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.

UK GDP and a Lesson on How Markets Work

One of the central tenets of our investment philosophy, which we have mentioned here often, is that we think equity markets are forward-looking—they discount expected events over the next several months. Economic data, by contrast, are backward-looking. Data released now reflect activity that happened in a previous month, quarter or year. Therefore, if you are looking at economic data for clues into what equity markets will do, we think you are probably mistaken, as share prices will likely already reflect that earlier economic activity. This may seem like a rather abstract concept, so let us look briefly at a shining, timely example: February’s UK gross domestic product (GDP), released Tuesday.

GDP is a government-produced estimate of national economic output. Most countries release it quarterly, but the UK—like Canada—produces a monthly report, giving more insight into the economy’s short-term twists and turns. That has been particularly illuminating during the pandemic, as it gives a more detailed look at how the past year’s lockdowns have had varying economic impacts. England’s third lockdown took effect in early January, and that month’s GDP fell -2.2% from December.[i] But in February, there was a slight recovery. GDP grew 0.4% m/m, even as the entire country remained under lockdown.[ii] To us, that is a noteworthy sign of the country’s economic resilience, which we think probably benefits many people at a personal level.

But does it really mean much to shares now? Consider what happened the day before the Office for National Statistics released this report: Businesses began reopening from that third lockdown. That reopening has been scheduled since 22 February, when PM Boris Johnson announced it. Also widely known: The government’s plans to have all remaining restrictions lifted by 21 June, provided the virus doesn’t escalate again. For nearly two months, the government’s reopening timetable has been common knowledge—a fact investors were likely well aware of as they bought or sold shares. This is what we refer to when we say markets price expected events.

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The Global Minimum Tax: An Uphill Battle Even With America’s Backing

Editors’ Note: This piece touches on politics, and as such, we remind you that MarketMinder Europe favours no political party nor any politician. We assess developments solely for their potential market impact.

On the heels of US President Joe Biden pitching his American infrastructure plan—and its embedded corporate tax hike from 21% to 28%—US Treasury Secretary Janet Yellen has been doing some related policy pushing. Yellen, based on her comments, is championing a 21% global minimum corporate tax rate. Wednesday, the Group of 20, or G-20, finance ministers from the world’s largest economies said they will discuss her idea this summer, which has many commentators we follow treating her plan as if it is—or is soon to be—a fait accompli. But whatever your view of this plan, we suggest keeping your emotions in check. We think this is likely to be some very difficult sellin’ for Yellen.

The rationale behind Yellen’s proposal appears straightforward enough. A central tenet of economic theory holds that people (and businesses) respond to incentives. Taxes are one aspect of such incentives. The more you tax something, the more likely you incentivise a business to find ways around it. Worldwide, nations’ approach to taxing corporations varies pretty widely. Hence, many multinational corporations have long sought to domicile in nations with friendlier tax systems. In proposing a global minimum tax, Yellen and Biden, perhaps rightly, might indicate they fear hiking US corporate taxes could lead some US multinationals to seek friendlier shores elsewhere.

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Why Savings Aren’t Necessarily Economic Rocket Fuel

As vaccine distribution becomes more widespread, many economists we follow are becoming increasingly optimistic about economic growth. One factor underlying the excitement: Households are sitting on a massive pile of savings, with the Office for National Statistics’ latest data showing £60 billion in new savings in Q4 alone.[i] We have seen many financial commentators argue UK consumers have between £120 billion and £170 billion in savings just waiting to be spent. Some claim this is fuel that will power an economic recovery for a long time to come.[ii] But in our view, households are unlikely to spend all these savings, and we think sentiment toward this alleged mountain of pent-up demand is a key place to watch for expectations getting irrationally high.

Bank of England Chief Economist Andy Haldane is perhaps the most high-profile individual we have seen making this argument, stating recently that consumers’ spending savings should power a “rip-roaring recovery.”[iii] Several other analysts have a similar viewpoint. Yet in our view, presuming households will spend all their savings and fuel a long boom when businesses reopen from the latest lockdown seems premature to us. Yes, removing COVID restrictions will likely release some pent-up demand, as economic data from last summer indicated.[iv] A similar phenomenon probably occurs again, though perhaps to a lesser degree since retail sales declined less this winter than during the first lockdown. That suggests less demand is pent up than before.[v] It also seems fair to presume travel and leisure spending will likely get a boost as people take delayed vacations. But that is a far cry from drawing down the entire pool of amassed savings. There is no rule higher savings automatically predicts higher spending, as households could also pay down debt or keep a larger emergency cash stockpile.

That latter decision wouldn’t be unprecedented. American companies did something similar following the 2008 – 2009 financial crisis, as Exhibit 1’s look at US corporate balance sheets shows.

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A Q&A on Inflation

Inflation chatter has dominated the financial headlines we monitor recently. We have seen many economists suggest rapid inflation is inevitable as easing COVID-related restrictions allow more businesses to reopen, especially with America’s government reportedly pursuing a multitrillion-dollar infrastructure spending plan. This week, we have come across commentary arguing we are seeing the initial signs of this, which we think makes it worth a look at what generally is—and isn’t—inflation. Mind you, we don’t think rising inflation is inherently a risk for equities, which have actually done quite well during such spells in the past.[i] Our research indicates trouble generally stems from when central banks commit a monetary policy mistake—for example, being too late to attempt to rein in prices by raising short-term interest rates and then over correcting. However, monetary policy decisions are human decisions, which we think defy prediction. Still, having a better understanding of the supposedly inflationary news today can help investors seeking long-term growth keep a level head when making portfolio decisions, so off we go.

First off, what is inflation, really?

Glad you asked. Inflation, as defined by every economics textbook we have encountered, is a general rise in prices across the entire economy. Inflation measures use broad baskets of goods and services in hopes of capturing broad trends accurately. These include government agencies’ gauges, such as the Office for National Statistics’ (ONS) Consumer Price Index (CPI) in the UK, Eurostat’s Harmonised Index of Consumer Prices (HICP) and the Bureau of Labor Statistics’ CPI in America. Private-sector measures exist, too, with one example being the Massachusetts Institute of Technology’s (MIT) Billion Prices Project. At any time, our research shows some items in these inflation baskets will rise whilst others will fall, but those outliers tend to cancel each other out and let the broader price trend emerge.

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Scotland’s Election and the ‘Risk’ of IndyRef2

Editors’ Note: As always, our political commentary is non-partisan by design. We favour no politician, political party nor any given outcome in a political referendum and assess political developments solely for their potential economic or market impact.

Scotland holds elections on 6 May, and with the Scottish National Party (SNP) polling well despite a scandal embroiling its current and former leaders, independence chatter is once again running hot amongst politicians and news commentators we follow.[i] The SNP is reportedly planning to table legislation laying the groundwork for an independence referendum before the election even takes place, suggesting tough rhetoric may dominate the campaign—and driving uncertainty for financial markets afterward if the SNP wins an outright majority.[ii] In our view, it is far too early to assess the probable election results. But even if another independence push gets going, we think it is likely to have only a limited impact on UK equities.

Even if the SNP wins an outright majority, holding a second independence referendum is likely easier said than done. Per the Scotland Act of 1998, all matters concerning the union must go through Westminster. That means the UK government must approve a request from Scotland to allow it to vote on holding a referendum. Prime Minister Boris Johnson hasn’t tipped his hand on this recently, instead suggesting in a recent speech that keeping an SNP majority out of Holyrood is the only way to prevent second vote.[iii] Guessing at politicians’ motives is always a treacherous task, but we wouldn’t be surprised if this were an exaggeration to motivate pro-union Scots to turn out in May. On past occasions, he has espoused the view that 2014’s vote was a once-in-a-generation event. Again, though, we don’t think it is possible to determine probabilities one way or the other.

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Why January Trade Data Likely Aren’t All-Telling About Brexit’s Impact

Ever since Germany released official data showing January imports from the UK plunged -56.2% y/y whilst exports bound for Britain dropped -29.0% y/y, we have seen numerous commentators argue these figures show how much the post-Brexit customs controls have damaged trade between the UK and Europe.[i] When the UK’s Office for National Statistics releases its own January trade figures on Friday morning, we think a similar chorus is likely to ensue. In advance, here is a discussion of why investors weighing Brexit’s market impact will likely benefit from taking these claims with a grain of salt.

Conceptually, using year-over-year trade figures to evaluate Brexit’s impact makes sense. Using month-over-month figures (the percentage change between December 2020 and January 2021) would invite skew since business surveys and other metrics show companies stockpiled goods and supplies before Brexit took effect. That activity seemingly boosted UK imports throughout 2020’s second half, as well as exports of most non-petroleum goods in Q4 2020.[ii] Even if Brexit went without a hiccup, we think trade activity quite likely would have fallen early in 2021 as businesses worked through these stockpiles. In theory, then, using the year-over-year calculation would be better because the base (January 2020) would similarly be a period when businesses were working through similar stockpiles amassed as an insurance policy against 2019 ending without an official Withdrawal Agreement.[iii]

However, January 2021 includes a large variable that wasn’t present in January 2020: the pandemic. In the various surveys on trade that we have reviewed, companies cite this as well as the new post-Brexit customs checks as reason for difficulty in filling overseas orders. That seems to us like a sensible assessment, and in our view, the impact of each variable is likely hard to disentangle. For one, the pandemic and associated lockdowns likely affected demand on both sides of the Channel. Since January 2020 predates this, it is a huge variable possible depressing year-over-year changes now. But beyond this direct effect, consider: Absent social distancing requirements, would better-staffed ports be able to process the new customs paperwork more quickly? We think there is a high likelihood the answer would be yes, but we also think it is impossible to quantify.

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What the 2021 Budget Shows About UK Debt’s Sustainability

Editors’ Note: Our political commentary is non-partisan by design. We favour no political party nor any politician and assess political developments for their potential economic and market impact only.

Chancellor of the Exchequer Rishi Sunak unveiled the 2021 Budget on Wednesday, outlining projected fiscal policy for the next five years. And with that, the UK became the first major nation to attempt to address the question, how will they pay for that massive mountain of COVID relief spending? The answer, at first blush, is “austerity,” which generally refers to raising taxes and cutting spending in order to reduce the deficit. That term featured in a lot of the press coverage we encountered. In our view, though, there is a bit more here than meets the eye. As outlined in the Treasury’s full Budget Report, most of the spending cuts amount to ending temporary pandemic relief spending—other forms of expenditure are scheduled to continue rising. Meanwhile, most of the tax rises are scheduled for 2023 or later, which we think gives the Treasury wiggle room to change course if things go better than expected economically—perhaps delivering a positive surprise to investors. Let us explain.

Based on our review of coverage, it seemed the figure getting the most ink in Wednesday’s press coverage was £470 billion. That is how much money the Office for Budget Responsibility (OBR) projects the Treasury will have spent on COVID assistance once all is said and done.[i] Echoing the general mood following Britain’s fiscal response to 2008’s global financial crisis, many UK financial commentators and politicians alike seemed focused on solving the how to pay for it problem as soon as possible—a notable difference from the US and much of Continental Europe, which seem content to kick the can for a while longer. Looking at the Treasury’s Budget report, we think officials probably have plenty of latitude to do the same if politicians preferred that path. For our research shows isn’t the total amount of debt outstanding that really matters to public finances’ sustainability, but how much the Treasury has to spend servicing it.

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‘Super’ Mario’s New Government Doesn’t Look Super Active

Editor’s Note: MarketMinder favours no political party nor any politician and our commentary aims to be nonpartisan. We assess developments solely for how they may impact equity markets.

Italy’s new government has been in office for only one week, but many financial commentators we follow are getting optimistic about what the new regime could accomplish. A little over a month after former Prime Minister Matteo Renzi and his small Italia Viva party withdrew from Italy’s multiparty coalition—leading to that coalition’s eventual dissolution—uncertainty over the shape of the country’s government has fallen. Former ECB head Mario Draghi—aka, Super Mario in honour of the iconic Nintendo character—is now Italy’s prime minister, charged with deploying EU coronavirus aid and leading a unity government comprised of virtually every major party in Italian politics. But while uncertainty is down and Draghi may have success in deploying EU aid, we think the government’s structure suggests Italian politics are as gridlocked as ever, which we think highlights the importance of keeping measured expectations. Whether you are bullish or bearish on the idea of a much-heralded central banker leading the country, don’t overrate Draghi’s ability to enact big reforms and change—which should be fine for equities, in our view.

Draghi’s victories in twin confidence votes—first last Wednesday’s 262 – 40 in the Senate, then the 535 – 56 win in the Chamber of Deputies last Thursday—were decisive. He now heads a broad-based government with the support of the Five-Star Movement, Lega, Democratic Party, Forza Italia and Renzi’s Italia Viva. Ministerial posts will be divided amongst these supporters, with a few going to non-partisan technocrats (meaning, appointees who don’t currently sit in Parliament but have technical expertise). As for the opposition, it chiefly comprises the far-right Brothers of Italy, who have voiced objection to Draghi’s staunchly pro-EU line. They were joined by a group from the Five-Star Movement—a group the party now says it will eject, so we figure it stands to reason that Italy will probably have a new political party in Parliament soon. Regardless, though, Draghi’s new government has broad support at its dawn.

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The Year Investors Endured

12 months ago Saturday, the MSCI World Index hit its final all-time high of a bull market that began way, way back in March 2009.[i] What markets endured over the next few weeks was awful, as was the pandemic’s toll on humanity—which we are still living even now. Yet despite all the terrible things that have happened, the MSCI World is now up 8.8% since that prior peak, which we think illustrates the timeless value of maintaining discipline and a cool head if you are investing for long-term growth.[ii]

The list of struggles and tragedy endured worldwide over the past year is overwhelming, to say the least. Beyond the pandemic and its horrible death toll, we had wildfires, tornadoes, floods and deep freezes. Locusts wiping out harvests throughout Africa. Deep political divisiveness. Societal unrest. These events have touched many lives, and as a society we have learned many lessons from them. But for investors, we think there is one big takeaway: Global equity markets rose as the vast majority of these troubles unfolded.[iii] Even the pandemic’s worst effects, from the mounting death toll to the deep economic contraction resulting from lockdowns, occurred after global equity markets bottomed in mid-March.[iv] We think that sharp downturn was markets’ way of anticipating the economic trouble to come. Therefore, keeping a forward-looking perspective—and staying disciplined—was generally key to capturing the recovery and reaping the cumulative gains since 2020 began.

Saying that in hindsight is one thing. Doing it at the time, in the heat of panic, was likely exceedingly difficult for the vast majority of readers. Between 20 February and 16 March, the MSCI World Index plunged -26.1%.[v] Likely adding to the panic was the handful of sheer vertical daily drops—like 9 March’s -7.3%, 12 March’s -7.4% and 16 March’s -8.6%.[vi] Like pretty much any bear market and early recovery, big swings clustered together, adding to the sense of panic.[vii] (A bear market is a broad equity market decline of -20% or worse with an identifiable fundamental cause.) While this bear market’s suddenness was unusual, our analysis of historical returns suggests volatility coming in clumps is normal in a bear market year. But that heightened volatility cuts both ways, as bear market years also tend to feature more big up days than pure bull market years—particularly in calendar years when a new bull market began midstream.[viii] Many of those big up days cluster around the bear market’s lowpoint, which in our view makes it crucial to be invested when a bull market begins. This is why we think selling after a big decline is among the most devastating errors a long-term growth investor can make.

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What December’s GDP Report Shows About 2021

If you even peeked at financial news last Friday, you likely saw the news that UK gross domestic product (GDP, a government-produced measure of economic output) just suffered its largest annual fall since 1709’s Great Frost wiped out the harvest. Indeed, 2020 is one for the history books—and not in a good way. But in our view, a look at December’s data and the UK’s economic composition shows why the future should be bright once businesses can reopen fully.

For full-year 2020, GDP fell -9.9%, amongst the worst declines major developed-world economies have reported thus far.[i] Yet in our view, this isn’t because Britain’s economy is inherently weaker than its peers—rather, it is because services industries make up a relatively larger portion of GDP. The Office for National Statistics (ONS) estimates services contributes about 80% of GDP annually.[ii] The World Bank, which uses different criteria, places services at 71.3% of UK GDP—more than the eurozone, where the World Bank estimates gets only 66.5% of its output from services.[iii] Pubs, cafes, restaurants and personal services took much longer than factories to reopen after 2020’s first lockdown. They were also forced offline again (except for takeaway business) during the autumn and winter lockdowns, whilst factories were mostly able to remain open. As a result, the UK’s largest economic segment took the biggest hit. Countries with similar policies endured milder GDP declines largely because their economies are relatively less services-intensive.

To see this another way, consider that household spending on leisure activities—which includes restaurants, pubs, cafes and other items you might classify as spending on social activities—accounts for more than 20% of UK household spending, versus roughly 15% for the world’s other major economies (as represented by members of the G7).[iv] Hence, UK output is likely especially vulnerable to the forced closure of these businesses.

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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.