This is what Blue Whale Capital chief executive and chief investment officer Stephen Yiu told Money Marketing.

Yiu, who also runs the Blue Whale Growth Fund, added that the British Isa “is a very bad idea” and he does not believe anyone should invest in it.

During the Spring Budget on 6 March 2024, chancellor Jeremy Hunt announced the introduction of a new British Isa.

Hunt said the British Isa will come in the form of an extra £5,000 tax-free allowance to encourage UK retail investment. The existing Isa allowance is £20,000.

Even with the tax benefit that the Isa adds, Yiu claimed a UK individual would still receive a higher return on investment (ROI) in US shares.

He added that for a person living in the US to have home bias when it comes to investing is beneficial, but not for an individual from the UK.

Yiu explained that UK investors already have a large amount invested in the UK, such as property and shares.

AJ Bell has also reacted negatively to the announcement and called the British Isa an “ill-conceived” idea that will not achieve its objective of encouraging more investment into UK companies.

AJ Bell chief executive Michael Summersgill said: “50% of the money our customers currently invest through their stocks and shares Isas is invested into UK assets, so this new allowance will have no impact whatsoever on their investment behaviour.”

“A tiny minority of people max out their £20,000 Isa allowance each year, but these are the only ones that will see any benefit from the additional British Isa allowance,” said Summersgill.

About two-thirds of the Blue Whale Growth Fund that Yiu manages invests in US companies.

The fund holds such American companies as Charles Schwab, Mastercard, Meta, Visa and Microsoft.

Yiu added that even though these companies are American, the organisations are global and have different locations around the world.

In January 2024, Goldman Sachs head of the investment strategy group and chief investment officer of wealth management Sharmin Mossavar-Rahmani said US equities are an “upward-trending asset class”.

She explained that over the past 15 years, US equities have over-performed and an investor would have seen greater returns from investing in US equities over Chinese equities.

Blue Whale Capital was founded in 2016 and the Blue Whale Growth Fund was launched in 2017.

The post Chancellor ‘should have unveiled American Isa’ instead appeared first on Money Marketing.

The online pensions provider has entered into an exclusive, non-binding term sheet with a large, US-based global financial institution.

The US has the world’s largest defined contribution pension market, representing approximately 80% of the global total and $22.5trn in assets.

Under the proposed strategic relationship, PensionBee will deliver the US service through PensionBee Inc.

This company will be established in Delaware as a wholly-owned subsidiary of PensionBee Group plc, with operational headquarters in New York.

PensionBee will manage the operations of the US business, including the hiring of a local team, making available its online retirement proposition and UK-based proprietary technology to consumers in the US defined contribution market.

PensionBee will enable US consumers to easily consolidate and roll over their 401(k) plans into a new Individual Retirement Account (‘IRA’).

The US-based partner will provide its expertise and substantial marketing funding.

PensionBee’s financial contribution will be financed from the existing resources of PensionBee Group plc.

Entry into a final binding agreement between the parties is subject to confirmatory due diligence, legal documentation and regulatory approvals.

The official launch is expected in late 2024.

PensionBee will continue to grow its market share in the £1trn UK defined contribution pension market, with the UK business financially separate to the US undertaking.

At the end of 2023, PensionBee had £4.4bn of assets under administration on behalf of approximately 250,000 invested customers

Given the context of the enormous US market opportunity, PensionBee sees the potential for its US business to grow rapidly, becoming at least the size of its UK business over the next decade.

PensionBee chief executive Romi Savova said: “In the year of our 10th anniversary, having demonstrated underlying profitability, we have entered discussions with a view to deploying our award-winning customer proposition, supported by our innovative technology platform and marketing approach, in the United States of America.

“This is a transformative step for PensionBee and for our stakeholders.

“By entering the world’s largest defined contribution pension market, where many consumers still struggle to prepare adequately for retirement amid an array of confusing and difficult to use investment options, our straightforward approach to online retirement savings will help millions of consumers look forward to a happy retirement.”

In April 2022, PensionBee said it had spent £12.9m on advertising and marketing in 2021, as it sought to capture market share and rapidly expand its customer base.

It said the majority of the £55m primary capital raised at the time of its IPO in April 2021 was earmarked for marketing expenditure.

In its half-year report in July 2021, PensionBee said it expected to be profitable by 2023.

In its interim report for 2023, the business reported a loss before tax of £9.2m, compared with a loss of £16.9m in H1 2022.

The post PensionBee announces ambitious plans to expand into US appeared first on Money Marketing.

The firm’s head of the investment strategy group and chief investment officer of wealth management Sharmin Mossavar-Rahmani made the comments during a Goldman Sachs media roundtable event.

She explained that over the past 15 years, US equities have over-performed and an investor would have seen greater returns from investing in US equities over Chinese equities.

US equities are the most expensive to invest in after Indian equities, but she feels Indian equities are overvalued.

Goldman Sachs believes the probability of a recession hitting the US in 2024 is at 30%, with the nation continuing to show “solid employment” levels.

The company’s head of tactical asset allocation for the ISG Brett Nelson added that he expects the US dollar to appreciate in 2024 by 2% and that interest rates will fall further this year.

Mossavar-Rahmani explained that in UK equities, technology only makes up 1% of the asset class, whereas in the US it makes up 20%.

In regards to the 11 spot bitcoin exchange traded (ETFs) funds that were approved by the US Securities and Exchange Commission (SEC) on 11 January 2024, Mossavar-Rahmani said this decision does not change Goldman Sachs’ stance on cryptocurrencies.

“Goldman Sachs does not believe in cryptos in general and bitcoin has no value.”

This comes as Managing Partners Group (MPG) has predicted equity markets will experience a “choppy ride” in 2024 as the higher yield market takes hold.

The international asset-management company believes the US will make rate cuts of 1.5% and 2% during 2024.

It also predicts a 0.5% cut in the UK in Q1, as the Bank of England (BoE) has the scope to cut rates to 4% by the end of 2024.

There is a bigger risk of recession for the US during the first half of 2024, MPG added.

The post US equities are an ‘upward-trending’ asset class, Goldman Sachs claims appeared first on Money Marketing.

Environmental, social and governance (ESG) metrics in the US have never been as established as they are within Europe.

From a performance perspective, research by Investment Metrics last year found high-ESG European stocks outperformed much more often than high-ESG US stocks did. In fact, high-ESG US stocks did not outperform the general market.

Confluence managing director – performance, risk and analytics Damian Handzy explains that the difference may reside in investor sentiment and demand. While European investors have shown receptiveness to ESG issues, their US counterparts are more reserved.

It will be interesting to see if these high-profile Republican states are followed by other politicians

Handzy says: “In America it’s a controversial topic, but in Europe it is not.

“That stark difference in general populace sentiment is echoed in the stark difference in ESG performance between the two continents.”

‘Pecuniary factors’

ESG is controversial not only among investors. It has also become a political battleground.

Recently, the state of Florida passed a resolution that banned pension funds from taking ESG metrics into consideration in their investment process. Instead, the resolution states, investment decisions must be based only on “pecuniary factors”.

Florida governor Ron DeSantis said: “With the resolution we passed, the tax dollars and proxy votes of the people of Florida will no longer be commandeered by Wall Street financial firms and used to implement policies through the board room that Floridians reject at the ballot box.

‘ESG investment’ has become a catch-all term that means different things to different people and unfortunately has become political for some

“We are reasserting the authority of Republican governance over corporate dominance and we are prioritising the financial security of the people of Florida over whimsical notions of a utopian tomorrow.”

The state of Texas passed a law in 2021 that restricted to the state, localities and pension boards any dealings with financial firms looking to divest from the fossil-fuel industry. This summer the Lone Star state published a list of 10 financial groups that were “boycotting” the fossil-fuel industry, via its comptroller, Glenn Hegar.

“The ESG movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or their clients,” said Hegar.

Other Republican states have enacted similar resolutions, such as Idaho, Oklahoma and West Virginia.

Mid-term elections

Foster Denovo head of investment research Declan McAndrew says: “With US mid-term elections in November, political rhetoric and headline-grabbing policy announcements are heightened. These elections are seen as crucial for setting out the context and composition for the 2024 presidential contest.

The current approach in the US towards ESG investing is based around offering financial incentives

“While decisions of this nature are disappointing and short-sighted, we should be careful not to over-react to them. Their negative influence could be limited; indeed, it may galvanise others to make their stance clearer.

“We have seen an increase in the political divide around ESG investing, particularly with the energy and inflation shocks we are all currently experiencing. This is not just in the US but also potentially in the UK.”

The US commitment to sustainability has been inconsistent. The country rejoined the Paris Agreement on 20 January 2021 after withdrawing in November 2020. With this precedent, ESG investors may question the reliability of US participation in the transition to a sustainable economy.

On the eve of the mid-term elections and two years from the presidential election, the federal stance on ESG could change.

If the term ‘ESG’ disappears tomorrow, the fundamental questions will remain

“This will depend on whether Congress is split between the two houses and also on whether Donald Trump or a similar hardliner gets elected once again,” says Victory Hill Capital Group chief executive officer Anthony Catachanas.

Yet the structure of the US political system means each state defines its own policies, independently from the federal government.

While the attitude to ESG varies between states, hostility to the metrics is specific to red states.

Handzy says: “Although certain states are limiting and even prohibiting ESG-based investment, other states are encouraging ESG, but not necessarily making this a legal requirement.

“New York State’s pension system has promised to divest from companies whose main business contributes to global carbon emissions, but this is not required by law.

The stark difference in general populace sentiment is echoed in the stark difference in ESG performance between the two continents

“In 2015, California passed a law to remove public investments in thermal coal. In early 2022, it passed the first law in the US requiring large companies to disclose all their greenhouse gas emissions.

“Demand for ESG investing is largely coming from individual investors and even certain cities. For example, in late 2021, San Francisco’s City & County Employees’ Retirement System changed its $636m [£548m] passive domestic large-cap value equity portfolio, managed by BlackRock, to an active systematic equity strategy incorporating ESG considerations, also managed by BlackRock.”

Anti-ESG impact on Europe?

Due to US global influence, one may wonder if the political division on ESG will be imported to Europe.

Catachanas thinks this unlikely, although he doubts Europe will influence the US either.

He says: “Europe is far ahead of the curve on ESG investing. These notions and principles are viewed as financially and economically beneficial in portfolios these days, and continue to become increasingly the norm.

We have seen an increase in the political divide around ESG investing – not just in the US but also potentially in the UK

“The disclosure regimes that have emanated out of Europe in general are very focused on a local European reality (think the EU taxonomy). They usually do not export very well to other parts of the world.

“It is highly unlikely to affect European investors and their orientation, but vice versa as well.”

The anti-ESG spate remains localised within the US and does not reflect its federal policies.

Handzy says: “The US, on a federal level, is not opposed to ESG investing. The recently passed Inflation Reduction Act makes provision for clean energy production, investments into natural capital, and tax credits aimed at reducing carbon emissions.

The ESG movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or clients

“The current approach in the US towards ESG investing is based around offering financial incentives for environmental business practices. Although this may not be as powerful a motivator as the European approach, it squarely brings the US into the ESG fold.”

But McAndrew believes political imperatives could still prompt anti-ESG rhetoric in Europe.

“It will be interesting to see if the moves by these high-profile Republican states are followed by other politicians seeking a more polarised view of ESG, which may appeal to their core election base at an opportune time,” he says.

“In the UK we have a new prime minister, and her highest priorities are immediate and pressing rather than long-term thinking. Will this influence policy? We’ll find out in due course”

Stewart Investors senior investment specialist Pablo Berrutti believes terms like “ESG” can distract from the underlying issues which are genuine concerns for investors and businesses.

In the US it’s a controversial topic, but in Europe it is not

“‘ESG investment’ has become a catch-all term that means different things to different people and unfortunately has become political for some,” says Berrutti.

“We need to think about either whether certain issues remain relevant to society and therefore businesses and investors, or whether individual companies make great investments because they offer solutions to problems and do it with integrity. No country can avoid those discussions because they are core to what drives value from the bottom up.

“If the term ‘ESG’ disappears tomorrow, those fundamental questions will remain.”

This article featured in the October 2022 edition of MM. If you would like to subscribe to the monthly magazine, please click here.

The post In Focus: ESG becomes a political battleground in the US appeared first on Money Marketing.

On US soil, we met with fourteen fund managers, fourteen analysts, two strategists and a CEO, across seven funds and three interesting new ideas. It was clear that for many we were their first in-person meeting for a long time.  

Soft landing   

The main observation from our trip was that the focus for US managers was not the war in Ukraine, as it is likely that the domestic economy is relatively well isolated, but the rise in inflation. Both energy and wage inflation were already increasing even before the conflict in Ukraine and managers are looking to how the Federal Reserve will react to its highest inflation prints in forty years. Following on from the policy meeting, financial markets in the US have remained focused on the potential for more aggressive interest rate hikes from the Fed. Chair, Jay Powell, has continued with the hawkish messaging that accompanied the interest rate hike and expressed confidence that the Fed can continue to tighten policy without leading the US economy into recession.  

The main observation from our trip was that the focus for US managers was not the war in Ukraine, but the rise in inflation.

We expect a lot of talk over the coming months of the potential for a ‘soft landing’ versus a recession. History shows engineering a ‘soft landing’ is not simple and even if the US escapes a recession, tighter monetary policy in the US usually causes trouble somewhere. The last ‘soft landing’ of a hiking cycle without a US recession was in 1994 but this still saw a huge crisis in Mexico and Latin American bonds and sowed the seeds for the 1997 Asian financial crisis. Even if the US does ultimately get monetary policy just right to not tip the US into recession, it does not mean that we will not see consequences elsewhere. 

Lockdowns pushed tech growth further in the US  

The US market has performed fantastically well since the Covid lows. Since our previous trip to the States two years ago, US equities have continued to be the strongest major market. It has been focused on higher ‘growth’ names and those that were seen as a beneficiary of lockdowns – with the likes of Amazon, Microsoft and the general increase in the use of technology as the world switched to virtual. These stocks were already a large weight in the US index, so helped power the majority of US indices to fresh and record highs.  

Since our previous trip to the States two years ago, US equities have continued to be the strongest major market.

Last year, this trend broadly continued, the list of names driving the market narrowed but this did not stop the performance of the index. The S&P 500 hit all-time highs but US equity gains were concentrated in just a handful. The market was up 24%, yet just five stocks accounted for half of that gain (Apple, Microsoft, Nvidia, Tesla and Alphabet), despite comprising only 18%of market capitalisation at the beginning of the year.   

Value biased managers more upbeat 

The value biased managers came across more upbeat on the shorter-term outlook in our meetings. Value investing has historically performed well in inflationary environments. Despite the pickup in value funds performance, money flow is still positive for underperforming growth managers. More recently, we have seen a change in leadership of the market and concern from the Fed about inflation has resulted in higher growth higher valuation names selling off and the value sectors (energy and financials) start to perform better. This has resulted in a change in fund performance and rankings, with the previous value managers that had been facing headwinds now shooting up in the charts with a strong tailwind, while well owned growth favourites are facing some more challenging times. Growth managers believe that if growth (GDP) does slow, their portfolios should hold up well as investors will continue to pay a premium for structural growth (i.e. Technology sector).  

Despite the pickup in value funds performance, money flow is still positive for underperforming growth managers.

We remain neutral in our view on US equities for now, cognisant of elevated multiples but recognising that many US companies are global leaders and highly profitable. Seeing some of the froth come out of speculative areas of the market, however, is certainly welcome and should provide an opportunity for managers who are genuinely active. 

Scott Spencer is investment manager in the multi-manager people team at BMO Global Asset Management (EMEA) 

The post BMO: Revisiting the US appeared first on Money Marketing.

Equity markets have been supported by impressive corporate earnings momentum, negative real interest rates, and emergency levels of policy stimulus. The strength of these forces is beginning to wane. Inflationary pressure continues to build, and the Federal Reserve is bringing to an end a period of super easy financial conditions. By mid-2022, the US central bank will have completed its quantitative easing taper and begun raising interest rates. 

The cause is not Omicron, but weaker fundamentals and ebbing liquidity. 

While expectations are for record current levels of profitability to increase again in 2022, high input costs and rising wage pressures seem likely to constrain margin progression. In combination with higher corporate taxes, there is now scope for earnings to disappoint. 

Warning from the past 

While speculation over the direction of US monetary policy has checked momentum in the broader global equity market, the largest US stocks have continued to enjoy a high proportion of flows. For every dollar flowing into the Nasdaq, 48 cents go into six large-cap tech stocks. 

High retail participation in markets has ‘gamified’ popular stocks. The market cap of Tesla rose by $390bn in 2021 and of Nvidia by $410bn. While they have an aggregate market valuation of nearly $2trn, they saw combined profits of $12bn this last year. Meanwhile, speculation is rife in other risky assets. The price of bitcoin rose 59% in 2021. Decentraland, a metaverse currency, rose almost 600% in the wake of Facebook renaming its holding company. 

For every dollar flowing into the Nasdaq, 48 cents go into six large-cap tech stocks. 

In isolation, there may be a rationale for each of these examples of apparent excess. In combination, they have all the hallmarks of hubris. In 1999, one in four IPOs went on to be successful companies. However, the market was pricing them all as winners. This is the consequence of excess liquidity combined with a good story.  

Cheap money is also spilling over into the real economy. US home prices increased by 18% year-on-year in September 2021. Rapid increases in house prices have proved an Achilles heel for economies in the past; the Fed will not want to repeat the mistakes of the 2008 financial crisis. 

End to the excess? 

There are signs the excess in the US equity market is giving way. Breadth is declining and the number of S&P 500 stocks trading at 52-week lows is rising rapidly, S&P valuation dispersion is at its widest since the late 1990s and equity volatility is picking up. 

The US equity market now looks vulnerable to any reversal of flows. We have already seen mini bubbles collapse in meme stocks, SPACs and clean tech this year. Apple is now valued at 29x 2022 earnings and Microsoft at 35x. These valuations may be defensible with the 10-year real interest rate at a multi-decade low. But should financial conditions tighten for any reason, the support would be removed.  

Fortunately, opportunities remain within the market for stock pickers. The hype cycle has a familiar pattern: excess and mania lead to a backlash, adjusted expectations and lower prices. A valuation reset in a polarised market provides terrific entry points into new, exciting thematic investments.  

Think thematic 

As Covid-19 becomes endemic, we will see medical procedures and cross border travel recover. This will benefit thematic portfolio holdings in healthcare, payments, retail and experiences.  

We have already seen mini bubbles collapse in meme stocks, SPACs and clean tech this year.

Earnings and price momentum strategies have been particularly successful in 2021. Stocks in defensive sectors such as consumer staples, growth utilities and specialist REITs have been left behind and offer valuation upside. Finally, a market seeking simple stories has shunned the more complex restructuring opportunities in the past 18 months. We see significant value in the special situation investments in our portfolios.  

Covid-19 will also prove a huge catalyst for innovation and creativity. For example, a consequence of current supply constraints and a shortage of labour is the desire for companies to strengthen their supply chains. This will particularly benefit the stocks in our automation theme and industrial software companies.COP26 also demonstrated the private sector will be critical for financing new technologies to reduce greenhouse gases. 

As policy shifts from the virtual world of Wall Street to the real world of Main Street, it is time for equity portfolio managers to diversify away from the larger US growers and accept more benchmark risk. While a period of lower equity returns and higher volatility is ahead, this reality will bring rewards for stock pickers in a wider array of themes. 

Jerry Thomas is head of global equities at Sarasin & Partners 

The post Sarasin’s Thomas: Reality beckons for equity investors appeared first on Money Marketing.

This change of heart is likely due to the remarkable recovery in the labour market. In just over a year and a half since unemployment peaked at 14.7% in April 2020, the figure has fallen to 3.9% – not far off the pre-pandemic lows of 3.5%. 

And even now, unemployment continues to plummet – in the past six months alone the unemployment rate has fallen on average 0.3 percentage points per month. Wages are now rising at three times the average wage growth seen in the last decade. It not only looks like the US economy is at or near full employment, but is on course to push beyond that. 

Post-pandemic ponderings

With a labour market that is running this hot and US inflation at levels not seen in nearly 40 years, the Fed now has to play catch up – it is expected to begin its hiking cycle in March, and start shrinking its balance sheet shortly after. It is clear the tide of liquidity is turning, and investors would be wise to think about what that means for their portfolios.  

In assessing the prospects for stocks, it helps to break down what to expect from the two key drivers of returns – earnings and valuations. 

On earnings, the outlook still looks strong thanks to above trend economic growth. Both consumer and corporate balance sheets are in good shape and are primed to continue spending. This will help ensure that demand remains robust. Companies also appear to have pricing power so have been comfortably passing on higher input costs to end customers.  

On valuations, a tightening stance will inevitably lead to some jitters in stock markets and provide a stiff headwind for valuations.

It’s useful to remember that stocks are valued on the sum of their future earnings, divided by a discount rate to give the present value of those earnings. Therefore, for a given rise in the risk-free rate (Treasury yields), those future earnings are now worth less when discounted back to today than they were before. 

Our base case is that Treasury yields rise and therefore that stock valuations will de-rate. While some areas of the market benefitted greatly from the wave of liquidity that the pandemic unleashed – particularly long duration growth stocks – investors should be conscious of the dangers that the reverse effect could have on areas of the market with elevated valuations. 

The ‘now what’ conundrum

Overall we think that earnings growth in aggregate should be sufficient to more than offset the decline in valuations leading to modest positive returns this year.  

That’s not to say that a Fed playing catch up won’t cause a problem for markets further down the line. But we believe it’s not the start of the rate hiking cycle that investors should fear, it’s the end of it. Historically stocks have performed well at the beginning of tightening cycles as policy is still accommodative and company profits are benefitting from a strengthening economy.

In each of the past four examples of these periods going back to the 1990s, the S&P 500 has delivered positive returns in the 12 months following the first hike. While markets are forward looking, they tend to be reasonably short sighted and struggle to see a recession more than a year in advance. Thus, they don’t tend to worry too much about the end of the tightening cycle when it’s just beginning. 

But beneath headline index returns, rising Treasury yields should coincide with a distinct change in market leadership to that of the last cycle.

This is a time to get active with portfolio decisions. Already in the first few weeks of this year we’ve seen a huge dispersion in the sector returns of the S&P 500. Cyclical sectors such as energy and financials have significantly outperformed the index.  

The change in sector leadership would also drive a rotation in country/regional performance. The days of US stock market dominance, driven by its huge weighting to expensive information technology may be ending. We find more value in the cyclical parts of the European and UK markets that sit on more reasonable valuations and stand to benefit from a world of strong nominal growth and rising interest rates. 

Don’t fight the Fed is a motto for investors to live by. But in 2022, it’s not yet time to fear the Fed either. 

Ambrose Crofton is a global market strategist at J.P. Morgan Asset Management 

The post Can markets cope with a Federal Reserve playing catch up? appeared first on Money Marketing.

Many equity investors will be watching bond yields closely to assess whether the recent out performance of growth stocks can continue. In a similar fashion to the first few months of this year, rising yields should benefit cyclical and value names. But, if yields slide, growth stocks would likely do well.

So, why have bond yields fallen so much? Well, TGIF. A feeling and acronym commonly associated with the end of a long week, while many bond bears may have been feeling this more than most over the last few months. Moreover, TGIF also neatly helps to explain why bond yields have been falling.

Technicals

In short, there have been lots of buyers and not many sellers of US Treasuries. The US Federal Reserve (Fed) has been purchasing $80bn (£36bn) worth of Treasuries per month for the last year.

Rising demand for Treasuries from the private sector has also added to the pool of bond buyers. Demand for Treasuries has been strong among pension funds that have managed to close or narrow their funding gaps due to strong equity returns over the last year. Private-sector banks have also parked excess cash, built up thanks to healthy consumer bank balances, in Treasury securities.

At the same time, new issuance of government bonds has been limited. The large sum of issuance last year means the Treasury has had plenty of cash available, reducing the need for new issuance of late. All this has led to demand for US Treasuries outpacing supply over the last few months.

Growth

Recent data has shown that the pace of economic growth may be peaking. US business surveys have moderated, while consumer confidence has dipped. Enhanced unemployment benefits and lingering concerns over the Covid-19 Delta variant have led to slower job growth than expected, despite the economy still being down over six million jobs relative to pre-pandemic levels.

Is there too much jargon in the financial services industry?

Inflation

Falling bond yields suggest that investors are buying into the Fed’s view that rising inflation is largely transitory. Maybe that’s no surprise, given 70% of the monthly rise in US core inflation for June was attributed to less than a tenth of the inflation basket. Supply shortages have pushed up prices of used cars, and the economic reopening has led to price rises for airfares and hotels, which should be temporary. Fears of runaway inflation appear to have subsided as medium-term inflation expectations – a driver of bond yields – have come off the boil.

Federal Reserve

The Fed pivoted in a hawkish manner in June. The dot plot now points to two rate hikes in 2023, with the potential for a hike as early as 2022. This suggests the Fed has a lower tolerance for inflation overshooting than the market previously thought. This has led to a faster pace of hikes being priced in over the short term and a lower peak in rates being expected further in the future. The market is suggesting that rates won’t need to rise too much over the medium term because inflation will remain controlled.

However, it is hard to see bond yields remaining this low. Treasury issuance should start to rise as cash available to the Treasury has already been run down. Remember, too, that the Fed is likely to signal a tapering of asset purchases later this year, which should reduce downward pressure on yields.

Fears over a growth slowdown also look overdone. Governments are planning on “building back better”, and business investment intentions are strong, suggesting a return to sluggish growth can be avoided. Vaccines also appear to be effective at weakening the link between cases and severe health outcomes, even for the Delta variant. If the hospitalisation data remains encouraging, the economies of highly vaccinated countries can avoid being derailed by rising cases. Real 10-year treasury yields, which are a barometer of long-run economic growth expectations, have fallen to below minus 1%. That is not reflective of the current US growth outlook, even though the pace of growth set a few months ago isn’t likely to be maintained.

With an uneven global vaccine rollout, the global economy may continue to face supply disruptions that keep inflation high through the rest of this year. Shelter inflation, which tends to be sticky, is also on the rise, while upward pressure on wages could prove to be less temporary. The real game-changer is the coordinated stimulus from central banks and governments, which, if not adjusted appropriately, could lead to inflation lingering. But even if inflation doesn’t run away, real yields should still be higher than they are today.

The outlook for US government bond yields has important ramifications for equity investors. History shows that higher bond yields, against a strong growth backdrop, should benefit more cyclical and value-oriented sectors and regions within equity markets. Volatility may remain, but the central expectation should be for broad economic growth to be sustained and for real bond yields to rise.

This could be the catalyst for value stocks to get back into the game, having been on the sidelines over the last few months as bond yields fell.

Jai Malhi is global market strategist at JP Morgan Asset Management

The post The curious case of falling bond yields delaying value’s comeback appeared first on Money Marketing.

Although US equities are now at an all-time high on several metrics, having just completed our six-monthly review of the US equity sector, we continue to see opportunities for investors. The yo-yoing in performance between growth and value in the US equity sector has made it an interesting space for the active manager. Against this backdrop, we believe it is important to maintain a balance of growth and value in a portfolio, particularly given the expected uncertainty in the near-term.

Since the US market has gone higher, outperformance has switched back to the growth winners we saw last year, rather than the value names in the previous quarter. While the largest five stocks in the S&P powered over 50% of the market’s increase in 2020, these stocks were not the only game in town. Many other growth names produced better returns last year.

Along with non-profitable tech there was also strong returns from non-profitable initial public offerings (IPOs) in 2020. For example, 80% of companies that went public in 2020 were unprofitable in the 12 months prior to their IPO. Despite this, the 2020 return from IPO stocks was over 100%, with first-day rallies almost three times bigger than the average of the last 40 years. Last year was one of the best years for growth investing ever and the “growthier” the business, the better. This demand for growth goes hand in hand with the return for retail client. There is no question that retail investors are back, with over 10 million new retail brokerage accounts opened in the US in 2020. This could continue as recent surveys show that large numbers of US citizens plan to use stimulus checks to buy stocks.

Is this the end of the 9-to-5 advice firm?

Surge in SPAC IPOs

In the first quarter of this year, we saw 12 special purpose acquisition companies (SPACs) IPO in the US, raising $3.6bn. These SPACs are sometimes called blank check companies and are shell corporations with the sole purpose of buying something at some point. SPAC companies are not new but all the US managers we spoke to as part of our six-month review expressed some form of concern about the huge number of them currently raising retail capital. Interestingly this concern was expressed by growth and value managers alike, although admittedly they did highlight that SPACs are healthy for the market longer term, as many of them are looking to take private companies public.

Strong economic recovery in the US

Given its significance and the recent headlines it would be remiss of us not to acknowledge the potential impact that inflation could have on the US equity market. The Consumer Price Index (CPI) in June rose at 5.4% year on year, well ahead of the 4.9% expected. This was the strongest pace of growth since 2008, driven by factors such as energy, which was up 24.5% year on year.

Recently we have seen the bond market beginning to price in higher inflation on the back of the economic recovery. It’s important to understand that inflation is not only kryptonite to bonds, it also impacts equities. The prospect of higher yields can affect stocks, especially the growth stocks which have enjoyed significant momentum from plunging rates of the past few years. Given the dominance of growth names in the US market, this could provide a headwind for growth stocks and the broader index but should be a good opportunity for an active manager. With value winning the first quarter and growth winning the second quarter in 2021, there’s still much to play for in the final half of the year.

Scott Spencer is investment manager in the multi-manager team at BMO Global Asset Management

The post How have growth and value fared in US equities? appeared first on Money Marketing.

While the aggregate numbers hide the hardship felt by many, the amount of excess savings that the US consumer has accumulated is vast. With households forced to stay at home last year, their options to spend were limited and so spending cratered. At the same time incomes were being supported by generous unemployment benefits and “stimmy” cheques that has meant the amount saved soared well above normal levels. Indeed a family of five with total income of under $150,000 (£105,851) received cheques amounting to $7,000 (£4,939). The results are staggering – the US consumer has put away more since the pandemic began than in the whole three years prior.

GameStop gets Gen Z to want financial advice

Such an unusual setup of restricted spending from lockdowns and fiscal support has led to wide disagreement among economists as to the growth and inflation implications going forward. The near-term pickup in growth and inflation is a given, but forecasts show that towards the end of the year, there is a wide dispersion in predictions. So, what mix of real growth and inflation will the recovery generate?

Much will hinge on the extent to which accumulated savings empower consumers to get out and spend. Some caution that savings are concentrated in higher income groups that historically have a lower marginal propensity to spend. But perhaps traditional economic theory falls short here given that consumers have been forced to save, rather than choosing to save. All the indications from the recent retail sales and jobs reports suggest that demand is extraordinary and growth in the industries that were hardest hit are now leading the way.

While it looks clear that demand is strong, the effect on the supply side of the economy is more uncertain. There are significant disruptions in manufacturing supply chains, including a shortage of semiconductors, rising freight costs and higher commodity prices. How transient these bottlenecks are remains to be seen, but it seems complacent to dismiss the possibility that they persist.

There are also price pressures in the services sector and businesses are struggling to rehire workers. The $300 per week in enhanced unemployment insurance, on top of an average regular payout of $320 per week, means that at least half of those currently receiving benefits are financially better off out of work. The enhanced support expires in September, leaving businesses with a dilemma. Do they pay more to hire now in order to meet the surging demand of the recovery, or wait until the benefits expire and hope to re-hire employees then at a lower cost? We suspect that given the strength of demand, many businesses will be forced to pay up.

Liontrust makes ESG pitch with new investment trust

The US Federal Reserve (Fed) has indicated that it would welcome a near-term inflation overshoot. Pre-emptive policy tightening to head off building inflationary pressures looks a thing of the past – the Fed has committed to only raising rates once full employment had been reached and inflation is at target and on course to moderately overshoot. This explains why the Fed intends to look through the current inflation pickup as transitory and is still carrying out $120bn in quantitative easing each month, in a year when the economy could grow at its fastest rate since the 1980s.

This raises the possibility that together, the Fed and Washington have made the policy punch a little too strong and could leave themselves with an inflation headache. Should the incoming data start to raise question marks around the Fed’s hypothesis that inflation is transitory, then volatility in Treasury markets could rise as investors try to reprice the implications for the Fed eventually having to tighten more aggressively to regain control.

How should investors prepare for the party? With the inflationary risks seemingly skewed to the upside, we think it makes sense for investors to be relatively light on duration in portfolios. The prospect of higher Treasury yields should support cyclical and value stocks, as these styles tend to outperform in this environment. Conversely, areas of the market that have been buoyed by low Treasury yields could struggle. For those that can stomach the liquidity constraints, diversifying portfolios with real assets that have low correlations with both bonds and equities and can provide some inflation protection could make sense – infrastructure assets stand out as one example in this respect.

For now the music keeps on playing, but investors need to be aware of the risks that a persistent return of inflation could dramatically change the mood of the party.

Ambrose Crofton is global market strategist at J.P. Morgan Asset Management

The post The US economy is set for a party – will there be an inflation hangover? appeared first on Money Marketing.

Lockdowns are easing with falling case numbers state by state. Further spending plans and policy initiatives on infrastructure investment and the energy transition are in train.

No wonder the focus of investors year to date has been on rising bond yields. Expectations coming into 2021 were for a gradual reopening of the US economy, with a commensurate drift up in 10-year bond yields to, say, 2 per cent over the course of the year from their unprecedented lows last summer of around 0.5 per cent.

Well, there has been nothing gradual or drifty about it. Yields have spiked to 1.75 per cent in weeks; 2 per cent looks achievable in days. Investors have looked to the US Federal Reserve chairman Jerome Powell to ‘do something’ to arrest the rise in yields – ideally reference that if this rise in yields gets too pronounced, the Fed can always initiate a policy of yield curve control to mitigate it.

Powell has refused to do so, merely reiterating that Fed policy will remain easy and supportive for months to come, and that despite the stimulus measures, there is a long way to go until the Fed would adjudge full employment to have been reached.

Cue more wailing and gnashing of teeth from bond investors. For once, my sympathies lie with the central bank. To look at nominal bond yields in real terms, the rise in nominal yields has taken real yields from over 1 per cent negative to around 0.5 per cent negative. If we reach 2.0 per cent nominal, that would approximate to a 0 per cent real yield.

But real yields should not be negative in a situation where we have climbed out of the abyss of emergency policy measures. It is entirely appropriate for them to have risen in response to the vaccination rollout and reopening.

Without a resurgence in the dollar alongside higher bond yields, which would have negative consequences for global growth particularly in emerging economies, the Fed should stay put, allowing investors to adjust to the welcomed normalisation of activity during 2021 and into 2022.

Higher bond yields have, of course, been key to the reversal in fortunes of growth against value stocks that we have witnessed since last November’s vaccine news broke. Tediously, we have entered a period where the markets obsess over every twitch in bond yields or auction coverage ratios – there is a cost to all this stimulus and it is in heavy bond-issuance calendars – and rotate between styles as a consequence.

It is to be hoped that investors will settle down as the speed of the yield move ameliorates. The focus then can be on the beneficiaries of reopening and recovery – and none more so than the UK.

Government roadmap

With the government having set out a gradual roadmap for reopening, it was sensible for the Budget to follow up with an extension of support measures well beyond this reopening timetable. Striving to ensure the easiest of transitions from lockdown to normality, this is designed to support the labour market and avoid any dramatic spike in unemployment as furlough measures wind down.

Thus far, unemployment has risen far less than most expectations, so trying to maintain this record is sensible. Likewise, further support for the housing market will keep the current buoyancy going for this important sector.

Given UK consumers’ willingness to spend, the scale of pent-up demand and the increased savings built up during lockdown, a meaningful boost in consumption is likely to develop from this summer until next.

So, the chancellor chose to focus on incentivising corporate investment over the next two years through a series of measures, notably the most generous tax allowances against capital investment ever seen in the UK. While one can argue the degree to which these allowances just bring forward expenditure, with a commensurate lull thereafter, historically companies do seem to have responded.

Alongside the probable boom in consumer activity over 2021-22, it seems likely that the corporate sector will also play its part, alongside government initiatives towards its regional ‘levelling-up’ and energy-transition agendas. GDP forecasts for next year have risen materially as a result.

While there is a sting in the tail for companies in significantly higher corporation tax two years out – and frozen personal tax thresholds for individuals – it is hard not to be optimistic about the UK economy as we emerge from lockdown over the course of the coming months.

Richard Buxton is head of UK Alpha strategy at Jupiter Asset Management

The post Investment Insight: A coiled spring? appeared first on Money Marketing.