MarketMinder Europe 

MarketMinder Europe

MarketMinder Europe provides our perspective on current issues in financial markets, investing and economics. Our goal is to analyse key topics in an entertaining and easy to understand manner, helping you see the news of the day in a unique perspective.

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.


What Investors Can Glean From Q4’s GDP Slowdowns

One month into 2021 and several major economies have released their government-produced measures of economic output—known as gross domestic product or GDP—for Q4 2020. After huge accelerations in Q3 GDP growth rates, many Q4 readings ranged from slowing growth to an actual return to contraction. Though these data are old news for markets, which we think are forward-looking, the numbers confirm several trends. Perhaps the biggest such trend: The broad reaction to the data is largely rational based on the news coverage we read—a sign of rising optimism, in our view, and worth noting for investors. 

After the US announced Q4 GDP on 28 January—growth slowed from a 33.4% annualised rate to a 4.0% rate (an annualised rate is the rate at which GDP would grow in an entire year if the quarter-over-quarter growth rate repeated all four quarters)—the eurozone followed suit.[i] Prior to the release, many economists’ expectations were low, as targeted lockdowns returned across the Continent in November and December. The results indicate projections were rational, as eurozone GDP contracted, but the numbers also largely beat expectations—signalling some economic resiliency. Germany and Spain even managed meagre Q4 growth.

Exhibit 1: Q4 Eurozone GDP

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Sentiment Watch 2021: Share Buyback Edition

Judging by the financial news publications we read regularly, press coverage has become much more cheerful over the past several weeks, in our view. Where once commentators we follow seemed pessimistic, seeing reason after reason equities had come too far, too fast, we think they are now fairly optimistic. Market sentiment overall doesn’t yet appear euphoric, as expectations for the economy still seem broadly reasonable to us currently. However, we think parts of the market are becoming frothy, making sentiment’s evolution a key factor to watch this year. In this regard, we find recent shifts in attitudes toward share buybacks notable.

Share buybacks, as the name might imply, refer to companies purchasing their own shares. Many consider this to be an alternative way of returning earnings to shareholders (the other main way being to pay a dividend). According to the theory, a buyback makes the remaining shares more valuable by reducing the number of shares its market value, earnings and other metrics are spread across. All else held equal, that would raise share prices and earnings per share (EPS), although there are many more variables at work.

In years past, most coverage we follow has been sceptical of buybacks. Commentators we read often echoed many American politicians’ complaints that buybacks were a poor use of capital that rewarded shareholders at workers’ expense, or they argued buybacks inflated EPS artificially and made investors think companies were more valuable than they really were. Other arguments we encountered regularly included assertions buybacks were the only source of investor demand and, if they ceased, shares would stop rallying. We think those claims didn’t mesh with reality, but they appeared to help dampen sentiment—and keep the euphoria we think contributes to bull markets’ deaths at bay.

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Weaker Data, Warmer Sentiment

With COVID caseloads spiking in the US and UK, authorities have tightened lockdowns, and economic data released last week seemingly registered the impact. But contrary to what we normally observe in the financial press this soon after a big equity market downturn ends, many financial commentators we follow are largely taking a longer-term, rosy view. Much of the coverage we encountered envisaged COVID vaccinations enabling a return to normalcy—and an economic recovery in the near future. To us, this is another indication sentiment has warmed considerably in recent months, which we think is likely boost equity markets as the year unfolds.

The latest UK and US economic data show lockdowns affecting activity, with service-related industries taking a harder hit than manufacturing. UK monthly GDP fell -2.6% m/m in November lockdowns took hold once again.[i] Services output fell -3.4% m/m, but industrial production dipped only -0.1% and construction rose 1.9%.[ii] Factories’ remaining open helped cushion GDP’s decline relative to both consensus expectations for a -5.8% dip and last spring’s sharp plunge, as manufacturing output rose 0.7% m/m.[iii] While the US doesn’t report monthly GDP, a similar disconnect is evident in other US data. Led lower by food services, December retail sales fell -0.7% m/m, missing expectations for a 0.1% rise.[iv] But industrial production rose 1.6% m/m in December.[v] It has now risen in seven of the last eight months.

Whilst the specific numbers above may have topped or missed expectations somewhat, none of them provide anything really surprising, in our view. For one, purchasing managers’ index surveys have hinted at these numbers for weeks.[vi] Two, based on our reading of the news, perhaps the most common fear after lockdowns began lifting last spring was a wintertime second wave. Virtually every expert in the field said one was likely, requiring a return to lockdowns. Our research indicates markets are efficient, quickly incorporating common views, opinions and forecasts about how the next 3 – 30 months may look. We think they price those views in advance—and in this case, that included renewed lockdowns.

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Lessons From Italy’s Latest Political Drama

Editors’ note: Our political commentary is intentionally non-partisan. We favour no politician nor any political party globally and assess political developments solely for their potential economic and market impact.

In all of last year’s chaos and mayhem, global political aficionados may have noticed one thing was absent: Italian political theatrics. But it is absent no more, as former Prime Minister Matteo Renzi pulled his upstart Italia Viva party from the governing coalition Wednesday, threatening its survival. We don’t think this is a terribly momentous event for Italian equity markets, which given the country’s history are likely rather familiar with unstable governments. Long-term interest rates don’t seem bothered either, as we will show momentarily. But in our view, the story highlights the degree of political gridlock entrenched in Italy—keeping legislative uncertainty low even as political squabbling spikes—which our analysis shows is generally positive for equity markets.

The now-splintering coalition has been in place since late-2019, when Matteo Salvini, leader of the nationalist party known as The League, pulled his party from a coalition with the anti-establishment Five Star Movement (M5S). At the time, Salvini was fresh off a much-photographed beach tour (those were a thing then) and riding a wave of popularity (pun intended). He reportedly sought to capitalise by forcing snap elections, perhaps thinking he may win an outright majority, which would theoretically eliminate the need to coalesce with a party that wasn’t very aligned with his ideologically. But Renzi, then influential with the centre-left Democratic Party (PD), opened coalition talks with M5S, and they eventually yielded a left-leaning multiparty coalition. Shortly after that, Renzi and some of his supporters left the PD and formed the small, centrist Italia Viva, which remained part of the coalition. But pandemic-related squabbling apparently nibbled away at the parties’ unity, and a disagreement on how to spend €36 billion of EU aid reportedly prompted Renzi’s exit.

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Life After Brexit, Day 7

What a difference a week makes! After closing out 2020 as the MSCI World Index’s worst-performing constituent country, UK shares jumped out of the gate in 2021, leaving the global market in the dust after the first calendar week.[i] Now, far be it from us to read into a few days’ market movement, but we think it is noteworthy that this rally arrived just as the post-Brexit chaos many commentators we follow warned of failed to materialise. Yes, there were a few speedbumps, but things seem to be going fine overall, and we think forward-looking equity markets appear to be getting on with it.

One big problem Brexit was supposedly going to cause, according to many observers in the financial press, was chaos at UK ports as hauliers got used to new paperwork requirements and—as we suspect all humans would—made some errors. The massive lorry queues that amassed when France closed its border over COVID concerns last month, according to many commentators, foreshadowed Brexit mayhem. So far, though, reports indicate things have gone much better than most expected. In one anecdotal example, Eurotunnel tweeted that all lorries crossing from Britain to France via the Channel tunnel’s shuttle train in Brexit’s first 8 hours—about 200 trucks—had their paperwork in order.[ii] Now, the Welsh port of Holyhead has reported a reduction in EU-based lorries using the UK as a stopover between Ireland and the Continent, while there is an uptick in lorries taking ferries directly from Rosslare in Ireland to Cherbourg in Northern France—a longer trip.[iii] But ports operators suggested they are sceptical that this is permanent. For one, rumours of chaos in Britain may have inspired hauliers to make the longer drive. Once it becomes clear things are running overall smoothly, activity could easily return to normal. Two, many reports indicate Brexit dread pulled a lot of demand forward, so this could be a natural hangover. Either way, the massive delays and disruptions so many commentators expected didn’t arrive.

The other big Brexit consequence many commentators warned of basically did come true: A big chunk of euro-denominated share trading left London exchanges as businesses shifted to comply with EU rules. On 2021’s first trading day, according to financial data-provider Refinitiv, roughly €6 billion of share trades shifted out of London—about half the activity normally seen, according to their researchers. That is a hit, but only a small one, as share trading is not exactly a big revenue-generator these days given low commission costs throughout the industry. Here, too, we think markets seem largely unfazed, as UK Financials are performing in line with their global counterparts year to date.[iv] Numerous reports demonstrate banks have also expected—and prepared for—this for years. In our view, small negative with no surprise power just isn’t likely to prove a major market mover.

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A Brexit Trade Deal for Christmas

Editors’ Note: As always, MarketMinder is politically agnostic. We favour no politician or political party and have no position for or against Brexit or similar geopolitical developments. We assess this and all political issues solely for their potential economic and financial market impact.

In perhaps the least 2020 thing to happen all year, UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen agreed overnight on a post-Brexit trade deal. According to media reports we read, it took 24 hours of telephone haggling over fishing rights, which ended in an agreement whereby EU fishing boats can access UK waters for five-and-a-half years but the value of their catch must fall by 25%—a deal some on both sides will likely find lovely and loathsome. Oh, and trade between the UK and EU will remain tariff free and not subject to caps or other restrictions, a win for businesses on both sides, in our view. Now, we have long argued a deal isn’t necessary for both sides’ economies (or equity markets) to do fine once the post-Brexit transition period ends next week, so we don’t view this as some major positive or super-bullish catalyst for markets. But it does clear most remaining Brexit-related uncertainty, giving businesses clarity on trade costs. More broadly, it probably helps boost sentiment, which adds to the growing optimism as 2021 dawns.

Beyond the fishing bargain, the agreement offers little that wasn’t already expected. It puts the UK outside the EU’s customs union, giving it noteworthy freedom to diverge from EU regulatory standards—a key point for those who were pro-Brexit. As a result, there will be border checks on goods crossing the Channel and the Irish Sea, leaving the border between Ireland and Northern Ireland unfettered, consistent with the Good Friday Accord. Those checks could cause some near-term backups and delays as freight firms adapt to new paperwork and procedures—not dissimilar from the interruption France closing its borders tied to COVID response caused in recent days. Moreover, the deal doesn’t apply to services—including financial services, meaning UK-based firms need to have a physical EU presence to ensure market access. That said, this was widely expected—financial commentators we follow have discussed this for years and have reported widely that many firms have already established footholds in EU jurisdictions . It also remains possible that London-based banks gain access later if the sides reach an agreement on regulatory “equivalency” or thereabouts.

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Why We Think Fixed Interest Still Make Sense in a Low-Yield World

Around the developed world, from sovereign debt to corporate, fixed interest security yields are historically low.[i] That has many financial commentators we follow asking: Why hold them at all? In our view, fixed interest’s primary purpose is to dampen portfolio volatility to mitigate swings for those needing to draw cash flow. Yes, yields today are miniscule, but we think fixed interest securities’ ability to cushion against short-term volatility endures—and makes a compelling case for them, should your goals, needs and risk tolerance make smaller swings optimal.

On 4 August, 10-year gilt yields dropped to a record-low 0.07%, and they have hovered below 0.3% since.[ii] Meanwhile, corporate fixed interest yields have also fallen to record-low levels.[iii] Both are well below their averages over the past decade (2.0% for 10-year UK gilts, 3.7% for corporates), a period when we observed many commentators also complaining about yields being too low.[iv] Yet even then, investors could take on a bit more credit risk, buy corporate debt securities with still-low default probabilities and earn positive returns even after accounting for inflation.[v] Not hugely so, but still positive. Now, some commentators say this refuge is dwindling.

Yet we don’t think record-low interest rates mean fixed interest securities play no role in portfolios today for those who need cash flow. Our research shows they tend to fluctuate less than equities in the short term—a vitally important point for these investors to weigh, in our view. If your long-term financial goals require a relatively high rate of cash flow—and after taking into account your other needs, risk tolerance and time horizon (the length of time your assets need to be invested to meet your needs)—we think a blend of equities and fixed interest can be very beneficial. Though portfolio income—interest or dividends—can help fund withdrawals, making equity sales is frequently a more reliable means of providing for cash flow needs. With this in mind, the combination of price movement and income—total return—is what matters most, in our view.

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Ratings Agencies Meet Realism in 2020

If misery indeed loves company, then you might find the following to be a heartwarming tale. For, you see, regular people aren’t the only ones who have had an awful 2020. Credit ratings agencies (companies that assign ratings to government and corporate debt securities based on their perception of the issuers’ ability to pay interest and principal) have taken their lumps, too. First they downgraded Canada and the UK and … few commentators that we follow paid them much mind. Then they downgraded two Australian states, and some Aussie financial commentators responded by rhetorically downgrading the agencies in noting just how feckless these ratings have become. We aren’t reveling in anyone getting (metaphorically) kicked in the teeth. But we think it is noteworthy that the world is catching on to the meaninglessness of ratings changes—illustrating how much the world has moved on since Standard &Poor’s (S&P) downgraded the US’s credit rating nearly a decade ago. It gives investors one less thing to fear.

Once upon a time, conventional wisdom amongst financial commentators held that if one of America’s three Nationally Recognized Statistical Ratings Agencies (NRSROs) downgraded a government’s credit rating, it would trigger mass selling of that issuer’s debt, sending interest rates soaring as investors fled the allegedly heightened credit risk. That was the raging fear we observed when S&P downgraded the US’s credit rating from AAA (the highest possible rating) to AA+ on 5 August 2011. At the time, the 10-year US Treasury yield was 2.58%, relatively low compared to history.[i] But the downgrade didn’t trigger a sudden disruption in financial markets. Pension funds and overseas governments (cough, China) didn’t dump their holdings en masse.[ii] Yields did not soar. Instead, they fell. One month later, America’s 10-year yield was down to 1.98%.[iii] A year after the downgrade? 1.59%.[iv] Now, the 10-year all the way down to 0.9%.[v] In the interim the US has had no debt crisis and seemingly no trouble finding buyers for new debt, despite quite a bit of new issuance. Other nations receiving downgrades in this era, including France, the UK and a host of other stalwarts, could tell similar tales.

None of the downgrade chatter we have observed since 2011 has matched the panicky hyperbole we saw then, but we have still seen a fair amount of fear—particularly when the UK faced another round of downgrades after the Brexit vote. This year, however, downgrade chatter seems largely absent amongst financial commentators we follow, and in our view, for good reason. It has always been our opinion that the NRSROs—which include S&P, Moody’s and Fitch—based their decisions on backward-looking information, which our research indicates markets incorporate well before it becomes part of an NRSRO’s report. For instance, in 2011, S&P’s stated rationale for downgrading the US was Congress’s protracted battle over raising America’s debt limit—a debate that had ended three days prior.[vi] Investors had spent months dealing with panicky headlines and shouting politicians. Markets, which our research shows deal efficiently with widely known information, reflected all of it—including the many popular rumours of S&P’s impending decision. The announcement merely tied a bow on everything, adding S&P’s official opinion to the many, many, many opinions we think Treasury yields had already priced in. Investors then seemingly decided they were perfectly capable of weighing risks on their own and acting accordingly, and they continued buying, sending yields lower.

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Brexit Gets a Little Bit Clearer

Editors’ Note: As always, MarketMinder is politically agnostic. We favour no politician or political party and have no position for or against Brexit or similar geopolitical developments. We assess this and all political issues solely for their potential economic and financial market impact.

They say good news comes in waves, so is it really any surprise that Brits began receiving the COVID-19 vaccine on the same day the UK and EU finally solved one of the most contentious pieces of Brexit? No, not fishing rights. But they did agree on how to implement last year’s agreement on the Irish border, prompting the British government to remove the bits of its highly contentious Brexit legislation critics argued violated international law. Tuesday’s developments don’t take a no-deal Brexit off the table, but we think they do remove some uncertainty over what that outcome would look like and what the UK’s international standing would be—an incremental positive for equity markets, in our view, although we never thought a no-deal Brexit was likely to be disastrous economically to begin with.

This agreement ends the saga that began in September, when the EU expressed its opposition to provisions in the Internal Market Bill, which set out the legal framework for post-Brexit trade in the event the EU and UK couldn’t strike a trade deal—a fallback position. Several EU officials stated they believed the provisions related to Northern Ireland violated the Withdrawal Agreement agreed last year, and even one UK cabinet minister said the provisions would “break international law in a very specific and limited way.”[i] That touched off a diplomatic firestorm, with several prominent people warning it would hurt the UK’s ability to sign free trade deals. Of course, mere days later, the UK finalised a deal with Japan, suggesting the initial reaction was overblown. Several other deals have followed or are in the works now.

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The Real Lesson From Britain’s ‘Austerity’ Error

Is the UK government about to repeat a terrible mistake? That question is stealing quite a few headlines as many financial commentators begin to anticipate Chancellor of the Exchequer Rishi Sunak moving to rein in public finances after running a massive public deficit this year.[i] Some commentators we follow are warning about the prospect of an increase to capital gains tax rates, which one government commission recently recommended. But the vast majority of commentators we follow seem preoccupied with the potential for spending cuts, which they see as a repeat of the 2010s’ “austerity”—the term widely used to describe the government’s approach to public finances during the last decade. These commentators argue big public spending cuts under former Prime Minister David Cameron and his Chancellor, George Osborne—which continued under Osborne’s successor, Phillip Hammond—doomed the UK economy to a decade of lacklustre gross domestic product (GDP) growth.[ii] Cutting spending now, they argue, would repeat this error and cause the rest of the world to far outstrip British economic growth after the pandemic fades. We don’t think it is worthwhile trying to predict what the government will do or how it will affect the UK economy, as there are just too many unknowns and human inputs. But in our view, a brief look at recent history might offer investors some helpful perspective.

Based on our reading of government pronouncements and press coverage of them during the last decade, it is true that Osborne and Hammond stressed deficit reduction whilst in office, and they used the word “austerity” a lot. But as Exhibit 1 shows, their actions didn’t amount to austerity as most of the world would recognise it. There were no draconian spending cuts. Indeed, annual public spending fell in just one calendar year, 2013, and by only £7.6 billion from the year before—a -0.9% drop.[iii] What actually happened is that Osborne deviated from his predecessor, Alistair Darling’s, plans and reduced the projected rate of public spending increases. Spending still rose, just not by as much as the prior government intended.[iv] We guess you could argue these fit under the loose definition of budget cuts, but changing a plan isn’t a spending cut if actual spending doesn’t drop.

Exhibit 1: The UK’s Not-So-Austere Decade

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Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

This article reflects the opinions, viewpoints and commentary of Fisher Investments MarketMinder editorial staff, which is subject to change at any time without notice. Market Information is provided for illustrative and informational purposes only. Nothing in this article constitutes investment advice or any recommendation to buy or sell any particular security or that a particular transaction or investment strategy is suitable for any specific person.

Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.