Capital International Group Limited is pleased to announce the acquisition of Martello Asset Management Limited (Martello), a boutique investment firm headquartered in Jersey. This strategic acquisition aims to enhance the jurisdictional footprint of the Capital International Group (the Group) of companies beyond their current locations in the Isle of Man and South Africa. The acquisition will increase the Group’s market presence and broaden its portfolio of services across Jersey and beyond. The acquisition is subject to regulatory consent in Jersey.
The integration of Martello’s extensive expertise and established client base will significantly bolster the position of Capital International Group in the investment management sector. This acquisition aligns with the Group’s long-term growth strategy to expand its reach and deliver exceptional value to its clients through diversified investment solutions.
Key Benefits of the Acquisition:
“We are thrilled to welcome Martello into the Capital International Group family,” said Head of Investment Management, Antony Kelsey, who has been leading the transaction. This acquisition represents a significant milestone in our growth journey. By combining our respective service offerings, we are well-positioned to expand the distribution of the Martello Global Equity Fund, and the wider Martello proposition into Capital International Group’s extensive relationships with intermediaries and advisers.
Martello has built a strong reputation for delivering exceptional investment management services and maintaining robust, good quality client relationships. The performance track record of the Martello Global Equity Fund speaks for itself and we are looking forward to working with the Martello team to distribute it more widely through the Capital International Group. The seamless integration of both companies will ensure continuity of service and a smooth transition for all clients and employees.”
“We are excited about the opportunities this acquisition brings,” said Gary Hill, Director of Martello. “Joining forces with the Capital International Group will enable us to leverage their extensive resources and expertise, ultimately benefiting our clients with enhanced investment options and services. We have been impressed with the Capital International team throughout our negotiations and we are confident that our team of professional employees and our clients will be well looked after in the future. The team will now engage closely with the necessary authorities to ensure the transaction receives all regulatory approvals as soon as possible.”
Anthony Long, Capital International Group’s Chairman said: “We have been keen to establish a strategic link with Jersey because of the strong investment management industry and community and so we are delighted that we have found Martello to help make a presence in Jersey a reality. The company’s African client base is also a great fit for us as we have 40+ staff across Cape Town, Johannesburg and Durban who are well placed to support and strengthen the relationships Martello have built.”
Disclaimer: The views, thoughts and opinions expressed within the article / video are those of the author / speaker(s) 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. Any reference to past performance is not necessarily a guide to the future. The value of investments may go down as well as up and may be adversely affected by currency fluctuations. CIG, its clients and officers may have a position in, or engage in transactions in any of the investments mentioned. Opinions constitute views as at the date of publication and are subject to change.
Regulated investment and banking activities are carried out on behalf of Capital International Group by its licensed member companies. All subsidiary companies are represented under the Capital International Group brand.
Capital International Limited, Capital Financial Markets Limited, and Capital International Bank Limited, are licensed by the Isle of Man Financial Services Authority. Capital International Limited is a member of the London Stock Exchange. 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 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. Capital International Bank is the trading name of Capital International Bank Limited. Capital International Bank Limited is also licensed by the South African Reserve Bank Prudential Authority to conduct the business of a Representative Office in South Africa.
CILSA Investments (Pty) Ltd (FSP No. 44894), trading as Capital International SA, is licensed by the Financial Sector Conduct Authority in South Africa.
Welcome to the Quarterly Investment Review for Q2 2024.
Our Investment team have put together a range of resources to update you on what has happened in the markets across the second quarter of 2024. Here you will find:
Head of Equity, James Penn, shares his insight into potential interest rate changes as well as elections in the UK, Europe and in the US.
Listen for an overview of the recent elections in South Africa.
The next episode of the podcast will see Lerato and Tatenda joined by well-known journalist, author and broadcaster, Mandy Wiener.
Click this link to subscribe and listen to the podcast on your preferred listening platform.
Inflation has been at the forefront of macroeconomic events, causing headaches for central bankers worldwide. In addition to the well-known inflation contributors, we have experienced post-pandemic and as a result of the Ukraine-Russia war, a new inflationary phenomenon has emerged. The demand for Taylor Swift’s record-breaking Eras tour has been significantly impacting local economies since its launch this year. Not only does the tour generate substantial revenue, but the increased consumer spending on hotels, restaurants, and flights is driving up prices, entrenching service sector inflation.
Despite inflation hitting the 2% target last month, the Bank of England has been hesitant to start cutting rates. Markets are anticipating the first rate cut in August. However, the spending by concertgoers, combined with the seasonal increase in summer holiday travel, may push service inflation to undesirable levels. The UK leg of the tour, taking place in June and August, is expected to add £1 billion to the British economy.
Taylor Swift is not alone in this impact. Legends like Bruce Springsteen, Sting, and Pink are also contributing to increased consumer spending on services, extending this inflationary pressure to the Eurozone and affecting the European Central Bank as well.
Interestingly, Taylor Swift has left a lasting legacy by adding terms like "Swiftflation" and "Swiftonomics" to the economic dictionary.
Global equity markets had another strong quarter, solidifying their one-year performance rebound. Key drivers of this positive trend included the continuation of the disinflation narrative, central banks beginning to cut interest rates, sustained earnings strength, and increasing positive sentiment surrounding Artificial Intelligence (AI). This was particularly notable in the United States, where the "Magnificent 7" further reinforced their dominant market positions.
In the second quarter of 2024, total equity market returns remained positive. The Nasdaq was the best-performing index, achieving an 8.5% return, followed by the S&P 500 with a 4.3% return in local currency terms, while the main UK index returned 3.7%. In contrast, Europe retreated by -1.6% largely due to political uncertainty in France. Rising pressures from the far-right National Rally party led by Marine Le Pen forced French President Emmanuel Macron to call a snap election causing France’s CAC 40 index to fall by -6.6%.
Large-cap stocks continued to rally, especially in the US technology and communications sectors, which are major benefactors of AI optimism. Nvidia briefly overtook Apple and Microsoft to become the most valuable company in the world, with an estimated value of $3.3 trillion. However, valuation ratios such as the Price to Earnings ratio have expanded in the US to 28.5x, compared to the long-term average of 24x, leading some market commentators to view the US market as potentially overvalued.
Political uncertainty was abundant during the quarter. Snap elections were called in both the United Kingdom and France, while in the United States, the first televised election debate resulted in a notable swing toward Donald Trump. Concerns were raised over Joe Biden’s performance, which was perceived as incoherent and rambling. Additionally, Donald Trump became the first former US President in history to be convicted of felony charges, receiving 34 counts of falsifying business records.
Fixed income markets came under further pressure as expectations around the commencement of interest rate cuts were again called into question, particularly in the US, due to continued economic strength. The European Union initiated its first interest rate cut of 0.25%, with expectations of an additional cut before year-end. The UK did not cut interest rates in the June meeting, despite increasing calls to do so. The expectation is now for the Bank of England to make its first interest rate cut in August, with another cut anticipated before year-end. Global government bond yields have been volatile, as the bond market attempts to forecast the forward interest rate path amid uncertainty around inflation data and central bank rhetoric, which fluctuates between dovish and hawkish tones.
The market’s digestion of both inflation data and the resulting central bank response continued to be a major focus of macroeconomic analysis. At the end of the quarter, major developed market inflation rates for the US, EU, and UK were 3.3%, 2.6%, and 2.0%, respectively. There is less reason for the US to cut interest rates compared to the EU and UK, largely due to differing economic situations. In May, the UK economy emerged from a technical recession, posting a GDP increase of 0.6%. The UK also achieved its target rate of inflation during the quarter, becoming the first major developed economy to do so.
In commodity markets, gold experienced gains, finishing the quarter up 4.3% at $2,326. Gold remains a safe-haven asset, offering diversification against inflation, geopolitical uncertainty, and potential market overvaluation. Meanwhile, oil retreated by -1.2%, ending the quarter at $86.4.
The second quarter presented fertile ground for growth, as markets largely benefited from a resilient macroeconomic backdrop despite increasing bouts of geopolitical volatility. AI continues to evolve into a major megatrend that could facilitate further sustainable long-term economic growth. The central bank environment remains supportive, and we expect the UK to follow the EU and begin the rate cut cycle in the coming quarter. This quarter highlighted the importance of maintaining a diversified asset approach in line with our long-term performance targets. We also remain mindful of short-term risks and opportunities, especially with the election risk looming in the second half of the year.
Disclaimer: The views, thoughts and opinions expressed within the article / video are those of the author / speaker(s) 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. Any reference to past performance is not necessarily a guide to the future. The value of investments may go down as well as up and may be adversely affected by currency fluctuations. CIG, its clients and officers may have a position in, or engage in transactions in any of the investments mentioned. Opinions constitute views as at the date of publication and are subject to change.
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), trading as Capital International SA, is licenced by the Financial Sector Conduct Authority in South Africa. All subsidiary companies across both jurisdictions are represented under the Capital International Group brand.
Welcome to the Quarterly Investment Review for Q1 2024.
Our Investment team have put together a range of resources to update you on what has happened in themarkets across the first quarter of 2024. 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.
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Portfolio Manager, Sean Mills, answers four key questions on the current AI mega-trend.
Head of Equity, James Penn chats to Portfolio Manager, Matthew Seaward about China's current investment landscape.
A new episode of Capital Alchemy has recently been released. Join host Tatenda Chikombero as he chats to Ulrik about the current tax landscape in South Africa including:
Watch the full podcast here on YouTube.
Listen to the podcast on your preferred listening platform.
Developed markets started the year mutedly, but by the end of January US, European, and Japanese equity markets had raced ahead delivering record highs across multiple trading sessions. Chinese markets were closely watched given negative performance in both mainland China and Hong Kong. Indices reinforced the view that the second largest economy in the world was struggling to return to levels of pre-pandemic growth.
In the end, the first quarter of 2024 produced the best first quarter in total equity market returns seen in almost 5 years. NIKKEI was the best index achieving 20.6%, followed by EUROSTOXX 12.4%, S&P 10.2%, and NASDAQ 9.1%, all in local currency terms, while the main UK index returned a modest 2.8%. The Japanese market index hit an all-time high after decades of stagnation, largely due to corporate reforms that took place during 2023 and a cheap yen attracting foreign buyers on a large scale. US stocks continued to benefit from AI euphoria as an endless stream of positive news on generative AI progress helped push US stock markets to all-time highs. The US Q4 earnings season also delivered strong results, with 75% of companies beating analyst expectations. However, there were some surprising individual underperformers, especially mega cap names like Apple and Tesla, which experienced difficulties amidst competition concerns or in dealing with regulatory lawsuits imposed by US and EU regulators. European stocks were surprisingly ahead of US peers for the quarter.
Fixed income markets came under pressure after the commencement of interest rate cuts were rolled further back in 2024, while the number of cuts expected for the full year have also been reduced. Global government bonds yields had a bumpy ride, mainly caused by bond markets overreacting to any uncertainty around inflation data that challenged the disinflation narrative while also navigating global central bank rhetoric which swung between dovish and hawkish projections. The Bank of Japan finally exited its yield control mechanisms and a negative interest rate territory while the Swiss National bank was the first major bank to cut their base rate by 25 basis points.
How the market digests inflation data and the resulting central bank responses continued to be at the forefront of macroeconomic focus. At the end of the quarter major developed market inflation rates for the US, EU, and UK were 3.2%, 2.4%, and 3.4% respectively. Reduced expectations of lower interest rates have mainly been affected by the surprising resilience of the US economy, with inflationary pressures not dissipating at a sufficient level to warrant cutting. Some signs of weakness have been seen, with European, UK, and Chinese economic growth flat, and even a technical recession for Germany. This could warrant the possibility of the EU or UK cutting rates before the US.
In commodity markets, gold recorded significant gains as it finished the quarter up 8.1% at $2229. The gold rally was supported by a softening dollar, the outbreak of two major conflicts, and pushed back projections of rate cuts making gold more attractive. Oil also rallied 13.5% finishing the quarter at $87. Oil prices were impacted by the Israel-Palestinian war, disruptions to Red Sea passage shipping, and reduced output from Russia caused by significant disruptions to refineries which were targeted by drone strikes.
This quarter presented a series of opportunities across a range of sectors. Markets largely benefited from a strong macroeconomic backdrop and the positive sentiment that surrounds the generative AI megatrend. We believe there remains a supportive central bank environment and we anticipate the first rate cuts will now begin in June, possibly with the European Union or the United Kingdom leading the way over the United States. We continue to maintain a diversified asset approach in line with our aim of achieving long-term performance targets while also being mindful of any short-term opportunities as they present themselves.
Disclaimer: The views, thoughts and opinions expressed within the article / video are those of the author / speaker(s) 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. Any reference to past performance is not necessarily a guide to the future. The value of investments may go down as well as up and may be adversely affected by currency fluctuations. CIG, its clients and officers may have a position in, or engage in transactions in any of the investments mentioned. Opinions constitute views as at the date of publication and are subject to change.
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), trading as Capital International SA, is licensed by the Financial Sector Conduct Authority in South Africa. All subsidiary companies across both jurisdictions are represented under the Capital International Group brand.
The population within the Gulf Cooperation Council (GCC) region has seen significant growth, reaching 56.4 million people in 2021, up from 26.2 million in 1995 (Source: ISI World Statistics). This surge is attributed to the influx of expatriate workers, drawn by favourable local taxation rules and expanding business opportunities.
Notably, the population balance has tilted in favour of non-citizens, constituting 50.9%, with an annual growth rate of 3.1%, compared to 1.4% for citizens. This shift, from 46.6% in 2010, suggests that the non-citizen population could double in about 23 years, reaching 57.6 million people by 2044 (Source: ISI World Statistics).
This population boom, particularly within the expat market, is driving a heightened demand in the financial services industry for top-tier advice, wealth management, and associated services and products. Among the available options for advisers to support their clients' financial goals, investment platforms are gaining significant traction.
Following my recent trip to Dubai, along with our Commercial Director David Noon, I wanted to share some insights on the trends and limitations our clients are facing. We work closely with our clients, and it is our commitment to understand their needs and the challenges they encounter.
Situs is defined as “the place to which, for purposes of legal jurisdiction or taxation, a property belongs” (Source: Golding & Golding). Despite the increasing awareness of situs tax, not everyone is cognisant of its potential impact on a client's assets upon death.
Did you know, for example, that a person holding over $60,000 in US stocks could face US situs tax of up to 40% of the value of their holdings? Likewise in the UK, if your combined UK domiciled assets total more than £325,000 then similar taxation can apply?
Situs isn’t just applicable to physical property but to a range of asset types. With clients wanting exposure to popular global stocks, or obtaining share options from their employer, it’s important to keep situs in mind and understand the associated risks involved.
To mitigate situs, options like an insurance wrapper or an international pension exist, though each comes with potential drawbacks. Our 'Kinesis Service’ aims to assist advisers and their clients in mitigating potential situs liability while harnessing the benefits of an investment platform.
The removal of the UAE from the Financial Action Task Force's 'grey list' (Source: Reuters) marks a significant achievement for the jurisdiction, signalling positive strides taken by the country. This development opens wider opportunities and fosters closer collaboration with other international jurisdictions.
Despite this success, the EU still designates the UAE as a high-risk country (Source: Reuters), emphasising the ongoing work required. The UAE's commitment to diversifying beyond the oil sector bodes well for industries like financial services, boosting investor confidence locally and internationally
Navigating international waters exposes companies to higher risk factors, with constraints ranging from clients returning to their birth country to stringent limitations on investment choices. As companies grapple with these challenges, it is crucial for advisers to scrutinise providers' outlook on risk and their policies.
I firmly believe in advisers and clients being given access to an open-architecture solution, allowing them to tailor investment solutions to their financial goals and risk appetite, both now and in the future.
Succession planning is a recurrent theme in nearly all my meetings, underscoring its significance in comprehensive financial planning. The importance of succession varies among clients, contingent on their unique circumstances. Fortunately, most providers present viable solutions, whether through life insurance policies with designated beneficiaries from the outset or platforms offering 'death bed' trusts. However, it's paramount to understand the tax implications for beneficiaries.
A word of caution is in order – always seek legal or tax opinions on prospective solutions to validate their legitimacy and safeguard against potential liabilities in the future. I've encountered instances where proposed beneficiary nominations, upon scrutiny, could falter as trusts, triggering unforeseen inheritance and probate obligations. In the intricate realm of wealth management, meticulous planning today ensures a lasting legacy tomorrow.
In conclusion, the offshore investment platform market is experiencing an exciting phase of growth. The prevalence and utilisation of platforms are steadily increasing, and at Capital International Group, we are dedicated to supporting this upward trend. With substantial plans for 2024 and beyond, stay tuned for future blog posts as we unveil more details about our exciting developments.
Disclaimer: The views, thoughts and opinions expressed within the article are those of the author 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 productor security or to make a bank deposit. Any reference to past performance is not necessarily a guide to the future. The value of investments may go down as well as up and may be adversely affected by currency fluctuations. CIG, its clients and officers may have a position in, or engage in transactions in any of the investments mentioned. Opinions constitute our views as of this date and are subject to change.
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) trading as Capital International SA, is licenced by the Financial Sector Conduct Authority in South Africa. All subsidiary companies across both jurisdictions are represented under the Capital International Group brand.
Why it’s Important to Stay Invested!
It comes as little surprise that, over the long term, equities outperform bonds, and that bonds outperform cash. So, why is it so challenging to make the decision to invest? Uncertainty, volatility, and psychological biases all prevent investors, even those more willing to take risks, from making the leap and entering the market.
Whilst many clients were comparing the positive cash returns last year to investment returns, over the last 13 months our PRISM H5 balanced strategy returned 6.7%whilst UK base rates returned 5.2% and to achieve a return close to UK base rates at the Bank clients would need to lock it away – typically for 12 months or more.
In the picture below we review how markets performed over the last 13 months and summarise the key events.
Disclaimer: The views, thoughts and opinions expressed within the article / video are those of the author / speaker(s) 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 productor security or to make a bank deposit. Any reference to past performance is not necessarily a guide to the future. The value of investments may go down as well as up and may be adversely affected by currency fluctuations. CIG, its clients and officers may have a position in, or engage in transactions in any of the investments mentioned. Opinions constitute our views as of this date and are subject to change.
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) trading as Capital International SA, is licenced by the Financial Sector Conduct Authority in South Africa. All subsidiary companies across both jurisdictions are represented under the Capital International Group brand.
The prospect of a steeper yield curve next year is becoming a focal point in financial discussions. 2023 marks the first time in a decade that the yield curve has remained inverted for the entire year, with this trend starting in July 2022. An inverted yield curve is traditionally seen as a sign of an impending recession and typically, the curve tends to steepen as a recession starts.
Throughout 2023, the market experienced an inverted yield curve in the 2-10 spread, starting and ending around -0.5%. The inversion deepened beyond -1% at times, notably in March and June last year.
Chart 1: Spread between 10-year and three-month US treasuries
Strategists predicted a recession last year but ultimately ended up being wrong with both the economy and the consumer proving resilient.
The job market is currently undergoing a rebalancing process and whilst the expansion of job growth has slowed, this trend is not causing much concern. The number of job openings remains higher than the levels observed in 2019 across almost every industry, indicating that labour demand remains robust and hasn't drastically declined. One explanation for the higher number of openings is more focused hiring in certain industries, such as healthcare, hospitality, and government. This has resulted in a larger-than-average increase in wages that has helped to attract new labour easing supply constraints.
The chart below highlights the number of job openings vs. the number of unemployed in the US economy. Anything above 1 implies more jobs than unemployed to fill them.
Prior to the January jobs report, there was an indication that the labour market was beginning to loosen, evidenced by a decrease in both the quit rate and wage growth. Nonetheless, the robust job gains in January contributed to the soft-landing thesis. Presently, there are still more job openings than unemployed people looking for work and, despite the January jobs report, we do believe the ratio is likely to move towards equilibrium by the middle of the year.
The ‘Sahm Rule’ derives one of its variables from labour and is a popular new Federal Reserve indicator designed to signal the onset of recession when the unemployment rate increases by 0.5% relative to its 12 month low. The rate had been showing an upward trajectory leading some strategists to call a recession. This trend, however, was promptly reversed following the release of the January job figures.
This all leads this economic environment to be particularly difficult to forecast. US labour shortages coupled with earnings being largely positive vs, consensus gives a compelling case for remaining invested in equity markets.
Going into 2024, I see three key tailwinds diminishing: reduced fiscal spending, a strong consumer base, and China's reopening, all of which contributed positively in 2023. For the first time, US debt sustainability has become a focal point among American politicians. Vivek Ramaswamy, for example, has tried, albeit unsuccessfully, to campaign for the presidency with a mandate centred on reducing the national debt.
US Treasuries are offering more attractive yields than in the past five years, leading to a shift away from the mantra around “TINA” or “there is no alternative”, which refers to equity markets being the only place where investors can make money. This change is drawing more Americans to treasuries, a trend we saw highlighted in the Wall Street Journal headline “Stock bull markets helped make boomers rich. High bond yields are helping them retire.”
https://www.wsj.com/personal-finance/retirement/income-investing-bonds-dividend-stocks-01a97372
The interest in US treasuries, by the American public is fortuitus for the Fed, given demand from international buyers has waned. Both China and Japan have both cut their holdings on aggregate of almost $3 trillion in 2013 to under $2 trillion today.
Higher interest rates have raised concerns about debt sustainability, as they are higher than those seen in the previous market cycle. Additionally, the expected large issuance of treasury bonds and Quantitative Tightening (QT) could potentially create a supply imbalance, further questioning the sustainability of debt.
However, we remain less worried about higher rates and are more concerned about higher debt levels coming from larger deficits. Which could be dangerous for the public debt path, particularly in the US where the debt to GDP ratio is expected to diverge from Europe.
The “Growth in a Time of Debt” paper by Reinhart and Rogoff indicated a relationship between slower GDP growth when national debt to GDP was above 90%. Whilst this theory has since been debunked, the question remains as to whether governments can get away with pseudo Modern Monetary Theory when other governments are remaining fiscally disciplined.
In 2023, the US saw public debt interest repayments hit $1.3 trillion, or 4.6% of its GDP, a figure that is expected to rise, even with the possibility of interest rate cuts later this year. Oxford Economics projections indicate that the budget deficit may increase to 10% of GDP by 2050.
In addition to continued deficits, Oxford Economics draw two conclusions. Firstly, the impact of higher rates may be less severe than anticipated even if 10-year government yields remain elevated. Secondly, the more significant impact is more likely to be felt through budget deficits. A permanent 1% GDP increase in budgetary spending would likely raise debt to GDP by 30% by 2050, which on their debt path projector looks likely to reach 220%.
Unlike the US the debt paths in most major European economies looks more favourable, thanks to generally lower long-term rates as well as smaller budget deficits. As forecasted in the below chart, compared with the US, Europe’s major economies will move towards lower deficit and debt levels.
The main reason for this difference is the tax revenue as a percentage of GDP is significantly lower in the US than many other European countries.
Tax-to-GDP ratios, 2021 and 2022p (% of GDP)
Note: Preliminary data for 2022 were not available for Australia and Japan.
With upcoming Presidential elections, there's high uncertainty impacting the US’ fiscal outlook and potential trade tensions. Recent 30-year Treasury auctions have yielded disappointing results, suggesting potential concerns over the sustained interest in long-term bonds, or perhaps highlighting the risks associated with the current market inversion. The main bidder for Treasuries has traditionally been from US domestic investment funds, yet their demand has failed to maintain momentum since last August.
While term premia (TP) has repriced sharply over recent months in line with our forecasts and trade recommendations, we see moderate further upside for several reasons. Firstly, measures of TP remain low relative to history and fundamentals. Secondly, upside inflation risks are higher than pre-Covid and, with inflation still above the Fed’s target, bonds should for some time remain a poor hedge for equities and other risk assets. Thirdly, and perhaps most importantly, domestic and global supply dynamics, which we have highlighted above, are supportive of higher premia, with large US fiscal deficits and ongoing balance sheet runoff or QT in both the US and other advanced economies.
This has led our team to see value in both the shorter end of the curve but also floating rate notes, given our expectations for rate cuts are both further out and so much less than what is presently priced in or expected by the market.
Disclaimer: The views, thoughts and opinions expressed within the article / video are those of the author / speaker(s) 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. Any reference to past performance is not necessarily a guide to the future. The value of investments may go down as well as up and may be adversely affected by currency fluctuations. CIG, its clients and officers may have a position in, or engage in transactions in any of the investments mentioned. Opinions constitute our views as of this date and are subject to change.
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.
Welcome to the Quarterly Investment Review for Q4 2023.
Our Investment team have put together a range of resources to update you on what has happened in markets across the fourth 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.
Soon to be released across various listening platforms, 'Capital Alchemy' is a brand new, interview style podcast featuring big names from across the financial services industry. Why Alchemy? The podcast aims to bring together leading minds and experts, creating a vibrant concoction of ideas, thoughts and points of view. Whilst the subject matter might sometimes be complex, Capital Alchemy’s laid back format makes it perfect to have bubbling away in the background of your dog walk, your kitchen clean up or your gym session. In the first episode, we were delighted to have Capital International's Tatenda Chikombero and Lerato Lebitsa host Certified Financial Planner, Kobus Kleyn. Watch the teaser below and keep an eye on our social media channels for the podcast's official release.
*Update - Capital Alchemy has now been released! Listen to the first episode here or on your preferred streaming platform.
The final quarter of 2023 provided welcome relief to investors as major stock indices and global bond markets posted their best returns of the year. This rise in asset prices reflected inflation numbers which fell more quickly than expected; this surprised the market and gave support to the view that central banks have reached the peak of the interest rate cycle.
The S&P 500, NASDAQ 100, and MSCI Europe achieved returns of 11.7%, 14.6%, and 6.5% respectively in local currency terms while the UK main index returned a modest 2.3%. The combination of lower bond yields, healthy corporate earnings, and falling inflation all helped provide support for a broad equity market rally. Growth stocks, especially those in the technology sector, and those that continue to participate in the artificial intelligence trend, outperformed value stocks. Third quarter earnings season in the US concluded with 80% of S&P 500 constituents beating earnings estimates by circa 8% on an average. The global equity rally was welcome but did highlight an issue that 2023 has been a year of poor market breadth as year-to-date US equity returns have been largely driven by the outsized returns of the Magnificent Seven, which combined on an equal weighted basis are up 111% YTD. Nvidia being a major player in AI innovation was the top performer of the 7 achieving a 240% return YTD. UK valuations, which have not become as stretched as US valuations, continue to be viewed as comparatively cheap.
Global government bonds rallied as yields rapidly declined after hitting their peaks in October. The US 10-year Treasury yield, which hit 5% in October, now sits at 3.9%. The UK and EU 10-year Treasury yields sit at 3.5% and 2.0% respectively. The “higher for longer” central bank narrative has been replaced by “lower and sooner” with interest rate cuts now expected to begin as early as Q2 2024. The pivot to a more dovish stance has occurred much faster than initially forecasted. Markets have interpreted the surprise disinflation readings to imply a similarly expedited cycle of interest rate cuts following the sharp cycle of interest rate rises. Renewed hopes of a soft landing gave support to investment grade and high yield bonds as credit spreads tightened.
In terms of macroeconomic figures, the surprise fall in headline inflation brought the most recent readings to 3.1% in the US, 2.4% in the EU, and 3.9% in the UK. On October 7th news broke of terrorist attack on Israel by Hamas, which sent shockwaves throughout the world and caused the volatility of commodity prices to spike. Brent crude oil prices reached a peak in October of $91, falling to $77 by year end. Gold finished the year rallying 11.6% to $2063. The current positive correlation between stocks and bonds is a useful reminder of the importance of diversifying through alternative assets such as commodities and real estate to hedge against other risks.
Throughout 2023, financial markets have contended with a formidable amount of volatility and uncertainty, but with greater clarity we can now refocus on key dynamic variables like the peaking and unwinding of the interest rate cycle and disinflation. An end to the interest rate cycle brings a sense of stabilisation to markets and forward interest rate expectations. Politically, 2024 is also an eventful year with elections in the US, EU, and UK.
Having avoided a much-feared recession over winter, and with the potential easing of interest rate pressures, consumers may become more confident, especially if inflation continues to decline and stay below 3.0% in 2024. The difficulty will be managing market optimism with the actual level of interest rate unwinding and to prevent valuation bubbles. Global economies must also contest with potential recession, especially in the UK where GDP fell -0.1% in Q3, while the US must contend with the burden of $34 trillion in national debt. Heading into 2024, we remain vigilant on the macroeconomic and geopolitical hurdles that need to be navigated while weighing potential opportunities against potential risks. In this environment we prefer resilient high-quality companies with strong balance sheets, good cash flows, and competitive pricing power.
Disclaimer: The views, thoughts and opinions expressed within the article / video are those of the author / speaker(s) 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. Any reference to past performance is not necessarily a guide to the future. The value of investments may go down as well as up and may be adversely affected by currency fluctuations. CIG, its clients and officers may have a position in, or engage in transactions in any of the investments mentioned. Opinions constitute our views as of this date and are subject to change.
In the months ahead UK politics will be dominated by relentless speculation as to the date of the forthcoming General Election. The quaint - or even 'working' - assumption underpinning such feverish chatter is that a sitting Prime Minister has absolute control over this fateful decision.
Rishi Sunak faces a predicament familiar to any Prime Minister trailing in the opinion polls as we enter the fifth and final year of the current parliament. Go early (in May) or wait in the hope that your electoral prospects will have markedly improved by the autumn? For what it's worth, I believe the Conservatives’ best chance of mitigating the extent of their losses will come in the spring, but I am almost certain that Sunak will wait until October or even November in what may be forlorn hope that 'something will turn up'.
Amidst all the political and economic turbulence of 2023 one thing has been uncannily consistent - the Opposition Labour Party's twenty percentage point opinion poll lead. Unless this changes few would blame Sunak for hanging on doggedly until the autumn. Yet even a sharp narrowing of Labour's poll lead in the early months of the New Year would probably tempt the PM to run it long in the hope that this favourable momentum might continue.
The one contrast is that last year began with Sunak's personal ratings comfortably outstripping the Conservative Party's. It ended with his polling numbers having plunged to levels that compare unfavourably even with his two immediate predecessors at the point they were ousted from the leadership. Whilst it would be unwise entirely to rule out yet another leadership challenge from disaffected and panicking Tory MPs, the general mood is less revolutionary, more one of fatalism. A flood of further retirements from parliamentary foot soldiers will likely be announced in the weeks and months ahead as the unpalatable prospect of Opposition or, worse still, personal defeat at the hands of the voters beckons.
So, what does history teach us about election outcomes when governments cling on to the bitter end? The record is a little more mixed than one might assume. Events can sometimes work in favour of the incumbent administration with most politicians understandably reluctant to forgo a final year in office if the long shadow of defeat hangs over them. In the 1990s the then Conservative PM, John Major, twice waited until virtually the last possible moment to 'go to the country'. In 1992 he confounded most commentators and all opinion pollsters by winning a narrow victory. Paradoxically, delaying that election in the (as it turned out) erroneous expectation that the prolonged economic recession would have come to an end by polling day probably worked in his favour as it heightened voters' doubts about the Opposition's economic alternative. Five years later clinging on until the last moment during far more clement economic weather served only to magnify the governing party's divisions (over European policy naturally) and establish ever more firmly the credibility and reliability of Tony Blair's New Labour Party. The landslide defeat that followed was the Conservatives' worst result since the 1830s.
At each of the six General Elections since that 1997 calamity the Conservative Party has increased its vote share (a feat unparalleled in UK politics in the era of universal suffrage). At the last election it won twenty-four seats that had been Labour strongholds since the Second World War or even earlier (the so-called Red Wall). For a time, it seemed that the 2019 General Election might join 1945 and 1979 as turning point contests; more likely political historians will see it as a flash in the pan after which normal service was quickly resumed. The coalition that Boris Johnson's carved out of Brexit voters in the former industrial heartlands of England and northern half of Wales and affluent market-towns of the Midlands and South has simply proved too broad an alliance to hold together.
The last time a sitting government went into opposition was in May 2010. Gordon Brown's Labour Party had little choice but to run down the clock to the latest possible day in the aftermath of the financial crisis. As the economy bounced back from a fearful recession-cum-depression during 2009, the Treasury was able to prime the pump by unprecedented borrowing and VAT cuts. As a result, the opinion poll gap narrowed sharply in the months before that election; although the government lost office, the margin of its defeat was conventional rather than the rout that had seemed on the cards only months before.
The risk facing any third or fourth term administration is that the longer it waits to call an election, the more irresistible becomes the argument that it is 'time for a change'. Voters stand ready to punish severely any government that blatantly overstays its welcome, especially where there is little tangible evidence of progress. Clinging on for its own sake is never a good look.
So, election timing will also be dictated by the success or otherwise that a government has in framing the narrative about the contest that lies ahead. It seems to me that there are clear parallels today with what turned out to be the long campaign of 1996-97. Then the incumbent Tories seemed unable to make up their mind whether to attack Tony Blair on the basis that he constantly changed his policy positions for expediency - or alternatively as a Trojan Horse to hard-left radical politics. Almost three decades on they appear to face a near identical dilemma in handling Sir Keir Starmer and his prospective government.
Options are evidently being kept open... for a while at least. National Insurance reductions announced in November's Treasury statement will take effect with almost indecent haste from early January, rather than at the beginning of the next tax year in April. The relatively early timing of the forthcoming budget for the first week in March is a further signal that a May election has not been entirely ruled out at this stage. This would also align national and local elections, probably enhancing the Tories performance in the latter and ensuring that the party's already depleted activist base is out working for victory.
Which brings us to the government's biggest and most intractable political headache as election year commences. The fact is that in the eyes of many Conservative Party members both the leadership and the parliamentary party as a whole lack legitimacy. As they see it, twice in the past four or so years, the Tory MPs have unilaterally overturned the membership's verdict in its single most important prerogative, namely electing the party leader. First in removing Boris Johnson, who was supported by two-thirds of the membership and within months of being anointed Prime Minister proceeded to win a once-in-a generation near landslide majority at the 2019 election. After his Tory parliamentary colleagues had unceremoniously ousted him, the membership voted in Liz Truss. To their dismay her premiership was terminated within seven weeks by the same MPs who then collectively installed Rishi Sunak (whose leadership claims had been specifically rejected by the grassroots after an exhaustive set of hustings) without even consulting the membership at large.
The simmering anger of Tory Party members has manifested itself in several ways. First, over candidate selection. One relatively little reported development has been the clear trend in 'safe' seats (those likely to be won even in a very challenging election) for local councillors and party activists to be selected in preference to the national list of candidates and Westminster-based special advisers and insiders. The presumption is that in future such MPs will be more aligned to grassroots opinion and willing to do the local membership's bidding. More worrying still for the leadership is the renewed threat that arises from the Reform Party and a resurgent Nigel Farage. Anecdotally I understand that vast numbers of Tory Party members, especially those living beyond London and the House Counties, have already made it clear that they will support Reform candidates whose simplistic policy prescriptions on immigration, tax cuts and the defence of the realm are at odds with the Conservative government's actions in a cash-strapped world restricted by obedience to international treaties.
Small wonder Rishi Sunak - like John Major before him - has been reduced to pleading with his parliamentary foot-soldiers to 'Unite or die'. It may be a cliche, but the electorate tends not to vote for divided parties; meanwhile in order to counter the threat from the Reform Party, each MP and candidate becomes tempted to stand on their own personal manifesto on the assumption that this will help them save their own skin. Expect to see much more of the faintly ridiculous self-important postering by faction leaders on both wings of the party that we saw late last year over Rwanda and migration policy.
The Sunak/Hunt partnership deserves more credit than it has received for stabilising the economic situation. They continue to be plagued by perennially pessimistic official forecasting and I suspect the out-turn in 2024 will be better than currently predicted. Nevertheless, economic growth will in all likelihood remain anaemic; interest rates will almost certainly come down a little and inflation will be further squeezed. However, the cost-of-living crisis will still impact many - especially those homeowners whose fixed-term mortgages are up for renewal. Few can confidently predict that international conflict will not also continue to adversely affect energy and transportation costs.
Labour's strongest card will evidently be to ask relentlessly: 'Are you better off now than you were five...or fourteen...years ago?' In short, the economic outlook may not be appreciably better in the autumn than it is now.
One other factor that may prove influential in election timing is the US Presidential contest. Sensibly perhaps the Founding Fathers established fixed term elections, but the fact that the US goes to the polls on 5 November may have some bearing on election strategy here. Not since 1964 have UK and US elections taken place within the same month; personalities aside (and I am not convinced that both or even either of the two current front-runners for the main party nominations in America will necessarily end up fighting the election) the biggest warning from the other side of the Atlantic is that even robust economic recovery since the pandemic has done little to boost President Biden's polling numbers. Perhaps the lasting impact of Covid has been to irreparably jolt voters' confidence in incumbent governments across the democratic world.
In a year when the world's largest democracy (India) and its largest trans-national bloc (the European Parliament) also go to the polls there is one New Year political prediction that can already be made with absolute certainty - 2024 will not be dull!
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.
