Uncategorised

CNN Business produces the “Fear and Greed Index”, a barometer of stock market sentiment. It uses a number of different measures to gauge the mood and whether share prices have run up too fast (that is the Greed factor) or fallen potentially too far (the Fear). As an indicator, in our opinion it is best used to show how our own feelings and biases can affect our decision making. When combined with other tools – including, most importantly, some fundamental research on investments – it is a useful measure of sentiment. How has it changed over time? As you can see here, the measure has been surprisingly volatile over the last year, swinging between the two extremes quite markedly, although given the events of the last year, perhaps it should not be that surprising. This oscillation between Fear and Greed was linked closely to the surge in inflation and the resultant increase in interest rates, as governments around the world instituted a series of hikes to try to cool their economies. After fifteen years of almost zero interest rates, interest rates shot up very quickly to historically more normal levels, but which, nevertheless, came as something of a shock to those who had become used to the narcotic effects of “free money”. During last year, every month’s inflation figure was awaited with the eagerness usually reserved for Euro Million Rollover draws, with investors hoping to gain some sign that pressures were abating and that interest rates had, therefore, reached a peak. Have they? Inflation has already begun a fairly quick descent from the highs and this, in turn, means that the upwards pressure on interest rates has also abated. However, there are a couple of flies in the ointment which will only really become clear over the year ahead. Firstly, where will inflation settle? Food price inflation remains high and recent disruption to freight passing through the Suez Canal via the Red Sea, coupled with low water levels reducing traffic through the Panama Canal, has put pressure on supply chains, potentially stoking inflation. Geopolitics has also kept the oil price relatively high, which has slowed the pace at which inflation is falling. What does this mean for interest rates? It looks as though we have seen the peak in interest rates and, all other things being equal, we should begin to see rates come down. Certainly, fixed rate mortgages in the UK are indicating that rates will fall, but the question is how quickly? There is no easy answer to this one and it is partly reflected in the swings in sentiment that we saw last year. One month’s data shows inflation is strong and that there are no signs of the economy slowing – cue a fall in bonds and equities as markets fear that interest rates are either going up or not coming down. The next month’s data shows fewer jobs being created and lower sales in the shops – cue euphoria and jumps in bond and share prices. However, having reached a peak, interest rates will begin to fall in due course, but probably not as quickly as some people hope (for the reasons above). Is this good news for the global economy? Recessions come in all shapes and sizes, but the technical definition is two quarters of negative economic growth. This can be, as in 2008, a collapse in the global economy or – and this type is far more common – a gentle slowing, with negative growth of a fraction of 1% in total. It is like the difference between a sniffle and flu. While we may have a recession this year or we may not – we simply do not know – it is far more likely to be of the mild variety. In any event (and to get back to the question), a falling interest rate environment is likely to create a more positive business environment for this year and next. Economies are much like super-tankers, in that it can take quite some time before the prow begins to turn and it can take quite some stopping when it does. Running an interest rate policy is, then, fraught with peril and definitely one where a good crystal ball or a skill in reading tea leaves is vital. What could go wrong this year? The list is limited only by your imagination. However, unknowns aside (i.e. the things that we do not even know are problems yet), the main issues this year are likely to be politics, the global economy and climate change. Shall we start with politics? Politics will certainly come to the fore this year. We need to have an election in the UK by January next year at the latest and we cannot imagine an electorate would thank a government who held an election campaign over the Christmas period. More likely is an Autumn election, with the gamble that the economy will show enough signs of recovery by then for a weary electorate to feel better off and more willing to give the incumbent government another go. With the polls where they are, this is going to be a tough call. What about the US? The US is interesting. The more court cases Donald Trump has to contest, the more popular he becomes – or at least the more popular he becomes with Republicans who must choose their presidential candidate. Conversely, although the US economy is doing OK, Joe Biden is not really reaping the benefit. The contest will likely come down to the polarising nature of Trump and whether enough people will vote for a candidate they do not really like to avoid having a president they do not want. However, looking at the increasingly radicalised nature of European politics and the collapse of moderate centrists, it would be a fool who would bet that Trump does not win. In many ways, this reflects the failure of existing parties to be able to deliver any rise in living standards

By Brooks Macdonald, Wednesday 22 November 2023 In stark contrast to the last, this Autumn Statement took place against a much more stable economic backdrop, a point Jeremy Hunt was eager to underline during his speech. Citing the fall of inflation down to 4.6%, and better than expected GDP growth in 2023, the Chancellor confidently declared that this was a statement for a ‘country that had turned a corner’. Higher tax revenue boosted government funds and the Chancellor has used this windfall to deliver a growth agenda. This budget has been designed to boost economic activity with the bulk of measures focused on businesses – comprising over 100 supply-side reforms. Savers and investors didn’t miss out either, with a series of pre-elections giveaways thrown in to help boost the Government’s appeal ahead of next year’s poll. Business reforms Prior to today, Mr. Hunt said that he would “remove the barriers that stop businesses growing” and true to his word he delivered one of the most substantial tax cuts for business in recent times, making the “full expensing capital allowance scheme” permanent. This £11bn billion-a-year tax break will allow firms to deduct the full cost of investments in equipment from their profits. While this has a big upfront cost, the Chancellor will hope that this creates a platform for UK increased business investment to boost economic growth and increase productivity, which has been stagnant since 2008. Pensions shake-up In a major pension shake up, the Government has introduced “Auto Enrolment 2.0,” which empowers savers to establish a lifelong “pension pot” that they can direct current and future employers to contribute to. While this move could grant savers greater control over their retirement savings, the extent of government assistance in guiding savers towards the most suitable pension provider remains uncertain. Despite heavy rumours to the contrary, there was good news for pensioners as the ‘triple lock’ pledge was honoured, lifting the state pension by 8.5% from next year. National Insurance reductions Despite his promise not to make any tax cuts that could lead to inflation, in a surprise move, Hunt reduced National Insurance for 27 million people. However, its impact on inflation will likely be negligible given the 2022 freezing of tax rate thresholds, which pushed many earners into higher tax brackets. ISA revamp Investors and savers will welcome a wide-ranging package of ISA reforms that simplify the system and encourage take up amongst younger people. The revamped regime includes the ability of individuals to contribute to multiple ISAs in the tax year without impacting their £20,000 allowance and will enable people to hold fractional shares within the tax wrapper. What this could mean for investors High interest rates still present a challenge for the economy and Hunt will hope to see the Bank of England’s policy move in lockstep with his fiscal loosening, but yesterday Bailey cautioned that the market is underestimating inflation risks. For investors, the UK remains a difficult place to judge. While sentiment has improved in recent months, a downward revision to growth by the Office for Budget Responsibility (OBR) and with inflation well above long-term targets, it’s not clear that we’re out of the woods just yet. The Chancellor believes we have turned a corner, but it’s still a long road ahead. Important information Investors should be aware that the price of investments and the income from them can go down as well as up and that neither is guaranteed. Past performance is not a reliable indicator of future results. Investors may not get back the amount invested. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. Investors should be aware of the additional risks associated with investing in smaller companies, emerging or developing markets. The value of your investment may be impacted if the issuers of underlying fixed income holdings default, or market perceptions of their credit risk change. The information here does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. This document is for the information of the recipient only and should not be reproduced, copied or made available to others. Brooks Macdonald is a trading name of Brooks Macdonald Group plc used by various companies in the Brooks Macdonald group of companies. Brooks Macdonald Group plc is registered in England No: 04402058. Registered office: 21 Lombard Street, London, EC3V 9AH. Brooks Macdonald Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England No: 03417519. Registered office: 21 Lombard Street London EC3V 9AH. Brooks Macdonald International is a trading name of Brooks Macdonald Asset Management (International) Limited. Brooks Macdonald Asset Management (International) Limited is licensed and regulated by the Jersey Financial Services Commission. Its Guernsey branch is licensed and regulated by the Guernsey Financial Services Commission and its Isle of Man branch is licensed and regulated by the Isle of Man Financial Services Authority. In respect of services provided in the Republic of South Africa, Brooks Macdonald Asset Management (International) Limited is an authorised Financial Services Provider regulated by the South African Financial Sector Conduct Authority. Registered in Jersey No:143275. Registered office: 5 Anley Street, St Helier, Jersey, JE2 3QE.