The last 12 months to April have been good for Capital’s equity selection, with our holdings outperforming their benchmarks: our UK stocks rose 13.3% versus 7.3% for the FTSE All Share index total return index. At the same time our US outperformed modestly in a more difficult market, returning -1.6% versus -1.9% for the S&P500 total return index.
We discuss below how our stock and sector choices have added value, but it’s worth also dwelling on how our investment philosophy has fed into this.
While we acknowledge that beating the index is difficult, and that passive investments like index trackers or iShares have many attractions, not least due to their low cost delivery of ‘Beta’ or market risk-related returns, we believe that active management can add value in certain circumstances.
First of all, it requires perceptive stock selection (finding companies that will outperform the benchmark), as well as avoiding companies that are likely to do poorly, or underperform the benchmark. But it also requires a high level of ‘active risk’, or difference in portfolio positioning to the benchmark position – this is tantamount to conviction investing. If one believes in a stock then clearly one should hold a higher weighting in it than in the benchmark. Alongside active share, we believe that low turnover is also important, or not buying and selling too frequently. If the stock has a competitive advantage then it should do well over a sustained period of time, so there is no need to sell too early in order to move onto the next thing, as the next thing may not be as good. This is tantamount to the ‘Buffet method’: not over-diversifying, having high conviction positions, and not trading stocks (selling them in the hope of buying them back at lower prices).
Starting with our UK stocks the first quarter of 2022 was tough, and in the early part of the year our holdings underperformed by some 3% after being hit hard by the Russian invasion of Ukraine. We had a big holding in gold miner Polymetal, which fell sharply despite not actually being sanctioned. We also had holdings in other stocks with exposure to Russia, like Mondi, the paper and packaging company. But from April 2022 onwards performance improved.
This was assisted in part by takeovers of two key holdings: Homeserve and Aveva. Homeserve had suffered over the previous 18 months on concerns about its core UK business (which installs and repairs boilers) and had missed profit guidance on several occasions. However, we felt that the market had overlooked its international operations, in particular its US business, and added to the position. The shares touched nearly £6 in March 2022, but two months later in May Brookfield, the Canadian renewables group, stepped in and offered £12 cash for the company. It was one of our biggest holdings and our biggest ‘active’ position.
Our main IT holding in the UK was Aveva, the industrial software company, which had fallen from £45 in 2021 to nearly £20 by mid-2022 in the fallout from rising interest rates over the course of the year. The company had also reduced profit guidance. However, in September 2022 the main shareholder, French industrial giant Schneider Electric, agreed to acquire the 40% of the company it did not already own at a significant premium. We had built up our holding before the announcement.
Our 6% outperformance in UK equities can be attributed between two different effects: allocation effects (which involved overweighting sectors that were going to do well like Financials and underweighting sectors like Real Estate) added 2%, while selection effects (by which we mean stock picking) added about 4%.
In Communication Services we added 1% of value by selling Vodafone and instead focusing on BT, WPP and ITV, backed up with some opportune buying. In Industrials, meanwhile, we added nearly 2% of value – partly from Homeserve, but also from a big position in Bae Systems, a major beneficiary of the renewed international hostilities that have resulted from the Ukraine war. This sector has also benefited in the first four months of 2023 from our position in Rolls Royce, which upgraded full year guidance in February. Our Utilities exposure added 0.8% of outperformance – mainly from a big core position in Centrica, which doubled during last year’s energy squeeze. Financials also benefited from selection/outperformance effects from ABRDN, Barclays, HSBC and Standard Chartered, while Staples benefited from our holdings in Tesco, Marks & Spencer and BAT Industries.
The S&P500 is a hard index to beat but we were pleased that our high active share versus the benchmark worked out there too, albeit outperformance was more modest. In the US outperformance came from allocation effects (overweighting the energy sector and underweighting the Real Estate sector). Meanwhile, we managed positive selection contributions from our holdings in the Consumer Discretionary sector (big relative positions in Lennar and MacDonalds), while good calls on Merck, Amgen, Johnson & Johnson and Stryker enabled outperformance in the Healthcare sector. Our US Industrials also fared well, with Boeing, Eaton and Fedex all doing well, albeit Fedex had struggled in the second and third quarters of 2022.
In Europe, we matched benchmark returns, with asset allocation effects (overweighting the area) offsetting stock selection. Our big individual winners were Deutsche Telekom in Communication Services, and BMW, LVMH and small cap Novem (which makes interior fittings for car) in Consumer Discretionary. In Financials our preferred bank, ING, outperformed strongly, as did Schneider, Siemens and ABB in Industrials, while SAP performed strongly in Information Tech. Losers were our healthcare stocks and our sticking with oil and gas producer Equinor, which performed strongly up until September 2022 but which has lost ground since as gas prices have fallen.
Hopefully this gives an illustration of our effectiveness in adding value through active management of stock selection.
What next? We are hoping for a few more winners over the rest of 2023, and are prepared to place big bets. In the UK, we are hoping for more from Marks & Spencer, which has turned itself round after almost two decades of decline, and from Smith & Nephew, which should benefit as waiting times for replacement operations start reducing. In Europe we expect more from ASML, the maker of highly advanced chip making equipment which is benefiting from an enhanced capital spending cycle. We also hope that Kering, which has underperformed in luxury over the past two years, can recover some lost performance versus its competitors, and are looking for improved margins at Akzo Nobel.
In the US, we hope that Intel can benefit from an upturn later in the year in spending on computer chips as inventories finally reduce. We also hope that the company (which has also been struggling for some time) can tap into AI trends and show progress in moving to lower ‘nodes’. We are also sticking with a big position in Apple, which we see benefiting from the iPhone 15, and in Microsoft, which despite strong performance over the past ten years, still has many things going for it.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
For nearly three decades, Capital International has sought to make money work better and to generate strong investment returns for our clients that are sustainable over time. These objectives are manifest in our investment philosophy and process that we call Sustainable alpha.
This investment philosophy and process has evolved over the years based on our experience of what actually works, both in the good times and through economic downturns and financial crises. This is a process and approach that has demonstrably delivered strong investment returns consistently over time.
From our investment research and forecasting, we observe that the companies that tend to deliver superior long-term returns for our clients exhibit two consistent characteristics.
Firstly, they create tremendous customer value, often using innovation and technology to transform the markets they operate in. This is what we describe as the thrust forces driving the business forward. We of course also look at external factors: Are its products or services sufficiently in demand? Does it have a competitive advantage? Is the market it operates in growing? Fundamentally we seek strong, growing businesses, but that alone is not enough.
Secondly, in order to maintain a world class performance over time, a great company, just like a great athlete, must keep in shape. To achieve this, a company must seek to consistently minimise the resources it consumes such as energy, raw materials and operating costs. We see these as the drag forces that can pull a company downward.
In our view, it is only by consistently reducing these drag forces whilst increasing the thrust forces, that a company can propel itself to success and generate returns not just for today, but sustainable returns for the future.
History is littered with yesterday’s growth stocks that ignored drag forces. Led by overpaid executives that believed their own press, recklessly spent other people’s money and took for granted their temporary dominance in a particular market. All too quickly they became bloated, spendthrift, behind the curve or just plain lazy.
The best executives, and indeed the best investors, live by the ancient Persian adage; ‘this, too, shall pass’. Knowing that the things that drive your success today are temporary and that markets are constantly changing, generates awareness of trends, a focus on productivity growth and financial prudence, as well as encouraging innovation to embrace the opportunities that change offers.
It should be no surprise that good management, strong governance, healthy motivated staff, a strong value proposition and increasing productive efficiency are fundamental characteristics of the high performing businesses that deliver strong investment returns.
These characteristics are also, of course, the very definition of sustainability and strong environmental, social and governance practices. Profitability and sustainability are not mutually exclusive concepts and the companies that will perform best over the long term are those that are committed to operating sustainably, constantly striving to improve efficiency and driving positive change.
We also need to be honest. We cannot simply flick a switch and divest from all sectors that fail to immediately meet arbitrary sustainability criteria. Right now, without fossil fuels, we cannot heat the millions of homes through harsh winters. Without industrial farming, we cannot feed the world’s 8 billion people.
It is a false choice to think we can or should disinvest from crucial industries on which our prosperity depends. This will actually create poverty, exploitation and suffering. Or, worse, lead to nationalism and even conflict. The exact opposite of the outcome we seek.
Instead, we need to encourage and champion iterative change, a process that’s incredibly powerful and overwhelmingly positive. Embracing innovations and technologies that create the sustainable solutions of tomorrow while constantly improving efficiency, reducing resource intensity and driving up productivity.
Hard working people and successful businesses are not the enemy of prosperity, they are the source of them. The reverse is also true. Businesses that fulfil these human needs, respond to change and innovate to create renewed value and increased productivity are the drivers of human prosperity. These are the successful businesses of tomorrow and these are the businesses that will deliver the best returns to investors.
Interestingly, when targeting sustainable investment returns, it’s the direction of travel for a business that is critical, not necessarily the starting point. Some of the best opportunities can be found in historically ‘dirty’ companies that have strong natural demand and are committed to the journey of developing better innovative, sustainable solutions and increasing efficiency.
So whilst our aim is to invest in assets that deliver sustainable profitability, it is not about virtue investing or green washing. We do not take an exclusionary approach to asset selection. To the contrary, we believe that all sectors are required for prosperity; a company doesn’t have to be perfect in terms of sustainability today but what we are looking for is clear evidence of and a commitment to progress.
This investment approach targets returns that are sustainable, not only for our clients, but also for society and the environment too.
It’s the ultimate win-win scenario.
In essence, Sustainable alpha is about identifying companies that can consistently increase the value they create, whilst reducing the resources they consume.
Quite simply companies capable of creating more from less – a perfect recipe for profitability.
Click to find out more about our investment philosophy.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
Regulated investment activities are carried out on behalf of Capital International Group by its licensed member companies. Capital International Limited and Capital Financial Markets Limited are licensed by the Isle of Man Financial Services Authority. Capital International Limited is a member of the London Stock Exchange. CILSA Investments (PTY) Ltd (FSP No. 44894) and CILSA Solutions (PTY) Ltd (FSP No. 6650), t/a Capital International SA are licensed by the Financial Sector Conduct Authority in South Africa. All subsidiary companies across both jurisdictions are represented under the Capital International Group brand.
A quick summary for those without the time and inclination to pore through this entire briefing - deeply disappointing results for the Conservatives, especially in many of its traditional strongholds in the south and midlands; substantial, telling but inconsistent progress for Labour across England; solid advances for the Liberal Democrats and Greens especially in areas where they already have an elected presence.
Never forget, in the wise campaign-trail words of the chief advisor to soon-to-be elected President Clinton over thirty years ago, "It's the economy, stupid!"
Funnily enough the strange obsession with US politics that grips the UK political class is one of the main reasons that such importance is attached to our annual cycle of local government elections. Most MPs, political journalists and policy advisers have an impressive recall of US political trivia and minutiae. By contrast, ask them for the name of the current French Prime Minister, German President or Head of Government in even a mid-sized EU state and silence is likely to reign.
So it is that we try to equate our confusing mix of county, unitary and district council electoral contests - some held annually, others on all-up basis every four years, a few with half their seats being fought biannually - with the far more consequential US mid-terms. As always in the UK's highly centralised political system perceived importance is attached only to 'what this all means for central government'. Heaven forbid that people might actually register their vote less as a protest against the government of the day, but more in support of local personalities and initiatives on planning, recreation policy, transportation or neighbourhood regeneration.
However, these were potentially the last full set of English polls to take place before the next General Election campaign is in full swing. As such they are the most proximate testing of the overall political temperature, especially if that impending election were to be called in spring or early summer 2024. Second only to parliamentary by-elections, which by their very nature arise only haphazardly, local elections impact most on the morale of the professional and activist base of all political parties. Campaigning means meeting large numbers of electors, testing the temperature of their anxieties and working out effective lines of attack and defence.
Lest we forget, only two years ago, Boris Johnson's Administration was riding high. In the aftermath of a remarkably strong performance in the pandemic impacted May 2021 local elections all the talk was of the 2020s being the Johnson decade. It was Keir Starmer who was painted as the transitory figure, widely anticipated as being merely the first of several hapless Opposition leaders. Yet as we know over the past 18 months, Labour has enjoyed consistent leads in the opinion polls. Since last summer these have invariably been by commanding margins, albeit showing some signs of softening as the Sunak government has stabilised the ship of state since arriving in office last October.
That said it is important that we do not read too much into these results. Whilst they indisputably impact party mood and confidence, local elections have often proved a notoriously unreliable weather vane as to what happens next. Predictably over recent weeks there has been a universal attempt to dampen expectations. There is nothing new in governing parties making apocalyptic predictions of massive losses at the same time as those in opposition suggest that even the most modest of gains are likely to be beyond their reach. If all the fantastical claims we have heard recently had come to pass, Electoral Returning Officers across the country would be hard pushed to declare winners anywhere!
The baseline of results against which yesterday's contests are to be compared was the May 2019 local elections. This was a famously untypical set of elections with Theresa May's administration on its last legs after the intense Brexit stalemate. Neither the Conservatives nor Labour managed 30% of the national vote with the Tories losing a quarter of the seats they were defending then (over 1300 across the country) and Labour unexpectedly failing to make any significant headway at all - instead it was the Liberal Democrats with 700 gains and the Greens with almost 200 who both more than doubled their previous representation.
This time round it would have been unthinkable for Labour and other Opposition parties to have failed to make significant inroads. One of the curiosities of the Conservatives' thirteen years in national office is just how well their standing in local government has held up. Until this set of results, they had consistently been the largest party in UK local government for nearly two decades.
So the attention of the UK political class now turns to the General Election, which as so often will boil down to the straightforward proposition of "Time for a change" versus "Don't let the other lot ruin the progress we have made".
Prime Minister Rishi Sunak will relentlessly seek to present the administration he has led since last October as competent, responsible and having a forensic attention to detail and data at its heart - a diligent government for difficult times, worthy of public trust at a time of intense economic insecurity and geopolitical turmoil.
But this is where it is the state of the economy that really matters. Last year and this (2022/23) represents an era of the biggest fall in individual living standards on record. This represents a grim backdrop for any incumbent government, especially one that seeks to defend a 13-year long record in office. This has been compounded by turbulence in the financial markets over recent months that now seems likely to play out in the 'real economy'. What should we make of its likely impact within that all important pre-election timeframe?
Prolonged financial market nervousness in both London and New York is to be expected. Both the UK and US face General Elections by the end of next year with a reasonable prospect of a change in administration (if not necessarily policy prescriptions). Despite concerted central bank efforts to tame the beast, inflation is likely to remain higher and endure for longer than most commentators currently assume.
Similarly, whilst interest rates have risen sharply over the past 18 months (remember that they still stand at historically low levels) I suspect they are likely to come down more slowly than is widely presumed. Evidently this will continue to impact sentiment in the commercial and residential property markets.
Most Britons under the age of forty have been led to assume that near zero interest rates are the norm. Adapting to a world where the cost of money is no longer virtually free, where indebtedness and profligacy are penalised rather than rewarded will prove tough. Central banks will come under huge political pressure in this pre-election period. As someone who has always been rather sceptical of the Bank of England's much heralded "independence" (as political appointees, Governors typically have highly attuned political antennae) I reckon that by this time next year the Bank will have seen fit to have reduced interest rates to around 3% as a "reward" for bringing inflation down from the double-digit levels of recent months.
Watch now for the unravelling of the huge burden of debt that overhangs Western economies in this brave new world of normalised borrowing costs. Governments, companies and households alike are afflicted. There is clear evidence that as funding costs rise, banks are cutting back on loans, renegotiating or rapidly terminating debt facilities and generally battening down the hatches. Whilst this may seem more acute in the US after their three high profile banking collapses of recent weeks, do not assume that similar calculations are not already taking place in banks closer to home.
Another credit crunch looms. We all remember how this was the precursor to the financial crisis of 2007-08. In the months ahead the SVB, First Republic and Credit Suisse banking collapses and their aftermath may also place in full view an unpalatable cocktail of derivatives and highly leveraged real estate exposure.
In so many aspects of life, moral hazard seems to have become an historical concept. Note how quickly and comprehensively the US financial authorities moved to protect SVB's depositors and have presumably underwritten JP Morgan's salvation of First Republic. However, this type of activism augurs ill for government balance sheets throughout the West - in truth the public clamour for constant protection by ever more government intervention is something that should be resisted, rather than pandered to.
The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
Welcome to the Quarterly Investment Review for Q1 2023.
Our Investment team have put together a range of resources to update you on what has happened in markets across the first quarter of 2023. Here you will find:
The graph below shows global equity performance across the quarter and plots world events along the performance line to indicate their impact on markets.
Hear from our team of Investment Managers as they each explore an important topic from the quarter.
It was a strong start to the year for global equity markets as supply chain issues eased following the end to China’s zero Covid policy. The European economic outlook has been improved by a mild winter, which helped to alleviate high energy prices. Wage growth slowed and inflation showed signs of moving in the right direction with prices in the US falling in January and the Federal Reserve’s preferred inflation measure, Personal Consumption Expenditures, 0.5% below expectations.
Labour markets were undeterred with a whopping 517,000 US jobs created in January, while unemployment was at its lowest since 1969. As the quarter progressed, consumer sentiment improved, retail sales surprised to the upside and purchasing managers indices signalled a return to economic expansion.
It was, to some extent, a tale of two halves. The downward momentum in US inflation slowed, while Europe’s core inflation failed to rollover. Consequently, there was a resurgence in hawkish commentary from western central banks with Federal Reserve Chair Jerome Powell summing up neatly, “the ultimate level of interest rates is likely to be higher than previously anticipated”.
In March, the world of finance was rocked by the second and third largest bank failures in US history, Silicon Valley Bank and Signature Bank. The Federal Deposit Insurance Corporation guarantees deposits up $250,000 but elected to protect depositors in full to avert a run on deposits at other small, regional US banks. Just a week later, following intervention from the Swiss government, Credit Suisse was acquired by UBS to prevent the bank from failing. The Swiss National Bank has assisted the takeover with CHF100bn of liquidity and certain guarantees on losses.
We don’t expect a repeat of 2008. The reaction from regulators has been swift and commendable. We may see that central banks around the world moderate their language about the need for further rate hikes, and indeed increase interest rates by less than currently anticipated, which would help markets significantly over the course of the rest of the year. We are comforted by the fact that the Federal Reserve was aware of the evolving situation at Silicon Valley Bank for over a year and had placed the company under supervisory review. It also appears that few European banks exhibit similar risk characteristics owing to more stringent regulation – Credit Suisse has been badly managed for some time; its demise has not been all that sudden.
Equity markets recoiled as a result of these events but have improved into the end of the quarter. US equities gained 6.5%, UK equities rose 2.0% and European equities were up 9.2%. The tech heavy NASDAQ index was the best performing major equity market, gaining 16.2% as markets anticipate a peak in the interest rate hiking cycle. Fixed income assets have returned near 3% across the board so it has been a good quarter for assets overall, despite some fear creeping in more recently.
We have been cautious into 2023 with the view that central banks will be looking for coincidental or even lagging indicators that confirm inflation is being tamed before changing the course of their aggressive policy. However, there is now cause for more caution from central banks and commercial bank lending should begin to tighten, doing some of the work for central banks from here. Furthermore, by mid-July, we will have lapped the 3 largest month-on-month US inflation prints in this cycle, so there should be considerable downward pressure on prices.
Sentiment may greatly improve in the near term and economic data has improved markedly, ahead of likely recession in the second half. We have therefore become more positive in our outlook but anticipate the need to realise profits from equity markets should they continue with upward momentum.
Disclaimer: The views, thoughts and opinions expressed within this article / videos are those of the authors / speakers and not those of any company within the Capital International (CIG) and as such are neither given nor endorsed by CIG. Information in this article / video does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
The world of finance has been rocked in the past few days by the collapse of Silicon Valley Bank last weekend.
SVB, as it was known, was a major regional bank in San Francisco which specialised in dealing with, and lending to, the tech sector. It had over $200bn in deposits so was not a small institution by any means, though it was not considered a ‘globally significant financial institution’ like some of its better-known peers such as JP Morgan, and was therefore not subject to the same level of scrutiny and regulation.
The bank had a very good track record and was considered an important partner by the tech sector. It had not been reckless and its lending book was considered prudent.
However, it came unstuck through its bond portfolio, having invested in government bonds at much lower yields two to three years ago when interest rates and Treasury yields were much lower. Over the past year this bond portfolio has lost money as a direct result of rising interest rates (bonds lose money when interest rates rise). At the same time, tech investors have needed to call on their cash reserves (which formed SVB’s deposit book) owing to capital markets not being open and to funding shortfalls as the economic environment has got tougher.
In the middle of last week SVB stunned markets by revealing it had made a $1.8bn loss by crystallising losses on its bond portfolio in order to fund these deposit outflows. SVB tried to raise capital but this proved impossible as the share price crashed. In a rerun of what happened at Northern Rock Building Society in the UK in 2007, depositors saw the share price collapsing and took their money out in a classic bank run – all too easy these days at the push of a button when confidence goes and the herd mentality takes over.
About $50bn, or a quarter of the deposit base, left the bank on Thursday and Friday last week. The Federal Deposit Insurance Corporation at the weekend decided that this capital flight had gone too far and stepped in to take over the bank, wiping out shareholders and bondholders.
There had been talk that the FDIC would only guarantee deposits up to the US statutory guarantee of $250,000, which was put in place at the time of the financial crisis to prevent bailouts and the ‘too big to fail’ syndrome.
If this had happened it would have been disastrous, as about 90% of the deposit base exceeded the $250,000 level and depositors would have lost much, or most, of their money. This would have caused devastation in the tech sector and led to the collapse of many start-up firms. It would have also led to bank runs at other smaller, regional banks, which would have probably led to a hard landing and serious recession in the US.
Thankfully, the FDIC decided to protect depositors in full, both at SVB and at Signature, a regional bank specialising in the crypto sector with about $90bn in deposits which was also ‘shuttered’ by the FDIC.
A serious sell-off in equities, and particularly bank stocks, followed on Monday on fears that the world was heading for another financial crisis.
Our portfolios had no exposure to SVB, or Signature, or Credit Suisse, and our bank holdings are focused on larger cap companies with very little exposure to mid-cap or regional banks. Our view is that the sell-off in equities on Monday was overdone given that investor fears relate to bank liquidity, which the Fed is addressing, rather than solvency. We believe there is no serious concern over the value of balance sheets as there was in 2008, and we are hopeful that the additional liquidity and lending facilities that were put in place by the Fed and FHLB (Federal Home Loan Bank) over the weekend, as well as the guaranteeing of deposits at SVB and Signature, will stem further panic.
Depositors with balances above the $250,000 at other banks will see what has happened and hopefully conclude that in the chance of their own bank getting into difficulties their own deposits will be guaranteed by the FDIC, and that there is therefore little point or benefit in moving them. In the wake of this swift action, we are also hopeful that spill-over effects into Europe or the UK can be minimised. The fact that the Swiss Central Bank on March 16th decided to aid Credit Suisse with $54bn of funding has helped sentiment in relation to financials.
The situation remains highly fluid and there may be a higher level of volatility over the next few weeks in the wake of what has happened, but our view is that there is no particular reason for selling and exiting the market at this point. We may see that central banks around the world moderate their language about the need for further rate hikes, and indeed increase interest rates by less than currently anticipated, which would help markets significantly.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
Jeremy Hunt became only the second of the five politicians since mid-2019 to have held the post of Chancellor of the Exchequer and survive long enough in office to deliver a Budget.
Calm reassurance remains at the heart of his style and substance. Not for him the almost traditional "pulling rabbits out of the hat" during the speech itself (except possibly the abolition of the lifetime allowance on private pensions savings) after a week-long drum beat of selected details being fed to the media. In an inadvertent nod to upmarket US journalistic practice, a policy of "no surprises" was evidently the order of the day - perhaps after the torrid year we’ve had since the last budget, a Hunt-led Treasury correctly calculated that market nerves would not withstand any more unanticipated excitement. As expected, the energy price guarantee was extended; the fuel duty freeze and five pence cut in petrol and diesel was retained; substantial uplifts were made to childcare benefits and defence funding.
The Sunak/Hunt team operates harmoniously and professionally. Despite being thrown together in the midst of crisis (the pair had never previously served together in cabinet and Hunt had been appointed just six days before the Truss administration imploded last October) initially thinking that Sunak would soon want his 'own man or woman' at the Treasury has given way to a realisation that stability in senior personnel will be required after last year's dizzying game of cabinet musical chairs. After all, how else is the UK to restore its credibility and hard-won reputation as a serious, reliable bastion of certainty in attracting foreign investment?
Siren calls from some quarters of the governing Conservative Party for immediate tax cuts and an aggressive growth-at-all-costs strategy have been kept at bay - for now - with a relentless redoubling of efforts to tame inflation as the most urgent economic priority. The demands of the Ultras have been roundly derided by many political commentators - never ending talk of having fiscal headroom to slash taxes sounds preposterous when the national debt has tripled over the past 15 years, now weighing in at £2.5trn and rising fast. Nevertheless, this background noise continues to represent a real threat to government stability, not least as these views are broadly supported by Party members, large numbers of whom remain unreconciled to the current leadership.
The narrative of betrayal that lies at the heart of the Johnson and Truss defenestrations will not easily fade and in this I am reminded of witnessing the perpetual anger of the parliamentary Left, denouncing each and every Labour government in office as having been thwarted by a conspiracy against enacting real socialism.
In fairness in recent weeks Rishi Sunak made more headway than had seemed possible in tackling one of Brexit's most intractable legacies. In truth the problems have not magically been forever solved, but he has brought his administration some breathing space by a characteristically meticulous attention to detail in discussions with Brussels over Northern Ireland's 'very special position' in the EU single market.
But why the all-embracing emphasis on tackling inflation? Politically the government sees this as crucial to the appearance of prudence and control over the nation's finances, an essential pre-requisite to securing a fifth Conservative term at the next General Election, which must be called by the end of next year. The economic rationale, led by a revitalised Treasury, is stronger still. For three decades we have relied on low levels of inflation to smooth the path for commercial investment and ease industrial relations. UK businesses and households have taken for granted that whatever the economic headwinds they have been able to plan on the basis that prices will never deviate much from the central bank's perennial 2% inflation target.
It is now evident that the post-lockdown recovery was built on the shakiest of foundations; the supply-chain hiatus led to a burst of inflationary pressure, a situation magnified by the impact of Russia's war in Ukraine.
Further fiscal loosening as the pandemic paralysed so many of the UK's service industries has also resulted in money supply becoming dangerously out of kilter. As the pandemic surged, the Bank of England, along with other central banks, revitalised its policy of Quantitative Easing, from which it had barely started the unravelling process after its emergency implementation during the financial crisis. Individual savings were massively built up during the exceptional circumstances of lockdown and furlough. It should not only have been dyed-in-the-wool adherents of monetarist economics who realised that this pent-up demand was likely to have adverse inflationary consequences.
It is now clear that keeping inflation to recent historic lows will be far more of a challenge than in the past. History also records that inflationary, and its close cousin, wage-price spirals tend to take hold extremely quickly. Incidentally this is also why the government has been so determined to concede little ground to any of the striking public sector workers in the array of current industrial disputes.
Exactly fifty years ago, in the first few months of 1973, inflation in the UK stood at 6.5%, only a little higher than the then 4% level in Germany whose economic success we then hoped to emulate as fellow members of the EEC. Yet within two years UK inflation levels had reached the unprecedented heights of 26%, whilst Germany's remained in low single digits.
The sharp increases in world energy prices as a consequence of the Arab/Israeli war of 1973-4 impacted equally on both manufacturing economies (this was in the era just before North Sea oil came on tap). However, organised labour in Germany worked in tandem with its government, realising there would have to be a short-term fall in living standards rather than pushing for large wage hikes. Britain's trades unions took the opposite course and the more powerful were able to threaten, and implement, strike action. Costs of production rose, further inflation resulted and ever larger pay claims quickly became the norm - those living on fixed incomes or in occupations lacking industrial muscle lost ground and living standards across the board plummeted.
Those who criticise Treasury Orthodoxy should reflect that its institutionalised memory is now an important element in ensuring that in the years ahead policymakers do all they can to avoid replicating the grim outcome of the 1970s. This is a task that has been made all the more difficult, incidentally, by this week's run on several US-domiciled banks including SVB, whose UK subsidiary was saved from insolvency by a Bank of England managed rescue by HSBC. Containing this fresh banking crisis and minimising its aftershocks will probably extinguish any appetite on the part of either the FED or the Bank to raise interest rates much further - despite the on-going and serious inflationary threat.
Little noticed in last month's reshuffle was that the departmental and personnel reorganisation has reinforced Treasury supremacy within Whitehall. In their own ways all three of Rishi Sunak's predecessors as PM sought to push back against what they regarded as a Treasury instinctively obstructive to the sweeping reforms they wished to enact. None succeeded and the Sunak/Hunt administration (probably happiest dealing in data and poring over spreadsheets) will restore the Treasury's overwhelming powerbase in the government machine.
In the final weeks of the last year the Chancellor set out a package of thirty de-regulatory City reforms designed, in his own words, to "turbocharge economic growth" and "unleash potential.” The Finance Bill that follows this budget statement will enact some of them and put meat on the bones of other more generalised proposals. At the time some commentators rather oversold the measures as Big Bang 2.0 (a nod to the 1986 reforms that re-established the City's leading international financial centre credentials). Nevertheless, this reflected a sense of a clear sense of direction after the loss in international confidence brought about following the Brexit vote when policy seems to have lurched between free-market rhetoric and knee-jerk interventionism. Finally, there seems to be some coherence, ambition and sense of mission, especially as financial services has been identified as one of the government's key growth sectors.
Interestingly not all the prospective deregulation comes about directly - or even indirectly - as a result of post-EU freedoms. The ring-fencing rules for banks were devised in Whitehall in the aftermath of the financial crisis; ditto the senior managers' regime which disincentivised global financial institutions from locating senior executives in their London office; the much vaunted disavowal of the EU's Solvency 2 measures, impacting the ability of our insurance industry and pension funds to invest in long-term infrastructure, has already been diluted by Brussels since we left the EU and was originally designed to ensure more assets were kept on insurers' balance sheets in the aftermath of the Lloyd's of London near-collapse in the 1980s; promoting London as a centre for digital currency is certainly innovative but may prove troublesome in the aftermath of what appears to be the unravelling of the next big financial scandal over crypto-assets.
One final word of warning - and as the erstwhile MP for the City of London for almost twenty years, I naturally speak as a friend and supporter of financial and professional services. In the aftermath of the 2007-8 banking crisis the near universal view was that we had become over-dependent on our financial services industry, which had become accustomed to light-touch regulation and had grown too fast relative to the rest of the UK economy. Those who worked in the City or in associated professions had made hay, but when the crash came we were all on the line to bail it out.
It was felt that a diminished financial services sector might also prevent London sucking in so much graduate talent from across the nation and the long road to levelling up opportunities and outcomes across the rest of the country would then commence. Slowly but surely many of these sentiments seems to have been forgotten and the regulatory safeguards that were supposed to ensure that ‘it must never happen again' have been lowered. This direction of travel seems set to continue, not least at a time when the New York Stock Exchange is making a very public challenge to London-listed businesses to transfer to Wall Street.
Yet two eternal lessons of political and business life are that it is rarely 'different this time' and that very few problems are entirely novel.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
As you may have seen in the news over the weekend, the collapse of Silicon Valley Bank (SVB) signifies the largest failure of a bank since 2008.
SVB grew to become the 16th largest bank in the US and the bank’s clients were primarily businesses in the tech industry across the world.
The demise of SVB was predicated by its investment in long-dated US government bonds. Traditionally seen as longer-term and safe investments, bonds are susceptible to changes in value when interest rates rise or fall. Unfortunately for SVB, the recent significant increases in interest rates caused a major reduction in the value of these bonds.
With tech companies particularly affected by the tough economic conditions over the past 12 months and incurring a high cash burn-rate, SVB were forced to sell these bonds at a loss to cover deposit outflows.
Following a public announcement for an intended capital raise last week to cover these losses, this triggered a ‘run’ on the bank and its unfortunate collapse.
The risk of contagion is minimal. Regulators in the US have since guaranteed all depositors’ funds and this morning HSBC have announced that they are acquiring SVB UK.
The approach to risk management for Capital International Bank remains incredibly prudent, our Bank is not exposed to any long-dated investments and maintains significant levels of liquidity. Our fiduciary banking counterparties continue to report strong results and a robust approach to managing risk and liquidity.
If you have any questions, our Team are always on hand to discuss these with you.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
Capital International Bank Limited is a wholly owned subsidiary of Capital International Group Limited (www.capital-iom.com), a privately owned financial services group based in the Isle of Man. Capital International Bank Limited is licensed by the Isle of Man Financial Services Authority and operates as a non-retail, restricted deposit taker under a Class 1 (2) licence. Deposits are not covered by the Isle of Man Depositors’ Compensation Scheme and terms and conditions apply.
They say a journey of a thousand miles begins with one step and I completely agree. My first step from the world of education into the world of Biosphere and sustainability as a fresh-faced young person taught me so much.
Late last year, I began my volunteer role as a youth representative for the UNESCO Biosphere Stakeholder Partnership Group in the Isle of Man. This was alongside starting work in Marketing at Capital International Group, a company that I believe is innovative and ambitious in its approach to sustainable development and is committed to preserving wealth in its many forms, including for our community and for the environment. Therefore, I felt incredibly blessed to have simultaneously started in two roles that perfectly link together in empowering this first step in my journey. This first step hurtled me towards the stark reality of the huge challenge that is engaging communities into sustainable development. It's safe to say, after my first experiences engaging with young people on the Isle of Man about our Biosphere, I felt lost.
After starting my position as youth representative, I decided that my first action was to speak with local degree students face-to-face to begin engaging younger members of our community. I believed that this was the most personable approach to establish myself as a welcoming figure for young people to share their perspectives and thoughts with.
It was an experience characterised by the saying: ‘If it wasn’t painfully difficult - you did it wrong!’
I entered the experience energized and excited with the prospect of forging connections and encouraging communication. My bright face, however, was soon replaced by confusion and worry as I was met with emotionless expressions, compounded by near silence. I was a stuttering, nervous mess as the mountain of a challenge that is engagement into sustainable development, grew ever taller. It’s an understatement to say that I left that experience wide-eyed, startled by the face of that reality.
On reflection, I am grateful for the most prominent lesson this challenging start taught me:
Do not assume that everyone understands what Biosphere is and why it is important because unfortunately most do not.
So now, I feel confident enough to say that the start of the engagement journey is encouraging people to understand what Biosphere status is and more importantly why we should care.
In my definition, a Biosphere is simply about connecting people to place. Biosphere reserves are testing grounds for innovative initiatives that drive sustainable economic development through the connection of communities to their environment. A local testing ground for global solutions.
This is incredibly exciting for the Isle of Man, considering we are the only entire nation that has been granted Biosphere status. A status that gives us a great context within which we can initiate new projects that can be tested realistically within a nation context. Considering that there are 738 Biosphere reserves across 134 countries, having a Biosphere status also enables a fantastic communication network across a wide array of contexts.
As a youth representative, my work to drive engagement is one of the key puzzle pieces in our Biosphere’s Five E’s strategy.
This strategy is integrated into our overall Island Plan as the first step in linking economic development to socio-cultural and sustainable development.
My mission to drive engagement amongst the Island’s young people is only just beginning, I am continually learning through trial and error. Since my first (and somewhat unsuccessful) engagement sessions back in November of last year, I have made many adaptations to my approach, including sitting in more relaxed settings with young people, building rapport and encouraging conversations about our Biosphere. An approach that has generated much more positive engagement.
I am glad to admit that I still bring a fresh face to the Biosphere mission, but with that I am hoping to bring fresh and positive engagement initiatives to our special Island Biosphere soon, continuing to learn from those wide-eyed experiences.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit
