Our Spring Budget Newsletter breaks down the Chancellor’s recent announcement, outlining what it means for you and helping you to plan for the new tax year – which is almost upon us.
When The Balloon Goes Up
When The Balloon Goes Up
Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services
A new term has entered the financial market lexicon, “geoeconomics”. Financial markets have long learned to live with geopolitics, a redrawing of the political map, but have historically found its evolution difficult to price properly, preferring instead to focus on perceived outcomes and the assessment as to how they might impact on economies and by extension financial assets. But what happens when the worlds of geopolitics and economics become inextricably entangled? Geoeconomics, a portmanteau word combining the two is a suitable term for developments on the world stage to which financial markets can no longer turn a blind eye. Critically, and this has become obvious as the war in Ukraine passes the anniversary of its initiation, economics is no longer a part of the fallout from geopolitical events, but an intrinsic feature.
Financial markets have entered a state of persistent reappraisal, adjusting to each move on the chessboard…
Financial markets have entered a state of persistent reappraisal, adjusting to each move on the chessboard as great power competition plays out. Having enjoyed the best start to any year for over two decades in early 2023, markets have become more circumspect over February. The discovery of what were purported to be spy balloons over North America caught the imagination of the general public, in one part for what they might signify and another for what feels like an anachronism, a throw-back to a world before satellite technology and hyper-connectivity. Whatever their purpose, the balloons have served as a portal through which can be glimpsed profound tectonic shifts, a crunch as political landmasses collide, abrasively, against each other.
Early 2023 idealism associated with inflationary pressures that were thought likely to have peaked, an economic “soft landing” and consumers’ capacity to digest and withstand higher interest rates and a higher cost of living, the Chinese economic reopening and the fortuitous benefit of a relatively mild European winter, have run their course. Markets have spent much of February casting about for, if not a new theme, then the validation of early year enthusiasm. What is interesting is the extent to which investors, whilst only too relieved to participate in the rally in financial asset prices after a dismal 2022, remain cautious regarding near-term prospects. Stock and bond prices have risen, but sentiment is brittle even as worst-case expectations as they pertain to the real economy have been sidestepped.
Having failed to unearth a new catalyst, the market’s tone has pivoted. Recessionary conditions, although postponed, have not been cancelled. Inflationary pressures although on a slowly descending path are proving sticky and hard to budge. Central banks the world over have raised interest rates aggressively in an effort to suppress demand, but labour markets remain tight and households are, for now, weathering the storm. Senior officials whose job it is to oversee the prosecution of monetary policy have insisted that there is to be, for now, no let-up in their vigilance and rates will continue to grind higher. In response, the mood across financial markets has flipped, investors no longer interested in how high, but how high for how long? Meanwhile, the world’s geopolitical (geoeconomic) flashpoints, in particular Ukraine and Taiwan, remain a profound cause for concern.
Thus, it is the interlinkage existing between diplomatic, political and now, sadly, military ambitions umbilically associated with economic dominance and the control of scarce resources through supply chains that form the basis of geoeconomics and the tail risks associated with higher for longer inflationary pressures that have served to shatter market complacency into a million pieces. Much will have to go right and very little to go wrong if all the king’s horses and all the king’s men are successfully to put humpty together again. It seems as if globalised ambitions and the fostering of “togetherness” are little more than a relic of yesteryear. A new era of multipolarity and fragmentation has dawned, central to which lies an increasingly ambitious China. Shrugging off the rebukes of US Secretary of State Mr Anthony Blinken and UK Foreign Secretary Mr James Cleverly in Munich, China’s top diplomatic official, Mr Wang Yi went hot foot to Moscow, thought likely the precursor to another summit between President’s Putin and Xi before too long.
How best to position for the redrawing of the map is surely the biggest challenge facing investors in the world’s financial markets. So profound are the uncertainties that few will argue against the cautious (defensive) positioning forming the bedrock of portfolio construction until such time as the dust settles. And settle the dust will, even if it takes time. Financial markets are both endlessly resilient and resourceful. The consequences of events now moving at warp speed will take time properly to digest and discount, but this will happen and when it does the opportunities created will likely prove both substantial and long-lasting. As we search for these opportunities it is this that keeps us both optimistic and constructive for the longer term.
A new era of multipolarity and fragmentation has dawned…
Important notice: This “Marketing Communication” is not an official research report or a product of the Raymond James Research Department. Unless indicated, all views expressed in this document are the views of the author(s). Authors’ views may differ from and/or conflict with those of the Raymond James Research Department. The author is not a registered research analyst. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Past performance may not be indicative of future results. Neither Raymond James nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. The information in this document does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. With investing your capital is at risk.
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2023 Outlook
Our latest Investment Strategy Quarterly discusses the potential opportunities and challenges the new year may bring. With features broadly assessing the outlook for 2023, from an analysis of global developed markets to a search for context and opportunities against the backdrop of an economic slowdown. Read all this and more in Investment Strategy Quarterly: 2023 Outlook.
Budget Newsletter
The line between Statements and Budgets has blurred in recent years. Chancellor Jeremy Hunt’s second major announcement was designated as an Autumn Statement, but it will have a greater financial impact than most Budgets. A broad range of tax increases and spending cuts ensures that will be the case, regardless of the Treasury branding.
Peace in our time?
Peace In Our Time?
Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services
“Change is the law of life. And those who look only to the past or present are certain to miss the future”
– John F. Kennedy
Even those with the longest careers in the financial markets are struggling to remember a year quite as tumultuous as 2022 has proved to be. Military conflict in Ukraine and sabre-rattling over Taiwan have made headline news all year and served to intensify volatility across all international financial markets. Product shortages and lingering supply chain disruptions, the consequence of Russian retaliation to the imposition of sanctions imposed by the US and its NATO allies on top of the Covid pandemic’s unwelcome legacy have exacerbated inflationary pressures. This has forced the world’s central banks to raise interest rates more aggressively than at any time in the past four decades, in turn imparting downward pressure on global economic activity and acting as a tough environment for financial assets.
On top of this already uncomfortable backdrop, the world looked on aghast as political turmoil tore apart the United Kingdom’s ruling Conservative Party, a turmoil that resulted in the sudden termination of Ms Elizabeth “Liz” Truss’ short-lived leadership and the eventual elevation of the former Chancellor of the Exchequer, Mr Rishi Sunak, as Prime Minister. Given the turbulence characterising the gilt-edged market and sterling’s plunge to epochal lows on the foreign exchanges, the new administration had to act fast to steady frayed nerves and head off a crisis that, in a highly dramatic turn of events, at one point threatened to engulf the country’s pension industry.
…the world looked on aghast as political turmoil tore apart the United Kingdom’s ruling Conservative Party…
One of the first decisions taken by Mr Sunak and his Chancellor, Mr Jeremy Hunt, involved scrapping almost everything remaining in the former Chancellor’s ill-thought-out and unfunded 23rd September “mini-Budget” even after Ms Truss’ high profile “U”-turn. The new administration has, instead, reverted to a fully costed Autumn Statement now scheduled for 17th November. Whilst the likely combination of tax increases and spending cuts may cause discomfort (and likely serve to intensify opposition parties’ clamour), financial markets have reacted favourably to the promised return to fiscal policy responsibility.
To recap, the gilt-edged market experienced a period of intense volatility in the early part of the month, with unprecedented daily moves a regular feature of a normally staid and sober market. UK government bond market gyrations horrified investors, in particular those overseas investors deemed essential to the necessary financing of the country’s substantial twin deficits. Immediate evasive action was required as a matter of urgency, in response to which gilt-edged yields fell sharply and sterling recovered its poise.
This does not mean that the UK is out of the woods. Financial market pricing implies that investors continue to demand a premium for committing to the UK’s government bond market. An estimated £30bn “fiscal gap” still requires plugging, in addition to which adherence to an overhauled set of fiscal rules and policies with the full backing of Conservative MPs will be necessary if faith is fully to be restored. If the rules are deemed too loose and/or policies aimed at achieving them are deemed unachievable the country’s credibility will likely remain on thin ice.
Looking on, the Bank of England is a far-from disinterested observer. Politics and fiscal policy are but two of the interest rate-setting Monetary Policy Committee’s considerations. Irrespective of the domestic economy’s weakness inflationary pressures have proved much stronger and lasted much longer than had previously been anticipated, a strong indication that yet higher interest rates are on the way.
Financial markets are, amongst many things, a discounting mechanism. It is seldom so much a matter of what one knows, as what one doesn’t know!
Whilst the UK’s political crisis has served to drive international events off the front pages, the all-seeing eyes of the financial markets are everywhere. The US Federal Reserve is continuing its rate-raising campaign even as important Congressional midterm elections loom. Elsewhere, Europe is facing an unprecedented energy crisis and further afield, the twice-decade Chinese Communist Party Congress has concluded as expected. President Xi’s historic third five-year term as leader has been confirmed, as has his stranglehold on power. How the political and geopolitical landscape evolves from here remains a challenge to investors, but perhaps not an insurmountable one.
Financial markets are, amongst many things, a discounting mechanism. It is seldom so much a matter of what one knows, as what one doesn’t know! A gloomy backdrop, both for the global economy and the corporate sector is already well known and surely largely fully priced in over what has proved to be a difficult year thus far. But financial markets inhabit the future as much as they reflect the present, a few dark hours now may presage a brighter dawn ahead and it is positioning in anticipation of such an eventuality that should dominate investor thoughts as we move into the final months of the year.
But financial markets inhabit the future as much as they reflect the present, a few dark hours now may presage a brighter dawn ahead…
Important notice: This “Marketing Communication” is not an official research report or a product of the Raymond James Research Department. Unless indicated, all views expressed in this document are the views of the author(s). Authors’ views may differ from and/or conflict with those of the Raymond James Research Department. The author is not a registered research analyst. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Past performance may not be indicative of future results. Neither Raymond James nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. The information in this document does not constitute advice or a recommendation and you should not make any
investment decisions on the basis of it. With investing your capital is at risk.
A time for Finesse
Are you ready for some football? Not American football, but global football—otherwise known as soccer! For the five billion spectators awaiting the start of the 2022 World Cup in Qatar this November, the sport is the epitome of speed and agility. But for the players on the 32 participating teams, it is so much more. The deceptively simple-seeming game requires years of training. It goes beyond the fundamentals of ball control to pitch awareness, anticipation, and making the right decisions under duress quickly.
Growth plan newsletter
What the Chancellor, Kwasi Kwarteng, presented to the House of Commons on Friday was definitively not a Budget; it was ‘The Growth Plan’. The sixth chancellor since 2016 was careful to avoid the B word, despite the huge sums of spending and borrowing that he announced – greater than in most, if not any, real Budgets, let alone mini-Budgets. When the Autumn Budget proper emerges – probably in November or December it is most unlikely to contain anywhere near such a wide range of radical and costly measures as were announced on 23 September.
Financial markets make progress in July against a difficult backdrop
Financial markets make progress in July against a difficult backdrop
Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services
“Not dead, only resting”: The Case for Portfolio Diversification
The investing environment could hardly be more challenging. Global economic activity is slowing, Western developed economies are flirting with recession, inflationary pressures are extremely elevated, and Western central banks remain committed to raising interest rates in a concerted effort to bring them under control. The geopolitical backdrop is still as dark as ever; the war in Ukraine continues, China’s bellicose threats against the United States ahead of House speaker, Mrs Nancy Pelosi’s visit to Asia have become more pointed. Europe faces a natural gas shortage over the coming winter, Dr Mario Draghi’s Italian government has collapsed, while in the UK, the same fate has befallen Mr Boris Johnson’s administration. And yet, despite all of this, Western developed financial markets have delivered positive returns. The FTSE 100 has recorded its best month of the year to date, while the more domestically focused FTSE Mid250 Index has delivered its best return since November 2020.
“The FTSE100 has recorded its best month of the year to date…”
Over in the sovereign bond market, prices have risen sharply, and yields have fallen. The benchmark 10-year gilt-edged yield stood at 2.60% at the end of June but has subsequently dropped to just 1.95%, in line with government bonds elsewhere. Financial markets, it should be remembered, inhabit the future, not the present. Clearly, recent price action confirms that investors are trying to “look through” further near-term economic weakness, persistent inflationary pressures and yet higher interest rates to a more constructive environment beyond.
Strange indeed that we entered 2020 perturbed by, amongst other things, too low bond yields, too tight spreads between risky and core credit and bond markets, sky-high equity valuations and a relentless “value investing never works” refrain. Yet over a tumultuous first half of the year, we saw higher bond yields, wider spreads, cheaper valuations, value outperformance (most notably from the energy and basic materials sectors) and systemic central banks attempting to steamroller everything in their path. Be careful what you wish for!
All the above is etched deep in investor consciousness as we think about the longer-term outlook for diversified portfolio performance. The higher financial asset prices have climbed, the greater the concern regarding future returns from traditional 60/40 portfolios (60% equities, 40% bonds). Until this year, these perturbations seemed not to matter. Global stocks and bonds rose in harmony, humming away nicely and delivering both positive returns and favourable diversification strategies. Then 2022 came along and diversified 60/40 portfolios lost an aggregate 16.5% (for both European and US investors alike), wiping out all gains accumulated since September 2020.
All this raises an important question: Do such large losses achieved with both stock and bond prices moving in the same direction simultaneously mean that diversified portfolios are fundamentally broken in an era of tighter policy? One way in which traditional 60/40 portfolios might be broken is that they simply cannot deliver a reasonable return going forward. Contrarily, though, lower stock and bond prices over the first half of the year have raised, not lowered, anticipated future returns. Is it this realisation that has served to drive July’s revival in investor sentiment and deliver such positive returns? Whilst an audible sigh of relief might be in order, all but the most hardened risk-takers are likely to remain wary, especially in the short term. The IMF has lowered its outlook for global economic activity again, the battle against inflation has not yet been won, the European Central Bank has only just started raising regional interest rates as the US Federal Reserve has delivered back-to-back 0.75%-point rate hikes and the Bank of England is pondering an acceleration in the UK base rate to address domestic inflationary pressures which show few signs of diminishing.
“Mathematically, even if stocks and bonds are now positively correlated, that correlation is still less than 1.”
Does the above suggest that portfolio diversification is dead? Positive bond–equity correlation has indeed proved a feature of the investing landscape in recent years, assisted in no small measure by the geographically widespread monetary and fiscal policy interventions of 2020 aimed at limiting the economic impact of the Covid pandemic and associated lockdowns. Yet, for all this, one should not confuse direction and magnitude. Bonds continue to represent a useful portfolio diversification tool.
Mathematically, even if stocks and bonds are now positively correlated, that correlation is still less than 1. This means that whilst these two asset classes appear to move together, there are still plenty of days in which they don’t. Why this matters is that even a positive correlation can still dampen financial asset
and portfolio volatility. What we see now is important slippage in both trailing and present asset volatility. For portfolio construction, that really matters as it should serve to dampen outsized fluctuations. Thus, despite recent travails, the case for diversified portfolios remains intact. The sharp first-half fall in asset prices has served to boost estimated longer-term returns to their highest levels in almost a decade.
“The sharp first-half fall in asset prices has served to boost estimated longer-term returns to their highest levels in almost a decade”
Important notice: This “Marketing Communication” is not an official research report or a product of the Raymond James Research Department. Unless indicated, all views expressed in this document are the views of the author(s). Authors’ views may differ from and/or conflict with those of the Raymond James Research Department. The author is not a registered research analyst. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Past performance may not be indicative of future results. Neither Raymond James nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. The information in this document does not constitute advice or a recommendation and you should not make any
investment decisions on the basis of it. With investing your capital is at risk.
Deciphering the Market’s Difficult Message
More than 200 years ago, a French military officer stumbled across the Rosetta Stone, a 2000-year-old carving with clues to deciphering the Egyptian hieroglyphs that had puzzled the world for centuries. We don’t exactly have a Rosetta Stone for our perplexing market’s future – no one does. But just as the Rosetta Stone opened a window into Egypt’s mysterious past, we have some clues that might help investors crack the code in the coming months.
Five Months Into The Year
Restoring Credibility
Chris Bailey, European Strategist, Raymond James Investment Services
“The great earthquake shall be in the month of May; Saturn, Capricorn, Jupiter, Mercury in Taurus; Venus, also Cancer, Mars in zero.” – Nostradamus
Every year is different from what you expect, and that is particularly true in financial markets. It is easier to say over the first five months of 2022 which investment areas have lost you money, especially if you also factor in the enhanced inflationary backdrop. There will always be some element of volatility in financial market investment, but it still plays the most essential role in any pension fund portfolio or medium-term financial target. What really matters is maintaining confidence during times of uncertainty.
Maybe some global investors sold in May and went elsewhere, but the fifth month of 2022 showed more gains than losses for the average investor. Whilst the sad events in Ukraine continue, and a number of important global central banks raised their interest rates, a good proportion of both equity and bond investments made money, and even the pound managed – for the first time in a number of months – to hold its value against the dollar.
“… the investment markets of the 2020s are behaving differently from the (typically profitable) 2010s.”
The economic backdrop for all global citizens remains complex, as evidenced by higher living costs. Meanwhile, the average company faces a range of supply and demand issues in a world with heightened geopolitical concerns. Whilst year-to-date challenges are always of enormous importance, the key for any investor is to focus on what will happen next. After all, it is not what you predicted; it is how you react to both and identify the opportunities.
As we all learned during the COVID-19 challenges – which, fortunately, the world continues to move away from (including a number of key cities in China which were materially closed down during the first few weeks of May) – the investment markets of the 2020s are behaving differently from the (typically profitable) 2010s. However, as all investors saw over the last couple of years – this does not mean there are no opportunities, even if there is more volatility and uncertainty. Big challenges, after all, can lead to big changes, too, as seen over many recent decades. And as investment history always tells us, the biggest risk of not benefiting from something is not being involved at all.
“It is easier to say over the first five months of 2022 which investment areas have lost you money, especially if you also factor in the enhanced inflationary backdrop.”
It is not controversial to say that the weather across the Northern Hemisphere should get better over the next few months. Similarly, it is easy to be pessimistic about prospects for financial markets currently. So, a bit like a rainy day during the height of summer, the world has had plenty of emerging challenges over recent years, but it has not been without opportunities too. Nostradamus, after all, has been calling for his great earthquake during the month of May for some time. Every year there is a small one somewhere in the world, and maybe one day, the great earthquake will occur. But it still remains wise to be involved in the investment markets. After all, we will all be hoping one day that it is time to enjoy a comfortable retirement.
As for the investment world, stay thoughtful and be happy
“…it still remains wise to be involved in the investment markets. After all, we will all be hoping one day that it is time to enjoy a comfortable retirement.”
Important notice: This “Marketing Communication” is not an official research report or a product of the Raymond James Research Department. Unless indicated, all views expressed in this document are the views of the author(s). Authors’ views may differ from and/or conflict with those of the Raymond James Research Department. The author is not a registered research analyst. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Past performance may not be indicative of future results. Neither Raymond James nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. The information in this document does not constitute advice or a recommendation and you should not make any
investment decisions on the basis of it. With investing your capital is at risk.