The strong start to the year was tested in March with the failure of several regional banks in the US, followed closely by the bailout of Credit Suisse, the second largest Swiss bank. Unsurprisingly, these events led markets lower over the month as sentiment soured. However, it wasn’t long before they regained most of that lost ground during April, with shares once again showing resilience. Stress in the banking system appearing isolated and easing inflation calmed nerves sufficiently for the FTSE 100 to close just below its record high of just over 8000 and up 4.5% year to date.

After underperforming all assets last year, ‘growth’/tech stocks have rebounded strongly year to date driving most of the equity gains. ‘Growth’ stocks had reached valuations not seen for some time which enticed investors back in, lifting stocks and the tech-saturated US economy. Following the recent rise, it is hard to call ‘growth’ company valuations attractive when compared to history, bond yields or value stocks. The latter rebounded most in April, with many banks categorised as ‘value’ and recovering after an initial wobble.

Lower energy prices meant commodities were the worst performing sector over the quarter, but that continues to be good for European stocks which were most sensitive to the gas price shock. Gold has bucked the commodity trend as a ‘safe haven’ asset, rising in value on the back of a weaker dollar and expectation of lower rates in 2024. Elsewhere, real estate struggled thanks to higher borrowing costs, with commercial property feeling most of the pain. An overspill into residential prices in the US could be harmful, with it being over four times the size of the commercial sector. Major risks here should be contained with most homeowners in the US holding long-term fixed rate mortgages and therefore unaffected directly by higher lending costs.

Stronger economic data has helped resilience, but equally may contribute to stickier interest rates. Inflation is falling although the most recent US job creation report once again beat expectations in May (by over 30%) causing unemployment to unexpectedly fall further. At present, US bond markets are pricing (with almost certainty) that interest rates will be cut as early as the end of this year. We still think investors may be premature with this forecast and, in any case, expect central banks to act slowly on the way down, requiring concrete evidence lower prices can be sustained before dropping interest rates.

Don’t panic, any bank can fail

With enough loss of confidence this is true, but particularly so in a world of online bank-runs, rapidly rising interest rates and availability of higher returns with greater security outside of the banking system. That all being in the form of Government Bonds (UK gilts/US treasuries) and Money Market funds. The latter of these recently drawing inflows of £580bn in just ten weeks.

With the combination of uncertainty and availability of alternatives for savers, it is not hard to see how deposits can plummet overnight and continue to do so. Just last week, two more US banks – Pacific Western and Western Alliance – had their shares suspended. However, as we indicate,  there is no need to panic as we do not see a re-run of 2008. Banks today are in much better health than during the credit crisis and, where cracks appear in the small and medium-sized banks, larger institutions are likely beneficiaries of a deposit boost, thus strengthening their positions. Banking consolidation, certainly in the US, is not new, given they have many more banks than in the more concentrated European system. In the 80s there were around 14,000 US banks and today, around 4,000.

Markets have calmed for now, but we anticipate a few more small/medium US names running into trouble, hopefully without too much fuss. We trust authorities will act if needed to avert an all-out loss of confidence as we journey along with a fragile financial system that still can’t cope with the monetary medicine required.

Ain’t no mountain high enough

It’s not just banks struggling to balance the books. The US government is again in need of an urgent agreement to raise the debt ceiling after spending more than they earn from tax receipts year on year. The next couple of weeks will be critical and may add some volatility to markets, in the form of upward pressure to treasury yields and weakness in the dollar. Ultimately, we expect a last minute agreement to be reached as the alternative, to default, would be a catastrophe for the US. That said, a more divided Congress raises the probability of a potentially ‘messy’ array of short-term measures if the ceiling isn’t raised in time, which won’t help short-term economic progress.

We think the big banks will be just fine, but regardless, there are good reasons for investors with large cash deposits to re-think where they store their wealth. Higher returns, greater security, even improved tax efficiency, are a win-win combination achievable from UK Gilts and money market funds and something you will likely hear more about from us this year. These benefits alone are reason for individuals and companies to re-locate cash savings, with the recent bank failures merely a reminder to review things today.

Summary

With the economy still expected to slow this year and equities having done so well year to date, we wonder if the latest rally has more legs left. On the whole, the service sector has been the saviour keeping the economy afloat, with goods and manufacturing having a harder time. Until an agreement is reached to extend the US debt ceiling, the next couple of weeks are likely to see a restricted range either way. US yields may creep up until then, with pressure remaining on the dollar and regional banking system.

It is true companies in the UK are not overvalued by historical standards and certainly not when compared to the US, potentially leaving room for price growth. Energy prices will also ease cost pressures for firms this year, but wage bills will bite and in the UK, what is left (in profits) will be 6% lighter than last year thanks to the rise in corporation tax from 19 to 25%. With productivity readings down and savings rates also falling, a slowdown in new jobs and rise in unemployment seem inevitable and is what central banks will require before lowering interest rates. Against this backdrop, assets that traditionally provide shelter from economic weakness look more attractive than they have for over a decade. Taking less risk with investments is an easier choice than it has been for many years.

Clients who pay close attention to our Bulletins will note our cautious undertone persists in pursuit of an honest appraisal of the indicators we watch. However, this is not to be mis-interpreted. Our outlook for low-risk investments (namely bonds) is more positive than it has been for a long-time, so the ‘risk averse’ are well positioned for the future. Investors prioritising the preservation of capital are now being rewarded for their patience and remain well positioned to take advantage of any economic shocks.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

The post Investment Update – Spring 2023 appeared first on Pinnacle Financial Services & Wealth Management.

There was some respite in the final quarter, with a feeling that recession was now priced into markets. Riskier assets/equities certainly bounced as inflation peaked, helped by falling oil & gas prices since the summer. A mild winter and expectations that interest rate rises would slow, or soon pause, also buoyed buyers. Small companies and European equities were big beneficiaries in the fourth quarter, the latter as a result of falling energy prices. China also rebounded strongly after a dismal 2022, with their zero-covid policy very much determining sentiment. Now one can only hope that they have moved beyond this stance.  Value stocks, particular in the energy sector, topped the performance tables over the year with the Russia/Ukraine conflict pushing prices higher.

Fundamentally Sound

For several years, Pinnacle Financial Services & Wealth Management has been positive on value stocks due to their fundamentals and inflation protection qualities. While technology stocks/growth equity won the race in 2020, the order has very much changed over the past two years where a ‘value’ tilt in our strategies helped contain losses in what was a very painful year for many. We have, for some time, been positioned for higher inflation and, while no diversified portfolio can completely protect against inflation shocks, we faired very well in ‘21 and ‘22. KMD’s strategies focussed on short maturity bonds, with lower interest rate risk which has also helped contain downside risks. Growth stocks bore the brunt of last year’s interest rate rises  and were down 29% compared with losses of just 6% from value stocks.

It is pleasing to see fundamentals finally working their way into share prices.

The future is not without its challenges, however ‘deep’ or ‘shallow’ the  recession we are facing. Supply chains are yet to right themselves entirely and deglobalisation is well underway, leading us to believe higher interest rates will be sticky. We think markets are a little optimistic by pricing in rate cuts just one year away, given inflation may  still be above trend ie above 2%. Prices will rise much more slowly this year, but one can’t help but think central banks are going to be much more cautious in lowering interest rates. This is relevant since all eyes remain on the Federal Reserve (and US rate policy) and it is rate expectations which will continue to dictate where equity markets go from here (as has been the case for some time).

Improving Value

On the positive side for 2023, equity valuations are more realistic than they were at the beginning of last year and energy input prices (oil & gas) are coming under control. A similar downside to that seen in 2022 is therefore less likely. In terms of home ownership, when compared to the past, today, not only is there a much higher proportion of homeowners with fixed rate mortgages (especially in the US)  who have not  yet been impacted by rising rates, but homeowners are also not as indebted as they were in the 2007/8 crisis.

Markets tend to price risk very well, but we could see a couple of positive ‘surprises‘. Firstly, de-escalation between China and the US in relation to Taiwan and agreement to cease their trade war would certainly boost markets. Similarly, if continued unnecessary loss of life fuelled a Russian revolt and Putin were to be overthrown, we could see an end to the conflict and re-opening of food and energy supply lines. Either outcome would provide a boost to stock markets.  However, for now, they are just potential ‘surprises’ and unfortunately, both carry even greater risks if they escalate instead, so positioning for either outcome with high conviction is unwise.

We have been cautious for some time and while, importantly, stock markets are now better value, so too are defensive assets, cash and fixed interest. Therefore, we see limited logic in now taking considerably more risk than we have done over the past decade. For the first time in a long while we are becoming excited about the prospects for Cautious investors and fixed interest.

Another tough year ahead

On the side of caution, housing market weakness has already begun with further falls in prices and construction activity likely, although price drops should be contained only by limited stock. Continued strike action in the UK remains disruptive to productivity and if the government concedes, could spark inflationary pressures through higher wages thus forcing interest rates higher. Even without wage increases, UK government debt issuance is set to soar over the next decade, with Citigroup forecasting this at c.£240bn a year compared to just a third of that (c.£80bn) over the past decade. With interest rates also over three times higher than they were, that is a 10-fold increase in new debt servicing costs! No wonder then that governments are not entertaining union demands.

High corporate debt levels, rising wages and extended profit margins lead us to believe earnings forecasts, that make up today’s more attractive valuations, may have undue optimism built-in. Equally, bond markets appear to be calling central bankers’ bluff in that interest rates will fall sooner (by the end of the year) than central banks are indicating. Markets often know best, but this time round we are with the central banks ie anticipating they will want to see inflation fall to target and remain there before considering a reduction in rates.

The worst of the inflation and market correction is probably behind us, but another economically challenging year lies ahead. In our view, the current economic balance is not conducive to high levels of conviction across most assets and regions. There are some areas where profit taking could be wise. For example, in energy stocks with additions to oversold sectors such as REITs or even bonds. US and Growth stocks could enjoy a little rebound, but our medium to long-term view remains that value stocks and emerging markets are likely to offer better value amongst risk assets with the potential for smaller companies to be added at opportune times.

Finally, cautious investors who suffered most in 2022 will be pleased to hear we are quite optimistic  about the outlook for those who are more risk averse (particularly in risk adjusted terms). The ‘return gap’ between high-risk and low-risk portfolios is likely to be much smaller in future and high-risk investors should carefully consider if additional risks will be commensurate with diminishing excess returns.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

The post Investment Update – Winter 2023 appeared first on Pinnacle Financial Services & Wealth Management.

The world economy has recovered strongly since the pandemic hit in 2020, but 2022 has proved to be a challenging year for the majority of assets.

The labour market has been tight, with the US unemployment rate at a near multi-decade low and wage growth a multi-decade high. These conditions have been compounded by supply chain disruptions leading to the economy experiencing inflationary expansion.

In our view, central banks should have had one foot firmly on the interest rate brake and governments been less loose with fiscal policy, but populist politics tends to be less accepting of prudent economics.

As we entered 2022, central banks were behind the curve just as price rises were exacerbated by the Russia/Ukraine conflict pressuring the cost of energy, food and transportation.  Now playing catch-up, with some large and prompt increases to interest rates, around 24 countries have already raised rates once this year. The US has led the way, with some of the larger moves increasing rates by 0.75% in both June and July. Further global rises are on the cards for 2023, although likely to be at a slower pace.

Nowhere to run, nowhere to hide

In this environment, typically ‘defensive’ assets (bonds) have fallen year to date to reflect higher market yields, but so to have equities, especially ‘pricier’ rate sensitive shares (e.g. tech/growth stocks).

In the first half, it is only really property and commodities that have held up, with energy and utility companies being the brightest spots amongst equity sectors, helping the UK to fare better than others. On the other hand, being home to many of the major tech firms, the US market retreated more with some of that weakness offset only by a stronger dollar for UK investors.

US stocks officially entered a bear market (defined as a 20% decline) as investor sentiment and consumer confidence fell, a slowing economy and mild recession at the forefront of investors’ minds. Q2 has been particularly tough as financial markets do not like rising interest rates. Higher mortgage/borrowing costs and more attractive cash returns simply don’t incentivise investment, but the UK has been a structural sufferer on this front since leaving the EU.

With two negative quarters of GDP already this year, you would be forgiven for thinking the US is already in recession, but with the Mid-term elections fast approaching, the White House would be quick to remind you that that doesn’t ‘technically’ mean the economy is in recession! If that convinces you, one still cannot deny the late cycle dynamics of price pressure, global monetary tightening and tight labour markets. In short, these factors all stress company profits and we don’t think this has been fully felt by firms as disposable consumer income is likely to feel a greater squeeze into 2023 and Covid-induced savings are spent.

A ‘recessionary’ bear market is typically accompanied by declining company profits, but in the first half of the year profits have been rising, just at slower rates. What we are hearing from company CEOs is more forward guidance of the challenges ahead and that corporate profit margins have already peaked.

China and the Eurozone

If the US is not in recession, then the Eurozone appears to be teetering close to the edge, continuing to suffer the fate of reliance on reduced Russian gas supplies. Political instability with a snap election in Italy, the Eurozone’s third largest economy, at a time when the European Central Bank is bringing the region out of negative interest rates, is adding to near-term trepidation.

China, the world’s second largest economy has been slowing for some time and Hong Kong slipped into recession in Q2. The economic toll of following a zero Covid strategy resulting in rolling lockdowns is certainly being felt. A weakening housing sector in China also remains a dark patch with shares dropping further, especially through July.

Not all doom and gloom

Despite all the doom and gloom this year, the major assets of bonds and equities turned positive in July and August to bring some summer respite for investors. Trends also turned again, the largest gainers being those that fell the most year to date, with tech stocks rallying.

Although noting the weakness in Chinese markets, economically there are some green shoots. China is further through into its slowdown phase and some data has surprised. Exports significantly beat expectations, credit growth is improving and importantly, while still suffering with rising input prices, Chinese consumer price rises are more stable. This is allowing monetary policy to loosen, in direct contrast with policy in the West. At attractive valuations and prices lower than the worst seen during the pandemic, in our view, the outlook for Chinese stocks is improving if they can battle through recent property market weakness and balance their political tensions with the US.

The recent positive performance has been driven mainly by expectations that interest rate rises would not be as fast or high due to slowing economic activity and limited corporate earning weakness. Markets are never linear and are now far from their highs. A rally in a ‘bear’ market is normal just as corrections are in rising ‘bull’ markets. Whether this is just a bear market rally remains to be seen – the economy is very late stage and has understandably lost momentum. Policy makers remain in tightening mode, the impact of which has not been fully felt by consumers, neither has the full winter cost of higher energy prices which are bound to weaken demand without further government support.

Stickier than anticipated inflation could yet cause further problems and populist politics of lower taxes and handouts add to price pressure. Either way, we typically discount much of the benefit you might think a new leader may or may not bring whether in No 10 or elsewhere. There are greater forces at play.

Against this backdrop, we feel investor optimism for profit growth is still too high. Expectations that this would be in double digits in 2022 at a time when conditions are challenging, significantly exceed the low single digit long-term earnings growth rates seen since 1950.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

The post Investment Update – Summer 2022 appeared first on Pinnacle Financial Services & Wealth Management.

Russia has a strategically important role as a leading global commodity supplier. In 2021, it was the world’s third largest supplier of oil and also produced 40% of the natural gas consumed by the EU. This reliance poses a significant problem, particularly for Europe. In the short-term, the choice appears to be between a country continuing to buy Russian products (where this is still legally permissible) and therefore helping to fund Putin’s war, or to potentially induce energy shortages, eyewatering price increases and ultimately recession for its own people and economy where it is not.

Going forward, countries are likely to think far more clearly about the wisdom of placing control of a wide range of matters in the hands of neighbours, thereby further enhancing the deglobalisation motion.

Russia and Ukraine also collectively export a quarter of the world’s wheat and a sizeable proportion of other grains. Both nations will likely face a reduced willingness, or ability, to supply food products to the rest of the world over the next year and beyond, thereby threatening global food supply chains. In the event that richer nations might hoard limited supplies for their own consumption in a temporarily shrinking market, poorer countries without sufficient domestic production may run the risk of facing food shortages, with likely devastating human consequences.

As events unfolded, this inevitably brought sudden shock to commodity supply chains, resulting in soaring commodity prices across the board in a short space of time. The diversified Bloomberg Commodity Index is up 32% YTD in USD terms. Although this can be a boon to those selling, it can represent financial hardship to those buying. Such changes have been sudden, thus explaining the violent reaction of financial markets.

Naturally, spiking prices in all directions inevitably leads to an inflationary destination. Prior to the invasion, financial markets were debating whether the inflationary pick-up during 2021 was ‘transitory’ and about to fizzle out (with 2021 inflation largely the story of Covid supply shocks in 2020 – in many respects, a similar parallel). Suddenly, elevated inflation is now likely to be with us for at least another year. The jury is out on whether higher levels of inflation than seen in recent years might be here to stay more permanently.

Bond markets were especially hard hit by this possible reality, on some counts registering their worst quarter for several decades. The FTSE All Gilts index (representing UK Government Bonds) is down just under 10% YTD at the time of writing – hardly a safe haven, losing more than almost all major stock indices. Longer-dated issues are down further still as market interest rates surged in anticipation of central banks needing to hike rates in order to get inflation back under control.

This comes at a time when global stocks have also lost money in the calendar year (with MSCI World down 3% in GBP terms, Emerging, European and Japanese markets falling between 6% and 9% and the higher beta US Tech-heavy Nasdaq index down 10%, all in GBP terms, at the time of writing). Russian equities lost almost all their value, as markets priced in a possibility of total loss.

Seeing both Bonds and Equities falling together is a big wake up call for the traditional 60 (Stocks)/40 (Bonds) portfolio. This has worked well over the past few decades (with past winners, such as Tech and other extreme Growth vehicles trading at lofty valuations, also falling the hardest in the stock market) but now appears to be changing. This is explained for the most part by the poor value on offer for both asset classes at headline level (not least as rising interest rates are mathematically able to threaten both sides of the ledger – something we have been warning about for some time).

This dynamic has been less of a threat for most Pinnacle Financial Services & Wealth Management strategies, with consistently lower sensitivity to interest rate rises through holding lower duration Bonds or All Weather funds as an alternative (which to generalise have held up better than most Bond types).

Amongst equity markets, the FTSE 100 index (with its large Energy and Commodity exposure) and MSCI World Value indices have bucked the trend, registering light gains so far of 3% and 5% respectively YTD in GBP terms.

Furthermore, exposure to Real Assets (Commodities including Gold, Infrastructure, Real Estate) have been inflation beneficiaries and could continue to be so from here. This performance grouping illustrates in no uncertain terms why the principle of diversification matters.

A further economic consequence of inflation is that higher prices hurt the consumer or the firm, acting as a brake on economic growth, thereby raising the risks of global or regional economic slowdowns or even recession. Some regions, such as Europe, could be especially squeezed, far more than say the USA. For this reason, some sharp divergences have been observed between various regions and asset types.

It may well be that the trends so far seen in 2022 will serve as something of a dress rehearsal for what might be expected over the next decade, albeit likely with several twists and turns along the way. The Pinnacle Financial Services & Wealth Management strategies have generally been well positioned for this set-up with some portfolios holding up far better than peers who were more aggressive in their focus on short-term rewards (and past big winners). Therefore, although the tone may sound negative, we remain confident in our ability to deliver diverse strategies for a range of market conditions, but particularly a continuation of the present trend which does not appear to be over.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

The post Investment Update – Spring 2022 appeared first on Pinnacle Financial Services & Wealth Management.

The US S&P 500 index is down 8.1% year-to-date (at 27^th Jan), while the ‘go-faster’ Tech-biased Nasdaq is down even more at 13.7%.

The high Growth style of investing, epitomised by the story of technology companies “changing the way we live our lives”, has faced relentless selling pressure. This has driven down American stock markets, due to the disproportionately large weightings that these areas represent within US bourses. The same dynamics are also playing out globally, simultaneously affecting other major regional stock indices.

If you are not a close follower of financial markets or only follow the UK’s FTSE 100 index, you might be surprised to learn of this mini drama. This is because the FTSE is up 2.3% over the same time period.

To understand why some investment areas are currently feeling acute pain while others are coming out seemingly unscathed, it is necessary to revisit the polarised dynamics that have characterised the investment world of the past few years.

Financial markets have effectively been playing out the financial equivalent of the ‘tortoise and the hare’ story, much to the frustration of any ‘fundamentally’ focussed investor. In the financial version, the Tech and other disrupter high-flyers (trading at very high valuations) continued to soar (despite eye watering price tags) while more traditional investment types (trading at sensible valuations) remained grounded. Most recently – in effect since the first vaccine discovery in November 2020 – this tide has started to turn, becoming more violent since the start of 2022.

It is important to point out that we are not against inevitable change when managing your investment portfolios. Instead, our greatest concern was always that such popular areas of the marketplace had become excessively overbought, leading to – by historical standards – very high valuations. If the past serves as a good guide, such stories never tend to end well. The only debate is usually for how long and by how much the bubble might inflate before it inevitably pops. For this reason, we chose not to back the seemingly unstoppable ‘hare’ based on a long-term understanding of financial market human behavioural dynamics. We prefer to remain disciplined to the long-term fundamental rules of the game as we see them.

Although markets never move in a straight line, it seems that a turning point may now have been reached. This is due mainly to higher inflation expectations, as market participants came round to believe inflation might actually be less temporary than first thought. As a result, more powerful expectations of interest rate hikes in the US (and globally, with the Bank of England recently hiking rates by 0.25%) have provided the catalyst for change, upsetting what to us always looked like a fragile set-up.

The first vaccine announcement in November 2020 served as a good marker of when the tide started to turn. It acted as an economic recovery catalyst and the change has been slow and gradual but turning more violent of late.

The investment types starting to come back into vogue include cheaply priced Value stocks, including UK Equities and generally most developed market stock markets, aside from the expensive headline US market (due to its large Tech weighting). Property, Commodities, defensive stocks – including Infrastructure – have also benefitted from this rotation. It might not come as much of a surprise to learn that these investment types are all generally perceived as inflation beneficiaries (or of rising interest rates in the case of Financial stocks, a Value sector), which makes sense given the sudden reassessment of this risk factor.

Fast Growth, Tech and higher risk Mid and Smaller Cap Equities have lagged. Their valuations are often based upon more distant growth prospects materialising (never guaranteed), which mathematically benefits from lower interest rate expectations or hurts when rates are rising. This is based on the fundamental way in which companies are always priced relative to risk-free returns ie interest earned on cash savings.

Interestingly, we note that High Yield bonds (the debt of low quality, financially less secure companies) has not really been affected by the recent turbulence. To us, this suggests the rotation between investment types does not look to be a function of weaker economic growth prospects. Rather, inflationary pressures are arguably more a function of continued economic progress, as well as other one-off factors such as older workers choosing early retirement thereby reducing the supply of available workers, leading to wage increases, which feeds into inflation. Again, this too makes sense from the perspective that cheaply valued, cyclical areas of the market may stand to gain.

Turning to other asset classes, not surprisingly, Inflation Linked bonds have outperformed conventional Bonds over the past year. Gold has edged up very slightly over the past three months, but has generally offered dull performance due to its defensive properties at a time of escape velocity since the initial Covid shock.

After a disappointing 2021 (Large Cap Tech & China faced pressure earlier than others for their own China-specific reasons), Emerging Markets have held up well during 2022. Unsurprisingly, Japan, being a large importer of energy during a period of soaring prices, has struggled. However, Japanese stocks appear to offer reasonable value looking ahead. The FTSE 100 is firmly on the performance global leader board over the past 12 months, albeit there is still significant ground to make up on a multi-year view.

Summarising, investing is very much about patience and not getting carried away with greed and fear. We are encouraged that value strategies are making back much of the lost ground in the ‘hare’ era. Importantly, the investments we hold on your behalf are not giving us sleepless nights during what might be proving to be a more stressful time for many.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

The post Investment Update – Winter 2022 appeared first on Pinnacle Financial Services & Wealth Management.

As would be expected (and in anticipation of such an outturn), financial markets reacted very strongly since ‘Vaccine date’, taking ‘confirmation’ that economic conditions would inevitably improve from dismal to buoyant. The rising tide lifted all boats, with global stocks since rising just under 30% (at the time of writing), as measured by the MSCI World index in GBP terms.

Economically sensitive, cheaper stocks (Value) outperformed aggressively for roughly six months as investors rotated from recent winners, such as Work From Home Technology companies and other market darling Growth stocks, into beaten up recovery names. Having fallen further, the recovery stocks had more to gain if they could survive to see economic normality. Mid and Smaller Company stocks rose at an even greater pace than Large Cap stocks, for similar reasons; smaller companies are generally more sensitive to domestic economic conditions than their larger, multinational counterparts. The UK FTSE Small Cap ex-investment trusts index was at one point up almost 70%. Over the one year since the virus announcement, the FTSE 100 index was on the verge of outperforming all other major stock market regions, including Europe, Japan and Emerging Markets, before just being pipped at the post by the US. This positive outcome marks a welcome change from recent years.

As ever though, it was not always plain sailing. Inflation concerns surfaced early in 2021 as supply bottlenecks and other shortages caused short-term headaches to companies and consumers. Product supply chains were hampered notably under the stresses of economic lockdowns, leading to shortages in goods such as computer chips and sharp rises in global shipping rates (which affect) the pricing of imported products that consumers buy). Several older workers also took the opportunity to claim early retirement, while the policy impact of Brexit saw a cessation in the usual influx of foreign immigrant workers, both of which contributed to labour shortages, most publicised in areas such as lorry driving. Oil prices also doubled over the year, feeding into all manner of transport and manufacturing costs.

There is much debate in financial markets as to whether widespread price increases might prove to be a temporary phenomenon – as a result of Covid disruption – that will eventually work itself out, or whether higher inflation might prove more permanent. If the latter, conventional investment portfolios could potentially face a degree of turbulence given high valuations for both stocks and bonds on many counts. That said, our judgment is that the Pinnacle Financial Services & Wealth Management portfolios (as they look today) would be expected to fare relatively well due to the inclusion of many inflation-beneficiary asset or investment sub category types.

Unlike the party mood seen in Developed country stock markets, Emerging Markets have struggled since early 2021, the point at which inflation concerns spooked markets. Generally speaking, if global central banks such as the Federal Reserve and Bank of England are seen as having to turn up interest rates in order to choke off inflation risks, less money tends to find its way to peripheral countries.

Events in China also made the headlines, not helping whet the appetite for Emerging stocks. Evergrande, the world’s most indebted property developer, defaulted on its debt, providing echoes of the global financial crisis. However, it must be pointed out that over 90% of Evergrande’s debt is owed locally within China, so the chances of this being an international debt problem via a chain reaction from bank to bank appears unlikely. Rather, problems are likely to be mopped up internally within the Chinese financial system – the authorities have many levers to pull. That said, property market turmoil generally leads to significant debt problems within the banking system, so there is certainly the potential for these to act as a drag on Chinese growth, regardless of deep pockets, offsetting progress elsewhere and those levers. Should Chinese growth come under pressure, this in turn could dampen the near-term prospects for those doing business with China (Asia Pacific region, Germany and Europe as key exporters, for example).

As a result of this and general signs of US growth paring back modestly, Bond markets appear to have become more concerned about slowing global economic growth prospects since the Summer. Since then, much of the Value vs Growth dynamic has reversed (albeit the rising tide has lifted all boats roughly equally high at the time of writing). Key central banks, including those in Canada, Australia and the UK, have sought to quell fears that they might leave an overheating economy unchecked. Consequently, this has taken the edge of some of the recovery plays since the Summer.

As would be expected in a rising tide environment, defensive assets proved dull over the past year. Gold declined – in mirror image to risk assets – for the first few months after the vaccine announcement was made, while UK Government Bonds came to lose circa 5% of their value. Since then, such instruments have broadly moved sideways, as have Corporate Bonds, over the entire period. Defensive share types also failed to join the party, with Utilities, Infrastructure and Consumer Staples (Food and Beverage) companies, for example, only registering slight gains, despite the rising tide.

All in all, 2021 looks set to close as a bumper year for investment portfolios. As always, though, we remain mindful of the need to consider the relative prospects for the tortoises as well as the hares.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

The post Investment Update – Autumn 2021 appeared first on Pinnacle Financial Services & Wealth Management.

The effectiveness of leading vaccines has largely been confirmed by the data.  Covid-19 fatality rates have been vastly reduced in recent months whilst the risk of transmission throughout the population has also notably faded.

Not only is this encouraging in itself, but governments have collectively, for the most part, responded by getting their acts together rolling out supplies across the globe, no doubt incentivised by the financial prospect of a return towards economic ‘normality’.

This positive vaccine picture gives us greater confidence that the worst might be behind us. Of course, we must not forget that no vaccine is 100% effective and further mutations and variants could yet change the picture. However, the facts would suggest that a light can now be seen at the end of the tunnel as far as economic – and hopefully daily – life is concerned. Inevitably there will be winners and losers from the changes brought to the world. For example, commercial property landlords might face new pressures from changing work and shopping habits, but it would appear that ‘business as usual’ is getting closer.

Notwithstanding the progress made in taming the virus during the first half of the year, a defensive rotation was simultaneously taking place beneath the surface in financial markets. Inflation fears (prevalent in January and February) receded almost as quickly as they prevailed! Related rising bond market rates retreated following a brief but aggressive rise. For example, US 10-year Treasury yields rose from sub 1% in late 2020 to almost 1.8%, before falling back down to 1.27% at the time of writing. UK Gilt yields followed a similar pattern. Such examples of market zig-zags in the short-term confirm to us the importance of not losing sight of the longer term picture.

As economic growth expectations weakened and inflation fears petered out more recently, some of the shine was taken off a chunk of the recovery trade. Consequently, Value, Commodity and Smaller Cap shares stalled in June as market participants looked for shelter in larger, ‘safer’ Growth stocks with greater structural prospects (but also with greater price tags).

Less aggressive economic growth forecasts might also serve to provide an important extended signal that the zero interest rate punchbowl might not be taken away any time soon. This is important when considered alongside the enormous global debt pile that has ballooned as a result of fighting the pandemic with economic stimulus. With such a large debt mound to work through, it is inconceivable that policymakers would wish to raise their own financing costs. With reopening prospects looking rosier, that seemingly offers something of an extended set of ‘Goldilocks’ conditions (not too hot, not too cold, but just right) for a little longer yet – hence explaining the continued sugar rush dynamics.

We have written several times that we feel some areas of global stock markets appear excessively valued, matched only by the degree of their popularity. In particular, US Tech/Growth names fit the bill, with these forming a large proportion of major US indices (circa 30%). Furthermore, the US stock market itself now represents nearly 60% of global stocks by value (roughly doubling from the level of a decade ago). This has been fuelled by the increasing popularity of the ‘FAANG’ Tech stocks, ESG (Environmental, Social, Governance) trends driving money into the same stocks, a shift toward passive investments that track the largest global stocks and momentum trades. All these are providing a wall of money that appears less concerned with elevated valuations, but that continues to extend this trend further still. Bearing this in mind, we continue to exercise caution with regard to areas of extreme popularity where we believe high valuation levels might come to pose a concern at some point. But until then, the music continues to play and everyone is up dancing.

The FTSE 250 Mid Cap index and UK Small Caps have surged over the past six to nine months since the recovery trade switch was flicked. Sterling assets are starting to get noticed again now that the worst of the Brexit uncertainty appears to have passed. The FTSE 100 index has fared well, albeit less spectacularly than its younger siblings. European stocks, which are more geared to global economic recovery, have also started performing over the past six months or so.

All in all, markets are continuing to absorb good news, but we remain aware that much complacency seems apparent with regard to high valuations in general. Much of this is due to the assumption of low interest rates for the foreseeable future.

The damage that unexpected inflation could cause to both components of a classic 60/40 Equities/Bonds portfolio is never far away from our minds. Should such a scenario prevail, we believe our more rounded exposures to portfolio construction and consideration of many of the historical drivers of long-term portfolio returns, could provide a greater shelter from such forces, as well as possible beneficiaries in many cases eg Commodity stocks, Value, Gold, Absolute Returns.

Ultimately, we will continue to manage your investments with discipline and without distraction in what we believe to be the most appropriate style – leaning into areas where we see value and exhibiting caution in those where we feel such a stance is warranted.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

The post Investment Update – Summer 2021 appeared first on Pinnacle Financial Services & Wealth Management.

Although it was inevitable that the progress of individual nations has varied, it is shameful that political ideologies and squabbles have taken priority over human life in too many instances. Thankfully the UK and US administrations have placed considerable focus on their vaccination efforts, as have some smaller nations such as Israel, bringing with it a reduction in transmission rates

The hope is that something closer to daily life will now follow, at which point much of the lost ground of the past year could potentially be made back in terms of both economic recovery and personal freedom.

Against this backdrop, it was perhaps not surprising to have seen Value/Recovery stocks surge since the first vaccine announcement was made in early November. Smaller companies, with their increased sensitivity to global economic growth, also outperformed.

Although the entire stock market tide rose, highly priced Growth/Quality/Momentum stocks (in general terms, past winners of recent years) have struggled in a relative sense since the first vaccine announcement in November. Global Technology (+9.6%) and Healthcare (+2.2%) have seen relatively muted gains compared to Financials (+28.4%) and Commodity Producers (+35.6%). [MSCI World sectors measured in GBP terms between opening prices 09/11/2020 to 20/04/2021]. There is talk that this rotation into ‘out of favour’ sectors is the beginning of a longer trend. Either way, the Pinnacle Financial Services & Wealth Management portfolios have enjoyed this turn in sentiment and are well positioned if the new momentum does persist.

Commodities prices have trended upwards in line with anticipated economic demand. There is a suggestion that notably higher demand could create supply shortages and inflationary squeezes. Supply chains have also been disrupted by the impacts of semi-closed economies – notably in semi-conductor chips – in which Sino-American tensions have also become elevated.

Whether or not inflation may come to rear its ugly head has become a big discussion point in financial market circles in recent months. Central banks are keen to introduce some mild inflation into the system as it would be a useful way of helping erode some of the gargantuan public debt pile by stealth.

According to central bankers, although central bank policy interest rates globally look set to stay on the floor for several years, bond markets have started to price in a legitimate case for higher interest rates sooner than was generally expected back in late 2020. This will no doubt please savers.

As a result, global bond yields spiked rapidly during January and February causing significant losses to conventional defensive fixed income Government bonds. US Treasury Government Bonds saw their largest quarterly decline in 40 years, justifying our light stance with so-called ‘riskless’ bond investments. (Nothing is riskless if you overpay).

It was not only conventional Bonds that fell in value. ‘Bond proxy’ defensive equity instruments such as Consumer Staples, Utilities and Infrastructure stocks also struggled, as did Gold, despite the longer-term arguments for the yellow metal in the event of heightened inflation prospects. But in the short-term, the defensive stance lost that tug of war.

Turning to global stock markets, our taking of pole position on vaccines meant that British stock markets powered ahead against global yardsticks.  For a similar reason, US equities also outperformed, despite their heavy Tech and Healthcare weightings – other areas did the heavy lifting.

In currency markets Sterling rallied, while UK Small and Mid Cap stocks outperformed to an even greater extent than the FTSE 100. Sterling assets look like they are beginning to play catch-up after being left on the ‘naughty step’ in recent years.

In the Emerging Markets, Brazil and India look to be under immense stress from surging infection rates and hospital infrastructures struggling to cope. Unlike their developed market counterparts, general rising indebtedness levels in the emerging world could potentially pose more serious financial credibility problems. Large developed Western countries have the keys to the printing presses, whereas emerging countries have traditionally faced little choice but to keep their houses in order otherwise they run the risk of traditional financial crises. Ensuring that those in the developing world receive access to vaccines will be critically important in avoiding this fate at a difficult time for their people and economies.

On the other side of the Channel, political bickering and inaction in Europe looks to have presented the real risk of a third virus wave across much of the continent, in contrast to the proactivity demonstrated in the US and UK. Asia also looks to have the virus and economic situation largely contained, highlighting yet again the case for regional diversification within investment portfolios at all times.

Wrapping up, financial markets have continued to progress to dizzy new heights, hitting new peaks on many international stages. This has been fuelled in part by optimism and also due to the immense global fiscal stimulus packages that have been put in place, leaving the financial system awash with cash. The inflation hawks and gold bugs are starting to speak up as expectations for higher prices creep in.

Stock and bond market valuations are both on the high side, albeit there is polarisation between the various camps. The real elephant in the room would be that unexpected inflation could threaten equity and bond markets simultaneously. Given the risk posed by this dynamic to traditional bond and equity portfolios, we are mindful of the need to remain vigilant on this count.

It would appear that 2021 has got off to a very good start, but by summer we are likely to be in a position to know whether that bullish optimism today can be justified by the data. Fingers crossed that it can.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

The post Investment Update – Spring 2021 appeared first on Pinnacle Financial Services & Wealth Management.

The huge stimulus packages put in place by the authorities – for example the US Fed policies measured in $ trillions and the latest €750bn European recovery package – have, in effect, put a floor in place for financial asset prices, creating a tide of global liquidity.

Much of this wall of money – hot off the financial printing presses – is finding its way into global asset markets, pushing many stock and bond prices close to pre-virus highs and, in some cases, beyond.

This apparent resultant steadiness may, on the surface, suggest that things are returning to normal, but financial market professionals know that there are notable lessons from historical bear markets that we must observe. When the authorities put a floor in place (especially via co-ordinated action from multiple central banks) despite dismal news and outlook, asset prices tend to then find the potential to recover, laying the foundations for moving on and this same pattern is presenting.

Meanwhile, in the ‘real world’, it is becoming evident how differing virus containment strategies (to simplify) have led to diverging outcomes between countries eg. US deaths are looking of great concern in comparison to those in Europe, while trends are also worrying in India and Brazil.

On the whole, mortality statistics would suggest, positively, that knowledge on how to contain the virus and slow its spread/impact appears to be increasing. Although it could be argued that perhaps with wiser, older generations being understandably more cautious and sensibly staying at home, they are keeping out of trouble and away from the grimmest category of the published statistics.

Unfortunately, the risk of economic health being placed ahead of the literal health of citizens is a disappointing but inevitable outcome in many instances. When the economic stakes are so high, the show must go on, when perhaps it shouldn’t.

It is often written that the virus has imposed dramatic technological progress and engagement upon us all. The anticipated sedate adoption over  multiple years of home working, Zoom meetings, online consultations with doctors and to some degree  obsolete shopping centres and fully manned offices are just part of our ‘new normal’ when previously they would have been seen as radical jumps. While this is true, the immense polarisation this is creating is leading to a widening gulf between investment winners (Tech, Healthcare, Gold) and losers (to oversimplify, anything else). Having said that, we note that the rising tide has lifted even the losing boats, albeit not by as much.

Markets are knee-jerking to vaccine hopes although for the most part, cheaper, out of favour recovery stocks (‘Value style’) are facing ever greater risks. Zero sales revenue is a new scenario that few, if any, analysts had seriously modelled in recent times, threatening the financial viability of even some big, ‘grown-up’ companies.

This outcome has sadly hurt our portfolios given our long-term tilt to cheap stocks (based on long-term history and the merits thereof) and we have naturally had to make some difficult assessments and cut losses in places as we look to draw a line and adapt where it is the right thing to do.

With Government Bond rates now essentially pinned at zero across the developed world, money has fewer safe places to hide than ever, that is if you wish to receive a return at the same time.

Logically, Gold looks to be the next ‘safest’ place if Government bonds no longer offer a return. This probably explains much of the yellow metal’s ferocious rise year-to-date with related gold mining stocks rising at an even faster pace.

It is entirely possible that a ‘gold bubble’ could follow given the wall of money and long-term fundamental case for escaping debt-ridden fiat (Government-issued) paper currencies like Sterling, Dollar etc. over the decades ahead. That said, perhaps the gold market might have run a bit hot in the near-term and progress with a vaccine could certainly reverse the sentiment for ‘fear assets’. Nothing ever moves in a straight line.

Back in Britain, the authorities are desperately looking to stem the leaks from the bucket by plugging dozens of multi-billion pound holes with economic stimulus. It certainly seems far too early to worry that the bucket will overflow pushing up inflation. However, Brexit concerns are still afoot and the usual late night poker antics are surely inevitable at the negotiating table while the political stakes remain so high.

The FTSE 100 index continues to prop up the table of global stock indices given its multiple out-of-fashion characteristics and highlights the importance of having a global investment portfolio.

In conclusion, the risks of being very right or very wrong are higher than ever and we are unwilling to take big bets on the future market direction from here and instead are seeking appropriate ways to hedge against varying scenarios.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

The post Investment Update – Summer 2020 appeared first on Pinnacle Financial Services & Wealth Management.

What’s been happening?

Markets have been slow to respond to the potential for Coronavirus to develop into a global pandemic. As contagion has spread beyond China, however, we have seen a sudden sell-off across global markets to the point where many individual stocks – especially in the US market – are heading towards correction territory  (-10%).

There are a number of reasons for the severity of the sell-off:

• Although indications are that the number of deaths from Coronavirus is only a fraction of that for seasonal flu’, there is no known protection or cure at present. Markets hate uncertainty and that includes a previously unknown and unpredictable pandemic. The race for a vaccine is on.
• In recent years, China has become the world’s factory for the component parts that other companies rely on to build their own products – everything from chips in smartphones to engine parts for cars. So when China closes its manufacturing plants, it creates a supply chain gap for other global businesses.
• People businesses – such as casinos, hotel chains, shopping centres and airlines are suffering as people avoid travel and shy away from crowded places and the risk of contagion.
• Some stocks – particularly in overcrowded growth sectors like IT – were already looking very expensive and due for a correction.

It’s not all bad news.

As is often the case where stock markets decline sharply, there has been a ‘flight to safety’ – meaning that people are buying government bonds and gold. This is good news for KMD’s diverse portfolios that already have exposure to these investments. Stock markets can never be a one-way bet, and so maintaining a diversity of exposure to different types of asset has always been our preferred way to mitigate the downside risks of a hit to one portfolio element.

Another important attribute for long-term investment success is patience and the art of knowing when it’s best just to do nothing. As Warren Buffet, one of the world’s most successful investors said this week: “investors should not buy or sell businesses based on the day’s headlines”. It’s important to remember that there are real businesses behind these falling stocks and they have not closed their doors forever. They may experience a temporary trading set-back but, if the world needed their products and services before Coronavirus, they will need them again when it’s over and normality returns.

What people often forget is that volatility is normal for stock markets and the best way to ride out the peaks and troughs is to avoid attempts at market timing – a sure way to lose money in brokerage fees. As the chart below shows, over the longer term, stock markets bounce back from epidemics. The war time advice of ‘keep calm and carry on’ has never seemed more appropriate. The worst thing to do is to ‘panic sell’ which only results in crystallised losses and the dilemma of when to buy back in.

When investors return to the markets (as they inevitably will) they will probably be more discerning and realistic about prices – perhaps signalling a revival in the value investment strategy.

A rebalancing exercise

As you are aware, our Investment Committee meets on a quarterly basis to discuss the medium- to long-term investment strategy and to review the performance of the underlying funds selected for our portfolios. At the last meeting, some minor adjustments to portfolios were recommended and agreed, and you will be receiving a separate communication from us about this. We would like to stress that our rebalancing decisions are taken as part of our long-term, cautious approach to investment and never as an attempt to time markets.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

Dean Aitchison
BSc (Hons), IMC, MCSI, MIMA
Chartered Wealth Manager
Investment Manager

www.kmdpwm.co.uk

February 2020

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The post Coronavirus – A Briefing Note appeared first on Pinnacle Financial Services & Wealth Management.