Nick Ferrari 7am - 10am
It's been tough year for investors and forecasting 2024 we will need to look for divine guidance
29 November 2023, 07:46 | Updated: 29 November 2023, 08:26
- David Buik is LBC's Markets Commentator and a Consultant to Aquis Exchange
Christmas is upon us! However, politically, and economically, the season of good cheer seems a million miles away! Good news is hardly in plentiful supply.
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The bombs have just stopped falling on Gaza/Israel, post Hamas’s brutal barbaric attack on 7th October, and perhaps a few days respite may offer a glimmer of hope.
Peace in Ukraine, after the ferociously cruel invasion by Putin’s military forces seems a million miles away. The damage these conflicts will have done to the world’s economy could be immeasurable.
In investor terms the only equity sectors that will have benefitted from these malevolently dangerous escapades will be defence, tech and oil!
Companies that will have blossomed in the last two years will be the likes of BAE Systems, Leonardo, Thales, Lockheed Martin, Honeywell, BP, Shell, Total, Repsol, Chevron and Exxon Mobil.
Then of course, the likes of Microsoft, Google, Meta, Amazon, Apple, Tesla and Nvidia more or less put all other equities ‘in the shade.’
These seven stocks constitute just under 40% of the value of the NASDAQ ($5.6 trillion). Also, Apple's market capitalisation is now just larger than that of the entire FTSE 100. Apple’s capital is valued at around $2.98 trillion, while the FTSE 100 at just over £2 trillion.
Despite the EU assuring us naïve souls that tough sanctions are being imposed on Russia, we all know that they are all but worthless, with Germany importing 55% of its gas requirements from Russia, with France importing 19% of its enriched uranium requirements from the same despotic regime.
However, I am pleased to say that Italy hopes to have put an end to importing energy from Russia within a few months. Sadly, India and Pakistan plough their own lonely energy furrow and still import oil and gas from Russia, with Japan requiring some gas from Russia, but to a greatly diminishing degree.
There is no doubt that the world is in a parlous state. I wonder if this august gathering agrees with me in its concern about such a dearth of quality amongst the major global leaders.
Putin, Xi and Kim Jong Un, are egregiously powerful dictators. As for Messrs Biden, Trump, Trudeau, Sholtz, Macron, De Croo, Meloni, Rutte (until the Dutch settle on a successor), Sanchez, Varadkar, Modi, Anwar ul Haq Kakar, El Sisi, Milei, Ramaphosa, Albanese, and Hipkins – well what a motley crew?
They hardly fill me with confidence in these very troubled times we all live in. Few are universally popular or respected. We must be thankful that President Biden would appear to have a decent team behind him.
As for our domestic scene, I can never remember a more unsettled period for domestic politics. The trail of devastation left by Boris Johnson and Liz Truss left PM Sunak running a hopelessly split government, which was leaning away from Conservatism towards liberalism. BREXIT seemed to have been left on the shelf, as have ‘levelling off’ and tax-cutting, all key parts of the manifesto that BJ was elected on with a massive 80 overall majority.
As an electioneering supremo and as an optimistic leader, BJ was, at the time of the 2019 General Election, in a league of his own, inspiring confidence across a large section of the nation.
However, Covid exposed the fact that he did not possess the skill sets to be a great PM. Indecision, economy of the truth, weak leadership and a largely uninspiring Cabinet inevitably put BJ’S Premiership to the sword.
All this country had to show for those three years was a very successful vaccination programme, full employment at a huge cost and a strong supportive stand against Ukraine.
This was followed by Liz Truss’s ill-thought-out tax cutting plans, undisclosed to BoE and OBR, which was a bridge too far – madness and how the country paid the price with bond yields hitting unsustainable levels.
Sunak and Hunt were left to clean up the mess, which they did. BUT little vison for the future was evident – just fiscal discipline. The Conservative Government is split into sunder, almost irrevocably!
The ‘gung-ho Boris Brigade’, the Liberal wing of the Conservatives and the breakaway Reform Party all venting their spleens in different directions.
Few will be surprised if the country does not experience a repetition of 1997, barring a miracle – a Labour government with a massive majority. Richard Tice, Nigel Farage and others are currently inflicting some serious damage on the conservatives, currently polling about 15%
The sad part about all of this drama is that the Labour front bench is equally uninspiring.
Starmer & Reeves have done the ‘smoked salmon bagel rounds’ with aplomb. However, regardless of any of your respective political persuasions, there is little fiscal room for Labour to do much financial damage for at least a year.
However, a huge Labour majority could eventually bring the ‘left’ into place with an uncomfortable level of influence. As for bringing back David Cameron? In many peoples’ minds PM Sunak jests – Lord Cameron is anti-Brexit and ‘ran to the hills’ after the 2016 result went against him.
He showed a total lack of judgement over Greensill Capital and was overly supportive of China. We shall see, but what an unholy mess post the Braverman fracas.
Apart from recent geopolitical issues – potentially the most dangerous since the Bay of Pigs in 1961, the world has had to contend with a severe banking crisis in 2008/9 triggered by sub-prime lending in the US and irresponsible under-regulated lending in other parts of the world, which the world’s economy has yet to fully recover from.
All these crises from excessive quantitative easing to supply chain issues and indifferent central bank guidance on interest rates have contributed to a level of inflation, until the recent easing, not seen since the IMF stood over a Labour Government like the ‘Sword of Damocles’ in 1974 after the Barber ‘boom & bust syndrome in 1974, when inflation hit 21%.
Inflation hit 9% in the US in 2022, with UK inflation reaching a staggering 11.1% in October 2022 and 9.2% in the EU. Last week inflation had fallen to 3.2%, with the EU at 3.6% and UK remaining stubborn at 4.6% respectively. The FED, ECB, the BoJ and the BoE have never been out of the headlines since COVID in 2020.
There is little doubt that the Central banks and the politicians gravely underestimated the damage COVID did to society – financially and emotionally. The world will play the price for years to come. The FED was the first to acknowledge that inflation was a problem. Its remedy was brutal but has been largely effective.
Conversely, the BoE was slow to the party in confronting inflation. When coupled with the damage caused by excessive QE and with the Government’s hopelessly ill-prepared energy policy, which proved catastrophically expensive, this cocktail proved inflationary and toxic.
Global debt has reached gargantuan levels in the last year and is not only getting out of hand, but also the ability to service debt of this magnitude profitably in many cases, must be in doubt. It hit a record $307 trillion in July this year, according to the Institute of International Finance and appears to be still climbing. US debt stands at $33 trillion and the UK at £2.5 trillion.
As a percentage of their GDP the numbers set out below are eyewatering in some cases – Japan 264%, USA 129%, France 112%, UK 101%, China 77.1%, Israel 60.9%, Ukraine 78.4%, Norway 37.4%, Saudi Arabia 30%, Australia 22.3%, Russia 17.2% and Kuwait 2.9%. If interest rates are not cut in 2024, many companies will fold, and unemployment will rise. As for the consumer, he/she is really struggling with the cost of living with mortgages and energy being particularly penal.
Global equities have had a roller-coaster ride in the past 3 years courtesy of Covid and geopolitical issues and despite higher interest rates attracting money from equities to the bond market, as well as to gold. In times of uncertainty yields of 4-6% are very attractive. Year to date the main indices have performed as follows –
Global indices YTD – FTSE -1.24%, DAX +13.48%, CAC40 +10.17%, DJIA +6.63%, S&P500 +18.99%, NASDAQ +37.10%, NIKKEI +29.91%, HANG SENG -13.77%, SHANGHAI -2.50%, FTSE 250 -3.64%. Considering the unappetising financial and geopolitical background, global equities have been remarkably robust, apart from the Hang Seng, the Shanghai Composite and to a lesser degree the FTSE 100.
The FTSE 100 has been in a bear market for nearly 2 years. Had China’s economy advanced as it had a few years ago, mining stocks quoted on the FTSE 100, which have been in the doldrums, would have provided some extra momentum to the FTSE’S value. London’s main index seems to be starting to come out of its somnolent performance. Banks and telecoms have proved truly awful investments with the exception of HSBC and to a lesser degree Standard Chartered. The FTSE 250 has been hopelessly undervalued and given a fair wind there are some bargains to be had.
Investors involved in US tech and in Japan have thrived this year, with moderate gains being made in France and Germany. China is currently and ironically suffering from a dose of stagflation. By its high standards it has yet to come back on the bridle. Property is proving to be in a parlous state and the Chinese Government will need to nurse it back to health. Recession will hit the EU. It is touch and go in the UK. If there is a recession it could be quite shallow and short lived. As for the US, 1.5% may be all we can expect as its economy is showing signs of decelerating.
Despite challenging stress tests being imposed by global regulators on the banking sector, there have been some worrying blips – Credit Suisse and SVB in California. Regulators are cognisant of the problems, and there may be further blips thanks to the level of sovereign, corporate and consumer debt. Investors need to be mindful of the threats.
The crypto-market continues to attract comment – both good and bad. Bitcoin is up 120% year to date. However, the overall market is still inadequately regulated – hence the Bankman Fried Fraud of $10 billion and a loss of $47 billion to its shareholders. I suspect Mr B-F will be ‘cooling his heels’ in a State Penitentiary for a few years. The other challenge financial markets need to face include the influence – both positive and negative - of AI. Just in passing tech is more often than not associated with US and China. Interesting to note that Israel gleans $338 billion annually from technology.
Despite BREXIT doomsters or remainers, the fact remains that UK exports remain very buoyant at £882 billion, the highest on record. Business conducted with the EU remains solid, though the doomsters say inflation has distorted the real value. This Government has been pre-occupied with fighting fires and has failed to deliver incentives to crystallise the value of BREXIT, especially the service sector and financial markets. This is being addressed by the Treasury, regulators, and Kemi Badenoch – not before time.
We also owe a debt of gratitude to the Last Lord Mayor Nick Lyons for pushing the City’s cause globally and I suspect the new Lord Mayor Michael Mainelli (695th) will be every bit as enthusiastic! IPO business globally has been derisory this year. US has grabbed all the headlines. Just because the US seems to value stocks 30% ahead of the UK, results from the likes of ARM and WeWork have been very disappointing. IPOS is currently a very expensive way of raising capital as hedge funds and private equity will testify to and know to their benefit.
I would like to pass comment on ESG investment – very controversial. Though ethical investing is laudable, why would investors want to cut off their nose to spite their face? Fund managers have been hell bent on supporting climate change and humanitarian causes and consequently have missed out on the defence and energy sectors.
This week we have incredibly important barometers for the US economy and to a lesser degree the UK - Thanksgiving, Black Friday and Cyber Monday – 70% of GDP is gleaned from retail.
Despite the economic and political turmoil, the City of London is well placed to respond to recovery, leaving other European financial centres is the shade. We must be proud of the level of innovation and technology and fintech. Though, as I have said, IPO are expensive in this climate, SMES will find plenty of support from Aquis Exchange and AIM listings when the sun appears high over the yardarm.
Also, there is a ton of money from private equity and hedge funds to provide momentum for attractive business propositions. I am always a glass half-full, and I am a huge believer in the City of London’s capabilities. 2024 could be a year for stock picking, whilst keeping an eye on the threat of recession. The US and Japan may offer the best opportunities for investment, but the unexpected is always there to challenge us.
And finally, to the autumn statement, The Chancellor reminded us that inflation had been halved, with government borrowing down, resulting in a percentage fall of GDP from 101% to 94% the next year. It was hoped that borrowing would continue to be cut in the next five years. GDP would also be higher than expectation this year at 0.6% in 2023 and 0.7% in 2024, having last March forecasted -1.4% for 2023, though the Bank of England maintains it will be flat. Jeremy Hunt was determined to spread his glitter around like confetti at a wedding. He started by reiterating that the UK produced the second highest growth rate of the G7 countries since 2010.
The essence of this statement was to stimulate business and the economy, whilst keeping the lid on inflation. The gargantuan sum of £4.5 billion of tax relief would be provided for strategic manufacturing over 5 years to include £2 billion on clean energy requirements (car battery plants as an example). 8.5% increase in Old Age pensions and 6.7% increase to Universal Credit were welcome, but one cannot help thinking that austerity is still on this government’s agenda.
Mr Hunt was not going to leave the dispatch box without telling members that if we want a decent welfare system and a respected civil/public services they need to be reformed with the numbers employed cut. At the same time Universal Credit is in need to be overhauled, encouraging those that can work to do so. 7 million people are out of work. Many of them are sick or disabled. They are not being targeted. However, it is felt that 200,000 of these people could be in work with encouragement over the next few years.
Unfortunately for the Government, I believe the dye is cast. Labour is likely to win the next election whether in May, October, or December. PM Sunak ticks most of the boxes - clever, industrious, and passionate in his beliefs. Sadly, for the Prime Minister he does not seem to tick the public’s popularity and charisma boxes. Jeremy Hunt is a very decent Chancellor. However, the public want more jam today and because of this current cost of living crisis and is not that interested in ‘following that rainbow, way up high!’ Churchill and Thatcher/Major know what it’s like to be thrown into the long grass by their party and electorate respectively; so, Rishi Sunak must just continue to put the country at the forefront of his plans and hope that Labour’s majority won’t be a landslide, which is generally thought to be unhealthy for democracy.
If the polls are right, most of the public think Sir Keir deserves a chance. Certainly, Shadow Chancellor Rachel Reeves has schmoozed her way around the portals of business and the City of London and Labour’s visions and goals left no obvious waves of fear. However, with the fiscal restraints and the need for discipline, scope for their expansive plans will be very limited. Labour will have a huge mountain to climb with an inexperienced front bench. They will need more than energy windfall taxes and the hammering of public schools with a 20% VAT loss, for fresh revenue for their ambitious plans. The challenge looks daunting.
There was a slight chink of light that appeared out of the end of the tunnel last week – More positive news on the PMI services sector and a brighter consumer sentiment outlook for December, probably geared to Thanksgiving, Black Friday, cyber-Monday and Christmas. The five days from Thanksgiving through Sunday will generate $37.2 billion in online retail sales, an increase of 5.4% over last year and 16.8% increase in on-line sales.
Finally, the investment symposium at Hampton Court, hosted by the Prime Minister and Kemi Badenoch, the Business Secretary saw pledges of £29 billion of investment in the UK.
Perhaps this is a sensible note to end on – Salutations & Felicitations for this coming holiday period!