The sands of time are fast running out on the current UK parliament. We have just witnessed what will almost certainly be the final set of Party Conferences before the next UK General Election.
In theory this might take place as late as January 2025 but Conservative Party strategists have already earmarked three potential dates next year - 2 May (to coincide with local elections), 20 June (to allow those local contests to test the political temperature) and 3 October (to enable the impact of any economic recovery to be maximised before going to the country).
The Conservatives have been in office since 2010 and the fifth consecutive term they are seeking would be unprecedented in the age of universal voting. Turbulence has been the new normal in British politics since the referendum of June 2016 when the UK people voted to leave the European Union. Remarkably it has been the Conservatives who have retained office throughout this period, winning two elections and holding office under five different Prime Ministers. However, the political and economic disruption caused by Brexit has been compounded by the adverse impact on the cost of living of the covid pandemic and the Russia-Ukraine war. Inflation is at a 40 year high and our national debt has almost tripled since the Conservatives came to office.
After all this upheaval there are now deep ideological and personality divisions within the Conservative Party. Privately most of its MPs expect the next election to be lost; the sense that it is 'time for a change' is now overwhelming. Indeed the current Prime Minister, Rishi Sunak, implicitly recognises this. His fresh pitch at last week's Conservative conference was a daring one - to position himself as the candidate of change, rejecting the short-termism of all of his recent predecessors. This has clear risks. For one it has antagonised former leaders - everyone understood that there was no love lost between Sunak and either Johnson or Truss, but in recent days David Cameron and Theresa May have also been publicly critical of him.
Sunak is a highly intelligent, diligent administrator never happier than analysing data and spread sheets. After the chaotic drama of recent years he offers competent, stable governance. But in truth he probably lacks the inspirational qualities that are also now needed to revive the Conservatives' fortunes. The opinion polls have been remarkably consistent since the beginning of the year and they all point to a crushing Conservative defeat. The events that are now playing out in Israel and Gaza may also pose a huge threat to short-term global economic confidence and growth. If history is any guide, a surge in oil and gas prices may drag Western economies into a recession over the next year or so, which is likely to be to the detriment of incumbent governments having to seek re-election.
Nevertheless it is worth remembering that one of the great charms of politics is its sheer unpredictability. It was only a little over two years ago (May 2021) that the Conservatives won the traditionally safe Labour seat of Hartlepool on a massive swing at a by-election. The confident talk then was that the 2020s would be the Boris Johnson decade and most commentators wrote off the prospects of Sir Keir Starmer, invariably predicting that he would end up as just another name in a lengthening list of former Leaders of the Opposition before Labour eventually made it back into office.
Today the self-same political experts are absolutely adamant that Starmer will win the next election. Perhaps he will - but to his credit he and his team are taking nothing for granted. The tide began to turn on his leadership not only as a consequence of unforced government errors, but when Starmer was able to persuade people of the calibre of Rachel Reeves (Shadow Chancellor) and Yvette Cooper (Shadow Home Secretary) to return to the front bench fold.
They have been followed more recently by a stream of high-flying civil servants in key back room roles. A further bloc of experienced operators from the Tony Blair and Gordon Brown foundations have also returned to the colours as Government office now appears within their grasp.
One of the reasons we have heard much in recent months about Labour's plans for constitutional change and blue sky thinking about reinventing the public sector is the implicit recognition that the state of the public finances will give any incoming Labour government very little room for manoeuvre on public spending.
Here is the strange paradox. Since the financial crisis of 2007-08 and the era of stagnant or diminishing living standards UK voters have moved well to the left on economic issues. Today a majority even of Tory voters support renationalising public utilities, such as water and the railways, and introducing wealth taxes for the super-rich. But this falling away of public support for free markets and capitalism has not resulted in people being persuaded to vote for Labour politicians espousing these values. This will lie at the heart of the Labour appeal over the next year which is likely to focus more on stability than radical change.
The strapline of Keir Starmer's speech at his Party's conference was a "decade of national renewal". This echoes recent interventions and interviews from his most prominent and trusted younger generation spokesmen from Rachel Reeves to Wes Streeting and Jonny Reynolds. It is an express call for at least two terms of government. In the first the offer is to stabilise the UK economy and public services; only in a second term will radical new centre-left investment and initiatives be possible. Ironically after 13 years of Opposition Labour's appeal is more one of security and stability rather than change. This mirrors the strategy in 1996-97, the last time Labour came into office (under Tony Blair) when the essential message was change the faces in government but not to do anything too radical in policy terms.
Many of Labour's most fervent supporters are looking for a much bolder approach. But they are unlikely to get their way. Instead the 'steady as she goes' strategy is playing out in two other ways. First in the ruthlessly tight grip that the leadership has taken over candidate selection. It is very wary of any internal dissent and wants only compliant centrists to make up the bulk of the incoming parliamentary party. This is a far cry, incidentally, from many new MPs in the 2017 and 2019 intakes who were left-wing activists in the image of the then party leader, Jeremy Corbyn. Many of these MPs have kept their own counsel in recent months, but they will remain a presence on the Labour benches for years to come.
Finally in the area of tax and spend, Starmer and Reeves are determined to take an orthodox approach and will likely emulate Blair/Brown in the run-up to 1997 by pledging to keep to the outgoing government's budgetary plans. We were then blind-sided by Gordon Brown rustling up some 'new' money, so to speak, by altering what appeared to be arcane rules by abolishing substantial tax relief on dividends that pension funds received on their investments. This £6 billion annual tax grab along with the 3G spectrum auction which brought in an unanticipated £20 billion windfall gave the incoming government something to invest. It is worth thinking now about equivalent opportunities that an incoming Labour Chancellor might pounce on to give herself some room for fresh initiatives.
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
Welcome to the Quarterly Investment Review for Q3 2023.
Our Investment team have put together a range of resources to update you on what has happened in the markets across the third 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.
Relationship and Business Development Manager, Donald Beggs and Head of Funds, James Fitzpatrick, discuss important topics from across the quarter, including interest rates and the clean energy sector.
Business Development Consultant Tatenda Chikombero interviews Business Development Manager, Lerato Lebitsa on the current landscape for investors in South Africa and the role offshore investment plays.
Portfolio Manager Matthew Seaward explores the performance of Emerging Markets over Q3.
Global equity markets posted losses during the third quarter; with the US, EU, and Japan falling -3.7%, -5% and -5.6% respectively in home currency terms. The Chinese market fell over 3% while Hong Kong was also weak, down over 7%. The UK equity market proved to be more resilient owing to its ‘value’ tilt and high exposure to oil and financial stocks achieving a positive return of 0.8%. This also reflected the relative cheapness of UK valuations which have not become as stretched as US valuations on a year-to-date basis.
Market sentiment was overall positive in July especially in the US where the AI rally continued to gain momentum, driving markets higher. Chip maker Nvidia was a notable beneficiary, reporting Q2 revenues of $13.51 billion, up 101% from a year ago and 88% from the previous quarter. However, as central banks began signalling to markets that rates would likely remain high and indeed ‘higher for longer’, and that a pivot in policy expectations towards cuts was not imminent, equity and bond markets both began to suffer. The reality of potentially higher peak interest rates also led to global government debt selling off as yields rose. This was reflected most markedly in the US bond market, where the US 10-year Treasury yield touched 16 year highs of 4.6% in late September as Fed officials guided that ongoing inflationary pressures could see interest rates remaining on an upwards trajectory.
The prospect of higher interest rates becoming the new normal has hurt equity valuations as higher discount rates are factored in for longer periods. This has also put strain on company growth prospects for those companies previously reliant on cheap debt for financing. Such a background has resulted in a poor August and a notably painful September for markets.
In terms of macroeconomic figures, August CPI readings for the US came in at 3.7% YOY while UK CPI remained high at 6.4% YOY. US Q2 GDP grew at a healthy annualised rate of 2.1% while UK Q2 GBP grew at 0.2%. UK wages also grew 7.3% in May ahead of expectations, an indication that the labour market remains tight.
Markets were indecisive about a rate rise in September, but in the event UK and US central banks chose to pause, with the US Federal Reserve staying put at 5.5% and UK Bank of England also holding at 5.25%. However, the European Central Bank increased the Deposit Rate from 3.75% to 4%. Rates are likely to be held at or close to current levels until well into next year, and yield curves are still inverted, with US Treasury 2-year yields at 5.1% and the UK Gilt 2 year at 4.7% alongside 10-year yields at 4.4%. in conclusion, we are unlikely to see any material cuts to interest rates until it is clear to central banks that inflationary pressures are well under control. It was noteworthy that Fitch downgraded the US long-term Issuer Default Rating (IDR) from ‘AAA’ to ‘AA+’ in early August on concerns about growth in government debt and on the ability of Congress to control spending, though this had little effect on markets.
Asian markets were shaken in September by the news that embattled Chinese property giant Evergrande was plagued by further issues. The stock itself was again suspended only a month after it had resumed trading following a 17 month suspension. Another Chinese property giant, Country Garden, also narrowly avoided default after reporting record losses and debts of more than $150bn. This weakness is a material concern as the Chinese property sector accounts for around 25% of China’s GDP and the bursting of the Chinese property bubble raises contagion concerns. China Q2 GBP grew 6.3% year on year, below expectation, and growth fell 0.6% quarter on quarter. Consumer spending, investment and trade all remain on the weak side, and the economy is only expected to grow 4% over the year as a whole.
Though gold typically acts as an inflation hedge, gold was down -3.7% in USD terms to $1848 against the higher interest rate background. During the quarter we exited our gold position and redeployed the proceeds into Treasuries and high yield fixed interest to take advantage of the high yields available. In contrast oil rallied by 27.3% in USD terms over the quarter to $95 a barrel. The US Dollar also appreciated against most currencies, up by 4.1% against Sterling over the quarter.
We find ourselves in an uncertain environment as the pressures of growth, inflation, and monetary and fiscal policy vie against one another, increasing the range of potential forward macroeconomic outcomes. Most global equity markets remain positive in the year to date, but for now we must cautiously assess developments as they take place, keeping an eye on valuations, the economic backdrop, and central bank responses. Inflation risks persist and central banks continue to monitor their progress in curbing inflation. There also remains the question of whether central banks will indeed pull off a soft landing or if the slowdown will be more severe. Central banks may be forced next year to adopt a more dovish stance if economic data suggests more damage is being done to the economy than necessary, but it remains too early at this stage to be sure. In this scenario, quality companies with strong balance sheets and good cash flows are key, and we will aim to add to such should valuations fall much further.
Disclaimer: The views, thoughts and opinions expressed within the articles, videos and soundbites are those of the authors/ speakers 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.
2023 has been a frustrating year for global financial markets thus far as expectations have continued to reset in response to global inflation and interest rate shocks. After a tumultuous 2022, investors understandably hoped and expected to see a stronger rebound this year. But every wave of optimism has thus far been swiftly stamped out by the sober warnings from central bankers, with ‘higher-for-longer’ interest rates being their default policy response until inflation is well and truly tamed.
Against this backdrop, PRISM has performed in line with its peer group, with PRISM H5 posting modest gains of +1.65% year-to-date in GBP terms (+3.7% in USD). The longer-term performance history of PRISM H5 remains strong relative to peers as illustrated below.
The unique structure of PRISM, where the returns of all profiles are driven from a single highly diversified master strategy, has resulted in lower risk PRISM profiles significantly outperforming their respective peers, while higher risk PRISM profiles have lagged pure equity only and growth strategies in the short term. This is due to the very unusual behavior of markets this year and longer term we believe the diversified nature of the PRISM master strategy will outperform less diversified strategies as markets normalise.
The scale and speed of the inflation shock and the interest rate response is unprecedented in recent history, with inflation reaching double digits in much of Europe and interest rates rising by over 5% in the US and UK in little more than a year.
Most of the hit to markets came in 2022, with all asset classes falling significantly but with fixed income and real estate being the biggest fallers. Extraordinarily, 10-year government bonds (traditionally viewed as a ‘safe haven’) fell in value by nearly 40% in a matter of months.
In the face of persistent inflation, we added to assets we believed would be able to maintain their real value over time, including real assets like commodities and precious metals, and trimmed our property and infrastructure holdings. Over the medium term only equity has the ability to respond to high inflation with higher earnings and despite short term volatility we largely held onto our high quality equity weightings throughout.
This strategy proved largely correct, with equities, commodities and alternatives holding up relatively well.
We were very underweight in bonds at the start of 2022, and in hindsight we were too quick to add to bonds as yields rose. Like many others, our initial view was that the inflationary spike was likely to be short lived and that the rapid rise in interest rates was an opportunity to lock in bonds yields that were starting to look attractive for the first time in many years.
While we were too early, we strongly believe this strategy will prove to be correct. UK and US treasury bonds are yielding 4.5% and 4.25% respectively, levels we’ve not seen for 15 years or more. The balance of risks is now firmly skewed to the upside for these bonds in our view. Similarly, high quality corporate bonds are yielding 6% or more and high yield bonds giving over 8%.
For the first time in well over a decade, bonds are expected make a substantial contribution toward PRISM’s annualised return target of 7.75% with relatively low risk, providing the perfect counterbalance to our equity exposures. We expect to continue to increase our bond exposures over the coming months as opportunities arise.
Equity valuations are more nuanced. The US market in particular has held up well this year with the S&P500 only 10% below its all time high, but there is a stark contrast in the distribution of those returns, with technology and in particular AI exposed tech companies driving the majority of the market performance.
On average, the earnings yield of US equities is just 4.75%, only 50bp above treasury yields of 4.25% - hardly, representative of deep value. Nonetheless, when we look past the averages and take out technology companies, we quickly find quality companies at much more reasonable valuations. Europe and particularly UK equities are awash with value. The earnings yield of the UK market is in excess of 9% with dividend yields exceeding 4% making the UK one of the most attractive markets from a relative valuation perspective.
Looking forward, investors are increasingly attracted to high cash yields, with fixed deposit rates close to or exceeding 5%, and asking why bother with volatile and risky markets when they have delivered little over the past couple of years when you can now achieve 5% in the bank? Tempting as this sounds, we believe it’s a classic liquidity trap. Real cash deposit rates, after inflation, are extremely low or negative and are likely to remain so.
A fixed deposit is at best a holding position providing relative protection in a falling market, but with bond yields now back up to attractive levels and the interest rate cycle nearing its peak, we expect the balance of risk to shift firmly to the upside over the next couple of years. Timing your entry is fraught with danger and impossible if you are locked into a fixed deposit.
History has demonstrated that the best strategy is to build up positions in quality assets during times of volatility, like now, and enjoy the ride when the market turns bullish again. We are certainly not out of the woods yet and further set backs are entirely possible if not likely over the coming months; however, we believe this is a good time for investors to top up holdings or begin re-entering markets in advance of the start of the next cycle.
Please do not hesitate to contact us if you have any questions or require further information in relation to this Prism Performance Update; our Business Development team can be contacted by email businessdevelopment@capital-iom.com or by telephone on +44 (0) 1624 654200.
To download this article as a pdf, please click here.
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 has been prepared for information purposes only and does not constitute an offer or an invitation, by or on behalf of any company within the Capital International Group of companies or any associated company, to buy or sell any product or security or to make a bank deposit. Nor does it form a constituent part of any contract that may be entered into between us. Opinions constitute our judgement as of this date and are subject to change. The information contained herein is believed to be correct, but its accuracy cannot be guaranteed. Any reference to past performance is not necessarily a guide to the future. The price of a security may go down as well as up and its value may be adversely affected by currency fluctuations. The company, its clients and officers may have a position in, or engage in transactions in any of the securities mentioned. PRISM GBP, USD and EUR Strategies were launched in June 2014, April 2018 and September 2018 respectively. Historical performance is calculated by reference to the actual investment performance of Fusion Alpha modelled into the PRISM product structure. Full details of PRISM are contained in the PRISM Brochure, Terms of Business and associated literature which is available upon request.
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.
We are excited to announce the opening of the Isle of Man's Biggest Swap Shop, taking place from the 25th to 28th August at the Strand Street Shopping Centre! This four-day pop-up event aims to revolutionise the way we think about fashion, sustainability, and charity.
In a world where the cost of living is skyrocketing, buying new clothing has become a luxury for many. We believe that everyone deserves to feel confident and happy in what they wear. Our mission is simple: to provide a low-cost and sustainable way for you to refresh your wardrobe while supporting a charitable cause.
Charity of choice
Proceeds from the Swap Shop will go towards supporting The Huruma Orphanage in Tanzania. The Huruma Orphanage was set up in 2012 and looks after children between the ages of 4 and 17. Most have been orphaned following the death of one or both parents, often as a result of aids or other life-threatening illness. The orphanage takes in these children and provides basic education, vocational training and a safe place to live. They also help the children to integrate back into society and to find work when they are old enough to do so. By participating in this unique event, you not only enhance your style but also contribute to the well-being and education of children in need.
How does it work?
The concept behind the Swap Shop is easy and inclusive. You can either bring your pre-loved clothes to exchange with others or simply browse and make a donation. For those who prefer to shop, each clothing rail will display a suggested donation amount, and we kindly ask you to contribute at least the displayed amount to support the orphanage.
If you wish to swap your clothes, bring the items you'd like to donate to the Swap Shop, and we'll reward you with two tokens (equivalent to £2) for each piece, up to a maximum of 14 tokens. These tokens can then be used to acquire new clothes from the shop. For some items, you may only need to add a small contribution to make it yours!
Want to swap or donate?
We welcome various clothing items for women, men and children, jewellery, accessories, shoes, and swimwear in good condition. Please ensure that the items you donate are clean and in a condition that you would wear yourself. Unfortunately, we cannot accept damaged, faded, or bad smelling clothing, and for hygiene reasons, we are unable to accept underwear.
Get an extra token!
To make this event a resounding success, we need your help in spreading the word. If you share your Swap Shop experience on social media using the hashtag #swapshopiom, we'll reward you with an extra token to use in-store. Simply speak to one of our staff members in-store to claim your token.
Please note that we will not be offering refunds and so monetary reimbursements are not possible, as all funds generated from the Swap Shop go directly to supporting The Huruma Orphanage. All surplus clothing remaining after the Swap Shop event will be donated and distributed among various charities across the Isle of Man.
Join us from the 25th to 28th August at the Strand Street Shopping Centre for a shopping experience that benefits both your style and the lives of others. Together, let's make a positive impact on the communities further afield.
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.
Despite being a member of FATF since 2003, South Africa (“SA”) has failed to achieve the required level of compliance with international anti-money laundering standards. The Grey Listing is an international indicator that SA is no longer regarded as a safe investment destination.
8 conditions have been narrowed down by FATF and are yet to be met. Accordingly, laws need to be tightened, mainly regarding money laundering, terrorist financing and corruption. The global watchdog was seemingly unimpressed with the current take on anti-terrorism, but so called “state capture” 1 has been indicated to be the final nail in the coffin. Subsequently FATF has especially requested assistance with extradition.
Although in the past few months leading up to the Grey Listing, SA has managed to pass some legislation regarding the above, the implementation and enforcement herein remains seriously lacking in SA. SA is not off to a convincing start with the Gupta’s extradition from Dubai failing whilst corrupt government officials remain within office.
The longer the Grey Listing status remains attached to SA, the more detrimental for the country’s reputation, currency, and capital borrowing cost.
The Finance Minister, Enoch Godongwana remains optimistic that we can look forward to removal within 2024. Experts are however not convinced. Until then SA can expect additional Due Diligence, transaction delays and higher costs as the new norm.
The Grey Listing factor is seen as the main contributor in the FSCA’s decision to step up on FIC Inspections. Accordingly additional pressure is now placed on accountable institutions to improve their compliance measures and to strengthen their efforts in combatting financial rime. The Regulator expects greater attention being given towards sanctions, domestic and foreign politically exposed persons, prominent influential persons and internal FIC training FIC.
Equally government is expected to step up to the challenge and to work alongside the Financial Services Industry (amongst others) to protect the integrity of SA’s Financial Industry and assist in reducing the global harm caused by financial crime.
In April 2023 SA has introduced the shared state forensic capability within FIC which will see specialised resources in forensic accounting, financial analysis and related services working together to support the work of law enforcement and other competent authorities in their pursuit of high priority criminal matters. Beneficial ownership have also been identified as a new focus along with FIC declaring more entities as accountable institutions.
Ultimately until such a time that more arrests and prosecutions are made, the Grey Listing status in SA will remain.
1.Systemic political corruption in which private interests significantly influence a state's decision-making processes to their own advantage.
What is CIG doing?
Over the past 18 months CIG has been working through the potential impact of SA being placed on the Grey List. This work has focused upon mapping out the potential impact for our clients and our business activities, mitigation strategies and aligning our approach, that may be deployed, where circumstances permit, to reduce the impact upon our client base. Kindly note that management and mitigation of risk factors, whether jurisdictional or otherwise, will be approached on a case-by-case basis.
What if CIG can’t mitigate the Risk?
It remain sour goal to cause as little disruption for our clients and intermediaries as possible. Our appetite towards our SA clients and intermediaries is unchanged and we will endeavor to mitigate the jurisdictional risk associated with SA to the best of our ability. However, risk mitigation cannot be guaranteed in all cases. In those cases where higher risk factors are deemed to be persuasive, we will seek to undertake Enhanced Due Diligence (EDD).
What does EDD entail?
EDD goes further than obtaining basic due diligence, in cases that are deemed to present a higher residual risk, owing to persuasive higher risk factors that cannot be mitigated. EDD may involve:
• Going further to verify customer related information, by obtaining and assessing information from a wider variety of sources.
• Taking additional reasonable measures to establish (and verify, as necessary) source of wealth and source of funds of the customer and beneficial owner.
• Undertaking further research, in order to understand the background of a customer and their business.
• Gaining additional information from the customer regarding the purpose and nature of the business relationship.
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.
Welcome to the Quarterly Investment Review for Q2 2023.
Our Investment team have put together a range of resources to update you on what has happened in markets across the second 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 specialists as they each explore an investment theme or the performance of an individual asset:
Global equities achieved moderate gains in Sterling terms during the second quarter with US & Japanese equities outperforming and China & Hong Kong underperforming. Year-to-date US equity market returns have been driven by just seven companies, namely Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Tesla and Meta (Facebook). The prospects for artificial intelligence have been a key driver in the performance of these stocks. Exclude them and US equity market returns have been flat.
Global bonds returned -3.9% as central banks maintained course in their attempts to quash inflation. This was particularly acute in the UK where the Bank of England surprised in June with a larger 0.50% interest rate hike in June. While headline inflation has rolled over, core inflation, which better highlights the impact of wages and the services sector, is proving sticky in the US & Europe while still high and rising in the UK. Sterling bonds have performed poorly as a result and the added pressure on the UK economy has held back the equity market. The silver lining is that Sterling has begun to strengthen and that could assist in bringing down inflation.
The impact of higher rates is yet to ease a tight labour market with US unemployment reaching its joint lowest since 1969 and UK wages on the rise. That could be about to change with signs of weakness in property markets as house prices are now falling across the UK, Europe and the US. As the cost of servicing mortgage debt increases, consumers are forced to tighten their belts and the UK is now expected to tip into a shallow recession, despite the IMF’s upgraded growth forecast in May.
The US regional banking crisis has simmered down with First Republic sold to JP Morgan and the FDIC to impose higher fees on the largest US banks to cover the cost of uninsured depositors. The US debt ceiling was raised and government spending curbed by the Fiscal Responsibility Act of 2023, ending a short period of volatility for short-dated US dollar lending.
China’s economy rebounded with a positive surprise of 4.5% GDP growth in the first quarter, but this was largely driven by domestic consumption and PMIs have since highlighted that Chinese manufacturing has shifted from expansion to contraction. This has cast doubt over the scope of the recovery as the country emerges from its zero-covid policy and the People’s Bank of China has now embarked on another monetary easing cycle in response. Manufacturing also remains a weak spot in Europe with the divergence between service and manufacturing PMIs at its widest in over a decade and Germany has tipped into recession as a result.
There were signs of political instability In Russia, as an important military mercenary group marched towards Moscow to remove the commanders blamed for botching the war in Ukraine. While political instability could ultimately be a route out of the conflict, it also increases the potential for tail risk events.
Capital markets have had to climb a wall of worry this year but with a few key risks behind us we can refocus on the key dynamic: core inflation remains above target in developed economies, central banks are therefore continuing to tighten, thus bonds are underperforming equities. Sentiment has been largely driven by expectations of a pivot from the Federal Reserve, but Jerome Powell has been cautious to signal such an event to avoid creating a bubble as the economy heads towards potential recession.
We have been increasing the amount of fixed income assets in portfolios as they now provide a much more attractive yield, but we are reluctant to give up too much equity which better protects capital through inflationary cycles as has proven to be the case thus far. If the global economy manages a soft landing, the pandemic legacy may be behind us.
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.
Seven years have now passed since the momentous referendum which heralded the UK's departure from the European Union.
Time enough, if opinion polls are to be believed, for an intensifying sense of buyers' remorse. Indeed after a series of false dawns - from an overwhelming desire to 'get Brexit done (at virtually any cost)' in response to an initial three years of political stalemate, to the current seven year itch of discontent - since 2016 the issue has never been far from the forefront of our political discourse. More recently it has been the proverbial elephant in the room - political leaders have dared not speak openly to the voters about it, lest they are accused of wishing to open up an issue that was supposed to have been settled.
For the Conservatives any admission from the leadership that recovery from economic stagnation requires an engaged, working relationship with the EU risks infuriating the Ultras and accusations of betrayal. Meanwhile Labour walks a tightrope between pacifying its unrepentant Remain graduate activist base and avoiding any action that dissuades Red Wall Brexit supporters from returning to the fold, having voted Leave in 2016 and then backing Boris Johnson's Tories in 2019. Even the Liberal Democrats remember all too well the outcome of the last election when having positioned themselves as the Party of Rejoining the EU in order to appeal exclusively (or so they hoped) to the 48% who had voted Remain they ended up losing ground from an already very low base.
Even amidst their current travails, the Scottish Nationalists know in their hearts that an unaltered Brexit decision is a crucial part of their case for independence. Sixty-two percent of Scots voted Remain so the fact that they were bounced into Brexit by the votes of the English (and Welsh) plays to a sense of grievance that is a mainstay of the SNP's appeal. This will only be enhanced by a sense that the recent adaptation of the Northern Ireland protocol has given that part of the UK its own "very special position" within the EU custom union and single market set-up.
In short the universally expedient position across the political spectrum is to claim that the Brexit question is now settled. Instead the clarion call on matters European seems to be "Let's move on...."
Slowly, however, over these years it has dawned on the general public that the form of Brexit we have finally ended up with has sacrificed our economic welfare at the altar of sovereignty and the notional freedoms to strike trade deals. In the meantime our borders seem as elusive to effective control as ever they were when we were members of the EU.
Always much overplayed during our half-century membership of what began as a common market and developed into the EU was the persistent irritation expressed by UK businesses, large and small, at the imposition of ever more 'European regulation'. In truth most of this blizzard of new rules of compliance came about as a direct consequence of the creation of a single market and customs union (of which the UK was both a leading advocate and beneficiary) by definition requiring regulatory alignment. This harmonisation worked in UK exporters' interests as it allowed British goods to flow unimpeded across the single market.
The consequences of leaving the customs union and single market have been as harsh as they were inevitable. Any business exporting to the EU (and naturally this has been especially onerous for small enterprises lacking the administrative capacity to deal with the increased regulatory burden) has experienced a marked increase in the level of paperwork and bureaucracy. Accordingly small, relatively insignificant derogation from EU rules makes little sense. Better either to maintain total equivalence (and accept that outside the EU we have become a rule-taking supplicant) or seek the benefits, and take the potential risks to reputation, that arise from root and branch deregulation.
Even the current government recognises that the rather obsessive idea that as a matter of urgency we need to purge the UK statute book of all remaining EU legislation would cause damage to international minded UK businesses. lnward investment will scarcely be enhanced at the prospect of replacing EU standards with British ones, not least as it will likely impose an obligation on companies trading across Europe to comply with two parallel sets of rules.
This reflects one of the unspoken truths about Brexit - namely, the inherent imbalance in power between the UK and the neighbouring 27-nation bloc, still making up a single market of almost 500 million people.
It was - perhaps still is - fashionable to dismiss the EU as being an institution in decline. Indeed to many the central premise of Brexit was that Europe was falling apart and that our exit would either precipitate its final collapse or enable us to escape whilst we still had the chance. This has also turned out to be a fallacy - along with the assertion that the act of leaving would signal the end of hostilities with the EU. A quick glance at the Swiss experience should have dispelled that myth. As we have seen over small boat migration, the Northern Ireland protocol and euro-denominated City trading, 'leaving' the EU has simply meant starting a whole new set of disputes and arguments with our closest economic neighbours.
Yet the British public was assured that the real prize of Brexit would be our ability to strike trade deals on our own terms with economic powers further afield, especially in Asia and the Pacific. For sure we have swiftly been able to cut and paste trade agreements that had already been recently finalised when we were at the EU table with countries such as Japan, South Korea and Vietnam - although ominously in the former case there were delays when Japanese trade associations sought to exploit the opportunity to re-negotiate clauses to their own benefit.
The US have repeatedly made it clear that they have no current interest in commencing what would be tortuously long negotiations. Presumably they will only do so when it suits them to drive a hard bargain with the UK in order to use this as a precedent for a US-EU deal.
Meanwhile the agricultural aspects of the rapidly negotiated UK-Australian trade deal were disowned not only by the UK farming lobby but by the hardline Eurosceptic former Secretary of State for the Environment - needless to say, only after he had left office. It is welcome that we have secured Dialogue Partner status with ASEAN and the CPTPP, but this is more a post-Brexit diplomatic and geopolitical triumph than any significant boost to trade.
Another misapprehension was that the UK would be able to retain all the benefits of the single market because high-end EU businesses would lobby to retain access to UK consumers. I remember well an almost comical conversation I had with one of Mrs May's three Brexit secretaries who sought ever more bombastically to insist that Mercedes and BMW simply would not allow the German government to risk cutting off the British market for their cars in our Brexit negotiations. Predictably what actually transpired was that the UK customers of these up-market global brands have been forced to grin and bear the imposition of tariffs after we left the EU.
But how does this all play out? Is a UK return to the EU on the cards?
In truth, despite all the problems outlined above I still regard this outcome as highly unlikely. After all as EU members we already had a bespoke deal that was tailored to our interests. The UK's substantial budgetary rebate, amply reflecting our relatively small and industrialised agricultural sector, was entrenched along with opt outs on the single currency, the Schengen common visa arrangements and elements of social legislation. Undoubtedly the starting point of any attempt to rejoin the EU would be sacrificing these special arrangements - in short the UK public would be offered a considerably worse deal than the terms on which we left.
Rather more important - would the EU really want us back? As members we were never fully committed or engaged (having stepped aside from the continental co-operation that led to the Treaty of Rome in 1957, we only joined sixteen years later in the second wave of membership). Thereafter we increasingly became semi-detached. Unless and until there is cross-party agreement in the UK in favour of rejoining the EU, it is highly unlikely that it would even commence discussions.
Lest we forget the UK was also comprehensively out-manoeuvred in the exit negotiations. As we now know those UK politicians who promoted Vote Leave had no plan or strategy from the outset - nor arguably ever since - as to what Britain really wanted from those tortuous discussions. By contrast the EU played a blinder - its negotiators were determined above all that Brexit should not serve as a precedent. Any other EU nation contemplating withdrawal had to be left in no doubt that walking away from the club would leave it worse off. So it has proved for the UK - all the more ironic since we were always rather skilled at negotiating our own best interests when we were members (as that list of historic opt-outs amply attests).
One other great paradox of recent years has come to light more recently with the Windsor Framework that made the hastily and poorly negotiated Northern Ireland protocol more fit for purpose. Suddenly it is apparent that the EU Commission had much more discretion to accept our wishes than we had been led to believe after Article 50 was invoked. Their insistence that the rigmarole of getting permission from all 27 Member states was a roadblock to progress turned out to have been simply a ploy - when it suited them, the EU was able to use plenty of discretion to act quickly and decisively. Previously under PMs May and Johnson the EU had shown little inclination to make life easier for a UK government especially whilst it pursued a campaign of public hostility in the media. However, under new leadership, at a time when the UK's NATO support over Ukraine was at the forefront of continental priorities, decisive and rapid progress was made.
Small wonder so few of the UK's diplomatic corps have any appetite to go back the the negotiating table with their EU counterparts. Brexit will not be reversed any time soon.
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.
I would like to take this opportunity to congratulate the massive achievements of our Parish walkers this past weekend. For those who are not familiar with the event, The Parish Walk is a race that covers an 85 mile course around the parishes of the Isle of Man. Competitors can stop at any of the parishes along the way with many aiming for Rushen (19 miles) or Peel (32 miles). Those striving to complete the entire 85 mile course must do so in under 24 hours. It's a real test of both physical fitness and mental determination.
The Parish Walk is loved by the local community; most people on the Island know at least one person who is either participating or supporting a walker.
With over 1000 walkers setting off from the start line on Saturday, this year's event proved particularly challenging due to the heat; there are usually around 20 gold medal finishers (finishing under 18 hours) but this year there were only 11.
This year, our Finance Director and two time Parish Walk winner, Paul Atherton, was going for a hat-trick and although he came second, we are so proud of his stellar performance. Adey Callister was going for his gold medal and was looking strong until the dreadful heat got hold of him – remarkably he still finished under 20 hours. In my view the true heroes are those walkers who finish between 20 and 24 hours and the superheroes are the ones who finish in the last hour. I witnessed first hand again the grit, determination and resilience of men and women who had to endure incredible pain and exhaustion, yet refused to give up. This is the spirit of the Parish Walk.
I also want to celebrate the achievements of our team members who did not complete the entire walk. It is an injustice to say: “I just made it to Peel or to ….”. It is remarkable to reach Peel, which is 6 miles further than a marathon and hardest part of the entire route.
Here are the achievements of our colleagues:
Herman, my wife and I supported two competitors, James and Monika Basson, who travelled to the Island from South Africa just for the Parish Walk. James made it to Peel and Monika pushed on in a truly remarkable iron woman fashion to be the 19th women’s finisher in 21 hours 53 minutes. Our “super scientific” race food regiment of salt sticks, cola and chicken stock soup did the trick during the last 7 hours of her walk.
I would like to thank all our colleagues and family members who supported our walkers and other walkers. Support and community participation are part of the spirit of the Parish Walk and what makes it such a unique event. A particular thanks goes to June Cannell, who expertly organised the Capital International Group support station on the road to the Sloc.
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.
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