Growth

When I was studying economics at university, the theories of John Maynard Keynes were to the fore. His ideas changed the way economics was practiced by politicians the world over. His idea that investment would produce more consumption and more wealth is known as the ‘multiplier effect’. He expounded that public expenditure should supplement private investment in times of distress. Keynes ideas were somewhat relegated by Milton Friedman’s direct criticism and monetarist economics, with the control of money being at its centre. Nevertheless, Keynes was the man who was the main advocate for the US Lend Lease programme, the post war loan from the US to Britain, the IMF, the World Bank and of course Bretton Woods. Many argue that Keynes and Churchill were the two greatest Britons of the 20th Century. Churchill the political and Wartime leader and Keynes the transformational thinking economist. Indeed, Churchill admitted he much regretted not taking Keynes’ advice not to return to the Gold Standard in the 1920s. So, in a modern context why is growth so elusive? With high debt levels, everyone wants growth to promise a better life. There are, as always, many reasons. I have listed eight that I feel are key.
  1. How growth is measured: Yardstick economists use the Gross Domestic Product (GDP), the aggregate value of goods and services produced by a nation. However, the components differ like apples and pears. Take the workers in the NHS. The aggregate of nurses’ work and the 800 diversity officers in the NHS cost £40m in employment. One saves lives and the other does not, perhaps making them more complicated. Yet they have an equal pro rata GDP impact. Similarly, a manufacturing based economy, such as China can be measured more accurately than a service-based economy such as the UK.
  2. Balance between investment and consumption: Short-termism has led to an imbalance in favour of consumption. This leads to poor infrastructure and an economy overdependent upon imports at the expense of efficient domestic production. Also, investment is carried out differently. The UK has an appalling record in cost escalation and delays for major infrastructure schemes such as HS2. French participants in the construction consortia on HS2 could not understand why it was costing 5x a comparable line in France. The answer was all the environmental red tape and use of cuttings to diminish noise.
  3. Rush to net zero: Just look at the green taxes on your energy bill and manufacturing costs in the UK compared with elsewhere. Aside from the CO2 arguments, we are essentially replacing relatively abundant and cheap sources of energy with more expensive new systems that have hidden costs. Additional diverted capital inputs are not producing any greater output so lower growth is achieved despite short term employment opportunities (this kit comes from China; we just put them up and sell them).
  4. Extreme ESG finding its way into all forms of life: This enables a country to export all the high carbon tasks overseas and claim it is carbon neutral. Then, it imports dirty overseas products without spoiling ESG data. How bizarre you can export jobs in this way. The authorities are only just waking up to this.
  5. Education standards: The Government crows about rising educational levels of school leavers but there are huge flaws in our system. Too many university courses are of no real value and too few students are taking a work-related alternative. Numeracy is way below standards in the Far East, too few scientists and engineers; then there is the rising numbers of pupils who never attend school at all.
  6. Immigration: An emotive subject as we are told it is essential to provide growth with an ageing indigenous population and low birth rate, but it seems to wed us to low skilled immigration and depress wage levels. The figures themselves are anything but accurate. Official estimates of EU workers in the UK in 2016 totalled 3.7m, yet 5.6m workers of EU origin applied to remain in the UK. Estimates of illegal migrants range from 2m to 5m. Modern slavery for those people without legal right to live in the UK is a continual problem. None of this will be recorded in GDP figures. Numbers discussed are net immigration, gross immigration is more revealing. Last year 450,000 Britons left the UK. Professionals seeking a better life overseas, with doctors going to Australia as an example and retiring people leaving for sunshine and low pension taxes. If we look at employment vacancies, these have been stubbornly around 1m for several years.
  7. Non-productive spending: That is not waste in the UK economy counted as GDP but spending with limited impact on the economy. Here we have defence spending. It does bring employment to the UK (and there are export and import aspects) and it is essential, but overall, the UK at 2% of GDP has a much higher defence spending than its peers in Europe. This is spending that otherwise would go on more productive works. Seems illogical giving aid to India, when their Government spends vast amounts going to the moon whilst neglecting the undoubted poverty in parts of that nation. A better system would be to give aid in kind, with gifts of British goods or services that have created some manufacturing or service activity here.
  8. Culture: An innovative nation no doubt, but the last 20 years have seen more red tape and especially a risk averse regulatory environment. That is why 50% of US citizens own shares and only 19% do in the UK. It is why UK pension funds only hold 2% in UK equities. The desire for regulators to be overprotective to the consumer is a very negative factor.
So, there you have it. A range of reasons for low growth in the UK and by no means an exhaustive list. A lot of work is needed to reverse this as speedily as possible.   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, January 2024

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As we enter 2024 the markets are treading water, as the global economic landscape appears poised at a critical juncture. After a strong market rally in December, the US Federal Reserve provided the clearest signal so far that interest rates have peaked. This gives the assumption that inflation was tamed, with some pundits expecting interest rates to start being reduced early in the second quarter of 2024. In the US… The economy remained robust whilst inflation was falling, thus allowing the Federal Reserve Board to manage a lowering of rates with the expectation of avoiding a recession. One thing to note; when the rate cutting cycle starts, history has shown the US usually goes first. In the UK and Europe, similar expectations ensued for inflation and interest rates, but the difference is that those economies are weaker than the US. This means that interest rates must fall to provide support. In Europe… The European Central Bank’s Christine Lagarde has said she thinks rates have now reached their peak. Legarde believes the euro zone has passed the hardest and worst part of the inflation battle and that rate cuts can start once the data confirms this. However, the question remains ‘Are we over the worst or is this as good as it gets, will 2024 be a year defined by a silver lining or still confronted by headwinds?’. From the recent US consumer price inflation figures, for now the narrative from the Fed is hawkish, this could drive bond yields higher and risk assets lower. This inflation reading could affect expectations, regarding the next move in monetary policy, the anticipation for an interest rate cut in March has now subsided. However, economic concerns should not stop investment, even though we could see further volatility throughout 2024.This volatility could provide a great opportunity to pick up reasonably priced shares. My Thoughts I feel that equities are likely to perform better in the first half of this year with the UK benefitting due to valuations being lower than other markets. We could also see investors diversify out of cash. 2024 is going to be an interesting year, especially as many countries (including the UK and the US) have elections - although historically elections have had little impact on the markets. Wishing you all a Happy New Year and remember investing diversification is as important as ever.   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 2024

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Some observations

Autumn 2024 is set to see a Presidential election in the USA and a general election in the UK and in both cases, opinion polls are currently indicating that change is afoot. By the end of the year, US President Trump may apparently be greeting UK Prime Minister Sir Kier Starmer to discuss the great affairs of state and international politics. Elections always affect stock markets, due to the increase in uncertainty and this is particularly so at present, given the history of President Trump’s first term and the longevity of the UK Conservative government that we are told is to lose power. Elections and the changes they bring can have huge effects on domestic and international economic policies, but perhaps surprisingly, there is little evidence that they have much medium or long-term effect on stock markets. A recent study by US Bank of the short-term effect of US Presidential elections showed that in the year leading up to an election, the total return from US equities and US bonds were on average lower than in non-election years, at +6% vs +8% for equities and +6.5% vs +7.5% for bonds. This however is typically recovered very quickly, so that for the past 10 elections, spanning the 40 years going back to President Ronald Reagan, on eight occasions the following year showed stronger performance and on only two did it show weaker performance. So, if that pattern were repeated, we should perhaps expect this year to be volatile and nervous as it wears on, but 2025 to give compensating strong returns and the net impact of the Presidential election would be inconsequential.

But what of the UK?

The Conservative Party has been in power alone or in coalition for over a decade, so the changes of direction of policy under a possible Labour government could be very significant. History however again suggests that any effect on stock markets is likely to be short lived. When John Major was re-elected Prime Minister in 1992, the period leading up to the election had seen weak stock markets and this reversed in the six months after it. However, in all subsequent five general elections leading up to Theresa May in 2017, post-election the Stock Market quickly resumed the direction it had been following previously. Boris Johnson’s election in 2019 was of course followed by the arrival of covid and so broke the trend. In many ways, that is probably the lesson of these observations; do not worry about elections, there are more significant effects at work that certainly will influence stock markets and we should spend our energy looking instead at those.   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 or contact me direct: peter.land@capitalfinancialmarkets.co.uk Peter Land, January 2024

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Stock Market Review

by Paul Coffin
Markets saw a good recovery in the last quarter of 2023 and improved sentiment has carried over into 2024. The reason was a change of consensus over the future direction of interest rates. For most of 2023 we had been expecting inflation to fall, pointing out that we did not expect interest rates to go higher. As inflation data came out much lower in October first in the US and then the UK, the markets began to believe that inflation was under control and that there could be scope for rate cuts in 2024. As of writing, banks have begun to reduce borrowing and mortgage rates. We expect base rates to fall to 4% by the end of 2024, 1.25% lower than they currently stand. Indeed, they may end up slightly lower. This news was good for shares as is usually the case and many stock markets rose between 5% and 10%... In the UK there has been much comment about the London Stock Market being in poor shape. It is certainly true that the Government needs to boost reasons to own shares. Firstly, they need to allow pension funds to hold more shares and to encourage private investors. To encourage this Capital Gains Tax should be cut and taxes on dividends reduced. Regulation needs to be reduced so that investment managers decide where to invest not regulators... The full commentary is available in the CFM Quarterly Newsletter sent out to our clients. If you would like more information on this and becoming a client please contact support@capitalfinancialmarkets.co.uk 

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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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