capitalfinancialmarkets.co.uk

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Technology Disruption

ChatGPT is a new Artificial Intelligence search engine linked with Elon Musk and Microsoft. You can test it out now if you go to their website. Essentially the software has become very advanced, it can answer most questions you enter. You may have read in the news that it can write essays and create drawings. Whilst there are concerns, it will also be a massive step forward for efficiency. It was opened to the public in November/December and already Microsoft have announced they will add it to their web search ‘Bing’. This will create massive competition for Google and may even relegate them. The underlying technology is what is going to drive cars in the future, control factory production lines and advance medicine. It will be an interesting one to watch in 2023.   Paul Coffin January 2023 For related comment see Stock Market Review,Volatility is also an Opportunity & Inflation, Cost Push, Strikes, Wars et al   Clients receive a quarterly newsletter with more insights from Paul and the CFM Investment Managers. If you would like to join us as a new client you can do here Or, if you would like to talk to one of our Investment Managers please email: support@capitalfinancialmarkets.co.uk

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Outlook

Generally, I see the outlook improving as the year progresses due to stabilising or falling interest rates. If interest rates are kept higher for longer this will prolong recovery. UK manufacturing has now effectively been in a recession for 9 months so in my view the Bank of England is behind. In China you will have seen the Covid protests. Although these were cracked down on, the result was the complete reversal of China’s Covid strategy, and they have now stopped lockdowns. Although sensible this could be viewed as a sign of weakness on Xi’s part which may incentivise protests on other issues. Whilst in the long term this could be a good thing for the West, if a more friendly governance were to follow, it could mean volatility for financial markets. I imagine there is a low risk of this scenario, but it is one to look out for.   Paul Coffin January 2023 For related comment see Stock Market Review, Volatility is also an Opportunity & Inflation, Cost Push, Strikes, Wars et al   Clients receive a quarterly newsletter with more insights from Paul and the CFM Investment Managers. If you would like to join us as a new client you can do here Or, if you would like to talk to one of our Investment Managers please email: support@capitalfinancialmarkets.co.uk

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Despite all the doom and gloom, there is some positivity in 2023

2022 was a very tough year for most investors ending with high inflation, higher interest rates and moving into a recessionary environment. Many were predicting that the global recession will continue into 2023. The best recession indicator is the inverted yield curve with the US two-year Treasury note continuing to offer more (4.2%) compared to the US 10-year (3.6%). For clarity, the inverted yield curve has emerged roughly a year before all recessions since 1960. On top of the cost-of-living crisis the UK was also hit by numerous political crises which added to the turbulence for domestic investors. The biggest crisis, being when Liz Truss and her then Chancellor attempted to put through a growth stimulation package in September, announcing billions of pounds of unfunded tax cuts. This sparked the biggest sale of the pound and gilts in almost 35 years, forcing the Bank of England to intervene. As we move into 2023, I’d argue now is not the time to run for cover. Yes things could become cheaper, but many asset classes have been hammered already, to the point where valuations are already looking attractive from a long-term investment perspective. I also feel inflation may now have peaked and will start to fall back in 2023, although it is unlikely to be near 2% in the UK any time soon. Sectors that could prove fruitful are energy and utilities. As a result of further pushes into alternative approaches companies in this sector are going through a complete change. Healthcare and Financial also look good as sectors to have exposure to. There are also the traditional UK equity income funds, once the bedrock of many an investor’s portfolio. Despite all the doom and gloom, there has been some positivity. With a quarter of Fund Managers predicting the prospect of an end of the war in Ukraine there is a cause for optimism. 19% remain positive about the opportunities in undervalued companies. This along with the recent announcement of China’s relaxation of its zero Covid policy, add to the potential stimulation of global growth. However, 2023 will probably be a difficult year, and volatility will continue. My final message is not to let uncertainty give way to pure pessimism. Markets have already fallen significantly, but you only lose money if you sell and crystallise your assets. Long-term investors must see through these very trying times and recognise volatility is also an opportunity.   If you would like to discuss your current investments or future plans we would be happy to schedule a call – Contact details for the CFM team are here and my contact details are: E: stephen.lovelock@capitalfinancialmarkets.co.uk T: 0203 6970561. Stephen Lovelock, January 2023   For related comment see Stock Market Review & Inflation Cost Push Strikes Wars

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