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.


PMIs, Supply Hiccups and Shares

Is the party ending? That is the question many financial commentators we follow asked as manufacturing purchasing managers’ indexes (PMIs) rolled in Monday. These monthly business surveys showed continued growth on both sides of the Atlantic, with some nations even accelerating modestly. But they also showed the strain of severe supply shortages, and we have seen some experts warn the economic recoveries from lockdowns are about to hit a harsh speedbump—particularly in Britain and manufacturing powerhouse Germany. We do think it is fair to presume businesses will have problems fulfilling orders in the near future, and that will weigh on output. But derailing the recovery seems a stretch, and markets have already signaled as much, in our view.

Overall, July PMIs were strong. As Exhibit 1 shows, the headline results clustered around 60—well above 50, the line between growth and contraction (according to the surveys’ methodology). New orders also grew at a fast clip, based on the commentary in IHS Markit’s press releases. Our research shows that is ordinarily a great sign for near-term economic growth, as today’s orders are tomorrow’s production. But these days, rip-roaring new orders can be a headache for businesses. Supplier delivery times are on par with lockdown-era disruptions, complicating manufacturers’ ability to keep up with demand. The PMIs demonstrated that many are hoarding resources and components, fearing even greater supply disruptions later, and instead fulfilling orders by drawing down stockpiles of finished goods. Even so, order backlogs are growing at or near record rates in most major nations—a sign demand is outpacing manufacturers’ production capacity.

Exhibit 1: Dissecting July’s PMIs

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Clearing the Air in ESG Investing

Is how a company makes money—and not just how much it makes—important to you? If so, you may be interested in “environmental, social and governance” (ESG) investing. But as the ESG investing realm gains popularity, confusion seemingly abounds over whether companies simply ticking the right ESG boxes will deliver superior returns. (In our experience, no one factor or set of factors outperforms permanently.) To help clear things up, here are some tips we think can assist you in navigating a still-budding investment space if it appeals to you and fits with your long-term financial goals, risk tolerance and other factors we think are crucial to determining anyone’s investment strategy.

Since ESG’s inception, a big question has perennially cropped up amongst commentators we follow: how to measure and compare companies’ progress outside traditional metrics like profits, revenues, gross profit margins (calculated as revenues minus cost of goods sold, divided by revenues, which we think is a good measure of the profitability of companies’ core business units) and market capitalisation (number of share outstanding multiplied by share price—the total market value of a company). Many research firms and index providers we monitor have since stepped in, introducing a series of ESG scores, which rate firms across a series of different criteria. Whilst these scores can be useful to help you avoid business activities you may object to or find counterproductive, we think it is important to note they are chiefly measures of operational risk. In our view, ratings can’t—and aren’t intended to—signal which firms will perform better in share-price terms; they are simply one input of many in that regard.

Furthermore, we have observed many financial commentators—and increasingly regulators—bemoan there is no consistent standard amongst ESG rating firms, as ESG factors are largely qualitative. For any given company, ESG rating firms can give wildly different scores, which we think highlights rankings’ inherent subjectivity.[i] Even if two raters used the exact same information, they could award different scores based on the methodology they use. For example, when it comes to numerically assigning a social score—ranging from a corporation’s leadership diversity to its child or slave labour exposure—which one do they think is more important? (Presuming the company’s reporting on the latter is even accurate, given the complexity of multilayered overseas supply chains and potential lack of transparency.) Even when an issue is theoretically possible to measure, say the carbon emissions a corporation is responsible for, in practice, raters can generally only estimate that figure—another data limitation likely rendering comparison more art than science.[ii] In our view, patchwork disclosure and hard-to-quantify variables often render ESG ratings a judgment call.

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What to Make of Recent Rising Inflation

The UK’s Consumer Price Index (CPI) inflation rate accelerated to 2.5% y/y in June—a three-year high and above the Bank of England’s (BoE’s) target.[i] The release spurred many questions amongst financial commentators we follow, including: Are higher prices here to stay? How will the BoE respond? What will this do to UK debt, considering one-fourth of the debt outstanding is inflation-linked?[ii] In our view, these questions seem rather hasty. We think the faster inflation rate is likely to prove temporary—not the beginning of 1970s-style surging prices or the start of a debt spiral necessitating draconian spending cuts and tax hikes.

Whilst CPI’s June reading grabbed eyeballs, the acceleration wasn’t surprising to us. One reason why: a math quirk known as the base effect. Many statistics agencies report CPI on a year-over-year basis—i.e., the percentage difference between a given month and the same month a year prior—to smooth over short-term data volatility and show longer-term trends. But one-time events (e.g., last year’s COVID lockdowns) can cause major skew.

We have seen many experts recognise this calculation quirk, too. The ONS has noted lockdowns hurt demand for many goods, which affected certain CPI categories. As the agency described, “Spring 2020 saw crude oil prices fall to a 21-year low. At first this impacted producer prices, but it quickly fed through to lower petrol and diesel prices. Average petrol prices fell by 10.4 pence per litre between March and April 2020, the largest monthly fall since the current series began in 1990. As those negative contributions from last year’s falls drop out of the 12-month growth rate and are replaced by positive contributions from higher prices, this base effect can be expected to place upward pressures on headline inflation for the next few months.”[iii] The ONS anticipates these pandemic-related distortions to fall out of the year-over-year figures in a few months’ time—a sensible projection, to us.[iv] 

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Slower Economic Growth Likely Won’t Sway Equities

With government stimulus hopes in developed nations in question and some economic data showing slowing growth of late, many financial commentators we follow are increasingly seeing the recent growth-rate pop as fleeting—and worrying it spells trouble. In the UK, May’s weaker-than-forecast monthly gross domestic product (GDP, a government-produced measure of national output) reading caught some experts off guard.[i] In the US, research outfits whose work we follow are already projecting slower-than-average GDP growth—and the possible implications—after government aid elapses. Now, we have long argued the reopening-driven growth surge would fade fast. But we disagree with the worried conclusions. Equities can do great in a slow-growth economic environment—worthwhile to keep in mind for investors.

When we see financial commentators argue a development or trend is good or bad for share prices, we find it valuable to research historical market data. The past may not foretell the future, but in our experience, it can help you assess probabilities—and provide data to test claims. Before last year’s pandemic-driven economic contraction, US annual GDP growth averaged 2.5% from 1989 – 2019.[ii] Over that period, we found stretches when strong GDP growth coincided with strong US equity returns. For example, from 1996 – 1999, annual GDP growth averaged 4.4%, and the S&P 500 delivered four years of returns above 20%—including 33.4% in 1997.[iii] But markets don’t need strong growth to surge. US shares rose 37.6% in 1995—its best year of the decade.[iv] Yet GDP grew 2.7% that year, its weakest reading of the 1990s expansion.[v]

Moreover, periods of weaker-than-average US GDP growth haven’t hurt US shares, as evidenced by the last bull market (an extended period of generally rising equities). From 2009 – 2019, US annual GDP growth averaged 1.9%—a percentage point below its 2.9% average from the preceding 20 years.[vi] But the S&P 500 spent just one year in the red during that stretch—2018, when GDP grew 3.0%, its second-fastest rate of the period.[vii] American equities’ best year was 2013 when they rose 32.4%.[viii] Yet GDP grew just 1.8% that year—its third-weakest during the expansion.[ix] More broadly, the S&P 500 was up 351% from 2009 – 2019, far exceeding the non-US developed world.[x] Slower-than-average GDP growth didn’t stop American stocks’ world-leading ascent.

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The ECB’s Strategy Review Likely Yields Little New

In the days since it concluded last Thursday, many financial commentators we follow have hailed the European Central Bank’s (ECB’s) 18-month strategy review seeking more effective monetary policy as a big shift. Many cite the ECB’s new twist on inflation targeting and a plan to help fight climate change as landmark achievements. But we think if you tune down the rhetoric to look at reality, you will see the new strategy is pretty hard to distinguish from the old.

The chief change to the ECB’s target inflation rate appears almost imperceptible to us. Instead of seeking an inflation rate “close to, but below” 2% y/y, now it is a “symmetric” 2% target.[i] According to the ECB’s announcement, this means inflation above and below 2% are “equally undesirable.” That may be, but we think markets are more interested in what the central bank would do about them. Many commentators we follow assumed the ECB would tolerate above-target inflation for a while if it was below before, like the US Federal Reserve’s (Fed’s) new inflation targeting approach.[ii] But that doesn’t seem to be the case. As German Bundesbank head Jens Weidmann—1 of 25 members on the ECB’s Governing Council—noted, the new strategy doesn’t try to make up for past undershoots with above-target inflation.[iii] We think it simply gives policymakers theoretical cover for trying to lift inflation toward the 2% y/y target, should it fall below that mark. The differences between this and the extraordinary monetary policy of the last seven or so years when inflation ran sub-target seems pretty semantic to us.

In our view, that verbal cover underscores the ECB’s inability to hit its target. This isn’t to knock the ECB specifically. According to our research, there is little evidence any central bank can reliably hit inflation goals, whether it is the ECB, Fed, Bank of England or Bank of Japan.

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2021 Halftime Report

2021 is officially half over, and if you are at a loss for how to describe it, you probably aren’t alone. In one sense, a lot has happened. The events in America’s capitol on 6 January, Brexit, the Suez blockage, the wild ride of GameStop and other so-called meme shares, family investment office Archegos’ collapse, cryptocurrencies’ wild ride, all things dogecoin, COVID’s delta variant, the Indian tragedy, new lockdowns in Australia, sabre-rattling in the Taiwan Strait and South China Sea, Middle Eastern conflict, you name it. But markets have seemingly told a different story, extending one of the longest quiet periods in recent memory. Day-to-day volatility is low.[i] As many outlets have noted, US shares have now gone without a -5% drop since last autumn.[ii] That might be why headlines have seemingly hyped every little wiggle along the way to global equity markets’ 11.9% first-half return, which we think illustrates the myopia seemingly plaguing the investment world right now.[iii]

One of what we consider Q2’s more interesting developments didn’t receive much attention from financial commentators we follow: Growth shares trounced value, 10.7% to 4.6%.[iv] Growth-orientated companies generally have higher valuation metrics like price-to-earnings ratios and focus on re-investing profits into the core business to expand over time, making their profits relatively less sensitive to economic growth rates. By contrast, value-orientated companies, which dominate UK markets, tend to carry relatively lower price-to-earnings ratios and more debt, making them more sensitive to economic conditions, and they tend to return more money to shareholders via dividends and share buybacks and invest less in growth-orientated endeavours.[v] Growth shares have led cumulatively since the recovery from last year’s downturn began on 16 March 2020.[vi] But value has had bursts of leadership, including an attention-grabbing run earlier this year. Yet since that value countertrend’s zenith on 13 May, growth jumped 11.1% while value managed to rise just 1.7%.[vii] Yet, strangely, most commentators we follow act like value remains on some huge tear whilst growth is stuck at the starting line with a sprained ankle. Consider this as Exhibit 22,567,938 in the wealth of evidence we have shared with readers over time suggesting that letting headlines drive your investment decisions likely isn’t a winning move. Sometimes, in our view, they are myopic and sensationalised. Other times, our research indicates they are dead wrong.

With growth shares, leading in Q2, growth-heavy sectors did a lot of the heavy lifting. Tech was the best performer at 11.4%, bringing it in line with the world year to date.[viii] Communication Services, home to many Tech-like firms, also outperformed at 9.1%.[ix] But Energy defied the trend, as oil market fundamentals seemingly outweighed stylistic factors. It kept outperforming and remains the market’s top sector year to date.[x] We think this is likely to prove fleeting, as the reopening demand mini-boom appears likely to run out of steam sooner rather than later and oil producers worldwide still have plenty of spare capacity.[xi] Based on our research, supply and demand appear likely to balance out before long, which we think in turn is likely to put a lid on oil prices and cool earnings growth for that sector.

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New Political Developments in Sweden and France Speak to Old Reality: Gridlock

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

One week after the big upset at Chesham and Amersham’s by-election, several financial commentators we follow are still dissecting the results and their potential implications for the UK government and its plans for housing policy, pensions and more. But this is just one of the big political stories in Europe over the past two, all of which we think point to continued political gridlock on both sides of the English Channel. In our view, this is a positive development for equity markets. When governments are less active, it reduces the likelihood of sweeping legislation creating winners and losers, which we think reduces the uncertainty facing equities. In the UK, this already appears to be playing out in the Conservative Party’s internal debate over whether to adjust its housing development proposals following the loss in Buckinghamshire. Read on for the latest across the Channel.

France’s Regional Elections Drain President Macron’s Political Capital

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UK GDP Tells a Well-Known Story

UK gross domestic product (GDP, a government-tallied measure of economic output) just registered its fastest monthly growth rate since July 2020.[i] Yet the nation’s recovery still trails many major developed economies, according to the Organisation for Economic Co-operation and Development (OECD)—and the outfit also warned domestic developments (e.g., Brexit) may hurt future growth.[ii] Whilst the latest GDP figures and projections tend to grab eyeballs, we think they are old news to markets—a point investors benefit from keeping in mind, in our view.

GDP rose 2.3% m/m in April thanks to the services sector’s 3.4% growth.[iii] COVID restrictions eased throughout the month, and the data confirm as much, as consumer-facing services (e.g., retail trade, travel and transport, and entertainment and recreation) jumped 12.7% m/m.[iv] Other people-facing services categories surged, including accommodations (68.6% m/m), food and beverages (39.0%) and other personal service activities, which include hairdressing (63.5%).[v] Education—the second-biggest contributor to growth behind wholesale and retail trade—rose 11.2% m/m and added 0.72 percentage point to GDP growth as more students returned to the classroom in person.[vi]

Services is nearly 80% of UK GDP, so strong growth there was more than enough to offset contractions in the other two major sectors, production (which includes manufacturing as well as mining and oil extraction) and construction.[vii] They contracted -1.3% m/m and -2.0%, respectively.[viii] Yet that weakness appears to be temporary, as mining’s -15.0% m/m decline stemmed from planned temporary maintenance closures at oil production sites.[ix]

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The UK Is Lining Up Trade Deals

Whilst much of the media focuses on the trade-related spat between the UK and EU over the Northern Ireland protocol, UK trade negotiators have apparently been busy. Last week, they finalised a fishing rights accord with the EU and a trade deal with Norway, Iceland and Liechtenstein.[i] Next up on the UK’s trade agenda: a UK-Australia trade agreement scheduled for mid-June. Talks are also in progress with New Zealand, most of the Pacific Rim, India and America.[ii] Note: We still don’t know if all or any of these deals will happen—the EU fishing and the Norway (et al) deals still need ratification, for example. But the symbolism is noteworthy, in our view: Post-Brexit Britain doesn’t seem to be retreating from the world, confounding some financial commentators’ portrayal of Brexit as a protectionist, isolationist move. That is a good lesson, we think, in not taking political rhetoric at face value when formulating an equity market outlook and making investment decisions.

Five years ago this summer, in the wake of Britain’s referendum to leave the EU, we observed many commentators theorising that the vote meant the UK was turning its back on the world and global trade. We saw others go further, suggesting it was a sign globalisation was in retreat. Meanwhile, the negative thinking implied, the UK was shooting itself in the foot, there was no upside to severing EU ties and calamity would result. Whilst we took no side in the debate and were neither for Remain or Leave, this argument did overlook a simple point: Leaving the EU freed Britain to pursue new deals of its own. Now that appears to be happening in full swing, and we think those still waiting for protectionist disaster may be disappointed.

To see this, consider all of the UK’s recent trade agreement activity. Even before Brexit took effect, there was the main EU trade agreement struck Christmas Eve and deals with 67 countries to preserve the trade agreements Britain was party to as an EU member-state.[iii] Yes, some loose ends remain, like squabbles over the treatment of goods crossing the Irish Sea. But some of these have even been ironed out, including last Thursday’s agreement on fishing rights for the next year with the EU. Point being, this relationship will now look like most trade relationships globally. Occasional tiffs leading to talks and further deals. The heavy lift, the trade deal, seems behind us.

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Why the G7’s Tax Deal Is Probably Less Than It Seems

A landmark deal.[i] That is what we have seen many headlines call a global minimum tax agreement Group of Seven (G7) finance ministers reached over the weekend, endorsing a 15% minimum corporate tax rate and agreeing to tax multinational corporations’ profits where they are earned regardless of whether they have a physical presence in that country. But before presuming a tax hike is inevitable, we think a little perspective is in order. For one, US President Joe Biden and US Treasury Secretary Janet Yellen appear likely to encounter gridlock in America’s Congress, where legislators from both parties have indicated they are rather cool on the notion of sweeping tax change. Without ratification in all participating nations, the weekend’s deal likely amounts to nothing. Beyond that, the G7 is just seven nations, all of whom appear to gain more than they lose from this agreement, in our view. An actual global deal, whether via the Group of 20 (G20, a forum for 19 individual countries and the European Union) or Organisation for Economic Co-operation and Development (OECD), is another matter entirely, in our view. That is but one reason we think this weekend’s agreement isn’t a game changer for any one country—or for giant Tech and Tech-like companies, which many financial analysts think this tax plan targets.

Like all G7 communiqués, this breakthrough is a political agreement, not a new law. But if the participating nations pass the relevant legislation, it would establish a minimum tax rate of 15% for all multinational companies doing business in these nations. That includes big US Tech and Tech-like firms, which would have to start paying taxes in all nations where they sell goods and digital services, not just the countries where they officially domicile. The communiqué states this coordinated regime would replace national digital taxes, ending the US’s separate tit-for-tat battles with France and the UK. Yet it isn’t clear, in our view, that this will raise a ton of revenue for these nations or be a giant headache for businesses, considering the tax applies only to companies whose profit margins exceed 10%. The huge American Tech, Consumer Discretionary and Internet Media companies this tax seems to target could ensure their margins never meet that threshold—for example, by spending and reinvesting back into their business—helping them avoid the tax altogether. But even if they don’t, paying 15% in France, Germany, Italy and Britain, instead of booking all European profits in a low-tax nation like Ireland (whose corporate tax rate is 12.5%), isn’t exactly going to destroy after-tax earnings, in our view. If anything, it might raise barriers to competition from smaller companies, which we suspect is a big reason some Tech-like giants publicly supported this effort.[ii]

But we think that is largely where the significance ends. The G7 consists of the US, UK, Germany, France, Italy, Japan and Canada. Their corporate tax rates, respectively, are 21% (plus varying US state rates), 19% (with a scheduled increase to 25% in 2023), 29.9%, 34.4%, 27.8%, 29.7% and 26.5%.[iii] What do all of those numbers have in common? You guessed it: They are all a lot higher than 15%. The agreement doesn’t require any of these countries to raise their own rates to level the playing field for all. Instead, they all theoretically get a bit more of the global tax pie. Therefore, agreement amongst these seven nations was probably always the easy part, in our view.

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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.