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.

A Broad Update on Energy Markets

There is a lot happening in the Energy space this week, as politicians globally react to both the horrors in Bucha and their constituents’ ire over high petrol prices.[i] Is a full EU embargo of Russian energy in the offing? Will international governments’ coordinated oil reserve releases ease the pain at the pump?

We will dive into both of these—from a pure market and economic standpoint. We are seeing oil and petrol prices become an increasingly hot political topic globally. But we favour no party nor any politician, and we don’t think markets have political preferences either. We think their focus, like ours, is on policies, not personalities. So please take a moment to turn off your political biases. … Ready? Ok!

The EU Cracks Down?

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Our Perspective on Stubbornly High Global Inflation Rates

There is a lot of inflation data out this week, and as you might have seen, it doesn’t appear good. A measure of American prices used by the US Federal Reserve accelerated to 6.4% y/y in February, a multi-decade high.[i] Meanwhile, preliminary March numbers in the eurozone suggest more pain is in store: the French Consumer Price Index (CPI, a government-produced index tracking prices of commonly consumed goods and services) sped to 5.1% y/y, and Germany’s jumped to an eye-popping 7.2%.[ii] The full eurozone’s hit a record-high 7.5%.[iii] Last week, Britain reported February CPI rose 5.5% y/y, up from 4.9% in January.[iv] We think another uptick seems likely when March data hit. We think it is fair to say the extended surge of fast inflation is a hardship for many and painful for all. Yet for stocks, painful often isn’t part of the calculus, in our experience. Rather, we think the key question for investors to ask is this: Are the ongoing disruptions forcing prices higher big enough to offset all the underappreciated positive drivers out there? We don’t think so.

Now, please note: Inflation is an increasingly partisan issue in many parts of the world. We favour no party nor any politician. Our comments on inflation are limited to the economics in question, viewed through a market-orientated lens. With that out of the way, we suspect it is worth noting inflation probably will peak higher—and stay elevated for longer—than we thought likely last summer. We think there is a simple reason for this: Russian President Vladimir Putin’s invasion of Ukraine, which rippled through oil, natural gas and other commodity markets, as well as complicating shipping routes.[v] We have all felt this at the petrol pump and when paying our electricity bills.[vi] Soon, fertiliser shortages may show up in food prices. So, too, might the potential shortages of wheat. Oil is also a feedstock for plastics and many consumer goods, making expensive oil likely to drive up costs for a wide range of products.[vii]

This is all happening at a time when we think the forces that our research shows drove prices higher throughout 2021 should be starting to wane. Last spring and summer—which might feel like an eternity ago—prices jumped off a depressed base as businesses reopened from lockdowns.[viii] Many businesses seemingly weren’t prepared for reopenings’ sudden demand influx, sending prices higher throughout travel and leisure.[ix] Motor vehicle prices also surged, especially in the US, where rental company activity appeared to be skewing the market.[x] Based on our analysis of the data, those fast increases, with 2020’s lockdown-deflated prices as the denominator in the year-over-year calculation, were primarily responsible for inflation as 2021 progressed, with supply chain issues adding dislocations later in the year.

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A Closer Look at Rate Hike Cycles and Stocks

Recent Bank of England (BoE) and US Federal Reserve (Fed) rate hikes have many commentators we follow questioning the outlook for stocks. The BoE warned further hikes are likely given its forecast for higher inflation, even as UK economic growth seems set to slow.[i] After the Fed’s first step up from zero last month, its graph of Federal Open Market Committee (FOMC) members’ fed-funds target rate projections implied more rate hikes at every meeting this year.[ii] If so, this would mean six more quarter-point increases, potentially putting the benchmark rate’s range at 1.75 – 2% by yearend. There is a lot of chatter amongst commentators we follow about what monetary policy institutions’ rate hikes might do to global stocks, but our research shows markets are often resilient as alleged tightening cycles get going.

Whilst this rate hike cycle is young, we see some preliminary evidence that successive rate hikes aren’t bad for stocks. The BoE hiked its Bank Rate for the third straight time last Thursday. It is now back to pre-COVID levels. How have UK stocks fared during the BoE’s tightening so far? Since 16 December, when the bank first hiked from 0.1% to 0.25%, to 17 March’s move to 0.75%, the MSCI UK Index is up 5.5%.[iii] That is rather remarkable, in our view, as the UK has handily outperformed relative to the rest of the world. The MSCI World Index fell -5.4% over the same stretch. (Exhibit 1) Now, we think UK markets’ oil-and-commodities tilt probably explains some of this outperformance.[iv] Regardless, though, we think this shows that even a pretty aggressive start to tightening isn’t automatically bearish.

Exhibit 1: BoE Rate Hikes Don’t Appear to Have Stymied UK Markets

Source: FactSet, as of 21/3/2022. MSCI World, World excluding UK, EMU, Japan and S&P 500 returns with net dividends and MSCI UK total return, 15/12/2021 – 17/3/2022.

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Checking In on Business Surveys, US Durable Goods and UK Retail Sales

As we approach Q1’s close, discussions about the global economy’s health abound in the financial publications we monitor. Besides ongoing warnings about rising prices, supply bottlenecks and COVID outbreaks potentially posing headwinds, Russia’s invasion of Ukraine added a new wildcard. Whilst dour projections are myriad, we think it is beneficial for investors to focus on actual data—and we got a bunch last week.[i] Here we break down both the numbers and the broad reaction to them from financial commentators we follow.

March Business Surveys Flash Some Positive Signs

First up: S&P Global’s March flash purchasing managers’ indexes (PMIs, which are widely watched business surveys)—the artists formerly known as IHS Markit PMIs.[ii] These are surveys measuring whether companies’ purchasing managers reported improvement or deterioration across a range of categories. Despite a few soft patches, they broadly showed continued growth across the developed world. (PMIs above 50 imply expansion.)

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Our Perspective on the Nascent Rebound

After another positive week, global stocks have pared most of their peak-to-trough declines during this correction.[i] Or, what we think is a correction—a sharp, sentiment-fuelled drop of -10% to -20%. Some financial commentators we follow have a different opinion and warn the past few days could be what people in our industry commonly call a sucker’s rally—a temporary positive burst that fools people into buying during a broader bear market, which is typically a much longer, deeper decline of -20% or worse with a fundamental cause. In all fairness, this is possible. Yet investing isn’t about possibilities—in our view, it is about probabilities. To avoid getting faked out, we think it is helpful to bear in mind some of what our research finds to be bear markets’ typical traits.

Corrections are usually short and steep from start to finish.[ii] Based on our historical research, they tend to start and end without warning, and they fall on feelings—sometimes tied to a big story, sometimes for no apparent reason. Sentiment usually appears to deteriorate throughout, generating a barrage of headlines warning this time is different and the decline will get worse. But then they end, usually as suddenly as they began, and a steep recovery typically follows.[iii] In our view, the best thing for someone seeking long-term growth to do during corrections is keep calm and hang on, lest they sell after a decline and miss the rebound—and miss returns that could compound over time.

Bear markets, by contrast, tend to last several months or more, usually rolling over gradually, with the worst declines coming late.[iv] In 2020, this wasn’t the case, as the bear market lasted just 17 trading days for the MSCI World Index—in our view, it was more like a correction than a bear market, despite the fact it technically was a bear market (the magnitude exceeded -20% and, in the lockdowns, we think it had a fundamental cause).[v] But that instance aside, our historical analysis shows bear markets are usually long grinds, and we think their slow start is what makes it possible to avoid part of their declines if you choose to do so and are correct in your analysis.

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Tempted by Energy Stocks' Heat? Be Careful.

Whilst global markets have endured a correction (a sentiment-driven decline of around -10% to -20%) this year, one sector hasn’t participated: Energy.[i] Global Energy stocks are up just over 37% year to date.[ii] This is generating a host of chatter about a long-lasting leadership rotation from financial commentators we follow. In our experience, this runs a high likelihood of spurring fear of missing out—FOMO—amongst investors whose portfolios followed the broader market’s swings. Dear readers, let us issue a friendly reminder: You can’t buy past returns. Moreover, what just led isn’t guaranteed to keep leading. So if Energy’s run is tempting you to surrender a diversified portfolio for a concentrated position, we suggest taking a deep breath and staying cool. In our view, discipline is key to successful investing.

Whenever past performance makes you want to trade, we think it helps to pause and go back to basics. Consider what we think is one of the first principles of investing: Past performance doesn’t predict future returns. What happened one month doesn’t determine what happens the next. Just because something did very well doesn’t mean it will stay atop the leaderboard. Our historical analysis shows leadership shifts often.[iii] Sometimes those shifts are lasting, resulting in cumulative outperformance over a few years.[iv] Sometimes they are quick deviations in leadership.[v] If you chase them, we think you run the risk of missing returns if the hot sector turns cold.

For a recent example, consider Energy stocks last year. Then, as now, they were the hottest sector early on. When Q1 2021 ended, global Energy stocks were up 20.7% on the year.[vi] The MSCI World, by contrast, was up just 4.0%.[vii] According to many financial commentators at the time, Tech stocks were out, and Energy stocks were in. But the party didn’t last. Energy stocks were basically flat over the next several months and underperformed for much of the rest of that year.[viii]

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What the Spring Statement Reveals About UK Politics Today

Editors’ Note: MarketMinder Europe favours no political party nor any politician. We assess political developments for their potential economic and market impact only.

Hours after the release of February’s inflation report Wednesday—which showed the inflation rate accelerating to 6.2% y/y—UK Chancellor of the Exchequer Rishi Sunak engaged in the semiannual rite of presenting a budget statement to Parliament.[i] When Sunak stepped up to the dispatch box to deliver this Spring Statement, many financial commentators we follow speculated that he may announce timely tax cuts and other measures to help people through a tough stretch of rising living costs.[ii] Yet the new measures were mostly muted, generating criticism from economic observers and fellow politicians in both parties.[iii] In our view, the significance for markets is likely more political than economic—counterintuitively, the disappointing statement may be a sign political uncertainty is falling, which we think is likely to contribute to global political tailwinds as the year rolls on.

For months, financial experts we follow have warned the UK is facing a Cost of Living Crisis.[iv] Not just from consumer price inflation, but also from the forthcoming increase to household energy prices in April, as well as tax hikes that will take effect then. The Office for Budget Responsibility estimates these factors will drop real disposable household income (meaning, after-tax income adjusted for inflation) by -2.2% this year, which would be the biggest hit to living standards since the 1950s.[v] After a fuel relief package introduced in February largely landed with a thud, public pressure for Sunak to do more to ease households’ pain appeared high.

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Dividends Are Nice, but They Aren't Safety Blankets, in Our View

Editors’ Note: MarketMinder Europe doesn’t make individual security recommendations. Those mentioned below merely represent a broader theme we wish to highlight.

Global stocks enjoyed a nice rally last week, but it doesn’t appear to have much calmed investors’ nerves.[i] Headlines throughout financial publications we follow continue warning of worse to come, and we have observed a growing number of articles featuring investment tactics for uncertain times. One supposed tactic we have seen getting a lot of ink: dividends. This isn’t unusual. In our experience, interest in high dividends tends to spike whenever markets get rocky—largely because the dividend payments offer perceived stability. In our view, this is a short-sighted and flawed viewpoint. We like dividend stocks just fine, but we don’t think they are safe havens.

In our view, much of dividends’ allure during volatility stems from a fundamental misperception about what dividends are. You can hear it in sentiments like, stocks may be down, but at least these dividends get me a nice yield. Problem is, this statement presumes dividends are a return on your investment, which isn’t true, as we will discuss. Dividends are a return of capital. Unless you reinvest them, they don’t add to returns.

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$100 Oil Probably Isn’t a Tipping Point

With the tragic events unfolding in Ukraine right now, financial market and budget impacts may seem small in comparison. Nevertheless, the conflict and the international community’s response have helped spur oil prices to climb, and with them, petrol prices—which we have observed is a real financial concern to many in the UK as oil bounces around $100 (£77) per barrel, whilst the national average petrol price is near 167 pence per litre.[i] In the minutes of its 17 March meeting, the Bank of England warned higher energy costs would “accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes.”[ii] As we wrote a few weeks ago, oil’s latest spike seems mostly sentiment-driven to us, and longer-term supply and demand drivers still suggest prices should stabilise sooner rather than later, even with uncertainty surrounding Russian oil supply roiling markets. Regardless, oil’s hitting any level has no direct bearing on broader economic activity, in our view: Its rise and recent surge don’t automatically foretell weaker growth.

Our research shows the UK economy doesn’t have a set relationship with oil prices. When oil spent much of 2011 – 2014 above $100 (£77), no recession (broad-based decline in economic activity) ensued.[iii] Conversely, whilst high oil coincided with recession in 2008 – 2009, we think the issue then was US accounting rules’ incinerating bank capital unnecessarily and the American government’s (in our opinion) haphazard, panic-sowing response that led to UK bank nationalisations and sharp drops in private sector lending—not oil.[iv]

Second, the popular reason commentators we follow say oil allegedly dictates the UK economy’s direction is flawed, in our view. In the US and UK alike, many of them argue high fuel prices undercut consumer spending. Yet from an overall economic perspective, fuel costs still count as spending, contributing positively to gross domestic product (GDP, a government measure of national output). Not that we think GDP is the be-all, end-all, but casting high oil prices as an automatic economic negative isn’t accurate. Rather, according to our analysis, higher fuel and energy costs change where people spend money—perhaps more goes to petrol and electricity, with less spent on leisure and non-essential items. Whilst we agree this creates winners and losers, mathematically, it doesn’t cause recessions. One way to see this is Exhibit 1, which shows UK household expenditures’ ongoing recovery, even with oil’s climb to $77 (£58) last year from $48 (£37) per barrel starting 2021.[v]

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It Still Isn’t Easy to Pass a Global Minimum Tax

Editors’ Note: This article touches on politics, so we remind you that MarketMinder Europe favours no politician nor any political party and assesses developments solely for their potential impact on markets, economies or personal finance.

Last fall, when 137 nations including low-tax burden countries Ireland, Estonia and Hungary agreed to sign onto a global minimum corporate tax deal, many observers we follow in financial media presumed the years-long process had taken its toughest step—the path to passage was now clear! We never really agreed, though, and have long harboured doubts that this process will deliver results. If it does, it is unlikely to happen fast, in our view, limiting the market impact. We got more evidence supporting our scepticism Tuesday.

For the uninitiated, the global corporate minimum tax is an Organisation for Economic Cooperation and Development-led initiative to ensure countries get a slice of revenue generated within their borders and arrest an alleged “race to the bottom” in which countries try to lure large corporations to domicile within their borders using lower and lower tax rates.[i] The deal signed last fall has two prongs, or pillars. The first aims to resolve fairness disputes about which country gets what tax revenue. It exclusively governs companies with global sales exceeding €20 billion (£16.8 billion) and “profitability” above 10%, transferring taxing rights over these firms from their home countries to those where the sales actually took place. [ii] Given the parameters, Pillar One would presently affect about 100 companies globally, half of which are US-based.[iii]

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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.