News

Near- term market sentiment: Despite continued sabre rattling by North Korea and the predictably bellicose responses from President Trump, key U.S stock market indices such as the S&P500, the Dow Jones Industrial Average, and the NASAQ are at all-time highs. It is not just Wall Street that is all-forgiving at present, so far this month we have seen a gain of 1.5% for the MSCI World index of developed stock markets, as measured in local currencies (and up 1.9% up in U.S dollars), with gains shared by most regions. Optimism is supported by respectable GDP growth in all the major economies, and expectations of continuing low U.S and global interest rates. Numerous polls of professional multi-asset fund managers suggest a strong pro-equity bias at present. This confidence is echoed by expectations of low stock market volatility: the VIX index (the so-called ‘fear gauge’) stands at just 10.1, indicating that investors expect the S&P500 index to be not too far from today’s value in a month’s time.

Can stock market gains persist? Yes, so long as the risk-free rate remains low. By which we mean, so long as bank account cash rates and core government bond yields continue to offer dismal returns to investors, forcing cash in more rewarding stock markets.

On this score we are re-assured by central banks’ caution over raising interest rates against a back ground of generally weak inflation throughout the developed world.

This week’s Fed meeting is unlikely see its policy makers alter their existing forecast of 3% interest rates end of 2019. This is more than twice the current level, but given the tendency in recent years for the policy members to over-estimate future interest rate levels, the actual peak in the current rate cycle is likely to be lower. A very gradual approach to rate hikes is coupled to promises of a very slow unwinding by the central bank of its enormous bond holdings. All of which limit the risk of U.S monetary policy tightening too fast, and so undermining American and global bond markets.

Given the surprising persistence of CPI inflation in the U.K, a rate rise before Christmas looks a possibility. But with all of the uncertainties of Brexit, anything more than one 25pb rate hike over the coming 12 months seems unlikely.

The ECB is not about to rock the boat either. For all Mario Draghi’s bluster about seeking to tapper the ECB’s asset program, he and his policy-making colleagues are hamstrung by the knowledge that some southern European bond markets might collapse if the central bank ceased buying their paper in current quantities. This would result in a renewed round of fiscal austerity on those countries, and -in all likelihood- stretch those countries’ baking systems to the limit, as their holdings of domestic government bonds fall in value. The ECB governing council is unlikely to risk such a scenario, and will persist with its current EUR 60bn a month bond purchases.

Therefore, as I wrote a few weeks ago, the returns from cash and core bond markets are unlikely to improve over the coming year at least. This supports assets that can produce a yield, and that will respond positively to rising GDP growth, such as equities. But some asset classes do appear overvalued in relation to their risk, not just Argentinian 100 year bonds but parts of the U.S high yield market and possibly also the leading quoted U.S tech stocks. In view of the low risk-free returns available, any correction in these markets is unlikely to trigger an across-the-board sell-off of global stock markets or investment grade bonds, but merely see the proceeds of sales re-invested in lower risk (but still yield-producing) stocks and bonds.

The total deficit of all the defined benefit (DB) pension funds in the UK stood at £460bn at the end of August, an increase of £40bn since last month, according to figures released from PWC.

PWC’s Skyval index, which comprises data from 5,800 UK DB schemes, showed pension fund assets at almost £1.6trn and liabilities of just over £2trn.

Steven Dicker, chief actuary at PWC, said that “August saw a small decrease in long-term real interest rates (interest rates relative to inflation) as measured by government bond yields, which has led to a £60bn increase in liabilities”.

“In contrast, assets have only grown very modestly by £20bn,” which resulted in the increase of the deficits, he said.

The deficit calculations are based on a ‘gilts plus’ approach, which PWC stated is sensitive to even modest market movements.

Mr Dicker said: “Compounding with the uncertain economic and political climate, the deficits calculated on this basis are likely to remain volatile.”

According to Steve Carlson, chartered financial planner at Cardiff-based Carlson Wealth Management, this monthly variation “is entirely normal”, since it is linked to gilt yields and investment returns.

However, “the overall deficit remains stubbornly high as gilt rates have been at historic lows for almost a decade, whilst increases in life expectancy have increased the total amount of pension a scheme expects to pay out per member,” he said.

Mr Carlson added that “this stubbornly high deficit is slowly being tackled by pension schemes as they decrease the amount of pension current workers are building up per year whilst increasing the amount they have to contribute and pushing back their retirement date”.

The problem with rising deficits is affecting a great majority of UK pension schemes.

Frank Field, who chairs parliament’s Work and Pensions Committee, has questioned why the Universities Superannuation Scheme (USS) deficit more than doubled in three years.

The annual accounts of the USS showed the pension fund’s deficit had widened from £5.3bn in 2014, to £12.6bn this year. This is the largest recorded deficit of any UK retirement fund.

The BBC, which is facing a current £1.8bn deficit of its DB scheme, will be paying £2.37bn over the next 11 years in a new repayment plan.

Near-term market sentiment: The FTSE All World index rose in August, for the tenth consecutive month. But we begin this week on an uncertain note, after the weekend’s news that North Korea has tested a large hydrogen bomb underground. Its nuclear missile program is once again rattling investor confidence. With U.S military options limited (and its Japanese and South Korean allies firmly against a pre-emptive strike), all eyes are on China. Will it oblige the U.S and tighten trade restrictions with North Korea, and so risk an economic collapse of its neighbour and a flood of refugees into China? Meanwhile there is a sense that the further the U.S Department of Justice delves into Trump’s Russian links, the more likely it is that Trump will himself look to distract media attention by baiting North Korea.

The good news is that, despite last week’s upgrade to U.S second quarter GDP growth data (from 2.7% to 3% annualised), and strong Chinese factory output numbers on Thursday, U.S, Chinese and European monetary policy looks set to remain loose and so to continue to support risk assets.

Weaker than expected August jobs growth in the U.S, and weekly earnings growth stuck at 2.5% y/y since April, both suggest limited inflation pressure coming from the labour market and the Fed may yet abandon the penned-in December interest rate hike. The ECB, meeting this Thursday, looks to be as far away as ever from tapering its asset purchase program since a strong euro (at $1.20) is a deflationary force that as a similar effect on the economy as a rate hike might. Draghi will not want to repeat the ECB’s 2011 error of tightening policy too fast, too soon, and ending the incipient euro zone economic recovery.

North Korea longer term outlook: China is North Korea’s only ally in the region, and we can assume that its patience with President Kim is becoming thin. But it too has few options. This problem may well just rumble on, with eventually the U.S and its allies learning to accommodate North Korea as a nuclear power. Similar to the emergence of China as a nuclear force to the frustration of Russia and the U.S in the 1950s. After all, it is not actually in President Kim’s interest to use nuclear missiles, because to do would invite an overwhelming response and probably the end of his family’s rule. But in the meantime, we can expect sabre rattling from North Korea and the U.S to create occasional bouts of market volatility.

Can stock market gains persist? Yes, so long as the risk-free rate remains low (by which we mean so long as bank account cash rates and core government bond yields continue to offer dismal returns to investors). With central banks in no rush to raise overnight rates, and global inflation still relatively subdued, the returns from cash and core bond markets are unlikely to improve over the coming year at least. This supports assets that can produce a yield, and that will respond positively to rising GDP growth, such as equities. But some asset classes do appear overvalued in relation to their risk, not just Argentinian 100 year bonds but parts of the U.S high yield market and possibly also the leading quoted U.S tech stocks. In view of the low risk-free returns available, any correction in these markets is unlikely to trigger an across-the-board sell-off of global stock markets or investment grade bonds, but merely see the proceeds of sales re-invested in lower risk (but still yield-producing) stocks and bonds.

Question: Exchange rates explained. Why Google Currency Rates and the actual amount you receive differ?

 Answer: Exchange rates on XE, yahoo finance or other currency exchange sites will show the interbank or mid-market exchange rate. This is effectively where the banks trade between themselves, and unfortunately retail clients can’t access these rates. A currency broker’s role is to get as close to that exchange rate as they can, and beat the exchange rate offered by the high street bank by up to 5%.

Question: Is a weak pound good for UK expats in the UAE?

Answer: For UK expats in the UAE getting paid in USD or AED, it is a great time to be sending money home. It does make visiting the UAE from the UK more expensive, but paying a UK mortgage or house purchase has just become 10% cheaper.

There are three things investors need to do in the aftermath of the UK’s decision to leave the European Union, affirms the boss of one of the world’s largest independent financial advisory organizations.

Nigel Green, founder and CEO of deVere Group, which has $10bn under advice, stated: “Britain’s decision to drop the Brexit bomb and abandon its four decades of EU membership has, of course, been fuelling turbulence in the global financial markets since even before the outcome was officially announced this morning.

“Against a backdrop of reeling markets and uncertainty, individual investors are, understandably, feeling nervous about their future financial security.”

Mr Green continues: “There are three things that investors need to do now as we enter into a new era.

“First, for the vast majority of investors the message is clear: Keep calm and carry on.  Hasty decisions are typically not the wisest ones.  There remains too much uncertainty around at the moment to take strong bets on any particular asset class, sector or region.

“The market volatility may indeed be an indicator of storm clouds ahead, but equally, and perhaps even more likely, it will present a positive buying opportunity. But we need to wait for the fog to lift a little first.

“A buy-and-hold strategy of quality multi-asset funds is as valid a strategy today as it has ever been.”

“Second, focus on the longer term.  Yes, the political landscape has changed overnight, but your financial objectives have not.

“Markets are, by their very nature, turbulent but stock market performance is fairly predictable over the longer-term – they usually go up.  For this reason, investing in equities is recognised globally as one of the optimum ways to accumulate wealth over long periods.

“All too often even experienced investors focus on the short term too heavily in times of market volatility of the kind we are now seeing, and there are many disadvantages to this.

“For instance, a short-term investment strategy involves considerably higher risks, compared to investing over a longer period.  Other pitfalls of a short horizon include that investors can often sell a quality investment too early due to over focusing on short-term valuation metrics.

“And third, keep an eye on other important geopolitical factors that will influence markets and therefore impact your finances. These include China’s economic growth, the possibility of Brexit contagion as other countries seek to exit the EU, the U.S. election, the failure of negative interest rates in Japan and the Eurozone to stimulate sustainable recovery, and the Fed’s nervousness over the U.S. economy.”

Mr Green earlier concluded: “In these times of increased volatility, a good fund manager will prove to be invaluable to help capitalise on the enormous opportunities that will be coming along and to sidestep the risks.”