Ethical Offshore Investments

Central banks were buying gold at record levels. Here’s why they’re selling now

Stephen Strowger — Wed, 15 Apr 2026 06:32:21 +0000

Christoph Burgstedt /science Photo Library | Science Photo Library | Getty Images

The following news article was published by CNBC.

Gold’s pullback is exposing a rare shift in the market: after years of relentless accumulation, some central banks are now selling bullion as Iran war-driven pressures force a scramble for cash.

Spot gold, which is currently trading at around $4,838 per ounce, has fallen about 10% from its late-January peak, slipping into correction territory even as geopolitical risks intensify. The move marks a stark reversal from last year’s rally, when central bank buying helped underpin prices despite rising interest rates.

“There has been notable selling of gold by central banks from a few market participants,” Nicky Shiels, head of metals strategy at MKS Pamp, told CNBC.

The drivers are increasingly tied to wartime realities. Higher oil prices are straining import-dependent economies, while currency volatility is forcing some central banks to intervene more actively in foreign exchange markets, said market watchers.

Spending requirements are also a pressing consideration for central banks. “Many were sitting on a lucrative piggy bank with prices around $5,000 an ounce,” Shiels said. Some are now using gold reserves to “pay for increased energy and defense expenditure or to defend weakening currencies,” said Shiels.

Emerging market central banks appear to be at the forefront of this shift. A stronger U.S. dollar and higher borrowing costs are amplifying pressure on currencies, increasing the need for intervention.

“As far as gold is concerned, emerging market currency weakness has led some central banks to sell gold to stabilize currencies,” said Steve Brice, chief investment officer at Standard Chartered.

Concrete data on central bank sales tend to lag or remain discreet, but signs have been emerging.

Turkey has been the most notable seller so far this year. Its official gold holdings dropped by 131 tons in March through swaps and outright sales as authorities sought to stabilize the lira, according to a report published by Metals Focus last Thursday.

The Turkish lira has weakened further to breach new records since the Iran war began, falling about 1.7% against the U.S. dollar since conflict first broke out.

Similar patterns are visible elsewhere. Russia has reduced gold holdings in recent months, likely to help finance budget shortfalls, while Ghana has also sold reserves to boost foreign currency liquidity, data from Metals Focus showed.

Poland’s central bank governor also briefly explored selling part of its gold reserves to fund defense spending. The central European nation was the largest central bank buyer of gold in 2024 and 2025.

A strong demand pillar

The shift matters because central banks have been one of the strongest pillars of the gold market in recent years. Their steady buying helped offset outflows from Western investors and underpinned bullion’s surge to record highs. Now, both of those drivers appear to be reversing at the same time.

Central banks have been a dominant force in the gold market in recent years, buying more than 1,000 tons annually from 2022 — which marked the highest level of annual gold demand by central banks on record — through 2024, according to the World Gold Council. In 2025, central bank purchases declined to 863 tons as market participants navigated record-high price volatility.

“Our take behind the drop is that it is likely that some central banks are selling gold to defend their currency and/or to fund energy purchases,” Natixis said in a note, pointing to rising oil prices and a stronger U.S. dollar as key stressors.

While emerging markets appear to be driving recent sales, major reserve holders such as the Reserve Bank of India, People’s Bank of China and Bundesbank have remained largely opaque on their gold activity, underscoring the limited visibility into official sector flows.

The combination of retail investors exiting their gold positions and some central banks turning into net sellers has been among a key reason behind the recent drop, Natixis added.

Natixis also pointed to rising U.S. Treasury yields as another driver of outflows, with higher returns on fixed-income assets reducing the appeal of non-yielding bullion.

Similarly, Adrian Ash, director of research at BullionVault, said the logic is straightforward: gold bought as insurance ahead of a crisis can become a source of funding once that crisis hits.

“You bought gold in case of a crisis. Now crisis has struck,” he said.

“The rise in oil and gas, as well as the U.S. dollar and borrowing costs worldwide, will mean many central banks need to increase their FX reserves… and potentially defend their currency,” said Ash.

Still, industry veterans cautioned that these moves are often tactical rather than structural.

For one, the sales highlight gold’s role as a reserve asset in times of stress, said Shaokai Fan, global head of central banks at the World Gold Council.

“It really emphasizes why central banks hold gold… it’s a liquid asset that typically performs well during periods of uncertainty, and therefore they can deploy it if needed,” he told CNBC.

Additionally, major consumers like China have historically stepped in during price dips, and Natixis’ senior commodities analyst Bernard Dahdah said he expects opportunistic buying to re-emerge if prices fall further, potentially providing a floor.

How to get exposure to the Gold price movement

At Ethical Offshore Investments, our clients can get access to Gold (as well as other precious metals) through a range of different Exchange Traded Commodity (ETC’s) available on the various investment platforms. This is a very cost effective & secure way of holding physical Gold in your portfolio, without the need to worry about storage and insurance.

For example, the iShares Physical Gold ETC which is listed on the London Stock Exchange (as well as the Frankfurt, Italian and Mexican exchanges) holds the physical gold bars in secured and allocated storage in J.P. Morgan Chase, London branch vaults. The price movement of the ETC is based on the movement of the spot price of gold, less their management cost to cover storage and insurance of the Physical Gold, which is 0.12%pa.

We can also provide specialist investment products that can leverage on the gold price movement. If an investor is confident that the price of Gold will rise, we can offer a leveraged Exchange Traded Product on the spot price movement of Gold, where investors can get 2x up to 10x the price movement. Obviously this increases the risk as if the price goes down, it will also leverage the losses.

We can also provide specialist investment products that benefit from a falling asset price. So if an investor is confident that the price of Gold will fall, an investment in an ‘Inverse Gold ETC’ will provide a positive return if the Gold price was to fall. Same as above, this can also be leveraged to 2x – 10x the price movement to enhance returns (both positive and negative). Speak with Ethical Offshore to see how easy it is to get this type of exposure, with no additional entry and/or exit fees (apart from standard stock broker costs & stamp duty when applicable).

Please Note:

Please note the above article was first published by CNBC Business and should not be regarded as individual investment advice on whether to buy, sell or hold any of the investments mentioned. Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Lower costs resulting in more of the investment growth staying in your pocket.

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Vanguard: Investing is a marathon, not a sprint

Stephen Strowger — Thu, 26 Mar 2026 11:32:35 +0000

25 March 2026

While volatility can feel unsettling, it is a normal part of investing.

Jonathon Jones,

Editor, TrustNet

Patience beats prediction when markets are volatile, according to experts at Vanguard, who have reminded investors that staying invested brings better results than trying to time the market.

The firm highlighted volatility last year surrounding US president Donald Trump’s ‘Liberation Day’ tariffs as an example. Had investors sold out of their investments on 8 April 2025 and returned to markets one month later, their returns would have been 10 percentage points lower today than if they had remained invested throughout (14.4% versus 4.8%).

James Norton, head of retirement & investments at Vanguard Europe, said: “Investing is a marathon not a sprint.

“While volatility can feel unsettling, it is a normal part of investing. Successful investing isn’t about trying to time when to buy or sell, but about having a clear plan, staying invested and contributing regularly. By doing so and maintaining a balanced, diversified portfolio investors give themselves the best chance of investment success and meeting their long-term goals.”

The research noted that the MSCI World index has experienced eight bear markets since 1972, each time recovering and then pushing to new heights, as the below chart shows.

Diversification also matters, however. US tech stocks have dominated returns in recent years but in 2025 a globally diversified portfolio would have made better returns. The report noted that the UK and emerging markets were up 23% versus 11% for the S&P 500.

Lastly, the firm said investors should not fear market highs, noting they are often followed by new records.

“You may feel uneasy when markets are rallying but history shows that markets often go on to reach more highs,” the report found.

Please Note:

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice.

Please note the above article was first published by Trust Net and should not be regarded as individual investment advice on whether to buy, sell or hold any of the investments mentioned. Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

At Ethical Offshore Investments, we hold a very high opinion on Vanguard and their range of low cost investment options.

Clients can access the Vanguard funds / ETF’s mentioned in this article via the various Investment Platforms, and not be subject to additional entry fees or commissions, when doing so with Ethical Offshore Investments.

Lower costs resulting in more of the investment growth staying in your pocket.

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Gold, bonds and currencies: The fund managers’ guide to safe havens

Stephen Strowger — Thu, 26 Mar 2026 06:05:32 +0000

24 March 2026

Traditional safe havens have been tested in recent months, with diversification proving the strongest defence for portfolios.

Emmy Hawker,

Senior Reporter, TrustNet

Volatility from geopolitical shocks, inflation swings and sharp market reversals was common in 2025 but have arguably ramped up even further to start 2026.

Such an environment typically sends investors towards long-established shelters, such as gold, government bonds and risk-off currencies – yet many of these stalwarts have struggled to behave as expected.

Below, managers set out how they currently view the traditional pillars of safety – from gold and bonds to commodities and cash – and why many believe portfolios need a wide range of defensive tools.

Gold and other commodities

Michael Walsh, solutions strategist and portfolio manager at T. Rowe Price, said gold continues to feature as a strategic diversifier in investor portfolios but “perceptions have matured”.

“Gold’s move through previous record highs can be seen as confirmation that the macro conditions under which gold has historically added value – policy uncertainty, institutional strain and geopolitical risk – are very much in place,” he said.

“Importantly, gold has demonstrated greater resilience than government bonds when real yields rise, reflecting sustained, largely price‑insensitive demand from central banks seeking to diversify reserves.”

For investors concerned about the credibility of fiat currencies and policy uncertainty, this structural support reinforces gold’s role as a hedge against systemic risk rather than a simple cyclical trade, Walsh said.

Paul O’Neill, chief investment officer at Bentley Reid, also said gold is the “truest” safe-haven asset. However, he has elected to trim back to target weight as the price has continued to rise.

Daniel Lockyer, senior fund manager at Hawksmoor Fund Managers, pointed out that gold is the only asset that stands out as preserving spending power over centuries.

He nonetheless acknowledged it has become a very popular trade in recent months. “Gold’s volatility has increased lately, which does worry us a bit.”

In recent weeks, the price of gold has dropped again as the Middle East conflict continues, shedding 11% to close at shy of $4,500 an ounce on 20 March 2026.

Meanwhile, George Cotton, manager of JSS Commodity Transition Enhanced, argued there is safety to be found in other commodities, which contribute to the 10% of his portfolio allocated to safe-haven assets, alongside gold and bonds.

Bonds

When considering fixed income, Will McIntosh-Whyte, co-manager of the Rathbone multi-asset portfolio funds, said government bonds have shown they can still perform their role in broad risk-off markets.

“There is no doubt there are some concerns over government bonds from countries with significant debt burdens and high budget deficits – however, this is reflected in higher yields,” he said.

“It is important to have diversification so a basket of bonds can provide the risk-off role of a portfolio, while reducing the risk one of those countries makes a fiscal misstep.”

McIntosh-Whyte said he reduced his funds’ 10-year gilts position in late February, “having sold all our 30-years the week before due to our concerns over potential volatility in gilts over the next few months”.

Meanwhile, Rebekah McMillan, associate portfolio manager at Neuberger Berman, said US treasuries can still help hedge growth shocks but noted the firm is ultimately neutral on US government bonds.

She noted they have proved to be less dependable versus inflation or political tail risks and have at times offered deteriorating returns during risk-off scenarios due to deficit, debt-issuance and term-premium pressures.

Tony Gibb, head of investments at Artemis, added: “The fiscal trajectory in the US is difficult to ignore, with deficits running at levels more typically associated with recession or wartime, the supply of government bonds is structurally elevated.

“While treasuries will likely still rally in a growth shock, the magnitude of that rally and the reliability of the hedge is more uncertain than it once was. Investors are being asked to take on meaningful duration risk for a return that may not keep pace with inflation.”

In contrast, short-dated corporate bonds are a “genuinely attractive defensive option”, according to Gibb, “with investors being paid meaningfully to wait, with limited duration risk – the asymmetry is compelling as you clip a reasonable coupon with limited sensitivity to rate moves”.

Meanwhile, Cotton said catastrophe bonds may also offer a compelling alternative for investors seeking safety, providing returns that are largely uncorrelated with traditional financial markets as they depend primarily on natural disaster triggers rather than economic cycles.

Currencies, cash and cash-like instruments

Although the US dollar is pegged as the most dominant reserve currency of the world, fund managers are wary of its volatility in recent months.

McMillan said: “The dollar has shown episodic weakness in risk-off episodes. We expect further downward pressure from prospective Fed rate-cuts and, longer-term, diminishing foreign inflows as investors may reallocate capital away from the US and/or increase hedge ratios on existing US assets.

“We are similarly selective on use of other foreign exchange (FX) havens such as the Swiss franc and Japanese yen given the number of structural and technical factors in play.”

In contrast, McIntosh-Whyte said that, as a sterling investor, the US dollar remains an “excellent” safe haven.

“Whilst the current US administration has perhaps dampened its appeal, in the vast majority of risk-off environments I still expect the dollar to help UK investors – from UK economic weakness and political uncertainty to geopolitical risk and global growth scares,” he said.

Cash also continues to have an important role to play in defensive allocations, offering capital stability and liquidity.

“Although cash rates are now falling in the US, UK and the eurozone, yields remain above inflation and are attractive by recent historical standards – in 2026, liquidity itself has become an increasingly valuable defensive characteristic,” Walsh said.

For pure capital preservation in acute risk-off events, McMillan said she sees the most reliable defence in major sovereign bills, short-dated notes plus agency/supranational paper and high-quality money-market exposure – “where depth and nominal stability matter most”.

Diversification is key

Ultimately, fund managers agreed that there is no one safe-haven asset that will protect investors from all possible risks. As such, diversification is the preferred formula.

Walsh said: “There is need for a broader toolkit rather than reliance on any single defensive asset, so we look globally across a range of different asset types in search of such protection.”

Artemis’ Gibb added he has shifted his mindset from asset labels to the underlying characteristics that drive resilience, such as valuation discipline, income generation and real (rather than nominal) returns.

“In short, we think about defence in terms of what an asset is worth today, not what it has historically been called,” he said

Please Note:

Clients can access the funds / indices / equities mentioned in this article via the various Investment Platforms, and not be subject to additional entry fees or commissions, when doing so with Ethical Offshore Investments.

Lower costs resulting in more of the investment growth staying in your pocket.

Speak with Ethical Offshore Investments to learn how you can save on your investment costs.

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What the Iran conflict means for oil, markets and portfolios

Stephen Strowger — Mon, 02 Mar 2026 12:33:47 +0000

2 March 2026

Joint US-Israeli strikes on Iran have sent oil prices surging and triggered a global flight to safety, but how should investors react?

By Gary Jackson,

Head of editorial, FE fundinfo

Joint US-Israeli strikes that killed Iran’s supreme leader over the weekend have triggered a global flight to safety, sending oil prices sharply higher, gold to near record highs and equity markets into a broad sell-off, with analysts warning the economic consequences could rival those of Russia’s invasion of Ukraine if the conflict proves prolonged.

In the early hours of Saturday 28 February 2026, the US and Israel launched coordinated strikes on Iran, codenamed Operation Epic Fury and Operation Roaring Lion respectively, targeted Iranian leadership, military infrastructure and nuclear facilities with the stated objective of regime change.

The Israeli Air Force deployed 200 jets in its largest ever sortie, striking around 500 targets. The US carried out dozens of strikes by planes from one or more aircraft carriers based around the Middle East.

Iran’s supreme leader, Ayatollah Ali Khamenei, was killed alongside several senior officials, including army chief of staff, general Abdol Rahim Mousavi and defence minister General Aziz Nasirzadeh. Iranian media also said Khamenei’s daughter, grandchild, son-in-law and daughter-in-law were killed.

Iran retaliated swiftly, striking Tel Aviv, Haifa and US military bases across the Gulf. The Yemen-based Houthis said they will resume Red Sea attacks and there are concerns Lebanon-based proxies will activate. By 2 March, the combined strike total had reached approximately 2,000 targets, with conflict spreading to Lebanon, Cyprus and Bahrain. Three US troops have been killed.

US president Donald Trump has warned the campaign could run four to five weeks but the endpoint is seemingly defined by outcome rather than time: regime change is the objective, making the conflict’s duration unpredictable.

The central market story – oil

Following the weekend’s strikes, Brent crude opened this week at $82 a barrel, up $10 on Friday’s close.

Concerns revolve around the Strait of Hormuz rather than Iran’s own production (which is roughly 3% to 4% of global supply). Approximately 20 million barrels per day of oil and nearly a fifth of global liquefied natural gas (LNG) transit the strait daily. Tanker movement has effectively halted following Iranian strikes and attacks on at least three vessels.

Hakan Kaya, senior commodities portfolio manager at Neuberger Berman, said: “A full or near full closure lasting a month or more would require demand destruction at levels that could push crude well into triple digits and European natural gas prices toward or above the crisis levels seen in 2022.

“The relationship between disruption length and price is not proportional – it accelerates. Every additional week of closure compounds the problem because storage buffers deplete, refiner production cuts cascade and replacement cargoes from outside the region take time to mobilise.”

Adam Hetts, global head of multi-asset at Janus Henderson Investors, provided a useful oil price comparison for context: $80 is consistent with June 2025’s Twelve-Day War between Iran and Israel, $90 with the clash between the two nations in April 2024 and sustained prices above $100 with Russia’s invasion of Ukraine in 2022.

Chris Beauchamp, chief market analyst at IG, noted that “oil and gas infrastructure in the region has not yet been extensively targeted, keeping oil well south of the $100 barrel range that many expected”.

Neil Wilson, investor strategist at Saxo UK, added that while a $10 rise in oil would not materially affect inflation and growth, “$100 oil would really hit the growth outlook”.

Strategic stockpiles in the US (over 400 million barrels) and China (approximately 465 million barrels) provide some buffer, alongside OPEC spare capacity of roughly 3 to 4 million barrels per day. Kaya said: “These are finite resources and they buy time, not resolution.”

Wider market reaction

Emma Wall, chief investment strategist at Hargreaves Lansdown, said the strikes had added “uncertainty and volatility to an already choppy market”. Global equities are “now digesting the likelihood of significantly higher oil prices, supply chain concerns and the potential for subsequent higher inflation”.

Gold surged above $5,400 per ounce, extending a near 20% gain year to date, while the VIX jumped to 25 from below 20 at Friday’s close. European equities fell 2.3% but the FTSE 100 held up better at -1%, supported by its commodity and defensive weighting.

Shell and BP each gained 5%, BAE Systems 7%. IAG slumped 10% as airports in Dubai, Doha and Abu Dhabi closed.

Wall noted that a rally in the dollar reflects US military and energy independence but added: “The world’s reserve currency has waned in popularity over the past year as gold has seemed to surpass it as investors’ preferred store of wealth.”

Bond markets are expected to benefit initially from safe-haven demand. Wall cautioned, however, that a protracted conflict bringing inflation and higher military spending could reverse this dynamic, pushing yields higher and the dollar lower.

Four scenarios that could follow

Neuberger’s Kaya outlined four paths for how the conflict could proceed. The first is rapid de-escalation: Hormuz normalises within days, oil spikes then retraces. This is what current consensus favours, though Kaya noted it “requires assumptions about rational actors operating under extraordinary stress”.

The second is a prolonged standoff of four to five weeks, with oil staying elevated and volatile as Hormuz remains partially impaired. Beauchamp noted that “with Trump saying the campaign could run for four weeks, there is plenty of scope for more downside should the conflict widen to encompass oil and gas infrastructure”.

The third path is the one Kaya argued deserves more attention: regime change followed by fragmentation. Libya’s output collapsed from 1.7 million barrels per day after 2011 and never fully recovered. Iraq took six years and a full military occupation to return to pre-war levels. A power vacuum in Iran could mean a structural loss of barrels for years, not weeks.

The fourth is an extended regional war in which Hormuz becomes uninsurable for commercial shipping and demand rationing becomes necessary globally. Saxo’s Wilson added: “The longer this goes on with the Iranian regime remaining in place, the higher we go up the risk ramp.”

What investors should do

The clearest point of agreement is this: do not react. Wall’s advice was simply to do nothing.

“Heightened market volatility was a feature of 2025 and our house view was that unpredictable markets were likely to continue this year,” she said.

“In our 2026 outlook, we called out ongoing tension in the Middle East, the Russia-Ukraine war and the US mid-term elections as potential inflection points for asset prices. The events of the weekend are deeply troubling from a humanitarian point of view and present global leaders with difficult choices to make. But they are sadly not isolated incidents – global markets continue to trade through wars, pandemics and natural disasters.”

Janus Henderson’s Hetts echoed this, arguing that investors should recognise they are likely at or near peak uncertainty and that “large shifts in market dynamics would require a long-running escalation of the conflict. At this stage, this is not our base case”.

For those seeking to act constructively, Wall highlighted fixed income funds, emerging markets and quality-style equities, particularly stocks with “stable and predictable cashflows and little to no debt”.

Kaya argued that commodities are “doing exactly what they are supposed to do in moments like this”, which is acting as a source of diversification when traditional assets are buffeted by geopolitical risk.

Hetts finished: “As always, we advocate for taking a long-term view to investing rather than reacting to near- term volatility. This means maintaining well-diversified portfolios including high-quality safe-haven assets able to weather short-term uncertainty.

“It also means staying invested, rather than trying to market-time geopolitical realignment and the associated risk. Instead, we believe in maintaining exposure to the long-term secular growth trends that will continue to shape markets globally.”

Please Note:

Lower costs resulting in more of the investment growth staying in your pocket.

Speak with Ethical Offshore Investments to learn how you can save on your investment costs.

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Can China’s momentum last in the year of the horse?

Stephen Strowger — Tue, 24 Feb 2026 10:57:15 +0000

By James Yardley on 12 February 2026 – FundCalibre

The year of the wood snake has been a good one for China. Its economy has recovered, and investors have rediscovered their enthusiasm for its stock market. Western leaders have started to wonder if it may be a more reliable ally than the increasingly wayward US and have sought to forge closer ties.

Can the year of the fire horse bring similar good fortune?

The fire horse symbolises energy, independence, and ambition. These characteristics are increasingly evident across China, as it branches out into new technology and moves up the valuation chain. The launch of Deep Seek early in 2025 showed that China was capable of real innovation, and the country is now moving from simply imitating Western technology to making its own.

Sharukh Malik, portfolio manager on the Guinness Asian Equity Income fund, says the Chinese government recognises that China cannot achieve the next phase of economic growth – moving from c.$12,000 to $30,000 per capita – from property market growth alone. This needs to come from building expertise in key industries, including electric vehicles, industrial automation, or developing drugs rather than copying European or American drugs. He adds: “The country is now creating its own technology from scratch in key industries.”

On a recent trip to China, he saw evidence of technological progress everywhere. He points to drone deliveries, new car brands such as Geely and Chery, and widespread electrification*. The country is also a pioneer in advanced manufacturing, with advanced robotics helping its factories to run more efficiently.

China is also keeping pace on AI. Chinese technology companies may offer a cheaper and diversifying alternative to the US hyper-scalers. Shao Ping Guan, manager of the Allianz China A-Shares fund says: “While semiconductor stocks have been notably strong this year, benefiting from China’s ongoing push for greater self-sufficiency, the rally has also extended to a range of areas linked to AI.

Strategic foresight

China has also shown itself capable of better forward-planning. In the tussle between the two great super-powers, China recognised the necessity of shoring up supply of critical minerals and metals some way ahead of the US, which is now scrambling to keep up. This has given it ‘cards’ in its negotiations with the US over tariffs, and a competitive advantage in key industries.

Guinness says there is a sense that the US is looking backwards. Its recent military interventions appear to be intended to shore up oil supply. President Trump has made it clear that he is no fan of ‘windmills’ – read: renewable energy sources. Ultimately, this will leave the US dependent on dwindling fossil fuel supplies. China, by contrast, is investing in renewables to the tune of around $350 billion per year – 3x that of the US*.

This paints a picture of an economy firing on all cylinders and a government with a clear vision. It continues to grow at around 4.5-5% a year**, and that growth is spread across a range of sectors, making it more durable and robust. The Chinese stock market has started to catch up. The Shanghai Composite is up 24.8% over the past 12 months, and 3.9% for the year to date***, after a long period of weakness. Nevertheless, says Sharukh, global investors remain under-allocated. It is worth noting that China represents around 17.7% of global GDP and just 3% of the MSCI ACWI index^.

Why investors remain on the sidelines

There are still imbalances in the Chinese economy. Supporting strategic industries with lots of investment has the inevitable side effect of over-supply. Excess capacity has been seen in a range of sectors, including electric vehicles and solar panels.

Dale Nichols, manager of the Fidelity China Special Situations fund, says this is being addressed through the country’s “anti-involution” campaign. “This aims to address deflationary pressures arising from excessive and inefficient competition, including fast-growing sectors such as electric vehicles and solar energy, and in some traditional industries such as paper and cement. The intent is to reduce excess capacity and destructive competition, while preserving confidence among private enterprises.

The property sector remains a potential source of weakness. The Chinese government has worked hard to deflate the property sector gently, and transition towards new pillar industries. It has recognised the vulnerability of growth built on property market strength alone. However, Sharukh says that while these new industries have been growing, they have not been able to offset the drag from a deflating property market, but this should start to happen later this year. “It will underpin economic progress,” he says. Shao Ping Guan points out that after four years of contraction, the share of the property sector has fallen from about 18% of GDP to 9% in 2025.

The property market is also tied into the strength of the consumer. Dale Nichols says: “A more stable property sector also remains critical to restoring consumer confidence. Recent trends have been mixed, with both new and existing house prices falling further in September as policy support waned during what is typically a strong season, although Tier 1 cities, such as Beijing, Shanghai and Hangzhou, continued to show modest gains. Stabilisation in the housing market is important for a broader recovery in household sentiment, which in turn is key to reviving domestic consumption.”

However, despite these challenges, says Dale, China’s structural strengths remain clear.

These creates a fertile environment for investors. China is still an area that requires some discernment. The government still exerts excessive control in parts of the economy, and investors need to be wary of interference. Nevertheless, its markets are increasingly offering a range of opportunities. The energy, independence and ambition of the fire horse is apt for the state of China today.

*Source: Guinness, January 2026

**Source: IMF, World Economic Outlook Update, January 2026

***Source: MarketWatch, as of 9 February 2026

^Source: State Street Investment Management, 17 July 2025

Please Note:

This article was first published by Fund Calibre and is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

At Ethical Offshore Investments, we can access the funds mentioned in this article on the various offshore investment platforms we offer. We do NOT CHARGE any additional entry and/or exit fees to purchase these funds for our clients.

As we aim not to use commission paying funds, we will access the lowest charging version of the managed fund that is available on the relevant platform…… resulting in more of the investment growth staying in your pocket.

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The AI alternative staring us all in the face

Stephen Strowger — Tue, 24 Feb 2026 10:24:09 +0000

By Darius McDermott on 2 February 2026 – FundCalibre

This article originally appeared in Professional Paraplanner on 30 January 2026

Artificial intelligence (AI) continued to be the driving force behind global markets in 2025. AI-related enterprises accounted for roughly 80% of the gains in the US stock market last year, while the five largest tech companies, heavily invested in AI, held a concentration of the S&P 500 not seen in half a century*.

Importantly, it was not just the data analytics or chipmakers who drove returns, but also those selling memory and storage products. However, there are growing concerns over just how narrow market leadership has become – and the lofty valuations of those AI-related leaders.

There is a growing consensus that 2026 needs to be the year that AI companies demonstrate a path to profitability to justify those elevated valuations. For example, the Goldman Sachs’ NonProfitable Tech Index has risen by over 100% from the lows of April 2025*. To put this into perspective, in 2020, the index soared over 300% before wiping out all its gains during the 2022 bear market. The fact is investors are piling back into speculative growth stocks.

In my eyes diversification has never been more important. But finding it is perhaps more challenging over the long term. Step forward India – a region with strong demographics, growth, few geopolitical concerns, strong corporate governance and a growing online economy. The trouble is, the investment world has spotted the trend, and valuations have in recent years reflected these tailwinds.

However, 2025 has been something of a roadblock to that growth as trade disruptions and geopolitical challenges saw India go through multiple downgrades. The current projections put India’s earnings per share growth for fiscal year 2026 at around 10%, compared with 12% for the previous year**. To put this into context, Indian equities are down 6% over the past 12 months – this comes at a time when emerging markets and global equities have risen 26% and 12% respectively***.

Clearly the cooling off in Indian equities has come at a time when other emerging markets (the likes of China and Korea) have forged ahead. However, muted foreign investor flows due to limited exposure to the AI theme also remains a key headwind. This is partially due to India’s late entry into the semiconductor space. India has started making moves to meet demand in the automotive, telecoms and industrial sectors with technology minister Ashwini Vaishnaw indicating the country could catch up with other major producers by 2032.

India now looks like an alternative AI play?

For the first time in a while, Indian equity valuations are not red hot. At the end of last year the MSCI India One-Year Forward P/E Premium versus emerging markets was below 60% – it has been higher than 100% on a couple of occasions since 2022. Franklin Templeton researchers forecast Indian companies should continue to maintain an EBITDA margin of around 20-22% – indicating an opportunity**.

Several tailwinds emerged during 2025, including the Reserve Bank of India cutting interest rates by 125bps to 5.25%. Cuts were also made to income tax and the goods and services tax, and inflation reached a multi-year low.

Steps are also being made on a trade deal with the US, a key overhead for the Indian economy, with hopes of securing a figure in the range of 15-25%. This could offer some relief for the weak Rupee, another deterrent for foreign investors.

We have to put these challenges into context; IMF growth estimates for India stand at a robust 6.6% for the 2025/26 financial year. Compare this with the US and the EU, which are on course to deliver 2% and 1.4% in 2026.

UTI Dynamic Equity manager Ajay Tyagi says there are several indicators to suggest conditions have become more supportive, citing valuations normalising and India’s 12-month forward price-to-earnings premium to MSCI Emerging Markets compressing by around 68%, bringing it close to five-year lows****. He says analysts forecast earnings growth of >15% per annum over 2026–27, while domestic flows remain resilient, with systematic investment plan contributions growing by more than 25% year-on-year****. He adds that the combination of a valuation reset, improving earnings visibility and strong local participation suggests recent underperformance may prove cyclical rather than structural.

Dipojjal Saha, a macroeconomist and product specialist at Ashoka India Equity Investment Trust, says while earnings growth has likely bottomed out and valuations are now are at about 10-year average levels, in their base case expectation, the market should broadly deliver returns in line with earnings growth, assuming no expansion or contraction in P/E multiples.

He says: “In our view, the opportunity to generate outsized alpha remains the most attractive aspect of investing in India. One of the reasons for the alpha opportunity is that India still remains a highly under-researched market and hence very inefficient. This makes it a fertile ground for bottom-up stock selectors. While there are strong opportunities across the market capitalisation spectrum, India has a vast, heterogeneous SMID-cap segment which is even less well researched and hence provides strong alpha generation potential.”

India has been an incredible long-term investment. It is also less exposed to the global economy, such as the S&P 500 (0.18) and MSCI World (0.30)^. Falling valuations means the economy stands out as a growth market offering a long-term alternative to AI and now could be an excellent time for investors who have previously been wary of excessive valuations to reconsider.

Investors wanting exposure to a single country offering might consider the Chikara Indian Subcontinent fund, which focuses on high-quality, mid and large-cap companies which are benefitting from the domestic Indian growth story. Those who may prefer exposure as part of a wider emerging markets portfolio may want to consider the likes of the GQG Partners Emerging Markets Equity or the FP Carmignac Emerging Markets fund, which invest 31% and 16% respectively in the country^^.

*Source: Allianz Global Investors, 1 October 2025

**Source: Franklin Templeton, Bloomberg, 21 November 2025

***Source: FE Analytics, total returns in pounds sterling, 12 January 2025 to 12 January 2026

****Source: UTI

^Source: Alquity, December 2025

^^Source: fund factsheet, 28 November 2025

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The Magnificent Seven aren’t at risk of a rerating: Here’s what is

Stephen Strowger — Tue, 24 Feb 2026 09:49:45 +0000

originally published 2 December 2025

Pictet explains why the most overvalued companies in the US aren’t in AI..

By Patrick Sanders,

Reporter, TrustNet

Concerns about the valuations of US mega-caps have skyrocketed this year, but this is the wrong part of the market to worry about, according to Arun Sai, senior multi-asset specialist at Pictet Asset Management.

The artificial intelligence (AI) story has dominated markets this year, to the point that investors are increasingly worried about whether the US’ largest companies can continue to match high expectations.

The circular financing deals that make AI companies dependent upon each other have also spooked some, with major players such as Nvidia, Intel and OpenAI partnering together, as shown in the chart below.

While these are “red flags”, the bull case for AI is being underestimated, Sai said.

Circular deals between AI companies

Source: Pictet Asset Management. Bloomberg News Reporting

The ongoing case for AI

Some experts have compared the AI boom to previous market bubbles, but the comparison is not entirely appropriate, the Pictet strategist said, and valuations are not as extreme as most think.

The AI cohort currently trades at an average of 30x price-to-earnings (P/E) ratio – lower than the Nasdaq at the height of the dot-com bubble, which traded at 100x.

Peak bubble valuations

Source: Pictet Asset Management.

“Looking at markers of when bubbles burst, I’d say we’re only above a third of the way in,” the Pictet strategist said.

This means that there is still significant room for deregulation and sentiment to improve, which will lead to a continued rally in these stocks.

“AI stocks are not cheap, but equally, they’re not frothy either. I’m happy to pay an average of 30x for AI.”

Current valuations are also broadly supported by strong fundamentals, he said. The bulk of the AI capex boom has been supported by operating cash flows, which further distinguishes it from the dot-com bubble, where “equity investments were financing the capex”.

On top of this, the earnings picture for these companies is broadly “comforting”, as they are growing their earnings per share well above the average US stock, as shown in the chart below.

“These stocks are market leaders and have been for years. That’s a comforting backdrop,” he said. “Markets are expensive, but I don’t think AI is the reason for that and that should change your risk-reward perspective”.

12m forward earnings of AI Stocks vs S&P 500

Source: Pictet Asset Management.

The ‘Terrific 20’

The biggest risk in the US market isn’t in the tech stocks, it’s in the rest of the US mega-caps, particularly a cohort that Sai called the “Terrific 20”. This is a broader set of large-cap American stocks, which are more closely tied to the “real economy” such as Walmart, JPMorgan and Berkshire Hathaway.

These stocks have surged to an average of 25x forward earnings, above the average US stock and not far behind the Magnificent Seven, as seen in the chart below. In total, they have surged almost 60% in the past two to three years.

Valuations of Magnificent Seven, Terrific 20 and Median US stock

Source: Pictet Asset Management. The Terrific 20 include Broadcom, JPMorgan, IBM, Berkshire Hathaway, Visa, Netflix, ExxonMobil, Mastercard, Costco, Walmart, Oracle, AT&T, GE Aerospace, Home Depot, Wells Fargo, Bank of America, Palantir Technologies, Chevron, Philip Morris International and Goldman Sachs

The problem with this is that the rally in these mega-cap stocks has been founded on “hopes” rather than fundamentals, which will backfire on investors, Sai said.

Unlike the Magnificent Seven, these stocks are not posting exceptional performances, but they’re being rewarded with much greater chunks of market share regardless, he said.

While some of these stocks have performed well, they have rallied because investors who were concerned about the Magnificent Seven valuations saw these as the next best thing.

“Investors who told themselves that they’ve missed the bus on AI looked at the US market and started searching for stocks that could attempt to replicate the success of the Magnificent Seven. That’s why the Terrific 20 have surged”.

As a result, it is these stocks that are “most vulnerable to a correction” within the US, because they have run up significantly but “lack the earnings leadership to justify it. Investors who poured into these businesses are taking on risks that “may not seem obvious at first glance”.

“I’m not worried about 30x on the Magnificent Seven. I think you should be worried about 25x on something like JP Morgan or Walmart,” Sai concluded.

Arun Sai – senior multi-asset specialist – Pictet Asset Management Ltd

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Complaint Resolution Service

Stephen Strowger — Wed, 18 Feb 2026 06:34:28 +0000

Have you suffered a financial loss due to mismanagement of your Offshore portfolio or policy?

Our Complaints Resolution Service may be able to assist you in gaining financial compensation

No win = No cost

Our Complaints Resolution Service has been successful in obtaining financial compensation for clients that have suffered financial losses due to the actions of Offshore Life Companies, Investment Platform providers, Pension Trustees, Discretionary Fund Managers and regulated Financial Adviser firms.

I would like to think that the majority of people involved in the financial and wealth management industry are honest, trustworthy people that are trying to help their individual clients reach their financial goals and objectives.

However, I am not that naïve to dismiss the fact that, be it just a small percentage of industry participants, that there are some with different motives for being in the industry, such as having the sole purpose of making as much money as they can, as quickly as the can, with no care or responsibilities of their actions on their clients financial situation…….. Unfortunately, I have witnessed this first hand and this was one of the driving forces for me in setting up Ethical Offshore Investments.

While a lot of the negative issues experienced by investors in the offshore industry is the result of those so called ‘Commission Cowboys’, there will be occasions where a client has been financially disadvantaged due to negligence or incompetence from the actions of a corporate entity, such as a Life Company, Pension Trustee, Discretionary Fund Manager or a financial advising firm.

This could be for example:

Incorrect or lack of disclosure of fees, charges and potential exit penalties
Inappropriate investments (too risky, lack of liquidity, lock in periods, lack of diversification)
Processing errors resulting in delays for payments
Unauthorised transactions

A lot of clients that have invested in Offshore type investment structures and investment schemes are not aware of their rights to lodge an official complaint and depending on the complaint (& the participants), lodging an application with a regulator for financial compensation.

So how does Ethical Offshore Investments assist with this…?

First off, we obviously listen to the complainant about what has occurred & how they believe that the actions that were taken resulted in a financial loss.

We will then request relevant information from the product provider(s) involved (with clients consent of course) and will review the actions or transactions that took place. Taking into consideration the location (where the advice/service was provided as well as country of residence of the client) as well as the location of where the responsible entity is located, we can then provide guidance on what course of action the client can take.

Just because a client may be living in Thailand for example and received advice/services from an unregulated firm, doesn’t mean that there isn’t anything that can be done…….. if the product that the complaint is referring to is from a recognised offshore Life Company (without naming names, but they generally are the ones based in the Isle of Man, Guernsey, Jersey, Mauritius or the Cayman Islands) then there is an official complaints procedure that these companies must all adhere to, as directed by the local regulatory body to maintain their relevant licensing and registrations.

First step is to approach the relevant company with full details of the complaint & documented proof of how the actions caused the client to be financially disadvantaged. In many situations, where it is a clear-cut case of where the actions of the Life Company / Product Provider did result in a financial loss, the Life Company will deal with it internally & offer a compensation pay out directly to the client.

If the Life Company / Product Provider disputes the allegations made and does not agree to compensation, the next step is approaching the relevant Financial Regulator for that particular provider.

United Kingdom – Financial Conduct Authority (FCA) UK
Isle of Man – Isle of Man Financial Services Authority
Guernsey – Guernsey Financial Services Commission
Cayman Islands – Cayman Islands Monetary Authority
Mauritius – The Financial Services Commission Mauritius
Labuan – Labuan Financial Services Authority

We then provide the regulator all of the relevant information for them to asses and determine an appropriate financial outcome for the client. As part of our service, we continue to liaise with the Regulator & the client on the progress, as well as providing additional information as requested by the regulator.

Recent Compensation Success

During 2025, we successfully arranged for the combined refund of GBP 1,818 back to 4 different clients, where a Discretionary Fund Manager located in the UK, along with an Isle of Man Life Company, overcharged fees for their services. A further GBP 855 has been refunded to another client so far in 2026.

2025 also saw us negotiate for a client the full surrender of a Savings Plan policy, without incurring the early surrender fee. We took this action for the client as we strongly believed that the Isle of Man Life Company that issued the policy, was not meeting their obligations as part of the plans Terms & Conditions.

This saved the client $ 6,689 in penalty costs. The client transferred the proceeds to an Offshore Platform and not only did this result in more flexibility with investment choices, it is also saving the client a further +2%pa in other charges…… so now, more of the investment growth stays in his pockets.

The final successful compensation in 2025 was a $370 compensation payment made for incorrect processing of contributions to an Isle of Man Life Company savings plan policy.

Previous years, we have been able to achieve the following compensation results for clients:

GBP 15,000 – incorrect processing of a withdrawal by an Isle of Man Life Company for a savings plan
GBP 12,000 – incorrect processing of an asset transfer by an Isle of Man Life Company for an offshore portfolio bond
GBP 10,031 – inappropriate investments allowed to be made by a Malta Pension Trustee Company
GBP 3,871 – incorrect processing of a surrender request by a Guernsey Life Company savings plan
USD 8,000 – incorrect processing of an asset transfer by a UK regulated Discretionary Fund Manager

There have been many other successful smaller claims where fees have been waived and or reimbursed to clients.

How much does this service cost..?

First off, this is a No Win = No Pay service. If after we have reviewed your complaint situation and agree that there is a case to be made, we will prepare all of the documentation required and lodge it with the relevant Life Company and following that, with the regulator. At this stage, the client pays Ethical Offshore Investments nothing..!!

If the complaint comes back unsuccessful (after appeals made to the regulator or tribunal), there is no cost to the client. So in other words, if we take on the case, we must strongly believe that there is a good chance of success…….

The cost to the client for when a compensation case is successful is dependent on a few different factors. The absolute maximum cost would be 20% of the net compensation amount received. And this is only payable once the compensation amount has been received.

However, this cost may in fact be lower depending on the actual amount of work we provided for the compensation as well as what business relationship that we have with the client. In some cases, the complaints resolution service can be part of the on-going client management service we are already providing and as such, there is no further costs to pay…… irrespective of the compensation amount awarded.

If you feel that due to the actions of a previous advising firm, product provider or investment manager has resulted in you being financially disadvantaged, please click on the Request Information button below and provide some details, including how we can contact you, and we can confidentially discuss what is an appropriate course of action for you take.

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Request Information

The post Complaint Resolution Service first appeared on Ethical Offshore Investments.

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Complaint Resolution Service

Stephen Strowger — Wed, 18 Feb 2026 06:17:43 +0000

Have you suffered a financial loss due to mismanagement of your Offshore portfolio or policy?

Our Complaints Resolution Service may be able to assist you in gaining financial compensation

No win = No cost

This could be for example:

Incorrect or lack of disclosure of fees, charges and potential exit penalties
Inappropriate investments (too risky, lack of liquidity, lock in periods, lack of diversification)
Processing errors resulting in delays for payments
Unauthorised transactions

So how does Ethical Offshore Investments assist with this…?

First off, we obviously listen to the complainant about what has occurred & how they believe that the actions that were taken resulted in a financial loss.

If the Life Company / Product Provider disputes the allegations made and does not agree to compensation, the next step is approaching the relevant Financial Regulator for that particular provider.

United Kingdom – Financial Conduct Authority (FCA) UK
Isle of Man – Isle of Man Financial Services Authority
Guernsey – Guernsey Financial Services Commission
Cayman Islands – Cayman Islands Monetary Authority
Mauritius – The Financial Services Commission Mauritius
Labuan – Labuan Financial Services Authority

Recent Compensation Success

The final successful compensation in 2025 was a $370 compensation payment made for incorrect processing of contributions to an Isle of Man Life Company savings plan policy.

Previous years, we have been able to achieve the following compensation results for clients:

GBP 15,000 – incorrect processing of a withdrawal by an Isle of Man Life Company for a savings plan
GBP 12,000 – incorrect processing of an asset transfer by an Isle of Man Life Company for an offshore portfolio bond
GBP 10,031 – inappropriate investments allowed to be made by a Malta Pension Trustee Company
GBP 3,871 – incorrect processing of a surrender request by a Guernsey Life Company savings plan
USD 8,000 – incorrect processing of an asset transfer by a UK regulated Discretionary Fund Manager

There have been many other successful smaller claims where fees have been waived and or reimbursed to clients.

How much does this service cost..?

Socially Responsible Investing using Ethical Business Standards.

Request Information

The post Complaint Resolution Service first appeared on Ethical Offshore Investments.

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Which Taxes Will Rise in Rachel Reeves’ Autumn Budget?

Stephen Strowger — Thu, 23 Oct 2025 07:59:00 +0000

Markets expect fresh tax hikes in the November Budget as the chancellor grapples with debt and weak growth.

Key Takeaways

Rachel Reeves’ second Budget next month will likely include more tax rises.

After a period of uncertainty over the health of the government’s finances, bond yields remain at elevated levels.

Inflation is rising and economic growth remains weak, limiting the chancellor’s options.

Further tax rises are a near certainty when Chancellor Rachel Reeves delivers her delayed Autumn Budget on Nov. 26, experts say, with a potential VAT increase now in the spotlight after a volatile month of political scandal and growing market disquiet over the achievability of the government’s own fiscal rules.

This event occurs against a more anxious backdrop than in 2024 when the chancellor delivered her first Budget in on Oct. 30.

In the buildup to her second Budget, there has been more speculation than usual about what the government has planned to fill the multi-billion pound gap in the public finances.

The UK’s restless government bond markets are keen to see evidence that the state has debt under control and jittery about any hint of the opposite. The yield on the 30-year gilt is still elevated at 5.63%, below 2025’s high of 5.72% in September, but still above levels in the autumn 2022 crisis. In this financial year, the UK government is expected to spend more than £100 billion servicing debt interest.

Reeves’ options include cutting public spending, raising direct or indirect taxation or increasing government borrowing, or a combination of all three levers.

Cutting public spending is unlikely to be popular with core voters keen to see improvements in public services.

Raising taxes is always politically dangerous: Taxpayers already face the highest tax burden since the Second World War, and the imperative to achieve a balanced or in-surplus government budget by 2029/30 is unlikely to cheer households struggling with rising food inflation.

Bond markets would prefer to see lower public spending and lower government borrowing, and would likely support tax increases as a way of balancing the books.

But higher taxation will likely worry business leaders, who argue more levies will choke growth at an already-precarious moment for the global economy. And after increases to employer National Insurance contributions kicked in this April.

Rachel Reeves Under Pressure as UK Economy Stalls

UK GDP growth in July was zero, down from 0.4% in June. Inflation has risen to 3.8% and is expected to rise to double the Bank of England’s target. The labor market is weakening. What’s more, formerly fringe party Reform UK would win a general election if called now, polls suggest. A summer of protests has put Downing Street on the back foot.

Though Reeves has hung on, speculation over her future has not dampened. Idle talk of an International Monetary Fund bailout has affected her credibility, even if it is at this stage unlikely. Speculation over her future reached a crescendo in early September, when gilt yields spiked around the time that the deputy prime minister, Angela Rayner, resigned.

“Whether the Autumn Budget is ‘do or die’ for the government remains to be seen, but it’s definitely do or die for Rachel Reeves,” says Morningstar’s chief European market strategist, Michael Field.

“We are at a crucial juncture. Labour has a great opportunity to make strides in fixing the UK’s financial black hole—a precarious, but eminently fixable, problem.

What Tax Changes Have Been Rumored?

Changes to property taxation, including stamp duty and council tax or imposing CGT on primary residences.

Lowering of tax-free sums for those accessing private pensions.

Changes to private pension tax relief.

Widening the scope of the VAT regime.

Income tax and/or National Insurance increases, breaking the manifesto pledge.

Making landlords pay National Insurance contributions on rental income.

Changes to Cash ISA limits.

Scrapping certain “gifting” exemptions under inheritance tax.

Will Reeves Raise VAT or Income Tax?

In its 2024 general election manifesto, the Labour Party pledged it would not increase the main rates of income tax, National Insurance and VAT. At the October Budget last year, it got around this constraint by increasing employer contributions on National Insurance rather than employee contributions. The government could now repeat this playbook.

In her speech to the Labour Party’s Annual Conference in Liverpool in late September, Reeves declined to outline how taxes might be increased, but it was clear to onlookers that the chancellor felt the cost of maintaining the government’s debt was unsustainable.

“There is nothing progressive, nothing Labour, about government using one in every £10 of public money it spends on financing debt interest,” Reeves claimed.

“Our economic renewal will rest on stability, to keep taxes, inflation, and interest rates as low as possible.”

The statement has been widely interpreted as a strong indication that the government will once more increase the tax burden.

Gilt Markets Expect Higher Taxes

When Reeves made this statement, there was little reaction from the UK gilt markets, indicating investors still wish to see the government’s plans before projecting any material implications.

“[Gilt] yields will likely remain elevated until we get a clear plan at the Autumn Budget, though given the UK government’s promises not to increase austerity and to keep its fiscal maths in order, the Autumn budget will inevitably bring higher taxes,” says Oliver Faizallah, head of fixed income research at Charles Stanley.

“This isn’t a quick fix, though. Higher taxes may create a fiscal doom loop, where tax increases hurt demand and growth, further lowering tax receipts.”

How Will the Government Raise More Tax?

Several means of increasing government revenue are reportedly under consideration. They include taxes on Cash ISA investments, changes to the capital gains tax treatment of property sales, and a major amendment to inheritance tax to restrict the so-called “gifting” rules.

It’s possible there will be more significant changes to the rules around VAT, a form of indirect taxation. Though Labour has pledged not to increase the headline rate of VAT beyond 20%, Reeves could lower the threshold at which businesses pay the tax.

She could also put VAT on private taxi and ride-sharing platforms online, and even remove the VAT exemption on private healthcare. The last of these policies would echo an earlier decision to remove a VAT exemption on private schools, which came into effect on Jan. 1 this year.

This might seem like an easy target, but VAT increases are typically passed on to consumers in the form of higher prices.

“If the government does increase VAT this could lead to a one-off increase in inflation, at a time when price pressures are already elevated,” says Kathleen Brooks, research director at trading platform XTB.

If tax increases are inevitable, then so too are other difficult decisions.

“Reeves has so far shied away from bold action, but bold action is what is required,” says Morningstar’s Field.

“Failure to do so could certainly result in a reshuffling of her job.”

What Tax Changes Were Announced in the 2024 Budget?

The rate of National Insurance employer contributions was increased to 15% from April 2025.

Pensions were brought into the scope of inheritance tax regime from 2027.

Changes were made to the treatment of family business, including farms.

Capital gains tax for shares was increased as well as stamp duty on second homes.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

Please Note:

This article was first published by Morningstar and is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

At Ethical Offshore Investments, we focus on reducing investment costs so that more of your investment growth, stays in your pocket.

Speak with Ethical Offshore Investments to learn how you can save on your investments costs

Socially Responsible Investing – Ethical Business Standards

The post Which Taxes Will Rise in Rachel Reeves’ Autumn Budget? first appeared on Ethical Offshore Investments.

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Does the gold price crash signal full reversal or short-term correction?

Stephen Strowger — Thu, 23 Oct 2025 05:40:41 +0000

Alex Sebastion – Portfolio Adviser Newsletter

22 October 2025

Price down to around $4,000

The price of an ounce of gold has stabilised at just above the $4,000 mark after crashing down from all-time highs of over $4,400.

Longtime gold-bugs and new investors drawn in by its spectacular price rise will all be trying to gauge whether the tide has turned for the precious metal and a protracted price fall is coming, or just a short-term correction.

The precious metal has seen a stellar run over the past three years, climbing from around $1,600 at the end of 2022 to the lofty figure of $4,400 plus.

The rise has been fuelled by concerns over the dollar, inflation, geopolitical trouble and pure speculative momentum.

Some form of correction was inevitable, but whether it resumes its rise after a cooldown or carries on lower to retrace much of the recent gain is yet to be seen.

Eamonn Prendergast, chartered financial adviser at Bromley-based Palantir Financial Planning, said: “Gold’s sharp fall is a reminder that hype often comes before a hangover. Markets move in cycles and fear of missing out can tempt investors to chase momentum at the wrong time.

“The lesson isn’t whether to buy the dip, but how to avoid being gold-hungry and overexposed to any single asset. A balanced, diversified approach remains the antidote to both panic and euphoria because lasting wealth is built on patience, not FOMO.”

Anita Wright, chartered financial planner at Ribble Wealth Management, added: “This week’s gold price plummet does not look like a bubble bursting. It looks like a shake-out within an ongoing bull market, driven less by hype and more by strain between paper contracts and the supply of real metal.

“Prices have jumped without a big build-up in speculators’ positions, which points to short squeezes and tight physical supply. In that world, sharp pullbacks are normal.

“The big picture is that gold has done this before. Previous bull phases have run much further before topping. On that basis, we are likely only part-way through. If policy makers ease again when risk assets wobble, weaker currencies tend to support gold.

“The forces that took gold to records—high debt, recurring market stress, and a bias to easier money—are still with us. That points to a volatile climb rather than a straight line. In short: this is a correction within a gold bull market, not the end of it.”

Please Note:

This article was first published by Portfolio Adviser Newsletter and is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

At Ethical Offshore Investments, we can access financial instruments to invest in physical Gold (without the cost of storage & insurance) via strictly regulated Exchange Traded Products (ETP’s) listed on the major stock exchanges such as the London Stock Exchange, NYSE, France, Germany & Australia. For those that believe the Gold price will fall, we can access regulated inverse ETP’s that will generate positive returns on negative Gold price movement.

For higher risk opportunities, we can also access leveraged ETP’s which can provide enhanced returns on the price movement.

We do NOT CHARGE any additional entry and/or exit fees to purchase these investments for our clients.

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The Structured Note Portfolio….. no set up costs – wide range of Note options

Stephen Strowger — Thu, 02 Oct 2025 05:11:28 +0000

The Ethical Offshore Investments

Structured Note Portfolio

With the increase in demand from investors for Structured Note type investments, we have decided to promote a Structured Note holding portfolio, with NO entry or establishment charges, and NO ongoing financial adviser charges.

Plus, investors through Ethical Offshore will continue to receive a minimum of 1% of the invested amount, rebated back to them.

So what is a Structured Note..??

A structured note is a hybrid investment product, issued by a financial institution, that combines a debt security (like a bond) with a derivative component to offer a return linked to an underlying asset, index, or commodity. It aims to provide investors with market-linked growth potential and varying levels of downside protection or principal safety, though this often involves capping potential upside returns.

Key Features of Structured Notes

Hybrid Structure: They merge a bond component, which can offer principal protection, with a derivative component, such as options, to provide exposure to various asset classes.

Underlying Assets: The note’s performance is tied to a reference asset, which could be a single stock, a basket of equities, an equity index (like the S&P 500), a commodity, or even interest rates.

Principal Protection: Many structured notes are designed to protect the investor’s principal, either fully or partially, by incorporating a debt component with a safety buffer or “barrier”.

Issuer Risk: As they are debt securities, the creditworthiness of the issuing financial institution is a critical risk factor for investors.

Complexity and Customization: Structured notes are complex products with features and payoffs that can be tailored to specific investment objectives.

How They Work (Simplified)

Issuer’s Promise: A bank or financial institution issues the note, promising a return that is determined by a formula based on the performance of an underlying asset.

The Bond Component: A portion of the investment is used to purchase a bond, which provides safety and potentially principal protection at maturity.

The Derivative Component: The rest of the investment is used to buy a derivative, such as options, to provide the upside potential linked to the underlying asset.

The Payoff: At maturity, the investor receives their principal and interest payments based on the performance of the underlying asset and the terms of the structured note.

The above is the result of an AI Google Search on What is a Structured Note, and in all honesty, I don’t think I could have worded it any better……….

How does this all come together…??

Investors will establish a Platform holding account with the Ardan International Platform that is domiciled and regulated in the Isle of Man (in some situations due to the investors nationality, residence country & tax situation, an Offshore Life Portfolio Bond policy may be used). This will be the holding structure for the various Structured Note investments that the investor chooses to invest in.

There will be NO entry or establishment fee applicable for deposits made into the Ardan International Platform that will be used to invest in Structured Notes, and in fact, investors that use Ethical Offshore will get a minimum of 1% commission rebate added to their Structured Note investments.

Click for Information on the Ardan International Platform

In addition to this, we will not be charging an ongoing portfolio client management fee for the Structured Note holding portfolios.

So, if we are not charging, how do we as a firm make money on this…..?

Structured Note issuers generally will pay a commission (or sometimes called a marketing allowance) to firms for the placing of their Structured Notes. We as a firm have an internal policy where we will share this commission we receive with the investor, and at least 1% of the invested amount is rebated back to the investor.

Example, a client invests $10,000 in a Structured Note, we will instruct the Note issuer to issue 10,000 units of the note at 0.99 (instead of the standard $1.00 issue price) which will result in the client investing a net amount of $9,900 for a $10,000 holding.

What type of Structured Notes are available

We have a wide range of Notes available, with the option of receiving a regular income (monthly, quarterly or semi-annually) or capital growth style notes. The underlying investments of the Notes will be either a mix of major indices, such as the Euro Stoxx 50, or the S&P 500…. or it will be a mix of (generally) blue chip global companies.

All of the Notes that we have available will have some form of capital protection feature, which can provide peace of mind during downward market periods. There are Notes available that have a full 100% Capital Protection feature, so even in the situation where an underlying asset was to considerably drop in value, or even fully collapse to zero, the Note would still preserve the investors capital and 100% of the invested amount would be returned.

Click here to see what Notes are currently available

We believe that this is a great, cost effective opportunity to invest in the diverse world of Structured Note products, where you can select the type of Structured Note(s) that meet your investment objectives, risk category and timeframe.

Speak with Ethical Offshore to see how easy it is to establish the holding Platform for your Structured Note investments……. And remember, there will be no set up or establishment costs for our Structured Note platform portfolios.

Risks to Consider

Issuer Credit Risk: The note’s repayment depends on the financial health of the issuer. For this reason, we will only use financial institutions that carry a financial rating of at least Investment Grade from Standard & Poors (S&P), Fitch or Moodys. Examples of the Institutions that we use include Barclays, BBVA Global Markets, BNP Paribas, Canadian Imperial Ban of Commerce, Goldman Sachs, Morgan Stanley, Societe Generale and UBS.

Complexity: The terms and features can be difficult to understand.

Potential for Lower Returns: To provide principal protection, the potential upside on the underlying asset is often capped.

Lack of Liquidity: Structured notes are not typically traded on public exchanges and may not be easily sold before maturity. However, the issuers of the Notes that we get exposure to, do have the flexibility to sell the Note holding prior to the maturity date, at the current market price (this may be lower or higher than the issue price).

At Ethical Offshore Investments, we are determined to show how clients can invest in a range of different investment structures and opportunities, but in a cost effective manner. The Structured Note portfolio is an example of that with there be no entry or establishment charges, as well as no ongoing client portfolio management charge (there will be an Ardan platform admin fee which is currently 0.40%pa (current max fee).

Our policy is that we will also rebate a minimum of 1% of the invested amount back to client, from the commission payment that we would receive from the Note providers

If you would like to learn more on how you can invest in a portfolio of Structured Note assets, please click on the More Information button below and our senior consultant will contact you personally.

Ethical Offshore Investments also provides guidance on portfolios that have an ESG (Environmental & Social Governance) bias and an SRI (Socially Responsible Investing) focus. By avoiding high charging, commission paying funds, this results in lower portfolio costs, so more of the growth staying in the pockets of our clients.

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A Global Investment Exposure for a Fraction of the Cost…..

Stephen Strowger — Wed, 06 Aug 2025 07:03:47 +0000

Global Exposure for a Fraction of the Cost

Investment Charges – How much is it really costing you & your future

Our solution keeps more of the investment growth in your pockets

At Ethical Offshore Investments, we have been strong advocates of helping clients reduce their ongoing costs. And we believe that our Global Index Investing option will not only provide clients access to investing in the world’s greatest companies, but doing so at a fraction of the costs.

Before we show you how low the total charges are if you become a client of Ethical Offshore, below is an illustration of why reducing your costs is so important.

Don’t let high costs eat away your returns

There is the common saying that you have to spend money to make money…. But the money you spend to invest has a big effect on what you have left in your own pocket.

Points to know

All investments have costs

Money you pay for costs compounds (rises exponentially) over time

Because some investments with higher costs have to overcome these expenses, their performance tends to suffer vs. lower-cost investments.

Understand what you are paying

At Ethical Offshore Investments, we have always strongly suggested that you ask your adviser or investment consultant, for a breakdown of all of the costs associated with holding an investment portfolio (don’t stop there….. ask your financial consultant what service or benefit is being provided for that specific fee / charge).

Every investment has a cost, even if you don’t realise that you are paying it

There are many different kinds of costs, but they all have one thing in common: if the money is going somewhere else, it is not going to you.

Why do costs matter

Investment costs might not seem like a big deal, but they add up, compounding along with your investment returns. In other words, you don’t just lose the tiny amounts of fees you pay – you also lose the growth that money might have had for years into the future.

For example: you invest $ 100,000 and the underlying investments generated a gross 6% each year for the next 25 years and had NO costs or fees, you would end up with an investment value of $ 429,190.

If on the other hand you had paid a combined 2% a year in investment costs & charges, after 25 years, you would have an investment value of only $ 266,580

That’s correct: the 2% of total charges you paid every year would reduce your investment value by nearly 38%……. that 2% doesn’t sound so small anymore, does it..??

Costs can eat away at your investments

The above example & image is provided by Vanguard Ltd

What can you do to control your costs..??

Because all investments have some form of costs, it might seem like a waste of time to worry about them. Or maybe you assume that a high cost means that you are getting higher quality investments & better total returns.

Unfortunately, nothing could be further from the truth. Research on mutual / managed funds has shown that in most cases that the higher-cost funds generally underperform lower-cost funds. That is because the fund managers charging these higher costs may struggle to add enough value to overcome the additional expense (in addition to this, they may have to take a slightly higher risk, more volatile approach to achieve the higher returns).

A Diversified Global Exposure for less than 1%pa

Actually, our global equity allocation total costs is 0.80%pa – that includes the fund manager charges, the offshore holding platform charges and the costs for having your dedicated, Private Manager at Ethical Offshore Investments who will continue to provide guidance and is your direct contact if you have any queries or concerns.

For clients that would like to invest in a dedicated US equity or a UK equity portfolio, the total cost is even lower at 0.75%pa

This is done through a selection of high quality Exchange Traded Funds (ETF’s) from the likes of Legal & General (L&G), iShares (Blackrock) and Vanguard.

Our Global Allocation will result in exposure to over 1,600 of the worlds biggest and most successful companies, which includes Apple, Microsoft, Amazon, Nvidia, Alphabet (Google) and Tesla. This can be invested in a range of different currencies.

Clients can also choose to have dedicated Ethical and Socially Responsible Investment index ETF which will only include the highest quality, screened ESG companies….. and all still for less than a total all up cost of 1%pa.

Finally, we can also offer a risk adjusted, diversified approach (using the expertise of Vanguard Ltd) where you can select a diversified asset portfolio of Bonds and Equities in-line with your preferred risk tolerance and investment objectives.

For our GBP investors, an example of this would be the LifeStrategy range of funds managed by Vanguard.

Vanguard LifeStrategy 100% Equity
Vanguard LifeStrategy 80% Equity (20% Fixed Interest / bonds)
Vanguard LifeStrategy 60% Equity (40% Fixed Interest / bonds)
Vanguard LifeStrategy 40% Equity (60% Fixed Interest / bonds)
Vanguard LifeStrategy 20% Equity (80% Fixed Interest / bonds)

The above funds are invested across a range of 10 different Vanguard index funds or ETF’s, which will result in portfolios having allocations across the different geographical locations, economies (both developed and emerging) and business sectors.

The total maximum cost with utilising the Vanguard LifeStrategy range of funds, along with the platform and client servicing costs would be 0.92%pa.

We have a range of risk managed, diversified Vanguard options for other major currencies….. and all for less than a 1%pa in total ongoing fees (including access to your own personal Private Client Manager at Ethical Offshore Investments).

What is the benefit to you…… the investor.

Well let’s go back to the previously mentioned $ 100,000 being invested, but instead of 2%pa ongoing charges, it is the 0.80%pa of total charges being deducted (& don’t forget, you still will have your own dedicated Ethical Offshore consultant to assist you with queries & guidance).

That cost saving would result in a portfolio value after 25 years of $ 355,140…….. that is $ 88,560 more in YOUR POCKET…!!!

For clients that have a personal offshore pension (QROPS or a UK SIPP), the investment cost savings are even more important. In addition to the platform, fund management and client management costs, Pension portfolios are also subject to Trustee fees as well as their own administration costs. While we will always try and use the more cost effective pension schemes and trustees, there will unfortunately continue to be trustee costs associated with offshore pensions….. so the more you can save on the portfolio costs, this will help negate the additional trustee charges.

Reducing your total investment costs, even by 0.5%pa could result in you not just retiring….. but retiring comfortably…!!

At Ethical Offshore Investments, we are determined to show how clients can invest in a global portfolio of quality companies, but ethically through low cost, flexible investment structures.

If you would like to learn more on how you can invest in a quality global portfolio with minimal costs, please click on the More Information button below and our senior consultant will contact you personally.

If you would like to get more information on the Sustainable Ethical Allocation portfolios, or enquire on the vast array of Sustainable and Ethical style funds available, please click on More Information.

The post A Global Investment Exposure for a Fraction of the Cost….. first appeared on Ethical Offshore Investments.

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Complaint Resolution Service

Stephen Strowger — Wed, 06 Aug 2025 06:23:24 +0000

Have you suffered a financial loss due to mismanagement of your Offshore portfolio or policy?

Our Complaints Resolution Service may be able to assist you in gaining financial compensation

No win = No cost

This could be for example:

Incorrect or lack of disclosure of fees, charges and potential exit penalties
Inappropriate investments (too risky, lack of liquidity, lock in periods, lack of diversification)
Processing errors resulting in delays for payments
Unauthorised transactions

So how does Ethical Offshore Investments assist with this…?

First off, we obviously listen to the complainant about what has occurred & how they believe that the actions that were taken resulted in a financial loss.

If the Life Company / Product Provider disputes the allegations made and does not agree to compensation, the next step is approaching the relevant Financial Regulator for that particular provider.

United Kingdom – Financial Conduct Authority (FCA) UK
Isle of Man – Isle of Man Financial Services Authority
Guernsey – Guernsey Financial Services Commission
Cayman Islands – Cayman Islands Monetary Authority
Mauritius – The Financial Services Commission Mauritius
Labuan – Labuan Financial Services Authority

Recent Compensation Success

Over the past few years, we have been able to achieve the following compensation results for clients:

GBP 15,000 – incorrect processing of a withdrawal by an Isle of Man Life Company for a savings plan
GBP 12,000 – incorrect processing of an asset transfer by an Isle of Man Life Company for an offshore portfolio bond
GBP 10,031 – inappropriate investments allowed to be made by a Malta Pension Trustee Company
GBP 3,871 – incorrect processing of a surrender request by a Guernsey Life Company savings plan
US $ 8,000 – incorrect processing of an asset transfer by a UK regulated Discretionary Fund Manager

There have been many other successful smaller claims where fees have been waived and or reimbursed to clients.

How much does this service cost..?

Socially Responsible Investing using Ethical Business Standards.

Request Information

The post Complaint Resolution Service first appeared on Ethical Offshore Investments.

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The safest of safe havens

Stephen Strowger — Wed, 09 Jul 2025 10:28:55 +0000

James Yardley – FundCalibre

2 July 2025

The pause on reciprocal tariffs ends on 8^th July. While it may be the case that Donald Trump pulls a couple of trade deals out of the hat just in time to avoid triggering significant market volatility, it is equally plausible that he could decide to double-down. Investors would be forgiven for gravitating to safer options in the months ahead.

But what are those safer options?

The problem is that a lot of previously safe options no longer look quite so benign. US treasuries, for example, have been a reliable portfolio ballast at times of significant economic stress, but with a high and growing debt burden and a weaker dollar, it’s become more difficult to make the case. The passing of the ‘big beautiful bill’ this week is likely to add to the fiscal woes of the US, and shows that Donald Trump has no real intention of tackling the deficit.

The other reliable safe haven has been gold. However, its price has risen around 27% for the year to date*. It is notable that it hasn’t protected investor capital during the recent tensions in the Middle East. Instead, it has been steadily dropping since the start of June. This may suggest its protective qualities are outweighed by its high price.

Within equities, safe havens are also more difficult to find. However, certain strategies can still offer some degree of protection for a portfolio. For example, funds with a lower beta (a measure of how sensitive a fund or stock is to movements in the broader market), such as Polar Capital Global Insurance, can help reduce volatility and downside risk, which can help cushion a portfolio during periods of market downturns. In addition, funds that focus on high-quality companies or defensive sectors like consumer staples tend to be more resilient during periods of economic stress.

A. Polar Capital Global Insurance

B. FTSE All Share Index

Another effective option is absolute return funds, such as BlackRock European Absolute Alpha or Janus Henderson Absolute Return. These funds can generate positive returns even when markets are falling, using strategies like short selling (where they profit from declining prices) offering an added layer of protection in uncertain environments.

Bond market tactics

For the most part, strategic bond fund managers are not avoiding US treasuries completely, but are sticking to shorter-dated bonds, which hold less interest rate risk. Stuart Chilvers, co-manager on the Rathbone Greenbank Global Sustainable Bond, says longer-dated bonds are where investors tend to focus most on the longer-term outlook for inflation and economic growth: “The 30-year US Treasury yield was just above 4% at the start of 2024, but it’s been well above 5% for much of this year and it soared to 5.50% ahead of the lower house vote.”

The fund doesn’t buy US treasuries anyway, which don’t meet its ethical screening criteria. However, their alternative is to buy supranational bonds, such as those issued by the InterAmerican Development Bank (IADB). It has also added to its long-duration Green Gilts.

Ariel Bezalel, manager of the Jupiter Strategic Bond fund, says: “It’s not just about picking the right government bond markets, but where you are on the curve. Having large exposure to the short-end in the US, and having decent exposure to gilts, bunds, Australian and New Zealand bonds has helped drive returns.” This is helping to shore up the defensiveness of the fund.

Gold as a diversifier

On gold, Ned Naylor-Leyland, manager of the Jupiter Gold & Silver fund, says the price has been buoyed by the weakness in the treasury market and the dollar. He believes it can retain its position as a safe haven at times of market stress: “It can serve as both a store of value and a powerful portfolio diversifier, especially when combined with silver and mining equities.”

However, investors need to bear in mind that they are paying more for the protection it provides. As with all insurance, it tends to cost more after your house is on fire, and this may be the case for gold today. Buying a diversified fund, which invests in both gold equities, silver equities and other precious metals, may be a way to get the same protection, but at a lower price.

A multi-pronged approach

Ninety One Diversified Income is another defensive option for investors. It has capital preservation as a key part of its mandate. Its managers recognise the problems inherent in US treasuries and are taking a three-pronged approach to building safety into the current portfolio: identifying individual credits that have their own micro return drivers, ensuring sufficient geographic diversification and not relying on US treasuries for safety, but diversifying into European corporate or high-quality asset-backed bonds**.

Within equities, rather than a pure value approach, investors could look to the stabilising power of income in this environment. BNY Mellon Multi-Asset Income is a good choice for diversified income. It has a yield of 4.35%, with 53% in equities and 22% in alternatives***. It has a high weighting in the UK (44%)***, so avoids many of the risks associated with US dollar weakness.

Investors may not be able to rely on the easy defensive options any more. US treasuries and gold still have a place as safe havens, but need to be approached in a different way. Elsewhere, investors can find safety in funds that are thinking creatively about preserving capital, or those that pay a reliable income. All of these options should provide some portfolio protection should the next round of tariffs prove tumultuous for financial markets.

*Source: Goldprice.org, price performance in USD, at 2 July 2025

**Source: Ninety One, 6 May 2025

***Source: fund factsheet, 31 May 2025

Please Note:

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Speak with Ethical Offshore Investments to learn how you can save on your investments costs

Socially Responsible Investing – Ethical Business Standards

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Investing in the giants of American capitalism

Stephen Strowger — Wed, 09 Jul 2025 09:35:52 +0000

Darius McDermott – FundCalibre

4 July 2025

No-one can deny that the United States is a global powerhouse and home to many of the world’s largest and most instantly recognisable companies.

Eight out of the 10 biggest – by market capitalisation – are headquartered in the country*. In fact, only six of the top 30 are based elsewhere*. Many of these are household names with popular brands and huge international customer bases, including Apple, Amazon, Visa, Tesla and Netflix.

Here we look in detail at these firms, the investment funds providing access to them and what their futures may hold under Donald Trump’s presidency.

Backdrop

The US totally dominates when it comes to the largest quoted businesses, boasting numerous multi-billion dollar corporate names. They include 17 of the biggest 20, with only oil giant Saudi Aramco, Taiwanese semiconductor maker TSMC and Chinese conglomerate Tencent preventing a clean sweep*.

A skilled workforce, established culture of innovation and business-friendly approach to regulation are among the reasons why so many of its companies have flourished. The country also has a very large and wealthy domestic market that helps drive demand for a wide variety of products and services.

Outlook for the US

Of course, there are issues. Fears remain that the global fallout of US President Donald Trump’s trade tariffs could be significant. Joseph Lupton, a global economist at JPMorgan, says: “The impact of the trade war will be focused on the US, where it is being waged against all economies…however, the rest of the world will not be immune to the damage.”

JPMorgan research suggests that a 10% universal tariff and a 110% tariff on China could reduce global GDP by 1%**. In addition, business sentiment is likely to be affected by tariff uncertainty.

Who are the biggest US companies?

Let’s first analyse the US from a sector standpoint. Technology is clearly the stand-out. 11 out of the 30 largest US companies by market cap operate in this area*. There are also five banks/financial services firms, three pharmaceutical businesses and three retailers, including Walmart. The remaining areas, which are each represented by one company, are oil & gas, entertainment, beverages, tobacco, automakers, consumer goods, healthcare & insurance, and aerospace.

Given our obsession with all things tech, it’s unsurprising that businesses involved in this sector have enjoyed the strongest demand from would-be shareholders. Share prices have soared in recent years due to phenomenal demand for products and rapid developments in areas such as artificial intelligence. This has helped create an exclusive club of nine US companies with market capitalisations of more than a trillion dollars – and a trio with valuations of more than $3 trillion.

Here are some of the major players and the funds providing exposure:

NVIDIA is the world’s largest company, as of 3 July 2025, with a valuation of $3.83 trillion (£2.81 trillion)**. The chip maker announced in late May 2025 that total revenue for the first quarter came in at $44.1 billion, up 69% on the previous year***.

The company is one of the largest holdings in the Allianz Technology Trust, which is managed by Michael Seidenberg, who focuses on themes addressing major growth trends. This trust, which has a high-conviction portfolio of 40-70 names, has been an exceptional long-term performer thanks to bottom-up stock selection and a macroeconomic overview.

Virtually everyone that’s ever turned on a computer will have used software developed by Microsoft, with Word, Excel and PowerPoint among the most popular programs. Despite fierce competition, the company founded by Bill Gates is still delivering. Revenue for the third quarter came in at $70.1 billion, 13% higher than the previous year****.

It’s currently the largest individual stock holding in the Comgest Growth America fund, which has a concentrated portfolio of 25-35 high-quality stocks. Holdings are expected to offer predictable and sustainable earnings growth, while also meeting the company’s strict ESG criteria.

Apple Inc, the iPhone maker is constantly duelling with NVIDIA and Microsoft for top spot in the valuation stakes and currently comes in at number three, with a market cap of $3.1 trillion*. The company, whose share price has risen 125% over the past five years, revealed revenue of $95.4 billion for the second quarter^.

Apple is the largest individual holding in the Mid Wynd International Investment Trust, which looks for businesses with substantial growth potential. It favours those with strong barriers to entry and the ability to reinvest cash flow back into their businesses. This long-term focus has proven successful.

Other sectors

How about the other sectors? Technology clearly dominates, but the top 30 largest US companies also include financial services firms, retailers, oil majors and pharmaceutical names.

The Brown Advisory US Flexible Equity fund, which is managed by Maneesh Bajaj, has exposure to some of these areas. Its holdings include Berkshire Hathaway^^, the investment vehicle that has operated for decades under the watchful eye of legendary investor, Warren Buffett. As of 3 July 2025, the company is the world’s 10^th most valuable – and eighth in the US*. Maneesh also has significant holdings in Visa and Mastercard^^, both payment providers that play instrumental roles in global e-commerce.

*Source: Largest Companies by Marketcap, at 3 July 2025

**Source: JPMorgan, 9 June 2025

***Source: NVIDIA, Press Release, 28 May 2025

****Source: Microsoft, Press Release, 30 April 2025

^Source: Apple, Press Release, 1 May 2025

^^Source: fund factsheet, 31 May 2025

Please Note:

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Speak with Ethical Offshore Investments to learn how you can save on your investments costs

Socially Responsible Investing – Ethical Business Standards

The post Investing in the giants of American capitalism first appeared on Ethical Offshore Investments.

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The importance of diversification in times of uncertainty

Stephen Strowger — Tue, 08 Jul 2025 12:05:24 +0000

Juliet Schooling Latter – FundCalibre

23 June 2025

In a time when fresh risks to the global economy dominate headlines almost daily, there has rarely been a more critical moment to ensure your investment portfolio is properly diversified.

Following the recent US airstrikes on three Iranian nuclear sites, markets are bracing for potential repercussions—particularly disruptions to oil flows and commercial shipping through key global routes. Crude oil prices responded with only modest gains; however, should prices rise further, we could see renewed inflationary pressure across the globe threatening to derail central banks’ efforts to begin cutting interest rates.

This type of geopolitical event highlights why diversification isn’t just a suggested investment strategy, it’s a necessity. Spreading risk across asset classes, sectors, and geographies can help insulate long-term portfolios from shocks in any one area of the market.

Strategies for effective diversification

At the heart of diversification lies asset allocation – the distribution of investments across different asset classes such as stocks, bonds, and real estate. While stocks offer growth potential, bonds provide stability, and commodities (the likes of oil and energy stocks) can act as a hedge against inflation.

1. Geographic diversification

Beyond asset classes, geographic diversification involves spreading investments across different regions and countries. This strategy helps mitigate the risk associated with a specific country’s economic and political conditions. No economy moves in isolation, but regional dynamics, whether it’s consumer trends in Asia or fiscal policy in Europe, can diverge significantly. Having exposure to multiple geographies helps smooth returns and capture opportunities wherever they emerge.

The Guinness Asian Equity Income fund invests in dividend-paying companies across Asia, capturing growth in emerging and developed Asian economies while maintaining a focus on income. In a recent interview with manager Edmund Harriss, we discussed the appeal of Asian equities and long-term income potential.

Another option is to look towards Europe, with the BlackRock European Dynamic fund. This flexible, actively managed fund focuses on undervalued European companies with turnaround potential. The fund is one of the best in a competitive sector, with a genuinely flexible approach and a willingness from the team to constantly refine and enhance the fund’s process.

2. Sector diversification

Sectors within the economy don’t move uniformly. By diversifying across industries, investors can navigate the cyclical nature of different sectors. For instance, if technology stocks face a downturn, investments in healthcare or energy may counterbalance the losses.

The VT Gravis UK Infrastructure Income fund is a concentrated portfolio offering exposure to income-generating UK infrastructure assets, a relatively defensive area that often moves independently of broader equity markets.

Polar Capital Global Healthcare Trust is a unique offering investing in a very specialist part of the market. Holdings in the trust will predominantly come from four sub-sectors: pharmaceuticals, biotechnology, medical technology and healthcare services.

3. Size and style diversification

Investors can further diversify by considering the size and style of companies. Large-cap stocks, mid-cap stocks, and small-cap stocks may perform differently under various market conditions. Similarly, value and growth investing styles have distinct characteristics, allowing investors to balance risk and reward based on their preferences.

The mid-cap space is a growing segment, but with few funds directly investing in it. One option is AXA Framlington UK Mid Cap; this fund offers a blend of growth and resilience often overlooked in favour of large caps. While it naturally focuses on medium-sized companies, its manager will be pragmatic about including select opportunities from the smaller companies space, as well as letting winning mid-cap holdings grow into larger-sized companies.

4. Alternative investments

Including alternative investments, such as commodities or private equity, can add an extra layer of diversification. These assets often have low correlations with traditional stocks and bonds, offering a unique risk-return profile.

The Jupiter Gold & Silver fund invests in both physical gold and silver bullion, as well as gold and silver mining companies. Manager Ned Naylor-Leyland is a passionate advocate for his asset class and in a recent interview told us more about the evolving role of precious metals in modern portfolios.

Schroder British Opportunities is another unique offering for investors which seeks to tap into the unloved status of UK equities. We believe the mix of public and private exposure really does allow the trust to stand out from its peers.

5. A multi-asset approach

You can diversify your own portfolio by combining various asset classes, sectors and geographical exposures, depending on your aims and objectives. This will give you the freedom to have a hand-picked portfolio. However, it’s also a lot of work and will require plenty of research.

An alternative is opting for one of the many multi-asset portfolios. These products combine different asset classes into one fund. One or more managers will then make the allocation calls required. For those who prefer to lean on the side of caution in today’s uncertain climate, here are two funds with capital preservation at their core.

The first one is Orbis Global Cautious. A globally diversified, conservative strategy built for capital preservation with measured equity exposure. The fund seeks to apply a cautious balance between investment returns and risk of loss using a global diversified portfolio and targets growth on a three-year rolling basis.

Our next pick is SVS RM Defensive Capital. Long-term capital growth and protection is the name of the game for this defensive, multi-asset fund. It aims to deliver positive absolute returns over rolling three-year periods, in a range of market conditions, with less volatility than equity funds.

Conclusion

In volatile times, diversification isn’t about trying to predict the future, it’s about preparing for the unexpected. By incorporating a mix of defensive and growth-oriented strategies across different regions and sectors, investors can help steady their portfolios and stay focused on long-term goals.

While no strategy can eliminate risk entirely, a well-diversified portfolio can provide resilience when markets are shaken by geopolitical tension, economic shocks, or inflationary pressures. It allows investors to remain invested through periods of uncertainty without being overly exposed to any single area of weakness.

Remember, diversification is not just a one-time decision, it’s an ongoing process. Markets evolve, opportunities shift, and risks emerge in new forms. The key is to remain proactive, regularly reviewing your portfolio to ensure it aligns with your objectives, risk tolerance, and the changing global landscape

Please Note:

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‘Markets on edge’ as Trump delays Liberation Day tariffs to August

Stephen Strowger — Tue, 08 Jul 2025 11:13:00 +0000

8 July 2025

Investor unease as US extends deadline for reciprocal import tariffs, giving nations more time to reach trade deals.

By Gary Jackson,

Head of editorial, FE fundinfo

US president Donald Trump has delayed the implementation of reciprocal tariffs tied to his ‘Liberation Day’ trade framework until 1 August, giving trading partners additional time to make deals but adding more uncertainty to the market.

The tariffs, originally announced on 2 April, included a 10% blanket duty on all imports and a second tier of ‘reciprocal’ tariffs targeting specific countries. The second tier was suspended for 90 days, set to expire 9 July but the White House confirmed the pause has now been extended by three weeks.

Letters from the US administration were sent in recent days to countries including Japan, South Korea, Malaysia, South Africa and Kazakhstan. The letters warned that tariffs could take effect on 1 August if trade negotiations fail to deliver deals.

Some proposed rates exceed 25%, with certain sectors reportedly facing potential levies as high as 70%.

The revised timeline does not change the tariff structure or targets. Instead, it provides governments more time to negotiate exemptions. While deals have been reached with China, Vietnam and the UK, talks with European Union members and several Asian economies remain unresolved.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: “Trump lit the fuse on tariff fears again last night, leaving investors bracing for fresh volatility.

“Wall Street was the first to react last night, with major indexes sliding over 1% as the tariff news hit the reels. After recent all-time highs for the S&P 500 and Nasdaq, the new 1 August tariff deadline and fears of skipped negotiations have markets on edge, especially with the US-China trade deal still hanging in the balance.”

European markets showed a more restrained response compared to Wall Street. The FTSE 100 edged higher and remained near record levels seen the previous month, as investors weighed whether the deadline extension would ease immediate trade pressures.

“There’s clearly a desire from the White House to get deals done, reflected in the latest extension of the tariff deadline,” Britzman said. “Investors are still digesting the latest developments, with US futures suggesting a claw back of some of yesterday’s losses.”

Market volatility, as measured by the VIX index, briefly rose following the tariff announcement but stayed well below peaks reached in April. The relatively moderate reaction suggests investors may be becoming more accustomed to shifts in US trade policy.

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Learning from Warren Buffett’s daily routine to improve investment decisions

Stephen Strowger — Tue, 08 Jul 2025 10:57:51 +0000

Warren Buffett’s routine is a testament to the power of discipline, patience and lifelong learning. By incorporating these principles into daily life, investors can develop a more thoughtful, strategic and ultimately successful approach to investing.

The following article, published by TrustNet provides a simple explanation as to how Warren Buffett, arguably the best investor we have seen, has created wealth for not only himself, but the many shareholders of his conglomerate Berkshire Hathaway Inc.

30 June 2025

By Trustnet Learn

Warren Buffett’s extraordinary success as an investor is not just the result of intelligence or luck – it is built on discipline, continuous learning and an unwavering focus on long-term value. While many investors spend their days analysing charts, watching financial news and making rapid trades, Buffett follows a much simpler and more deliberate routine. His daily habits revolves around reading, independent thinking, avoiding distractions and maintaining a structured approach to decision-making.

Buffett believes that successful investing is more about temperament than intelligence. His disciplined lifestyle and structured habits reinforce the patience and rationality that underpin his investment philosophy. Unlike many traders who react emotionally to short-term market movements, Buffett cultivates an environment that helps him think clearly, filter out noise and make informed decisions.

By studying Buffett’s routine, investors can learn valuable lessons about how to develop patience, improve financial knowledge and make better long-term investment decisions. Understanding how he structures his day, prioritises information over action and focuses on what truly matters provides practical guidance for anyone looking to strengthen their investment approach.

BUFFETT’S DAILY HABITS

Reading for hours each day: Why he prioritises information over action

One of the most defining aspects of Warren Buffett’s daily routine is his commitment to reading for several hours each day. He has stated that he spends 80% of his working hours reading and thinking, rather than actively making investment decisions.

Buffett’s reading list is extensive, covering financial reports, business news, books and academic research. Some of the key materials he reads daily include:

Company financial statements and annual reports – These help him analyse businesses and assess long-term value.
Newspapers such as The Wall Street Journal and The Financial Times – To stay informed on economic trends and market developments.
Books on business, history and psychology – To deepen his understanding of human behaviour, business cycles and investment strategies.

Buffett has often argued that knowledge compounds over time, much like financial investments. He believes that reading broadly and consistently helps investors develop better judgment, recognise patterns and make well-informed decisions.

For individual investors, this lesson is critical. Instead of relying on social media tips, stock market hype or hot stock recommendations, investors should focus on deep research and fundamental analysis. Buffett’s habit of reading extensively allows him to think independently and filter out short-term market noise.

Avoiding distractions: How he stays focused on core priorities

Unlike many investors who constantly check stock prices and react to every market fluctuation, Buffett deliberately avoids unnecessary distractions. He does not sit in front of multiple monitors watching price movements, nor does he make knee-jerk decisions based on breaking news.

Buffett’s office in Omaha, Nebraska, is far removed from the financial centres of New York and London, allowing him to focus on investment research without the pressure of market speculation. He does not let news cycles, media speculation or short-term stock movements influence his decisions.

This approach reinforces his belief that the stock market is there to serve you, not instruct you. He views stocks as ownership in real businesses, rather than mere trading instruments. By avoiding distractions, he ensures that his decisions are based on deep analysis rather than short-term speculation.

For investors, the key takeaway is to reduce noise and focus on long-term value. This means avoiding:

Checking stock prices too frequently.
Making impulsive trades based on headlines.
Following investment fads without conducting due diligence.

Instead, investors should create an environment where they can think clearly and make rational decisions based on fundamentals.

Thinking independently: The importance of avoiding market noise

Buffett is known for his ability to think independently and resist herd mentality. He does not follow the latest investment trends or invest in companies simply because everyone else is doing so. His investment decisions are based on fundamentals, not speculation.

One of his most famous quotes is: “Be fearful when others are greedy and greedy when others are fearful”

This mindset has helped him make some of his most profitable investments. For example, during the 2008 financial crisis, when many investors were panic-selling, Buffett invested billions into struggling companies like Bank of America and Goldman Sachs. He saw that these companies had strong long-term fundamentals despite short-term troubles.

Investors can learn from this by:

Developing independent thinking and questioning market trends.
Avoiding emotional reactions to stock price movements.
Focusing on company fundamentals rather than short-term price changes.

Thinking independently requires confidence, patience and a willingness to be contrarian when necessary.

Simple living: Why Buffett avoids excess

Despite being one of the richest individuals in the world, Warren Buffett leads a remarkably simple and frugal lifestyle. He still lives in the same modest house in Omaha that he bought in 1958 for $31,500, drives a regular car and avoids extravagant spending.

Buffett believes that material excess does not equate to happiness or success. Instead, he focuses on things that truly matter – financial independence, meaningful work and intellectual growth. This philosophy aligns with his approach to investing: he avoids speculative risks and focuses on building sustainable wealth over time.

Buffett’s simple lifestyle provides an important lesson for investors: financial success is not about extravagant spending but about making smart, long-term financial decisions.

The value of relationships: Why Buffett surrounds himself with smart, trustworthy people

Buffett has always emphasized the importance of relationships in business and investing. He has long credited his success to surrounding himself with intelligent, ethical and trustworthy individuals. His partnership with Charlie Munger has been a key part of his investment success, as Munger’s wisdom has helped shape Buffett’s approach.

Buffett also values integrity in the people he works with, famously saying:
“You’re looking for three things, generally, in a person: intelligence, energy and integrity. And if they don’t have the last one, don’t even bother.”

For investors, this highlights the importance of:

Seeking out mentors and advisers who have valuable experience.
Avoiding short-term thinking and working with people who prioritize long-term success.
Being ethical and disciplined in financial decisions.

Surrounding oneself with knowledgeable and ethical individuals leads to better decision-making and long-term success.

Routine and discipline: The key to consistent success

Buffett’s daily routine reflects his overall investment philosophy – consistency, patience and discipline. He does not chase quick gains or change his strategy based on trends. Instead, he follows a structured approach to decision-making that has stood the test of time.

Having a strong routine and discipline in investing means:

Developing a set of rules and sticking to them.
Avoiding impulsive decisions based on fear or greed.
Consistently applying fundamental analysis rather than speculating.

Investors who establish and maintain structured investment habits are more likely to achieve sustainable financial success.

HOW INVESTORS CAN APPLY THESE LESSONS

Buffett’s daily habits provide a blueprint for how investors can improve their own decision-making processes. By adopting these habits, investors can:

Develop a strong reading habit to enhance their financial knowledge.
Avoid unnecessary trading and market distractions that lead to emotional investing.
Think long-term and make independent decisions based on company fundamentals.
Simplify their financial lives by focusing on sustainable wealth-building rather than speculation.
Surround themselves with ethical and intelligent people who help them make better choices.

This Trustnet Learn article was written with assistance from artificial intelligence (AI).

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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The vast market opportunity for Artificial Intelligence

Stephen Strowger — Mon, 30 Jun 2025 11:52:33 +0000

The following article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy, sell or hold any investment, or to adopt a particular investment strategy.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

The Polar Capital Global Technology Team offer analysis and opinion on Artificial Intelligence (AI), the huge potential it offers and how it is becoming a powerful force for productivity and innovation.

Developing large-scale AI systems has increasingly centred on the ability to match the capabilities of OpenAI’s GPT-4. The common themes among those trying to bridge this performance gap revolve around both computational efficiency and quality output – two fundamentals to advances in AI technology.

A significant milestone in 2024 was the breakthrough performance of OpenAI’s o1 model which fundamentally reimagines how models adapt to novel tasks during inference. Central to this evolution is ‘chain-of-thought’ (CoT) prompting where large language models (LLMs) simulate human-like reasoning by breaking down complex tasks into a sequence of logical steps, a technique pioneered by Google Research in 2022 and subsequently refined in early 2023 to enhance LLMs’ deductive capabilities. As a result, LLMs can not only tackle more demanding and nuanced problems but also significantly enhance the transparency and interpretability of their output.

This has led to numerous efforts to replicate it, with DeepSeek gaining most attention for its cost efficiency while maintaining high performance. It achieves performance comparable to OpenAI’s o1 model, despite being trained on previous-generation infrastructure.

For the full report – click here

The following is the net performance (in GBP) for the Polar Capital Technology Fund over the past 10 years (v’s the technology investment benchmark) and the Polar Capital Artificial Intelligence Fund since its inception

A. IA Technology & Technology Innovation

B. Polar Capital Global Technology I Acc (GBP) ** 20.8%pa over the past 10 years

A. Polar Capital Artificial Intelligence I Acc (GBP) ** 12.8%pa since inception 6/10/2017

At Ethical Offshore Investments, we provide ongoing guidance to our clients to ensure that their current & future financial goals and objectives are met. The above article is from Polar Capital LLP and they provide quality managed funds that provide exposure to the companies that their management team believe will benefit from the continuing development of Artificial Intelligence. These funds can generally be accessed on the major offshore platforms that we provide.

We specialise in cost effective solutions to ensure more of the investment returns stay in your pocket…… when we place an investment trade into one of the Polar Capital managed funds, we do not request an entry fee to be deducted and we do not receive any commission. We do invest in the lowest charging version of the fund available on the platform.

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Who wins as value moves up the tech stack? A golden era for emerging B2C platforms

Stephen Strowger — Mon, 30 Jun 2025 10:59:13 +0000

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

We are now two and a half years into the AI infrastructure buildout, catalysed by the launch of ChatGPT. We have a good degree of conviction over who we believe the winners are in the AI infrastructure layer of the new technology stack. However, as the cost of AI systems comes down and we move from enterprises experimenting with AI to deploying AI inference at scale, value moves up the stack. The key question for investors at the moment is who the winners will be in the application layer. These are the companies building on top of accelerated compute and delivering AI-infused productivity to us as users. The battle to become the user interface for AI is fierce and disruption is a certainty, not a likelihood.

Companies that are well positioned have a handful of critical features in common. Firstly, distribution advantage matters. We are seeing this play out in a number of B2C platforms like Meta, Spotify, Netflix and Shopify. These companies already own the consumer, they live in our pockets, and they sit on a body of unique, proprietary, real-time data – essentially a goldmine for AI use cases.

This cohort of companies moved quickly to adopt AI internally, leading to shrinking cost bases, and they are now focused on infusing AI across their platforms to create new revenue streams, leading to enhanced user engagement which turbocharges the network effects they enjoy.

Take Spotify as an example: in the past two years, operating expenses as a percentage of revenue has declined from c.30% to c.20%. The company has reduced headcount in favour of automation and is now printing cash. On top of this leaner architecture, AI features are being layered to draw in new customers: AI-fueled daylist and playlists are increasing customer searches by 2000%, for example, which in turn deepens user engagement and stickiness – Spotify’s AI DJ customers return on average 25% more. This feeds better data on 640 million users, which further improves recommendations and the platform experience.

Crucially, these companies are innovating on a unified software platform. How a platform is architected really matters for AI in order to be able to ingest, store and utilise data at massive scale at speed. This cannot be said for many legacy enterprise software companies.

We view Spotify as an earlier-stage Netflix, but who are the earlier-stage Spotifys of this world we are backing? Mercado Libre, Doximity, Affirm, Lemonade and Upstart to name a few. These platforms span sectors, from healthcare to financial services to ecommerce, but they, like Netflix and Spotify et al, possess a unique distribution footprint, unique proprietary real-time datasets, and a unified software platform.

Mercado Libre – Latam’s digital ecosystem

Mercado Libre has transformed its dominant Latin American e-commerce platform into a multifaceted digital ecosystem – integrating marketplace, payments, logistics and lending.

Picture Amazon ten years ago, but on a larger scale and with a uniquely expansive logistics footprint. With more than 100 million unique buyers on its platform, Mercado Libre’s expansive distribution network generates a vast, real-time data stream on consumer purchasing behaviour and merchant inventory – far surpassing that of its fragmented rivals and giving the company a lasting competitive edge.

The company leverages this proprietary data to personalise the shopping experience and inform financial offerings: AI-driven features now automate product review summaries, tailor notifications for abandoned carts, and equip sellers with dynamic pricing and instant answers to customer questions. These AI enhancements have measurably improved the customer journey, driving conversion and retention: unique active users on the company’s marketplace grew 25% year-on-year (yoy) last quarter, with Fintech active users growing 21% yoy.

Such growth demonstrates the power of a unified platform in which marketplace transactions flow seamlessly into fintech services – most notably Mercado Pago digital wallets and credit programmes – creating a self-reinforcing flywheel. In effect, Mercado Libre follows Amazon’s playbook yet supercharges it with AI: its extensive reach and integrated services generate data-network effects that allow machine-learning models to refine product recommendations, optimise logistics and sharpen credit underwriting in real time, pushing value creation ever further up the stack towards the application layer.

Affirm – Real-time finance at the point of sale

For a growing swathe of Americans, revolving credit-card debt has become the default way to make ends meet – stacking households with punitive interest charges and paving the way for alternatives like Affirm. Almost 37% of US adults carry a credit-card balance – an astonishing share given today’s punitive interest rates. Affirm offers a remedy: shoppers receive their goods immediately and repay the cost over three to 18 months, interest-free.

While the service began with big-ticket purchases, it is now increasingly used for smaller items as well. Tackling this widespread consumer pain-point has fueled Affirm’s rapid growth over the past decade, bringing the company to scale. Today it operates one of the largest “buy now, pay later” (BNPL) networks, embedded in 300,000-plus merchants – from Shopify to Amazon – and serving more than 21 million active customers. Affirm exemplifies the power of AI-driven fintech, delivering intelligent credit decisions at the precise moment of purchase.

This widespread distribution gives Affirm two key assets: a trusted brand at checkout and a constant flow of transaction-level data. Every time a shopper opts to split a payment, Affirm’s platform performs an instant, AI-driven credit decision – assessing the individual’s risk based on thousands of data points beyond a static FICO score. In fact, Affirm’s approach “underwrites every extension of credit” in real time using not only the consumer’s Affirm history but also their up-to-the-moment indebtedness elsewhere. This dynamic use of proprietary, real-time data differentiates Affirm from legacy credit card models and shifts value to the application layer (where the lending decision happens) rather than the credit infrastructure beneath.

Critically, Affirm has invested in AI and machine learning to sharpen its edge. The company’s fraud detection and loan underwriting now employ transformer-based AI models, boosting accuracy and reducing losses. Internally, AI automation parses contracts and streamlines merchant onboarding, allowing Affirm to scale operations without proportional headcount. These AI-driven productivity gains translate into better economics and customer experience – fewer manual reviews, faster approvals, and more personalized financing terms. As a result, Affirm can offer many 0% APR promotions (subsidised by merchants to drive sales) while still expanding its user base (active customers grew 23% yoy last quarter) with disciplined risk management.

Lemonade – the insurance platform built for AI from day one

Few consumer experiences are as universally frustrating as filing an insurance claim, a fact reflected in the industry’s dismal net-promoter scores. Lemonade sets out to reverse that reputation by offering first-rate service at a fair price and, in the process, completely re-imagining what insurance can be. Born in the cloud, the company treats insurance as a digital, AI-native consumer product: tightly integrated data and machine-learning models replace brokers and paperwork, while chatbots do the heavy lifting.

Its unified software platform spans renters, homeowners, pet, life and now motor policies – avoiding the siloed systems that hobble legacy insurers – and every touchpoint, from sign-up to claim, runs through proprietary bots (“AI Maya” for sales, “AI Jim” for claims). Lemonade thus shows how application-layer disruptors can out-manoeuvre infrastructure-heavy incumbents by delivering a faster, friendlier and markedly cheaper customer journey.

The AI-driven productivity gains are striking: c.98% of claims now begin with AI Jim handling the first notice of loss, and c.40% of claims are resolved end-to-end with no human intervention at all. Lemonade’s AI swiftly verifies coverage, analyses the claim via computer vision and natural language processing (e.g. scanning videos of damage), and instantly approves and pays out legitimate claims – once even in three seconds, setting a world record. This level of automation slashes overhead costs and delightfully speeds up service – the company’s use of AI has cut claims processing time by a whopping 90%.

Deep data integration is key: companies that haven’t architected themselves for AI, with data entwined across functions, will be hard to glean the type of deep insights Lemonade has built its business upon. In Lemonade’s case, every new customer (now nearly 1.8 million, skewing young and digital-native) provides behavioural data that continuously trains its AI models. This growing data trove creates a flywheel: more users and claims improve the algorithms, which in turn enable better underwriting and user experience. As the pool of data increases, Lemonade’s risk pricing is becoming more accurate and profitable, evidenced by a 30% increase in premium per customer as the company expands into higher- value policies.

Upstart – AI lending platform building the foundation model for credit

First introduced in 1989, the FICO score gave American lenders a standardised yardstick for judging creditworthiness. It was a breakthrough in its day, yet the lending industry has since fallen behind the data and AI revolution, leaving millions of would-be borrowers underserved and unable to obtain affordable credit. Upstart set out 15 years ago to solve that problem. Its AI-powered lending platform provides granular credit insight to institutions ranging from banks to motor dealerships, enabling them to write better loans at sharper prices.

Rather than build its own branch network, Upstart sells a lending-as-a-service model to more than 500 banks and credit unions – a distribution strategy that has delivered nationwide reach. Through these partners and a direct-to-consumer funnel, Upstart ingests a torrent of proprietary data: application details, repayment histories and macro-economic signals far richer than any single FICO score. The impact is striking. Upstart’s personal-loan model evaluates over 2,500 variables per applicant and is trained on 86 million repayment events, updating itself daily as new data arrive. Independent studies show the system can approve 43% more borrowers at the same loss rate, or cut APRs by a third while holding approvals steady – a step-change in both efficiency and financial inclusion, achieved through superior application-layer intelligence.

Upstart’s unified platform automates the entire lending workflow – marketing, application, identity check, risk assessment, and even compliance – demonstrating huge AI-driven productivity gains. Over 92% of Upstart-powered loans are fully automated, with no human intervention in the decision. Customers get an instant, all-digital experience (often receiving funds the next day), while bank partners benefit from lower operating costs and faster loan growth. Upstart’s AI also adapts in real time to macroeconomic changes via a proprietary index and adjusts lending criteria accordingly, something static credit models can’t do. By moving the brains of lending into the cloud, Upstart has shifted where value accrues: instead of banks gaining advantage from owning branch networks or securitization pipelines, they now seek out Upstart’s application-layer solution to stay competitive.

Doximity – The “LinkedIn for Doctors” making practitioners more efficient

Often described as “LinkedIn for doctors,” Doximity already reaches more than 80 % of all US physicians – a distribution beach-head that is almost impossible to replicate. On top of that trusted network, the company has stitched together a single, HIPAA[i]-compliant workflow suite (newsfeed, tele-health video, secure fax, scheduling) so every click feeds one unified data lake. The result is a platform-level moat: users stay because their colleagues, patients and day-to-day tools are all in the same place, while life-science marketers and hospital systems keep spending because that’s where clinicians actually engage.

Over the past year, Doximity has pushed value even further up the stack by embedding generative AI directly into those workflows. Its ChatGPT-powered Doximity GPT drafts referral letters, insurance appeals and patient education in seconds, and is offered free to every verified clinician – driving rapid adoption. Usage numbers tell the story: in Q1 2025, over 620 000 unique prescribers used the company’s workflow (AI, tele-health, fax, scheduling), up five-fold year-on-year.

That deeper engagement is translating into economics: trailing-12-month net revenue retention sits at 114 % (rising to 121 % for the top 20 pharma customers), showing that the more AI features clinicians tap, the more advertisers and hospitals expand their spend. By combining unrivalled reach, proprietary real-time data and tightly integrated generative-AI tooling, Doximity is shifting healthcare value from legacy IT rails to the intelligent application layer – exactly the pattern we expect to define the winners as AI matures.

_[i]_{HIPAA = Health Insurance Portability and Accountability Act}

Key Risks

Past performance does not predict future returns. You may get back less than you originally invested.

We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.

The Funds managed by the Global Innovation Team:

May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
May have a concentrated portfolio, i.e. hold a limited number of investments. If one of these investments falls in value this can have a greater impact on a Fund’s value than if it held a larger number of investments.
May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails.
Do not guarantee a level of income.

The risks detailed above are reflective of the full range of Funds managed by the Global Innovation Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

DISCLAIMER

This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.

It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.

This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

Article originally published by Liontrust Asset Management. FE fundinfo is not responsible for its content or accuracy and may not share the author’s views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

At Ethical Offshore Investments, we provide ongoing guidance to our clients to ensure that their current & future financial goals and objectives are met. The above article is from Liontrust Investment Partners LLP and they provide quality managed funds that provide exposure to the companies mentioned in the article. These funds can generally be accessed on the major offshore platforms that we provide.

We specialise in cost effective solutions to ensure more of the investment returns stay in your pocket…… when we place an investment trade into one of the Liontrust managed funds, we do not request an entry fee to be deducted and we do not receive any commission. We do invest in the lowest charging version of the fund available on the platform.

Socially Responsible Investing – Ethical Business Standards

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Managing Investment Risk in Retirement

Stephen Strowger — Mon, 30 Jun 2025 09:45:06 +0000

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

The need to manage investment risks in retirement is more acute now than ever before. Recent stock market volatility and upside inflation risks from tariffs are once again focusing minds on the phenomenon known as sequencing risk.

Large withdrawals from a pension pot when fund values are depressed can significantly reduce the sustainability of income.

In the UK, flexible drawdown was introduced with pensions freedoms in 2015, and the extended 2022 bear market in both global stocks and bonds was its first real test. Meanwhile, today’s higher bond yields mean annuities are a more competitive investment solution than they used to be, albeit with significantly less flexibility.

Trevor Greetham, Head of Multi Asset, analyses the importance of managing downside risk over the recessions and bear markets the average person is likely to encounter in retirement.

Read Full Article

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

At Ethical Offshore Investments, we provide ongoing guidance to our clients to ensure that their current & future financial goals and objectives are met. We specialise in cost effective solutions to ensure more of the investment returns stay in your pocket…… This could be the difference between retirement and a comfortable retirement.

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How to invest like Warren Buffett

Stephen Strowger — Tue, 03 Dec 2024 11:55:33 +0000

Sure….. follow the steps and principals that Buffett has employed for many, many decades and create an investment portfolio along the same lines as him.

Or…… why not just invest in the listed shares of Berkshire Hathaway Inc (BRK:B) and let the following of principals and investment decisions to be done by Warren Buffett and his very experienced team.

This stock can be held via the Ardan International Platform as well as most of the ‘open architecture’ Offshore Portfolio Bonds (such as RL360 PIMS, Utmost Executive Investment/Redemption Bonds, Investors Trust Access Portfolio, Friends Provident Reserve).

If you would like to learn more about Berkshire Hathaway Inc & how holding this stock as part of your portfolio can improve your financial situation, please press the More Information button.

25 November 2024

By Trustnet Learn

Warren Buffett, often referred to as the ‘Sage of Omaha’, is synonymous with success and longevity in the stock market. Buffett’s investment approach, characterised by simplicity and discipline, has not only yielded extraordinary returns for his company, Berkshire Hathaway, but also offered a model for individual investors worldwide.

FROM HUMBLE BEGINNINGS TO BILLIONAIRE INVESTOR

Buffett’s journey began in Omaha, Nebraska, where he was born in 1930. His foray into finance started early; he purchased his first stock at age 11. From running a paper route to buying a pinball machine and placing it in a local barbershop, his entrepreneurial spirit was evident. Buffett’s early life was not one of privilege but of keen interest and self-driven education in the world of finance. He honed his craft under the tutelage of Benjamin Graham at Columbia Business School, the man who would become his mentor and the father of value investing. Graham’s influence on Buffett was profound, shaping his investment philosophy fundamentally.

CORE INVESTMENT PRINCIPLES

Buffett’s investment style can be distilled into a few core principles that have consistently guided his strategy.

Value investing: Buffett invests in companies whose shares trade for less than their intrinsic values. He is known for his thorough analysis of company fundamentals and not overpaying for stocks, no matter how promising they may seem.

Long-term holding: “Our favourite holding period is forever,” he famously said. Buffett’s approach is the antithesis of the short-term trading that characterises much of today’s market movements. He believes in investing in companies that he understands and expects to continue growing and succeeding in the future.

Margin of safety: Emphasising the principle taught by Graham, Buffett always seeks a margin of safety in his investments. This means buying at a significant discount to intrinsic value to cushion against errors in judgment or unforeseen market downturns.

Circle of competence: Buffett restricts his investments to businesses he thoroughly understands, a practice that has kept him from making investments that don’t align with his expertise, regardless of popular trends.

Management quality: Buffett places significant emphasis on the quality of a company’s management. He prefers to invest in companies with honest and competent leaders.

INVESTING LESSONS FROM WARREN BUFFETT

Understanding a company’s value: Buffett suggests investors should only invest in companies they understand and which have intrinsic value — value that does not depend on external factors such as currency fluctuations or commodity prices.

The compounding advantage: Buffett showcases the power of compounding interest, often stressing the importance of holding stocks for the long term to maximise returns.

Staying within your circle: He cautions investors to invest within their ‘circle of competence’ and to resist the temptation to follow the crowd. This discipline helps avoid missteps in unfamiliar territories.

Rationality over emotion: Buffett has remained stoic through market fluctuations, emphasising the need for investors to be rational and not be driven by emotions. His investment decisions are based on facts and analysis, not on market speculation or investor sentiment.

Investment vs speculation: Buffett draws a clear line between investing and speculating. He advocates for investment based on solid research and long-term potential, not on the speculation of quick profits.

Warren Buffett’s success demonstrates the power of simple principles applied with discipline and patience. His approach demystifies the stock market, making it accessible and rational. As markets evolve, the core tenets of Buffett’s philosophy continue to influence countless investors, encouraging a thoughtful, principled approach to the art and science of investing.

This Trustnet Learn article was written with assistance from artificial intelligence (AI).

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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UK Tax Planning: Post-Budget Impact Assessment

Stephen Strowger — Tue, 03 Dec 2024 05:12:56 +0000

In her first Budget, UK Chancellor Rachael Reeves confirmed the abolition of the remittance basis of taxation for non-domiciled UK residents (non-doms) from 6 April 2025, as well as substantially curtailing the current protections for non-UK assets held by non-doms from UK inheritance tax (IHT)

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Shorting: The realm of the gifted fund manager

Stephen Strowger — Mon, 02 Dec 2024 11:55:11 +0000

Your four-minute guide to short selling

Chris Salih – FundCalibre (equities, specialist investing)

26 November 2024

Many of you would’ve seen the 2015 film The Big Short, which tells the story of the financial professionals who predicted and profited from the 2007-08 global financial crisis.

Essentially, short selling, or shorting, is a way of taking an investment position aimed around profiting from a falling share price. Investors profit when their chosen investment falls in value and lose out when it rises. It is the opposite of taking a ‘long’ position – where you expect the price of a stock to increase.

But it is a risky and complicated strategy. The Big Short highlights the sub-prime mortgage meltdown which ultimately led to the global financial crisis. It also highlights the complex financial terminology in the industry, using vivid and humorous ways to highlight complex tools (such as Collateralized Debt Obligations (CDOs) and mortgage-backed securities).

Unfortunately, FundCalibre was unable to repeat the trick by getting the likes of Ryan Gosling and Margot Robbie to “break the fourth wall” to explain certain financial jargon. So here is a quick guide to shorting and why you should only trust a skilled active manager in this challenging market.

A brief example:

As mentioned, it is possible to make money when the price of an asset falls by short selling it. You do this by entering into a contract to sell an asset that you view as overvalued, buying it back for less on a specific date. If you are right, you will make a profit.

For example, a fund manager has done the work and identified a share (a company) they feel is going to fall in value. They then borrow this share from a broker and sell them on the market when they are trading at £1.

One month later, the share price has now dropped to 70p – meaning they can benefit from the lower share price. A manager can then buy the share back for 70p, return the share to the broker and make money on the difference (30p minus trading costs).

It allows the investor to make money should they feel a share, sector, style or region is set to fall out of favour.

Don’t try this at home!

But there are plenty of dangers; your upside is really capped at two times your investment, but the downside loss is unlimited from a mathematical perspective. You also lack control and are dependent on the market, as short positions can be squeezed. A good example of this was when the share price of the American chain of bricks-and-mortar video game stores GameStop rose dramatically in 2021.

Governments can also give you a headache – they can often ban shorting or make it illegal in times of distress, potentially ruining a hedged portfolio. There is also the reality that a lot of companies do make money over the longer term, making them tough to short for a prolonged period.

When has shorting historically been used?

Timing really is everything in short selling, which is why a fund manager should be your first port of call with this type of strategy. Stocks typically fall in value much faster than they grow – remember, shorting too early can be extremely painful.

Here are a few periods which Capital Group has highlighted as being a potentially attractive environments for short selling*:

When the market is bearish – Short selling is most fruitful when the market declines precipitously and sharply. The global financial crisis was quite the time, with short sellers making fat profits on big financial landslides. Downward trends reign supreme in a bear market.

When the market isn’t dull – Capital Group says a common trading rule is to never short in a market that is dull, flat or has a low trading volume. It is believed that an inert market is accumulating energy before a dramatic rise.

When fundamentals are worsening – Macro- and microeconomic fundamentals can go weak. For the overall economy and its smaller segments, deteriorating data can indicate a potential economic slowdown, bearish market sentiments or new volume lows, etc. Stock fundamentals can weaken as well. The reasons are multiple, from dropping revenue, to growing input costs, to bigger challenges a company faces. However, seasoned short sellers will never hurry up to take action. Before going short, they will wait until the bearish trend consolidates.

When the investment is priced for perfection – Efficient market theory implies that the price immediately reflects positive predictions, including innovations, strong earnings, product launches, etc. Stocks whose value already includes positive developments are called ‘priced for perfection’. The thing is that such stocks may not grow when good news is actually released, as the improvements have already been predicted.

Once investors realise they’ve been over-optimistic, the downward phase begins. This is the best time for a short seller to kick start their investment strategy.

Timing, insight and experience are all crucial elements in short selling – done right it can offer both diversification and excess returns, but there are plenty of risks. That is why we believe it is the realm of the experienced fund manager.

Here are a few to consider:

Janus Henderson Absolute Return

The Janus Henderson Absolute Return fund is a global long/short equity portfolio with a UK bias that aims to deliver absolute positive returns over rolling 12 month periods. Its target is to outperform the UK base interest rate, after charges, over any three-year period. Broadly, two thirds of the portfolio is in shorter-term tactical ideas, with the remainder in core holdings.

In a recent catch-up, fund manager Luke Newman said the higher interest rate environment was a benefit to the fund as it offered greater dispersion on the long and short-side of the portfolio. Speaking in July, Newman said the fund’s short book currently has around 50 names.

BlackRock European Absolute Alpha

A long/short approach is also employed by Stefan Gries and Stephanie Bothwell, the co-managers of the BlackRock European Absolute Alpha fund. Their objective is to achieve positive absolute returns over periods of 12 months, regardless of the prevailing market conditions.

The managers look for a mix of characteristics. For short ideas, they look at structurally challenged businesses, with limited pricing power, high leverage, and the potential to be disrupted. For long positions, they favour good management teams, an historically high return on invested capital, good free cash flow, and an ability to preserve capital through difficult cycles.

CT Global Extended Alpha

This is a 130/30 fund – this means the fund can employ leverage to invest more than 100% of its capital. So the manager might invest 130% long and 30% short. This would leave net long exposure of 100% (i.e. still around the same net exposure as the market).

Manager Neil Robson says this structure is a fund manager’s dream. He describes it as lining up on the starting grid for a motor race with an engine 50% bigger than everyone else’s.

The ability to short some stocks means valuable research is not wasted when the team realises a company is in trouble and it gives it another opportunity to add alpha.

Man GLG High Yield Opportunities

Man GLG High Yield Opportunities is an unconstrained, concentrated global high yield bond fund, driven by individual bond selection, but guided by top-down thematic ideas. Manager Mike Scott has an exceptional track record and has widened his investment flexibility by taking short positions in this portfolio.

*Source: Capital Group

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Fidelity manager: “There are a lot of rubbish companies in Europe”

Stephen Strowger — Wed, 20 Nov 2024 11:02:16 +0000

“Here’s how we find the good ones” – Marcel Stotzel

19 November 2024

Being selective when investing in Europe is a necessity, according to Fidelity’s Marcel Stotzel

By Matteo Anelli,

Senior reporter, Trustnet

Investors with £15,000 to spare would probably be inclined to stick the sum into the stock market, but let’s imagine they decided to buy a Hermes Birkin bag instead.

Usually, that privilege is reserved for recurring customers who have already spent at least the same amount on other Hermes products and made it onto the waiting list.

Assuming this is the case, let’s say the visit to the shop establishes that instead of £15,000, the much-dreamed bag now costs £16,000.

“Do you walk out of the shop?” asked Marcel Stotzel, deputy manager of the £4.3bn Fidelity European fund. Probably not – and this speaks volumes about the unsurmountable pricing power that the top European companies have, he said. “It’s incomparable to any other market in the world”.

The same goes for Nespresso coffee drinkers, who are unlikely to give up on their caffeine intake just because their cup has become 10p more expensive.

But for each of these Dr Jekyll companies, a Mr Hyde is lurking somewhere in the market – “crap, quasi-government-owned companies with really bad governance at the low end”, as Stotzel described them.

“The spread between the good and the bad in Europe is higher than any other market in the world,” he said. This means Europe is “a much more fertile stock-picking ground than for example the US”.

Even within luxury goods, it’s worth choosing your horses wisely. Western consumers are done spending their post-pandemic furlough money and stimulus cheques and sales in China – a key market for European brands – have slowed, as the Chinese wealth creation engine is not growing as strongly as it was.

For all these reasons, Stotzel likes to focus more on “safer luxury” – not the likes of Burberry, whose share price plummeted 39% over the year to date, but more the likes of Hermes, which has two-year backlogs that it can eat into.

Performance of stock over the year to date

Source: Google Finance

“We like the ultra-high-net-worth space, where the Chinese consumer still has the ability and the willingness to purchase,” the manager said.

Europe also looks particularly attractive in those areas where companies “just happen to be at a big discount for the only reason they are trading in Europe”.

An example of that from the Fidelity European portfolio would be Swedish mining equipment company Epiroc. Together with Sandvik, they are the only two players in the world whose machines can go deep into the ground to find gold ores, which are becoming more and more elusive and difficult to extract.

“They have no US competitors, no Chinese knockoffs, nothing,” the manager said. “Epiroc sells into Chinese mines, for example, which makes me pretty confident that its business model is sustainable.”

Fidelity European is a 45-strong portfolio, whose top-10 companies include the usual European suspects Novo Nordisk (6.3%), SAP (5.1%) and ASML (5%), among others.

The fund has been struggling in the past year, when it only achieved fourth-quartile returns, but it maintained a maximum FE fundinfo Crown Rating of five given its strong long-term performance, reaching first quartile over the past 10 and five years and second quartile over three.

Performance of fund against index and sector over 1yr

Source: FE Analytics

Stotzel isn’t blind to the challenges Europe faces, especially economically. But his main lesson was that “the economy isn’t a proxy for the stock market”.

Benjamin Melman, global chief investment officer at Edmond de Rothschild, agreed that European pessimism might be overdone.

While there is no doubt that Donald Trump’s election and the threat of tariffs have exacerbated investor scepticism towards Europe, Melman said investors should not forget that European companies with a cost base in the US will benefit from the lower corporate tax rate.

According to Morgan Stanley’s estimates, while 26% of the sales generated by MSCI Europe companies are exposed to the US, the percentage of exports – threatened by the tariffs – is only 6.2%.

“European equities are now trading at a record discount relative to their US counterparts, yet Europe is not in crisis. We have also observed that the economic surprise index has tended to recover a little over the past few weeks,” he said.

“In Germany, the likely change of government could bring more favourable news on the fiscal front. Germany has all the fiscal levers it needs to rebound and while the political will has not been clearly expressed so far, the lines are shifting.”

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The ‘Hidden Gem’ funds that you may not know yet

Stephen Strowger — Wed, 20 Nov 2024 09:58:59 +0000

20 November 2024

Fund pickers highlight 3 underappreciated funds across global markets

By Patrick Sanders,

Reporter, Trustnet

Fund management is home to several big names, such as BlackRock or Fundsmith, with well-earned reputations for quality. However, there are strategies that despite enjoying good performance, have remained relatively underappreciated.

While these ‘hidden gems’ may pass under the radar for many investors, they are well-liked among professional fund pickers, who are always keen to find undervalued strategies that can keep up with the industry’s giants.

Below, fund selectors reveal their best-kept secrets, covering everything from US and global equities to European small-caps.

For Jason Hollands, managing director at Bestinvest, the £1.5bn GQG Partners US Equity fund is a standout example of a hidden gem.

Despite only being launched in March 2021, the fund has enjoyed the third-best three-year performance in the sector at 52.2%. This result surpassed both the wider S&P 500 index and the highly competitive IA North America peer group.

Performance of the fund vs the sector and benchmark

Source: FE Analytics

Despite these strong results, Hollands noted that the portfolio has yet to make a splash with UK retail investors, as it lacks the large sales and marketing teams that larger fund houses take for granted.

Nevertheless, Hollands was a fan of the strategy’s high conviction, concentrated approach with just 33 stocks. “While this may seem risky, there is a very stringent focus on downside protection and historically, the fund has proven defensive during difficult periods,” he said.

Moreover, investigative analysis plays a crucial role in the team’s approach. Each stock is monitored by two team members, allowing them to make changes quickly to keep up with market developments.

Analysts at FE Investments are similarly positive about the fund, awarding it with an FE Fundinfo Crown Rating of five. “The macro ‘switch off’, whereby entire sectors can be exited quickly in the event of new risks emerging, has been highly successful at limiting damage in falling markets,” they said.

Alex Paget at VT Downing Fox suggested an underappreciated global fund, the £10.5m Palm Harbour Global Value fund, led by senior manager Peter Smith.

“It sits in the global sector but looks nothing like the ‘average’ global fund. It’s value, it’s small-cap, and (thanks to Peter’s experience) will likely be biased towards European stocks,” he explained.

This offshore “minnow” has risen by 61.3% in five years compared to a sector average of 51.2%, a second-quartile performance. This track record is particularly impressive given the fund’s bias towards Europe and away from the US, Paget argued.

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics

“This is a real hidden gem that will deliver strong long-term returns, especially when the current era of mega-cap domination eventually subsides,” he added.

Moreover, he explained that the strategy benefits from an emphasis on stock picking, with the team constantly searching for discounted opportunities. This has positioned the fund well to endure market downturns and shifts in sentiment.

As a result, the fund has enjoyed strong downside protection, with a first-quartile downside risk of 12.4% over the past three years.

Paget said: “We want to invest in the next GOATs (greatest of all time) and we think this fund has very GOAT-y credentials.”

Finally, Ben Yearsley, director at Fairview investing, identified the £2.5bn Polar Global Insurance fund as a favourite.

“It feels odd suggesting a fund that has a 20-year track record and is more than £2bn in size, but that is precisely what I’m going to do. There isn’t a find like it available to UK investors,” he said.

With a sector-leading 10-year performance of 273.4%, this strategy has outpaced the IA Financials and Financial Innovation peer group and the MSCI World/Insurance benchmark. While the fund slid into the second quartile over half a decade, it was the best-performing strategy in the past three years.

Performance of the fund vs sector and benchmark over 10yrs

Source: FE Analytics

Yearsley rates the fund highly due to its stock composition. It is an insurance-focused fund which forgoes well-known names such as Aviva and instead targets smaller reinsurance businesses such as Arch Capital Group.

“These companies benefit from good insurance underwriting, basically setting the correct levels of premium as well as earning a return on premiums as they are invested,” he explained.

“This latter return is linked to treasury yields and the fund is a beneficiary of the higher rate environment we are now in.”

Analysts at Square Mile Investment Consulting & Research also favoured this fund, crediting it for its sensible and proven management style, which allowed it to navigate this “sleepy sub-sector of markets” that many investors often deem too complex.

Please Note:

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A guide to staying the course during global elections

Stephen Strowger — Mon, 19 Aug 2024 09:54:11 +0000

Staci West – FundCalibre

25 July 2024

In recent years, the adage that politics doesn’t significantly influence financial markets has been a common refrain among fund managers. Many view political events as mere “noise” with minimal long-term impact on market performance.

However, recent developments, such as the French elections causing financial market instability, have challenged this notion. With the US election looming in November, investors might feel apprehensive. Yet, the key takeaway is to avoid getting overly entangled in political fluctuations and maintain a steady investment strategy.

Looking back at UK and Indian elections earlier this year

Traditionally, elections and political events have caused short-term volatility but have not substantially altered market trajectories. For example, James Thomson, manager of the Rathbone Global Opportunities fund, emphasises “we are relatively agnostic of the political backdrop as long as we avoid the extreme ends of the political spectrum.” This perspective was evident during the recent UK election, where a decisive Labour party victory brought stability without significantly impacting market fundamentals.

Emerging markets, often perceived as more susceptible to political disruptions, have shown resilience in recent elections. The Indian election, for instance, caused a temporary market dip but soon stabilised as investors recognised the continuity of Prime Minister Modi’s economic agenda. The M&G Emerging Markets team noted that despite initial concerns about election-induced volatility, markets have remained relatively calm. They believe that subtle political shifts could potentially open new investment opportunities in these regions.

When politics and economics collide

While political events generally have a limited long-term impact, there are exceptions, especially in countries with high government debt. France is a prime example, where a debt-to-GDP ratio of 112%* has raised concerns. The financial markets’ primary worry isn’t the rise of a far-right government but rather political paralysis that could hinder efforts to address the deficit.

John Chatfeild-Roberts, investment manager on the Jupiter Merlin Portfolio range, explains the problem: “Bond market investors breathed a sigh of relief about the National Rally losing (its intended fiscal plans set alarm bells clanging in Brussels). However, depending on the outcome of the political horse trading in Paris to form a government and its ability then to push through policies, the outlook remains uncertain.

“The far left’s economic policies are just as alarming to Brussels and the bond markets as those of the far right; if executed they would most likely cause investors to seek a ‘risk premium’ for lending to the French government. On the other hand, if France’s governing system becomes paralysed, little will be done to help overcome economic stagnation or reduce France’s very overstretched government finances.”

This situation illustrates how political uncertainty can impact specific sectors, such as banking, which in France is particularly vulnerable due to reliance on wholesale funding.

The US Election

The upcoming US election also poses potential risks, with the US debt at 122% of GDP* and no clear plans from either political party to address it. While stock markets might be less directly affected, bond markets and the dollar could experience volatility. The imposition of tariffs and trade restrictions, particularly under a potential Trump presidency, could disrupt various sectors, including technology, autos, electronics, and retail, and contribute to inflationary pressures.

Despite these risks, some analysts predict stronger economic growth under a Trump administration. George Brown, Senior US Economist at Schroders, says “if Trump were to win the election, our expectation is that US growth would be stronger and inflation firmer. However, the Trump campaign has been light on detail and so it is difficult to make assumptions about economic policy.

“One thing that we are confident about is that most of the macroeconomic impact won’t be felt until 2026 onwards. In terms of growth, our analysis suggests the US economy would expand by 2.2% in 2025 under a second Trump presidency. It would then accelerate to 2.7% in 2026 as the administration’s growth-promoting policies kick in, before easing back to 2.3% in 2027 as higher inflation weighs on consumer spending.”

Investment strategies in turbulent times

Given the potential for political events to create market turbulence, some investors adopt a defensive stance. Steve Kelly, manager of the AXA Framlington American Growth fund, remains cautious about cyclical sectors and believes that the current bullish sentiment may be tested in the coming year. However, he also anticipates that interest rate peaks could ease valuation pressures, benefiting less cyclical growth companies.

The recent French election underscores the fact that high debt and political instability can significantly influence markets. However, for most investors, the best strategy remains to stay the course and not overreact to political events. Active management can play a crucial role in navigating these uncertainties by adjusting portfolios to mitigate risks and seize opportunities as they arise.

Political events and elections undoubtedly introduce a layer of complexity to financial markets. However, history shows that the long-term impact of politics on investments is generally limited. Investors should focus on the fundamentals of their investments rather than getting swayed by political headlines.

For those particularly concerned about political instability, considering global or multi-asset funds can provide additional diversification and risk management. These funds can spread investments across various regions and asset classes, potentially cushioning against political shocks in any single country.

Three funds to consider

Mid Wynd International Investment Trust

Mid Wynd International Investment Trust is a core option for any investor looking for a conservatively-managed offering that taps into a number of global trends. The trust uses a thematic approach to portfolio construction with a strong sustainability focus running through the investment process. The portfolio has been a consistently strong performer, whilst demonstrating lower volatility when compared with many of its peers.

M&G Episode Income

M&G Episode Income is a multi-asset fund that invests directly in individual stocks and bonds. The name “Episode” refers to those periods of time when investors’ emotions cause them to act irrationally. The manager uses behavioural finance to find pockets of value and invest against the herd, rather than following it.

WS Montanaro Global Select

WS Montanaro Global Select is an unconstrained quality growth strategy that scours the globe in search of the best small and mid-cap companies. This high-conviction fund looks for businesses that are profitable, have a long runway of growth and offer sustainable competitive advantages.

*Source: Trading Economics, government debt to GDP, December 2023

Please Note:

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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Is a bitcoin allocation a diversification ‘cheat code’?

Stephen Strowger — Thu, 15 Aug 2024 12:13:46 +0000

The following article is from the Portfolio Adviser publication from 15 August

A 1% allocation to bitcoin in a 60/40 portfolio could have added an annualised 0.67% to returns over the last 11 years

Photo by Art Rachen on Unsplash

15 August 2024 – Christian Mayes

Digital assets continue to work their way into the professional investment space despite caution from regulators and misconceptions around the asset class, according to industry commentators.

While the Securities and Exchange Commission (SEC) and the Financial Conduct Authority (FCA) have both taken a cautious approach to crypto, regulation introduced over the course of the year so far has seen spot bitcoin ETFs approved in the US while UK asset managers are now able to offer physically backed products to professional investors.

Despite increased interest from asset managers, however, we are still in the very early phases of adoption of the asset class. According to Syz Capital’s head of liquid alternatives Richard Byworth, less than 4% of the global population have any exposure, while far less understand the “core value” of a “highly portable, and absolutely scarce, asset”.

What should a bitcoin allocation look like?

The positive correlation between equities and bonds in recent years has left investors considering alternatives to further diversify their portfolios.

John Plassard, Mirabaud Group senior investment specialist, says that digital assets can provide this due to their low correlation with traditional assets.

“They offer high growth potential as emerging technologies with significant upside if widely adopted, making them attractive to risk-tolerant investors,” he says. “Cryptocurrencies are also seen by some as a hedge against inflation, due to their limited supply and decentralised nature.

“However, their high volatility poses substantial risks, suggesting they should only comprise a small portion of a portfolio, typically 1% to 5%. Additionally, the evolving regulatory environment and security concerns introduce further risks that investors must consider.”

He believes the adoption of bitcoin and ethereum ETFs has given a “new dimension” to the asset, as the products have made it easier to integrate crypto into a diversified investment strategy, while the increased accessibility also lowers the barriers to entry for investors who were previously reluctant to gain direct exposure due to perceived risks or technical complexity.

According to research from WisdomTree — who are among the asset managers to embrace digital assets — looking at the 11-year period between 31 December 2013 to 30 April 2024, adding a 1% allocation to bitcoin to a 60/40 portfolio (60% MSCI All Country World, 40% Bloomberg Multiverse) would have increased returns by 0.67% per year, while adding only 0.07% of volatility and 0.5% of maximum drawdown.

Pierre Debru, the firm’s head of quantitative research & multi asset solutions, says: “The correlation with equity and fixed income is lower than commonly used assets like commodities, gold, or Reits. The return potential is well above all other often-used asset classes, and the information ratio aligns or betters most active strategies or hedge funds.

“And yet, contrary to retail crypto ownership, institutional investors’ current crypto ownership remains very small, even if it has recently grown thanks to the ‘wake-up call’ that was the approval and launch of spot bitcoin ETFs in the US.”

He likens professional investor sentiment towards crypto to the ‘Pepsi challenge’, in which consumers of Coca-Cola are invited to participate in a blind taste-test of the two brands as part of a marketing stunt. While most people instinctively think they preferred Coca-Cola, a majority chose Pepsi in the challenge.

“In the same way that consumers, while confronted with tangible proof of their preference for Pepsi, stuck with Coca-Cola, institutional investors continue to disregard the new asset class that is crypto, dismissing all the accumulating research on its strong potential as a source of growth and diversification.

“The asset class and bitcoin, in particular, continue to carry the stigma of many disproven and often contradictory misconceptions, such as that it is only useful for criminal activities and, simultaneously, that it has no real-life use case. Those misconceptions are creating a psychological bias for many investors that stops them from recognising what are now hard-to-contradict facts.”

Syz Capital’s Byworth adds that there is huge value in a decentralised and secure network that has proven its antifragility “time and time again” over the last 15 years.

He says the volatility of bitcoin can make it problematic for clients focused on short-term returns and liquidity.

“But for anyone with a time horizon over four years, the asymmetric upside of bitcoin is a cheat code for increasing portfolio performance.”

Key election issue

Following Republican nominee Donald Trump’s speech at the bitcoin 2024 conference in July, cryptocurrency has emerged as a new political battleground in the race to the White House.

Among several pro-crypto pledges, Trump said that, if elected, his government would stop selling the bitcoin it currently holds and would transfer it to a strategic reserve.

The US currently holds 213,000 bitcoin, of which 94,000 were seized in connection with criminal activity.

Trump also vowed to make America the “cryptocurrency capital of the world” by developing its crypto industry, while he also pledged to fire SEC chair Gary Gensler and appoint a crypto-currency adviser to “design transparent regulatory guidance” within his first 100 days.

While the Democrats under Joe Biden have taken a cautious stance on crypto, Plassard argues that Kamala Harris may also warm to the asset.

“Kamala Harris may soon recognise that cryptocurrencies are here to stay and propose developing policies accordingly. She could have staff trained on the subject and work with industry players.

“Secondly, Kamala Harris could commit to working with the cryptocurrency industry, appointing regulators who understand and do not look down on the technology. It should be remembered that cryptocurrencies do not fit easily into existing regulations and require an extremely nuanced approach.

“Last but not least, the US industry is crucial to national security and the dominance of the dollar. The Harris camp cannot deny this.

“A more constructive approach from the Vice-President would be a unique — and opportunistic — opportunity to show that Democrats support technological innovation at a critical time before the elections.”

Plassard adds that, from an electoral perspective, crypto and blockchain technologies have an outsized impact in securing victories ahead of and behind the polls.

“Cryptocurrencies are at the heart of voters’ concerns in key swing states, and a balanced approach to cryptocurrencies that drives innovation while protecting consumers is very positive for policymakers and candidates.

“More than 20% of voters in key states have identified crypto as a major issue in the 2024 election, and it’s critical that the Democratic Party makes a compelling case to crypto voters while ensuring that consumers benefit from thoughtful and appropriate regulation.”

Why specifically bitcoin?

Though digital assets incorporate a wide variety of different cryptocurrencies, bitcoin has received the most attention from investors.

“While we do allocate to managers who have demonstrated success in navigating the opportunities within crypto markets, we maintain a cautious approach towards the broader crypto space,” says Syz Capital’s Byworth.

“In our view, bitcoin stands apart due to its unique characteristics, while many other cryptocurrencies face significant challenges, such as limited utility, centralised structures, and weaker network effects. As a result, we believe that a majority of these assets may struggle to maintain value over time.”

“It often requires some time, and willingness to accept that preconceptions may be wrong for an investor to understand the various aspects that make bitcoin such a unique asset,” he adds.

“Perhaps the shortest path to taking a first step is understanding that there is growing demand for bitcoin, that 19.7 million have already been issued, that 21 million will be the limit of that issuance for eternity, and that we are at 4% adoption by humans, less than 1% adoption by corporates, less than 1% adoption by nation states and 0% adoption by AI… and that it will take another 116 years to issue the remaining 1.3 million bitcoins.

“As Satoshi — bitcoin’s creator — once said: ‘it might be worth getting some, in case it catches on’.”

Please Note:

This article is provided for information only.

The above article was published by Portfolio Adviser and should not be regarded as individual investment advice on whether to buy, sell or hold any of the assets mentioned.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Interested in having some Bitcoin exposure…??

Speak with Ethical Offshore Investments to learn how you can get exposure to the asset with minimal costs, through our strictly regulated platforms and Exchange Traded Funds (ETF’s)

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Core and satellite investing explained….

Stephen Strowger — Tue, 13 Aug 2024 04:34:09 +0000

There are many ways to build an investment portfolio

FundCalibre explains the Core Satellite method of portfolio construction

Juliet Schooling Latter – FundCalibre – 12 January 2023

There are many ways to build an investment portfolio. For example, you can decide to focus on just one area, such as UK equities, or cast the net wider for more global exposure.

Which is the best option will depend on your investment needs, the amount of money you can put away, and your overall attitude to risk.

Confident investors may choose to painstakingly blend together a wide variety of funds covering different asset classes, countries, and sectors. The less gung-ho, meanwhile, are more likely to buy a multi-asset portfolio instead and let the manager make all the important selection calls.

Another popular approach is known as “core and satellite”. Here we explain the concept, highlight the potential benefits, and consider the possible downsides.

What is core and satellite investing?

Let’s start with a basic definition. ‘Core and satellite’ is a portfolio construction technique that aims to help investors strike a balance between growth and risk. It involves having a stable building block at the core, to which you add some riskier but potentially more lucrative investments to the overall portfolio.

For example, core holdings can include index tracking funds that follow particular indices and generate a return in line with these markets. Alternatively, they may be funds that focus on stable, dividend paying large companies that have well established, reliable business models.

The extra so-called satellite holdings will then hopefully add some extra spice, while not being a large enough percentage of the portfolio to cause major damage should they underperform.

What are the benefits of a core and satellite investment approach?

The main benefit of this approach is providing a bedrock of investment performance with the additional benefit of (hopefully) enjoying some extra returns. It also enables investors to have some limited exposure to areas they may find of interest, just without taking too much risk when it comes to overall returns.

The core-satellite approach can embrace a variety of assets, including equities and fixed income, as well as being adjusted to suit an investor’s objectives and attitude to risk.

What are the downsides to a core and satellite investment approach?

As with any investment, there are no guarantees that the satellite positions will actually make you money. In fact, they may act as a drag on performance.

Such funds will also require more analysis, particularly if they cover sectors or industries on which there isn’t a lot of easily accessible information. This research is likely to take a lot of effort. Potential investors will need to weigh up whether they have the time and inclination required.

As with all investment funds, you’ll also need to consider the impact of fees – in terms of both core positions and satellite holdings. These charges will obviously impact the overall level of returns enjoyed.

More niche funds, for example, may come with higher charges. If the satellite fund subsequently delivers bumper returns, then the extra costs won’t be too much of a problem. However, if it fails to meet expectations, then it will have more of an adverse impact.

What type of investor is best suited to a core and satellite approach?

An investor wanting the comfort of having most of their holdings in stable investments – with a small percentage in more exciting assets – could be drawn to this approach.

Of course, what percentage of their overall investment they choose to put into the satellite positions will influence the amount of risk being taken.

The more cautious investors will probably limit the amount held in such extra funds to 5-10%. Those willing to take more risk, meanwhile, may opt to have more in satellites.

Choosing your core-satellite approach

Before you choose funds, you’ll need to decide which assets you want in the overall portfolio. For example, are you after a core of bonds of equities? Do you want passive index trackers or income producing actively managed funds?

Depending on the level of returns generated, the core-satellite mix will need to be regularly rebalanced to ensure it reflects the preferred asset allocation. It’s also worth revisiting your core-satellite approach on a regular basis to ensure it continues to deliver the risk-reward that best meets your needs.

How to choose a core holding

A core holding will generally be a fund that has a decent growth target, with a manager at the helm that has a proven ability to deliver returns. Such portfolios will often invest in stable, established companies that can usually be relied upon to deliver decent returns, irrespective of the economic backdrop.

These funds can generally be held for many years. For example, core funds may have a UK large cap mandate, which means they buy into the largest UK-listed companies.

Alternatively, they may have more of a global reach and the freedom to invest in interesting companies across the globe.

How to pick satellite holdings

Having the opportunity to buy satellite funds means investors can have a bit of fun with their portfolios and put some money into areas that are of interest.

A satellite holding can be pretty much anything. For example, investors may choose funds covering more potentially exciting areas such as the emerging markets. These portfolios will invest in companies within regions that are still developing and aren’t as closely followed as more developed markets.

This means that they have greater potential to deliver better-than-expected returns, which can translate into unexpected improvements in the stock price.

However, the downside is that returns will be more unpredictable. You’ll need to expect a fair degree of turbulence by embracing these areas.

Other examples of satellite funds could be those investing in single countries like India or China, or those investing in single industries, such as the insurance, healthcare, technology, or financial sectors.

Important information:

Please note the above article was first published by Fund Calibre in January 2023 and should not be regarded as individual investment advice on whether to buy, sell or hold any of the funds or strategies mentioned. Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Socially Responsible Investing – Ethical Business Standards

The post Core and satellite investing explained…. first appeared on Ethical Offshore Investments.

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The charts showing the true scale of the Magnificent Seven’s fall

Stephen Strowger — Mon, 12 Aug 2024 11:52:36 +0000

9 August 2024

The Magnificent Seven have been knocked off their perch but do their less frothy valuations make them a more attractive prospect?…

By Emma Wallis,

News editor, Trustnet

The savage sell-off in technology stocks has hit the Magnificent Seven hard but now they are no longer priced for perfection, investors may be wondering whether this is a good time to pile back in.

Chris Beauchamp, chief market analyst at IG Group, believes that current market volatility is “a growth scare” and “probably not the beginning of something more dramatic”.

A reset was arguably needed, he continued, and now share prices are more attractive. “If you wanted to be in tech, now is a better time.”

In mid-July, the Magnificent Seven as a group were trading on 52x earnings – a 15% premium to their five-year average. By 6 August, valuations had fallen to a 3% discount versus their five-year average price-to-earnings (P/E) multiples, as the table below shows.

Magnificent Seven P/E ratios vs 5yr average

Sources: IG Group, Reuters Eikon

Amazon’s P/E ratio has slumped to almost half (47.5%) of its five-year average, while Nvidia’s P/E of 58.5x represents a 24% discount compared to its five-year average of 77x.

After months of gravity-defying gains, Nvidia’s share price slid from $134.91 on 10 July to $98.91 on 7 August – a $36 or 27% fall.

If he had told an investor two months ago that they would soon be able to buy Nvidia at today’s prices, they would have “bitten my arm off”, Beauchamp said.

Share price performance of Nvidia over 1 month

Source: Google Finance

Looking at the US stock market more broadly, Beauchamp thinks the recent falls should not cause panic. The less liquid summer months are usually a tricky period for markets and volatility is part and parcel of investing.

The S&P 500 has retreated to its May 2024 levels, wiping out a couple of months of gains which is “not cataclysmic” and perhaps volatility is “the price you pay” for the exponential returns earlier this year, he said. “We’ve been riding so far ahead of an average year, so there had to be a reckoning.”

Performance of S&P 500 over 6 months in dollar terms

Source: FE Analytics

Beauchamp thinks the US equity market to end the year above its current level but “we should expect the ride to be choppy from here.”

Judging by their trading activity, IG Group’s clients were net short US equities at the market’s mid-July peak but have been buying during the sell-off, he added.

IG Group clients’ exposure to the S&P 500

Source: IG Group

For Simon Webber, head of global equities at Schroders, the correction also came as no surprise. “We have been anticipating increased equity market volatility given the disconnect between buoyant consensus expectations, mixed economic data and an apparent mispricing of risk.”

He agreed with Beauchamp that equities have become a more attractive prospect following the sell-off. “The bottom line is that equity markets were vulnerable to a correction but company fundamentals are decent and heightened volatility is an opportunity for repositioning where dislocations occur,” he said.

“A soft landing for the economy remains our central scenario and we still expect equity markets to be well-supported in the medium term by modest growth in corporate earnings.”

Conversely, Franklin Templeton’s chief market strategist Stephen Dover warned that “the market moves may not yet have run their course”.

“Opportunity will eventually present itself, but we think it is too early for all but the most long-term investors to seek value,” he cautioned.

Timing the market is notoriously difficult, especially as the best days often come hot on the heels of the worst. As such, most stick with the tried and tested mantras of diversification and drip feeding, even – and perhaps especially – during volatile periods.

Rob Morgan, chief investment analyst at Charles Stanley, said: “At these times it is usually best to keep calm, stick to your investing plan and keep focused on the fact that sharp short-term moves should pale into insignificance over multiple years and decades. It’s rather like avoiding seasickness by keeping your eyes on the horizon rather than the rolling waves below.”

For anyone with cash on the sidelines who is thinking about investing but might be nervous about current market conditions, making regular contributions, perhaps at monthly intervals, is “one way to counter market ups and downs, as well as take some of the stress out of investing”, he said.

“The advantage of dripping money into the market is that you don’t need to worry about market timing. The strategy can even turn market volatility to your advantage as you average down if prices fall further.”

Please Note:

As we aim not to use commission paying funds (where applicable), we will access the lowest charging version of the managed fund that is available on the relevant platform…… resulting in more of the investment growth staying in your pocket.

Speak with Ethical Offshore Investments to learn how you can save on your investment costs.

Socially Responsible Investing – Ethical Business Standards

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Global Exposure for a Fraction of the Cost…..

Stephen Strowger — Mon, 12 Aug 2024 08:07:02 +0000

Global Exposure for a Fraction of the Cost

Investment Charges – How much is it really costing you & your future.

Our solution keeps more of the investment growth in your pockets.

Before we show you how low the total charges are if you become a client of Ethical Offshore, below is an illustration of why reducing your costs is so important.

Don’t let high costs eat away your returns

There is the common saying that you have to spend money to make money…. But the money you spend to invest has a big effect on what you have left in your own pocket.

Points to know

All investments have costs

Money you pay for costs compounds (rises exponentially) over time

Because some investments with higher costs have to overcome these expenses, their performance tends to suffer vs. lower-cost investments.

Understand what you are paying

Every investment has a cost, even if you don’t realise that you are paying it

There are many different kinds of costs, but they all have one thing in common: if the money is going somewhere else, it is not going to you.

Why do costs matter

If on the other hand you had paid a combined 2% a year in investment costs & charges, after 25 years, you would have an investment value of only $ 266,580

That’s correct: the 2% of total charges you paid every year would reduce your investment value by nearly 38%……. that 2% doesn’t sound so small anymore, does it..??

Costs can eat away at your investments

The above example & image is provided by Vanguard Ltd

What can you do to control your costs..??

A Diversified Global Exposure for less than 1%pa

Actually, our global equity allocation total costs is 0.80%pa – that includes the fund manager charges, the offshore holding platform charges and the costs for having your dedicated, Private Manager at Ethical Offshore Investments who will continue to provide guidance and is your direct contact if you have any queries or concerns.

For clients that would like to invest in a dedicated US equity or a UK equity portfolio, the total cost is even lower at 0.75%pa

This is done through a selection of high quality Exchange Traded Funds (ETF’s) from the likes of Legal & General (L&G), iShares (Blackrock) and Vanguard.

Vanguard LifeStrategy 100% Equity
Vanguard LifeStrategy 80% Equity (20% Fixed Interest / bonds)
Vanguard LifeStrategy 60% Equity (40% Fixed Interest / bonds)
Vanguard LifeStrategy 40% Equity (60% Fixed Interest / bonds)
Vanguard LifeStrategy 20% Equity (80% Fixed Interest / bonds)

The total maximum cost with utilising the Vanguard LifeStrategy range of funds, along with the platform and client servicing costs would be 0.92%pa

What is the benefit to you…… the investor.

That cost saving would result in a portfolio value after 25 years of $ 355,140…….. that is $ 88,560 more in YOUR POCKET…!!!

At Ethical Offshore Investments, we are determined to show how clients can invest in a global portfolio of quality companies, but ethically through low cost, flexible investment structures.

The post Global Exposure for a Fraction of the Cost….. first appeared on Ethical Offshore Investments.

The post Global Exposure for a Fraction of the Cost….. appeared first on Ethical Offshore Investments.

Recession, correction, rally – an investor guide to market volatility

Stephen Strowger — Thu, 08 Aug 2024 09:46:21 +0000

Chris Salih – FundCalibre

7 August 2024

The first seven months of 2024 have seen robust gains in the stock market, with global equities up some 13%* off the back of positive economic indicators and the continued anticipation of interest rates cuts by the US Federal Reserve.

Mega-cap technology stocks, such as Nvidia, have continued to make strong returns, while traditionally defensive stocks like utilities and gold outperformed. It’s not been completely smooth sailing as small-caps across the globe have lagged, while interest rate predictions have continually been pushed back due to the resiliency in markets – something which has kept investors on their toes.

But crucially, volatility has remained low. The VIX index is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market. A number greater than 30 is considered to signal heightened volatility from increased uncertainty, risk and investor fear. VIX values below 20 generally correspond to more stable, less stressful periods in the markets. For much of 2024, it has been below 20 (it has had an average closing price of 14)**.

But the recent sell-off has seen this change markedly. The VIX reached its highest level on Monday (August 5) since the height of Covid in March 2020 as global equities fell sharply**. It briefly broke above 65 on Monday morning, up from about 23 on Friday and roughly 17 a week earlier – a reflection of the volatility in markets. It has since dropped back down to 23 as of writing (August 7)**.

What caused this latest bout of volatility in global markets?

Disappointing jobs data from the US at the back end of last week acted as a catalyst for the sell-off, with investors fearing that the Federal Reserve made a mistake by keeping interest rates unchanged, potentially pushing the world’s largest economy towards recession.

Stock markets were already worried about high borrowing costs and unsettled by signs that a long-running rally in share prices, fuelled in part by optimism over artificial intelligence, might be running out of steam.

The start of this week saw most global markets fall sharply. Japan’s market plummeted to its biggest fall by points in history on Monday***, before subsequently recording a record rise the following day (August 6). The UK, Europe and Asia also saw markets tumble amid the uncertainty.

Most markets have since stabilised and begun to recoup some of those losses, but there remains significant uncertainty about the US economy, with analysts now expecting the US Federal Reserve to cut interest rates sooner to stave off the threat of recession.

Regardless of whether we are out of the woods or not, volatility can be an unnerving time for investors, and can lead to knee-jerk emotional reactions we can often regret. Investing based on emotion really is one of the biggest mistakes anyone can make, particularly in uncertain times.

With recession still a possibility and geopolitical uncertainty rife, more volatility may be on the way – with this in mind here are a few ways to handle these challenging periods.

1. Focus on long-term goals

Short-term volatility doesn’t always affect the long-term growth of your investment. So, it may help to focus on those long-term goals during volatile periods.

It sounds silly to say, but recessions do not last forever. According to NBER data, the average US recession lasted about 17 months in the period from 1854 to 2020. In the post-World War II period, from 1945 to 2020, the average recession lasted about 10 months. Riding these short-term fluctuations could bring positive returns when you look further ahead^.

2. Time in the market – not timing the market

It is important to realise you are only making losses if you crystallise them. It can help to think of any falls in value as ‘paper losses’. Staying invested gives you more time to recover and grow those assets.

Time in the market – not timing the market – is essential for those who want to maximise their long-term goals.

Over 35 years (1986-2021), mistimed decisions on an investment of just £1,000 could have cost you almost £33,000-worth of returns. Research from Schroders examined the performance of three indices that reflect the performance of the UK stock market – the FTSE 100, the FTSE 250 and the FTSE All-Share^^.

If, at the beginning of 1986, you had invested £1,000 in the FTSE 250 and left the investment alone for the next 35 years, it might have been worth £43,595 by January 2021^^. However, the outcome would have been very different if you had tried to time your entry in and out of the market.

During the same period, if you missed out on the FTSE250 index’s 30 best days, the same investment might now be worth £10,627, or £32,968 less^^, not adjusted for the effect of charges or inflation.

Between 1986 and 2021 your original £1,000 investment in the FTSE 250 could have made:

11.4% per year if you stayed invested the whole time
9.5% per year if you missed the 10 best days
8.1% per year if you missed the 20 best days
7% per year if you missed the 30 best days

3. Balance and diversification

Investment portfolio diversification is a tried-and-true strategy that aims to strike the right balance between risk and reward. It sounds simple in practice – but is something which can easily be forgotten when markets are doing extremely well or struggling.

By combining different types of investments, you could potentially lower your overall risk of loss. That’s because a lower return in one type of asset, like equities, may typically be compensated by a gain in another type, such as bonds. There are also plenty of multi-asset funds to consider which invest in the likes of property, commodities, infrastructure and more.

Funds to consider

With the direction of markets looking distinctly uncertain – here are a few funds to consider for various approaches to risk and return.

Capital preservation

There are a couple of routes to take here. The first would be a fund with lower volatility. A good example would be JOHCM Global Opportunities. Manager Ben Leyland has a strong bias towards larger and medium-sized multi-national businesses in his portfolio, which typically holds 30-40 stocks. The philosophy of this fund is ‘heads we win, tails we don’t lose too much’, and if markets do struggle, the fund’s strict valuation process will help in this regard. The fund also can, and will, hold large cash positions if valuations are unattractive.

Others to consider include absolute return vehicles like WS Ruffer Diversified Return, which is already defensively positioned on markets and holds a number of uncorrelated assets.

Going global

For full exposure to the market, investors could look to global funds with a focus on pricing power (the ability to pass on pressure to their end customer). These quality businesses are usually able to grow in periods of uncertainty.

Funds to consider here include the IFSL Evenlode Global Income fund. The managers take a long-term approach, focusing on quality, cash-generative businesses. They define quality companies as those with three characteristics: asset-light business models; high barriers to entry which can’t be disrupted easily; and finally, their customers’ decision to buy their product or service should not be determined completely by price. An alternative would be the Murray International Trust, which is an international portfolio of global equities while also having the flexibility to invest in fixed income. The trust is also trading on an attractive discount of 9.2%^^^.

Diversification – multi-asset funds

Those looking for a multi-asset solution might consider the Orbis Global Balanced fund, which scours the world for the best investment opportunities across a number of asset classes including equities, fixed income and commodities.

An alternative would be the M&G Episode Income fund. The name ‘episode’ refers to those periods of time when investors’ emotions cause them to act irrationally and thereby open up opportunities for those who can put their emotions aside. Manager Steven Andrew uses behavioural finance to find pockets of value and invest against the herd, rather than following it.

*Source: FE Analytics, total returns in pounds sterling, from 1 January to 31 July 2024

**Source: Macrotrends, VIX Volatility Index

***Source: BBC, 5 August 2024

^Source: Forbes Advisor, 15 August 2023

^^Source: Schroders, 2 June 2021

^^^Source: AIC, 5 August 2024

Please Note:

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Speak with Ethical Offshore Investments to learn how you can save on your investments costs

Socially Responsible Investing – Ethical Business Standards

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A quick-fire look at where the 5 August sell-off hit hardest

Stephen Strowger — Thu, 08 Aug 2024 08:53:52 +0000

6 August 2024

After markets dove on US recession worries, Trustnet finds out where the worst losses were borne yesterday…

By Gary Jackson,

Head of editorial, FE Fundinfo

Stocks plummeted yesterday after a crash in Japanese equities spread to global markets, leaving areas such as Japan, emerging markets, the UK and tech stocks nursing heavy losses.

Market commentators attributed the sell-off to worries about a US recession, rising Japanese interest rates and the stronger yen, and lofty tech stock valuations. Although markets have rebounded today, experts warn that volatility might continue to flare up for some time to come.

Stephen Innes, managing partner at SPI Asset Management, said: “This wasn’t just any market dip; Japan witnessed its second-largest stock plummet ever, sending shockwaves through global markets and whipping up a storm of volatility usually reserved for catastrophic events.

“Having navigated numerous market downturns, I can say that insights become clearer post-crisis. When you identify the cause and effect, the worst is often over and the cleanup begins. Yet, each meltdown can still shock those who’ve never weathered a major downturn.

“A defining trait of these self-perpetuating market crises is the vicious cycle where sell-offs amplify volatility, which in turn cripples the market’s risk management abilities, feeding back into more declines. That’s precisely our current scenario – a loop of rising volatility and shrinking risk capacity that challenges even the most seasoned traders. Just look at yesterday’s VIX surge; the fear gauge truly takes no prisoners.”

The VIX over 1yr

The above chart shows how the VIX, which measures the implied volatility in the S&P 500, has been climbing over recent weeks but spiked yesterday as markets routed. At one point, it reached 42 points – its highest since markets tanked at the start of the 2020 pandemic.

Performance on 5 Aug 2024 by asset class

How did this play out among asset classes? Global equities were the focus of the selling with the MSCI AC World index dropping 3.4% over Monday’s session. With investors worried about the health of the economy, it was natural that they would pull back from risk assets.

Conversely, investors moved into government bonds yesterday – the classic safe haven when stock markets sell off and beneficiaries if the US cuts rates to deal with recessionary risks.

Performance on 5 Aug 2024 by geography

Japan fell hardest of the major regions, as yesterday’s headlines made clear, with the Nikkei 225 plunging 12.4% in its worst fall since 1987. The unwinding of the Japanese carry trade, whereby investors borrow in yen to reinvest in higher-yielding assets, impacted global liquidity and caused the sell-off to spread first to Asian markets then globally.

Emerging markets tended come off worse than developed markets, although Brazil and China – which have been sold down heavily recently – escaped with muted losses. The FTSE All Share lost 2.2%.

Performance on 5 Aug 2024 by industry

Tech stocks were another area that bore the brunt of yesterday’s selling, reflecting the meteoric rise in recent years and more recent concerns over the profitability of the artificial intelligence (AI) revolution.

All of the ‘Magnificent Seven’ – the group of AI-linked stocks that made specular gains in 2023 – were down in the 5 August sell-off. Nvidia dropped furthest, falling 6.7%, while Apple lost 4.8% and Alphabet shed 4.6%.

Performance on 5 Aug 2024 by investment factor

Momentum was the investment factor that sold off the most. Momentum investing has led the market for some time but investors have been drifting away from these stocks since early July; the style is known for staging dramatic reversals when strong runs come to an end.

Small-cap stocks were also hit hard. Investors had been rotating into small-caps in recent weeks but sold them on yesterday’s recession worries as they tend to more cyclical (tied to the strength of the economy) than large-caps.

Performance on 5 Aug 2024 by Investment Association fund sector

It should be little surprise that the IA Japan sector felt the most pain in the sell-off, with the average fund down 5.7% – someway off the 12.4% drop in the Nikkei but painful nonetheless.

What might be more surprising is the fact that the three UK equity sectors – IA UK Smaller Companies, IA UK All Companies and IA UK Equity Income – were hit with a heavier average loss than the IA Technology and Technology Innovations sector.

In all, 84.4% of the funds in the Investment Association universe made a loss on 5 August. There were 20 sectors were every fund made a loss, including IA Japan, IA UK All Companies, IA UK Equity Income, IA UK Smaller Companies, IA Technology & Technology Innovation, IA North America, IA North American Smaller Companies and IA Global.

The 20 worst-performing funds all focusing on Japanese equities, with the biggest faller being Amundi MSCI Japan. Indeed, most of the 50 funds with the biggest losses are Japanese funds, with the exception of a few Korean and Taiwanese equity funds and one tech fund.

Please Note:

Speak with Ethical Offshore Investments to learn how you can save on your investment costs.

Socially Responsible Investing – Ethical Business Standards

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Is the market sell-off a buying opportunity?

Stephen Strowger — Tue, 06 Aug 2024 10:14:36 +0000

6 August 2024

Market volatility pits the bulls against the bears…….

By Emma Wallis,

News editor, Trustnet

Global equity markets are plummeting after ratcheting up strong gains this year, which presents a dilemma for long-term investors.

Should they take profits and position their portfolios defensively to guard against further falls? Or should they utilise the current volatility to buy on the dips? The third option is to hold tight, ride out the volatility and focus on the long term.

Several factors are contributing to the market sell off, from weak US jobs data and tech companies delivering slightly disappointing results, to the strengthening yen leading to an unwinding of the carry trade. Yet sky-high valuations are also to blame for the correction, said Chris Metcalfe, chief investment officer of IBOSS, given that some share prices had reached “unreasonable levels”.

Jean-Louis Nakamura, head of conviction equities at Vontobel, agreed that the current repricing is “legitimate”.

“Earnings growth forecasts were probably excessive for 2025 and later and had to adapt from a more realistic baseline,” he said. The correction was “not completely surprising”, therefore, but it has “proved more brutal and concentrated in times than expected”.

While some investment managers see the sell-off as a healthy correction, other more bearish market participants will interpret it as “the start of something altogether nastier”, said AJ Bell investment director Russ Mould.

“Bears will say that someone, somewhere has lost $2.3trn on the Magnificent Seven since May, while the Nasdaq is just 5% above where it was in November 2021, before the AI hype machine moved into top gear.”

Adding to the bear case, legendary investor Warren Buffett has sold 50% of his stake in Apple.

Below, experts reveal whether they are bullish or bearish.

The bulls are treating the sell-off as a buying opportunity

Lindsay James, investment strategist at Quilter Investors, said the economic backdrop remains “reasonably solid” so she views the current period of “outsized volatility” as a buying opportunity for long-term investors.

“Current market moves in the US and Europe are well within the bounds of normal market volatility,” she pointed out.

The US stock market, meanwhile, looks worse than it actually is due to its concentration, with large-cap tech leading the major indices downwards. “The MSCI USA Equal Weighted Index remained flat in sterling terms for the month up to 2 August. In contrast, the MSCI USA Index declined by 3.9% over the same period. This indicates that recent declines have been more concentrated among the Magnificent Seven stocks, as other companies, with more reasonable valuations and less ambitious earnings expectations, have been less affected,” James explained.

Euphoria over the Magnificent Seven is being “rightly tested”, she added, hopefully leading to a broadening of market returns.

“Whilst recent data has done little to calm investors nerves, we are at point in the economic cycle where central banks have maximum firepower to stimulate growth and are entering a phase where we would expect this to be gradually deployed to good effect,” she concluded.

Joe Bauernfreund, portfolio manager for AVI Global Trust, also sees the sell-off as a buying opportunity. “History tells us that as uncomfortable as such environments are whilst they play out, they also present highly attractive opportunities at prices few imagined possible just a matter of days ago. As such, whilst cognisant that we do not know precisely what is around the corner, we proceed forward slowly, with a balanced mix of caution and conviction,” he said.

Furthermore, Nakamura warned that bearish investors who move out of equities now risk missing a potential bounce. If the prices of risky assets fall much further, the US Federal Reserve might intervene with an emergency cut, he said. Should that happen, “the rebound in stocks may then be as brutal as the recent sell-off, with sectors and markets the most supported by secular drivers and/or interest rates sensitivity (tech, AI, US, Taiwan, India) progressing the fastest”.

The bears are playing it safe

On the other hand, Metcalfe thinks that investors should consider increasing their exposure to fixed income. “Even before the recent sell-off in the US and the dramatic collapses in Japan and other parts of Asia, data suggested that higher-yielding assets were undervalued compared to equities,” he said.

“If market volatility continues, we might see a shift back into bonds, as they are currently acting as a safe haven. This trend is likely to persist if equities remain unstable, providing a more secure option for investors during these turbulent times.”

Other parts of the market have held up comparatively well, namely gold, value stocks, defensive sectors and markets driven by their own monetary cycle, such as China.

Metcalfe warned, however, that “historically, in times of crisis, investors end up selling what they can rather than what they want to, which might eventually affect gold as well”.

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What’s causing stocks to sell off..??

Stephen Strowger — Tue, 06 Aug 2024 08:51:49 +0000

6 August 2024

With a rout taking place in global equities, Trustnet finds out what the experts think is behind it.

By Gary Jackson,

Head of editorial, FE fundinfo

Stocks markets enjoyed a strong opening half to 2024 but have retreated in recent weeks and were hit by a major rout yesterday, so what is driving this sudden nervousness?

Japanese equities plunged more 12% as Asian equities fell overnight on Monday, leading US and European markets to head downwards when their sessions opened. Although the drop in Japanese stocks was eye-catching, equities have been drifting down since 10 July as shown in the chart below (which doesn’t capture yesterday’s moves).

Many headlines have pointed to investors worrying about a looming US recession as the main cause of the sell-off, although not everyone is convinced by this narrative.

Performance of asset classes between 10 Jul and 2 Aug 2024

Source: FE Analytics. Total return in sterling.

Russ Mould, investment director at AJ Bell, said there are three main reasons why “a market storm is emerging from a seemingly cloudless summer sky” – with worries about a US recession being one of them.

“First, equity, and to some degree bond, markets have priced in the ‘perfect’ scenario of a cooling in inflation, a soft landing in Western economies (and thus corporate earnings) and rate cuts from the Fed, Bank of England and others,” he said.

“Any deviation from that path could therefore lead to trouble – either stickier inflation, economic and earnings disappointment or slower-than-expected rate cuts.”

On Friday, the non-farm payrolls data revealed that US unemployment was rising while, earlier in the week, the purchasing managers’ index data showed US manufacturing is contracting.

The latest Bank of America Global Fund Manager Survey found 68% of investors think the global economy is heading for a ‘soft landing’ – where activity slows but recession is avoided. This suggests that any concerns about an economic contraction would go against consensus and potentially spark significant portfolio shifts. Just 11% of fund managers were expecting a recessionary ‘hard landing’ at the start of July, Bank of America found.

Mould explained: “A US slowdown is not priced in at all – if anything markets were more concerned about it overheating earlier this year – and those with long memories will remember how frantic rate cuts in 2000-02 and 2007-08 failed to stave off a bear market in stocks, because the economy tipped over and corporate earnings fell far faster than the headline cost of money.”

Most fund managers expected ‘soft landing’ in Jul 2024

Source: Bank of America Global Fund Manager Survey

Mould pointed to the strength of the Japanese yen as another contributing factor to the sell-off. The yen carry trade – shorting a weakening yen, borrowing against it and using that money to go long non-Japanese risk assets – has been a major source of global liquidity but this trade is being unwound as the currency strengthens after the Bank of Japan hiked interest rates.

The third reason highlighted by the AJ Bell investment director is the fact that US equities have rallied much faster than GDP growth, corporate earnings or cash flows over recent years and are starting to look expensive – and potentially ripe for a correction.

Of course, there are differences of opinion. George Lagarias, chief economist at Forvis Mazars, said he is not convinced that worries about a US recession are driving the sell-off. He pointed out that history suggests bad macroeconomic data leads to higher rate cut expectations, which tends to fuel a market rally rather than a pullback.

“The equity markets have corrected initially on the same limited tech-focused basis they had rallied in the past few months and then more broadly, due to technical factors and during a period which traditionally features low trading activity, at least from humans,” he added.

“While they may well continue to correct in the next few days or weeks, we don’t see a fundamental case for a broader equity re-rating.”

Lagarias noted that the market decline since 10 July has mainly been focused on the so-called Magnificent Seven, especially Nvidia, Microsoft and Amazon.

Performance of MSCI ACWI sectors since 10 Jul 2024

Source: FE Analytics. Total return in sterling

Nvidia – which has been the darling of the market for some time thanks to supplying chips critical for the artificial intelligence revolution – is down more 20% since 10 July. However, it is still double its value at 2023 year-end and trading 40x its forward earnings, despite this fall, Lagarias said.

“While US large-caps are down 5%, ex-the Magnificent Seven they are only down 0.75%. Notably, the FTSE 100 hasn’t moved significantly,” he added.

“As of Monday 5 August, we are seeing evidence of spillover in the wider market (the Nikkei down 12.5%, US futures down 3%). However, this is precisely the point where we’d expect the Fed to affirm it’s ‘Put’, one way or another.”

The Fed Put referred to is the belief held by investors that the Federal Reserve will intervene to support markets if their prices drop to a certain level.

Michael Langham, economist at abrdn, is another who thinks concerns about a US recession might be overdone.

“We think the macro backdrop isn’t as terminal as markets are indicating. Strong labour supply growth in recent years has helped to cool the labour market and layoffs remain low in the US. In Asia, the upturn in tech exports and still buoyant domestic demand shouldn’t set alarm bells ringing yet for policymakers,” he said.

“We expect the Fed to begin easing in September, which should provide the runway for cutting cycles in parts of emerging Asia, and likely further stimulus in China could also have some positive spillovers, softening any slowdown in the region.”

On what to do next, investors are equally split.

Lindsay James, investment strategist at Quilter Investors, sees opportunities, noting that market moves in the US and Europe seem to be “well within” the range of normal volatility while companies have just posted a “generally positive” second quarter earnings season.

“Ultimately this period of outsized volatility against what remains a reasonably solid economic backdrop should present a buying opportunity for long-term investors,” she said.

But Peter Berezin, chief global strategist at BCA Research, was much more bearish, saying investors should be underweight stocks and overweight government bonds. In equity portfolios, investors should be tilted towards defensive sectors such as consumer staples, utilities and healthcare, he argued.

Berezin reiterated a warning he put out last month: “Don’t buy the dip. The equity bull market is over. The US will enter a recession in late 2024 or in early 2025.”

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Don’t Try and Pick ‘Tops or Bottoms’

Stephen Strowger — Tue, 06 Aug 2024 05:57:25 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

The purpose of publishing these newsletters on the Ethical Offshore website is to provide investors some simple, easy to understand technical details on why the US markets are behaving the way they are at the moment, what has occurred to get them where they are, and what actions may influence where they end up in the near future.

The way Adrian Tout explains all this, in simple terms, I believe is good reading for any investor to get a better understanding of what is happening within the financial markets, what risks to be aware of and how to take advantage of these market conditions for your medium to longer term investment journey.

Lesson: Don’t Try and Pick ‘Tops or Bottoms’

Two lessons on what not to do from TV’s most famous stock picker
Did Buffett just ring the bell on Apple at 32x forward earnings..?
A Framework to help assess whether buying (or selling) is a

Yesterday’s post talked about how I don’t try and pick a top or bottom in a stock. I don’t believe it’s something you can do consistently well.

Now and again it happens – however I attribute that to luck more than skill.

When I sold the bulk of my large-cap tech holdings a few months ago – it was not the top in these names. Most of them continued to add further gains.

However, when I sold, I felt were trading at the “greed” point in the cycle below (“d”)

On the other side of the coin – when there is outright fear (“g”) – I don’t pretend to know where the bottom might be. Therefore, my approach is to wade into a stock in halves.

For example, my first half position is typically around “f” – when I sense valuations are below the mean (blue line).

Quite often the stock won’t plummet to oversold levels … where it finds a base and continues to rally.

For example, stocks spend most of their time just either side of the mean between “not too bad” and “not terrible” (i.e., points b, c, e and f)

However, when there is genuine fear in the market – I will often look to establish a full position.

For clarity, in my case, a full position will vary anywhere from 2% of my total investable capital (for a more speculative position); and as much as 20% (not more than) for a very high quality stock.

For example, earlier this year Google constituted ~16% of my total holdings (it’s less now)

But on average – my full positions are typically in the realm of 4-5% of my total investable capital.

This is what works for me and how I manage risk – it may not work for you.

Today I want to share two examples from a ‘market expert’ on the dangers of:

• Calling a bottom in a stock; and

• Capitulating when fear is greatest (when you should be buying)

And in my conclusion – I’ll share a timely example of what one of the greatest investors of all time did with his Apple position last quarter.

Spoiler alert: “be fearful when others are greedy; and be greedy when they are fearful”

To our first lesson…

Lesson #1: Calling a Bottom (or Top)

Bottoms are always very easy to see in hindsight. A stock eventually finds the lowest level someone is willing to sell – it proceeds to catch a bid – and from there it rallies.

We look back and say “well that was the bottom”.

Hindsight Capital Inc. always produces astounding returns!

As investors, we don’t have the luxury of knowing what the future holds. All we have are probabilities.

In most cases, the price will go lower than what you paid for it; and/or continue to rally after you sold it.

That’s the case for me at least.

And this is precisely what happened to financial media personality Jim Cramer this week.

But a quick preface before I continue…

Cramer is an entertainer first and foremost. He hosts a program on CNBC’s known as “Mad Money”. His job is two-fold:

• Deliver entertaining (financial) content to lure eyeballs; and

• Enable his employer – UniversalNBC – to sell more advertising.

Part of Jim’s entertainment are regular stock tips.

But a word of caution… he’s an entertainer first and a stock picker second (as I will demonstrate)

Therefore, if you are acting on a Cramer tip – be sure to do a lot of independent work.

Earlier this week (Monday – July 29) Cramer “called the bottom” for popular cybersecurity company CrowdStrike (CRWD)

After a 35% plunge in the stock’s price following the largest IT outage in history – Cramer felt this was enough.

Whilst not the focus of this post (but to demonstrate the severity) – Delta estimate they lost in the realm of $350M to $500M – forcing them to deal with 176,000 refunds after cancelling some 7,000 flights as a result of CrowdStrike’s negligence.

If Delta are successful with their lawsuit (and I don’t see why they won’t be) – one wonders at what precedent this could set?

‘Has the Fed made a mistake…?’

Stephen Strowger — Tue, 06 Aug 2024 04:59:47 +0000

The following article is from the Portfolio Adviser publication from 5 August and their commentary of the recent announcement from the US Federal Reserve – have they waited to long to start the interest rate cutting cycle.

Has the Fed made a mistake?’: Weak US jobs data sparks recession concerns

S&P 500 fell 1.84% on Friday following the report, while Japan’s Nikkei 225 dropped over 12% on Monday

Jerome Powell. Copyright: Flickr/Federal Reserve 5 AUGUST 2024

Christian Mayes

Weaker than anticipated US jobs data has sparked concerns over the likelihood of a recession.

The S&P 500 fell 1.84% on Friday following the report, while on Monday, circuit breakers were triggered in Japan to curb panic-selling as the Nikkei 225 ended trading down 12.4%.

The report, released on Friday, showed US job creation had slowed to 114,000 in July. Meanwhile, the unemployment rate also rose to 4.25%, up 90 basis points from a cycle-low in April 2023.

Friday’s data led to the triggering of the ‘Sahm rule’ – an indicator which hints at a recession when the three-month moving average of the national unemployment rate exceeds the lowest three-month moving average rate from the previous year by 50bps or more.

It follows the Federal Reserve’s decision to hold the Fed Funds Rate at 5.25% to 5.5% last week.

Seema Shah, chief global strategist at Principal Asset Management, questioned whether the data may leave the Fed regretting it had not cut rates at last Wednesday’s meeting.

She said: “Oh dear, has the Fed made a policy mistake? The labour market’s slowdown is now materialising with more clarity. Job gains have dropped below the 150,000 threshold that would be considered consistent with a solid economy.

“The rise in the participation rate is certainly good news and dulls the recession signal from the newly triggered Sahm Rule. Even so, a September rate cut is in the bag and the Fed will be hoping that they haven’t, once again, been too slow to act.”

Despite the recessionary signals, Tiffany Wilding, PIMCO managing director and economist, adds that there are mitigating factors not reflected on paper.

“While the headline numbers were weaker than expected, and certainty reflect an economy that is slowing, there were some caveats in the details, which continue to paint a picture of a slowing but not yet crashing economy.

“First, Hurricane Beryl hit Texas during the survey week, with 436,000 workers unable to work due to bad weather, and an additional 1,079,000 forced to work part time.

“Second, some inability of the seasonal factors to fully adjust for seasonal hiring also likely contributed to the noise. Third, the increase in the unemployment rate has occurred without a notable fall in the level of employment. Rather labour supply has expanded.”

With inflation easing to 3% in June, just ahead of the Fed’s target of 2%, Charles Schwab UK managing director Richard Flynn said the jobs report shows that the balance of risks are changing.

He said: “The recent loosening in the jobs market has been a positive indicator for inflation prospects, as too much activity can be a precursor to demand-side pressure on prices. Since inflation figures have come into shooting distance of the Fed’s target, however, the balance of risks has begun to change.

“Today’s figures may stir anxieties that central bankers haven’t moved fast enough to cut rates, nudging the jobs market into a downward spiral. The Fed’s lengthy hiking campaign is so close to achieving its objective for inflation – let’s hope that success on that front doesn’t cause the labour market to tumble.”

Please Note:

This article is provided for information only.

The above article was published by Portfolio Adviser and should not be regarded as individual investment advice on whether to buy, sell or hold any of the assets mentioned.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Speak with Ethical Offshore Investments to learn how you can save on your investment costs.

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A seismic shift in UK politics – stability in asset markets

Stephen Strowger — Tue, 09 Jul 2024 12:28:18 +0000

The following article is from Canaccord Genuity Wealth Management and their views on the immediate impact on the UK investment markets, and what does it mean for the markets and UK investors going forward.

A new red dawn: UK investment markets this morning

5 July 2024

Since the UK general election was called in May our view has been that the Labour party would achieve a large working majority. We were obviously in line with the consensus but this has now proven to be the case nevertheless. Despite polls suggesting there would be a Labour landslide, it’s still shocking to see the scale of their victory and the defeat of the Conservative party.

The results this morning demonstrates the new Labour government will have a considerable majority to work with. There were some extraordinary individual events, with several cabinet ministers and a former prime minister all losing their seats, making this election one that will last long in the memory of UK voters.

A calm market amid a landslide

Given the result was extremely well telegraphed by opinion polls, we felt that the market impact would be limited. The opening moves across financial markets have been calm, with immediate reactions muted, suggesting that this result was expected. Despite the scale of the victory and the opportunity a huge majority presents to the incoming government, financial markets are currently relaxed by the prospect of the new administration. This could change in the coming months, as the Labour government start to flesh out their policies and unveil how they intend to manage the country and the economy in the coming years.

An obvious focus for all of us will be the new government’s immediate and future spending and taxation plans, in which expectations are that to fund their policy programme, there will have to be a rise in taxes. While there was very little open discussion of this on the campaign trail, the incoming government will recognise they need to keep the bond market calm, by attempting to raise revenues as their spending grows, as the UK’s current debt pile is already extremely large and there will be a lot more debt to be issued (in the form of UK government bonds).

Having won so big, despite only winning a relatively small number of extra votes, we are already seeing many on the left of the party demanding a more aggressive stance on tax and spending. How the new prime minister and his inner circle control these pressures will be watched keenly. Keeping the cost of borrowing under control and avoiding the market turbulence experienced during the short-lived Liz Truss premiership will have to be a priority for our new chancellor and the Treasury. Whether they can master this will be a key factor for market volatility in the UK in the coming years.

There will be no immediate changes to our investment strategies after the election. Our view remains that UK assets are good value and can offer investors attractive returns in the coming years.

From polls to portfolios, ballot papers to bond markets

UK equities have been consistently relative underperformers, but there is a chance that the promise of political stability – even if there are understandable concerns about future tax policies – can usher in a period where the discount that was applied to UK equities because of our uncertain political situation is gradually removed. Based upon corporate fundamentals and valuations, there is a strong case to be made that UK equities could go from global laggards to global leaders in the coming years.

UK corporate bonds also offer comparatively high yields to investors, leading us to believe that they too deserve a place within clients’ portfolios. Current yields compensate investors properly for the risks they’re taking in lending money to high-quality companies and are considerably higher than they were only a few years ago. We are still expecting the Bank of England to start cutting interest rates in the next few months, with support for the economy necessary and inflation appearing to be mostly under control. This could benefit areas of UK fixed income.

Bigger questions undoubtedly linger over the outlook for UK government bonds and our currency. In recent months we have seen renewed volatility in longer-term borrowing costs for governments as uncertainty rises over the prospect of a second Donald Trump presidency in the US and the possibility of political change in France and the UK. With government bonds, we have limited exposure and have insisted on keeping the maturity profile of the bonds we own relatively short, ensuring that we do not expose our clients to the potential volatility that can take place with longer maturity bonds, where interest rate, inflation and political risk could become a reality in future years.

In terms of our currency, which is typically the earliest place to view signs of concern, we feel that sterling will remain in a similar range to where it has been in recent times and are not expecting any outsized moves in the coming months. This could of course change, and we will be open-minded about what might happen as we start to see the Labour government’s plans coming into action.

Looking across the Atlantic and into the future

That open-minded approach will be vital as we go through a period of political uncertainty across the world in the coming months. The immediate election in France, with the final round of voting on Sunday 8 July is a possible source of short-term market stress. The daunting and uncertain prospect of the US presidential election in November is another reason why our balanced and diversified approach to investment is appropriate.

We remain cautiously optimistic that the outlook for many assets is attractive. Valuations across many financial markets, including those in the UK, are sensible and we believe that this will be the much bigger determinant of future portfolio success, rather than the continued shifting sands of politics across the world.

Please Note:

This article is provided for information only.

The above article was published by Canaccord Genuity Wealth Management and should not be regarded as individual investment advice on whether to buy, sell or hold any of the assets mentioned.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Speak with Ethical Offshore Investments to learn how you can save on your investment costs.

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The role of Bitcoin in a portfolio

Stephen Strowger — Tue, 09 Jul 2024 11:23:49 +0000

With 2024 turning into year one of “the institutionalisation of bitcoin”, investors focus is quickly moving from “does it make sense to allocate to crypto in a multi-asset portfolio?” to “what is the optimal allocation to crypto in my portfolio?”.

Adding crypto to a multi-asset portfolio is an idea more mainstream than cutting-edge

Our research paper, Bitcoin in multi-asset portfolios, which was first published a few years back but updated earlier this year, aimed to highlight the advantage of adding cryptocurrencies to a multi-asset portfolio. Our work provided four important results for institutional investors:

Digital assets represent between 1% and 2% of the market portfolio (depending on when one looks). Multi-asset allocations that don’t invest in cryptocurrencies are effectively underweighting the asset class and betting against it, which, in our opinion, should be a position reserved to investors with deep knowledge and a strong “negative” thesis on the space.

Bitcoin exhibits high growth potential compared to other asset classes, having been the best asset in nine of the last 12 years and remains uncorrelated. It is, therefore, a very strong candidate for a multi-asset allocation.

Even a modest allocation in a portfolio can significantly boost returns with a minimal increase in overall risk, thereby enhancing the portfolio’s risk/return profile. The information ratio of such an addition hovers at around 1, making it a highly appealing proposition.

The increase in volatility and drawdowns caused by the inclusion of bitcoin in a portfolio is effectively managed through diversification and regular rebalancing. Adding 1% to a 60/40 portfolio historically would have only added 0.07% of volatility, demonstrating the stability of the portfolio².

A framework to assess the optimal allocation to bitcoin for investors

While the answer will vary depending on investors’ specific situations, In a second paper, The role of bitcoin in a portfolio, which we published recently, we have leveraged three different quantitative techniques to help answer investors’ new questions about the optimal allocation.

The first technique used is a bootstrapping technique that consists of using historical data for fixed income, equities and cryptocurrencies over the last 10 years and then generating Monte Carlo simulations of 36 months periods through random sampling. In other words, bootstrapping creates new series of returns by reordering existing historical series. This makes the bootstrap samples inherit the same distribution as the original data, allowing estimation of the sampling distribution of various statistics.

Using those simulated series, we can construct a time series for a 60/40 portfolio (equity/fixed income) and portfolios that add bitcoin to the 60/40 portfolio. We then study the resulting distribution and in particular the distribution of relative risk and relative drawdowns.

In Figure 1, we can see that in the case of 5% bitcoin investment, in 99% of the cases the investor would have experienced a relative maximum drawdown (versus the 60/40) of less than -4.4%, and in 1% of the cases they would have experienced a relative maximum drawdown worse than -4.4% (the blue bar).

Figure 1: Using relative drawdown to calibrate the allocation to bitcoin

Source: WisdomTree, Bloomberg. S&P. From January 2014 to May 2024. Calculations are based on monthly returns in USD. Historical performance is not an indication of future performance and any investments may go down in value.

Using this technique, an investor can determine their preferred crypto allocation from the risk they are willing to take. For instance, consider a conservative investor who is comfortable with a maximum 1% relative drawdown (compared to a traditional 60/40 portfolio) with a 99% confidence level. From the chart, they can conclude that allocating between 1% and 2% to bitcoin would be most suitable.

The second technique consists of using a mean-variance optimisation framework, as proposed by H. Markowitz, based on JP Morgan Long Term Capital Market Assumptions for equity and Fixed Income and based on three scenarios for Bitcoin:

Good scenario: Bitcoin’s return is assumed to be equal to the US large cap equity estimated return + 20% per annum — this remains significantly below historical returns and below the 2023 performance by a wide margin. The volatility is assumed to be 20% lower than bitcoin’s historical volatility

Mid scenario: Bitcoin’s return is assumed to be equal to the US large cap equity estimated return + 12.5%. The volatility is 10% lower than bitcoin’s historical volatility and the correlation with the other assets is increased by 10%

Bad scenario: Bitcoin’s return is assumed to be equal to the US large cap equity estimated return +7.5%. The volatility is equal to bitcoin’s historical volatility and the correlation with the other assets is increased by 20%

We can note that:

In both the good and mid scenario, bitcoin receives a non-negligible weight even in low volatility portfolios. For example, in the mid scenario, the optimal portfolio with a 5.5% volatility would allocate 1.5% to bitcoin

Bitcoin allocation is present in all portfolios with more than 5% volatility, even in the bad scenario, where crypto returns only 7.5% more than equities per annum

For an aggressive multi-asset portfolio (~10% volatility) allocations range from ~ 1% to ~9% depending on the scenario

Figure 2: Asset allocation of efficient portfolios by portfolio volatility in three forward-looking scenarios

Source: WisdomTree, JP Morgan. Calculations are based on monthly returns in USD. Historical performance is not an indication of future performance and any investments may go down in value.

The third technique is to construct portfolios not based on allocating weights to assets but on defining target risk contribution for each asset and deriving weight from those targets. An investor that wants to dedicate one per cent of its portfolio risk to bitcoin would then have to allocate 0.7% to bitcoin, as indicated in Figure 3. A more aggressive investor who wants to dedicate 5% of the risk would allocate 2.2%.

Figure 3: Average overweight/underweight vs. benchmark portfolio

Source: WisdomTree, Bloomberg. From January 2014 through December 2023. ‘TRC’ denotes ‘Target Risk Contribution’, and ‘90/5/5/0’ representing the benchmark portfolio of 90% risk allocated to equities, 5% to bonds, 5% to commodities, and 0% to bitcoin. Historical performance is not an indication of future performance and any investments may go down in value.

Conclusion

As cryptocurrencies slowly gain their place in multi-asset portfolios, it becomes necessary to create a framework to assess the relevant allocation to those assets, taking into account their growth potential, diversification potential, and the change wrought by their wider adoption. Our findings can be found in the table below summarised across three types of portfolios: Conservative, Balanced and Aggressive.

Overall, it looks like a conservative portfolio would aim for a slight underweight to crypto compared to the market portfolio, with an allocation of around 1%. This is perfectly logical as a conservative portfolio is also underweight other risk assets, such as equities.

A balanced portfolio could aim for a slight overweight with around 3% of the allocation. Finally, an aggressive portfolio, with its classic overweight to risky assets compared to the market portfolio could easily target a 5% allocation to crypto.

If there is one thing to take away from this research, it’s that the time for ignoring this asset class has passed. Not allocating to the asset class is no longer the default decision. Investors or multi-asset managers need to have a view and a plan for this maturing asset class.

¹ Conservative behaviour for cryptocurrencies: positive return but well below what we experienced historically, similar volatility and correlation.
² Bloomberg, WisdomTree. From 31 December 2013 to 31 December 2023. In USD. Based on daily returns.

The above article was published by Wisdom Tree and should not be regarded as individual investment advice on whether to buy, sell or hold any of the assets mentioned.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Clients of Ethical Offshore Investors can get access to a range of regulated, daily traded Exchange Traded Funds (ETF’s) that have a direct holding of Bitcoin. This will result in performance in-line with the daily movement of the Bitcoin price.

Speak with Ethical Offshore Investments to see how you can get Bitcoin exposure in a regulated, cost effective manner……..

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Fundsmith Equity Fund – Semi-annual Letter to shareholders

Stephen Strowger — Mon, 08 Jul 2024 10:47:01 +0000

As one of the largest equity funds available for retail investors with just over £ 24 billion of funds under management, we have posted the link to the Semi-annual letter to shareholders of this popular fund. Below is the net performance of the I Class version of the fund (this is the lowest charging version of the fund that we access for our clients on our lump sum investment platforms) for the 2024 YTD as well as for the fund against the IA Global Index fund since the fund’s inception.

Cumulative Performance

Annualised Performance

If you would like to get more information on the Fundsmith Equity Fund, or on the many equity funds that can compliment the Fundsmith Equity Fund, please click on the More Information button below and we will forward the information to you.

Fundsmith published Terry Smith’s semi-annual letter to shareholders of Fundsmith Equity Fund.

If you are interested in reading it, a copy can be found on the Fundsmith website by clicking HERE

Please Note:

This article is provided for information only.

The above article was published by Fundsmith and should not be regarded as individual investment advice on whether to buy, sell or hold any of the assets mentioned. Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Speak with Ethical Offshore Investments to learn how you can save on your investment costs.

Socially Responsible Investing – Ethical Business Standards

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‘How will the upcoming UK election affect me and my money?’, you ask…

Stephen Strowger — Thu, 27 Jun 2024 08:43:21 +0000

The following article is from Canaccord Genuity Wealth Management and their views on the likely UK market and currency movement after the UK election

All change for our government… but no change for UK asset markets?

25 June 2024

Understandably, the forthcoming general election has garnered a huge amount of interest from our clients. You want to know whether the likely change of government in early July matters for your portfolio and if it changes our views on UK investments. The short answer is no, not really. Although as always, we should keep an open mind. Whilst we in the UK might look upon the general election of early July with keen interest, global investors just don’t care, and market shockwaves are unlikely to be felt in the coming months.

We believe that there are three reasons why the UK election is unlikely to move markets in a major way, aside from the inescapable fact that the UK is shrinking in global influence.

No alarms and no surprises

The chief factor is that the result is already deeply discounted. What happens is highly unlikely to be like the ‘surprise’ thrown up by the result of the Brexit referendum in 2016, or a high-stakes gambit like President Emmanuel Macron’s recent election call in France, both of which triggered significant market volatility.

Investors and markets are expecting the incumbent Conservative Party to suffer a crushing defeat and the Labour Party a major victory.

The recent re-emergence of Nigel Farage and his commitment to Reform UK, and the problems faced by the Scottish National Party (SNP), make it even more likely that the widely expected outcome of a major Labour majority comes true.

The name’s bonds, market bonds

Secondly, there’s no signs that any future Labour government is planning on pursuing any maverick policies. We might all be able to find something that we disagree with in their manifesto, but the reality is that it is mostly unexciting, without any unexpected policies or promises.

Finally, any new government might think they are in charge, but the reality is that the bond market holds the trump card. Because of the teetering and ever-growing debt pile that has been amassed by our governments over the last 30 years, we don’t have the financial or fiscal wiggle-room for ‘out of the box’ policies. The ill-fated Liz Truss administration was a clear reminder of the practicalities of overseeing our country in its parlous financial position.

Of course there could be some reaction, but we would be expecting mere ripples rather than shockwaves because of this election.

More likely is that the UK markets simply continue to perform based upon corporate fundamentals. UK equities have started to perform better in recent months, and we think this should continue. UK companies’ shares are cheap, profits are expected to grow, and some of the bigger sectors in the UK equity index have found recent favour.

Another potential tailwind could be that international investors may breathe a sigh of relief at the changing of the political guard, after a period of stagnation, but it is more likely that they might decide to ‘buy British’ as our equity and corporate bond markets are decent value, rather than anything else. It is hard to imagine international appetites for UK companies’ shares dwindling even further.

Gilts, currencies, and future political changes

Where we could arguably see a bit more excitement is with UK gilts. But again, the gilt market will likely be mostly dominated by global inflation and interest rate trends, even if some domestic factors could have a bit of an influence. Whilst we continue to admire the improved returns on offer from short-dated government bonds, particularly those which offer a tax-efficient return, we remain deeply sceptical of lending money to the UK government for long periods, given the uncertainty over our borrowing requirements, inflation trends and interest rates in the coming years.

Whilst predicting the forthcoming fluctuations in currency markets leaves one always open to ridicule, we are again not expecting anything exciting. A fresh government with a decisive mandate could be a support for the pound, with a lot of caveats, but the pound is likely to be relatively rangebound, with the cable rate* continuing to oscillate between US$1.20 and US$1.30, as it has for quite a long time. Of course, a currency rate also depends on the other side of the equation, and as we have seen with the euro recently, it is hard to find that many other countries in solidly stable states. Maybe, given the issues faced by all major developed world nations, the UK could benefit from being the ‘cleanest dirty shirt’ in a global context. That would make a nice change.

Forthcoming elections in France and the US are likely to be a greater focus for investors in this year of global elections. But again, ultimately, the key driver of asset returns will be dictated by the price one pays for an asset and the holding period ahead, rather than an election cycle, even if that can be a contributing factor in the short term. In conclusion, this election could well be a non-event in market terms, but that doesn’t mean that the outlook for UK assets is as boring as the election is likely to be. We remain positive on UK equities and UK corporate bonds for our client portfolios as they are good value, unloved by global investors, and offer potentially attractive returns in the future.

*The cable rate is a term meaning the exchange rate between the US Dollar (USD) and British pound sterling (GBP).

Please Note:

This article is provided for information only.

The above article was published by Canaccord Genuity Wealth Management and should not be regarded as individual investment advice on whether to buy, sell or hold any of the assets mentioned.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Speak with Ethical Offshore Investments to learn how you can save on your investment costs.

Socially Responsible Investing – Ethical Business Standards

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Terry Smith’s four things the industry needs to improve on

Stephen Strowger — Thu, 27 Jun 2024 07:37:10 +0000

The following article was first published by TrustNet on 21^st June 2024. We feel that this article is relevant to many investors as the Fundsmith Equity Fund has been a very popular fund with retail investors over many years.

It currently has just over £ 24 billion of funds under management, and has been a long term equity holding for our clients. As explained in the article, recent performance has struggled a little against its peers and benchmarks….. but there is no disputing the out-performance of the Funds strategy over the past 10 years.

IA Global Index +158.8% (10.0%pa over past 10 years)
Fundsmith Equity I Acc +326.9% (15.6%pa over past 10 years)

The veteran manager calls for improvements on transparency and choice, among others.

21 June 2024

By Matteo Anelli, – Senior Reporter, Trustnet

One of the industry’s most-held funds, Fundsmith Equity has an enviable track record – it was almost perfect until 2021, when a combination of market forces and two badly timed sales impacted performance.

In the three years since, the fund hasn’t managed to beat the MSCI World index, a reason why earlier this year, it was included in Bestinvest’s Spot the Dog report for the first time.

Below, veteran manager Terry Smith justifies the underperformance against its “dog” status, discusses portfolio turnover and elaborates on the areas where the industry needs to improve.

Performance of fund against sector and MSCI World index over 3yrs

Source: FE Analytics

Can you describe your process?

We seek to buy good companies with a high return on capital employed, because that is the financial metric which shows they are creating value, and a source of growth to allow those high returns to be invested and compound in value. We try not to overpay and seek to hold them for the long term.

Why should investors pick your fund?

We aim to run the best fund ever, meaning the one with the highest return over the long term, adjusted for risk.

What were the best and worst calls over the past 12-18 months?

The worst was selling Amazon. We last sold it on 4 May 2023 at a share price of £83 and since then it rose a further 74% – that’s against the 26% growth of the MSCI World index in the same timeframe. At the beginning of June, the price was £145 per share.

The best was holding Meta, which went from £185 to £386, returning 108%. Since we first bought it in February 2018, the share price has risen almost 200% from £129.

Why has the fund underperformed of late?

Interest rates began rising in late 2021 and had a disproportionately large impact on stocks of the sort we own. They are high quality companies and therefore, on average, more highly rated than the market.

But the share prices fare worse than the average when rates rise, just as long-dated bonds fare worse than short-dated bonds in those periods. Also, my sales of Adobe and Amazon could have been better timed.

You bought and sold those two stocks in quick succession. Has turnover increased?

Minimising portfolio turnover remains one of our objectives. Last year it was 11.1%, just a little higher than usual and far less than the average fund manager.

In 2023, we sold our stakes in Adobe, Amazon and Estée Lauder and purchased stakes in Procter & Gamble, Marriott and Fortinet. This may seem a lot of names for what is not a lot of turnover as in some cases the size of the holding sold or bought was small.

We have held 10 of our companies for more than 10 years, five of which since inception in 2010.

What do you make of Bestinvest’s report finding Fundsmith was a ‘dog’ fund?

When Bestinvest issued its report, our main UK competitor’s global fund had underperformed Fundsmith Equity by 16 percentage points over the period chosen by Bestinvest but was not rated as a “Dog”, which raises an obvious shortcoming of the methodology.

Also, one of the years included as a period of underperformance was 2021, when the fund returned 22.1%, only marginally behind the MSCI World Index that returned 22.9%. I don’t think many investors were unhappy with a 22.1% return that year.

We think investors should judge our returns over the long term, and since inception the fund is up 594% or 15.3% on an annualised basis, net of fees, compared with 11.8% for the benchmark MSCI World.

What do investors consistently get wrong?

They have too much of a home bias. Why should investors in the UK invest in the FTSE100? The UK is under 3% of global GDP. There is a whole world to choose from.

In what areas does the industry need to improve?

Firstly, transparency, for example making sure that investors can see how much they are being charged – not just in terms of management fees but also charging admin fees direct to the fund and not via the management company, and dealing costs.

Why are there ad valorem charges for some platforms which basically supply software?

Secondly, direct and clear communications explaining fund objectives and what has happened in plain language.

There are also far too many funds and too many intermediaries between the investor and the companies they invest in. Intermediaries always add costs.

What do you do outside of fund management?

I like to keep fit and practice Muay Thai. I have a history degree and still study the subject. I scuba dive.

Please Note:

This article is provided for information only.

The above article was published by Trust Net and should not be regarded as individual investment advice on whether to buy, sell or hold any of the assets mentioned. Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Speak with Ethical Offshore Investments to learn how you can save on your investment costs.

Socially Responsible Investing – Ethical Business Standards

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A Regular Savings Plan… or A Savings Trap

Stephen Strowger — Tue, 18 Jun 2024 15:34:39 +0000

This article may save you from locking into a very expensive, inflexible long term savings contract!

Know the facts and your options BEFORE you sign up for a Contractual Savings Plan policy

I have made it no secret in the past that I am not a fan of ‘contractual’ Savings Plans and what we saw with the Covid19 pandemic in 2020 and the impact that it had on so many individuals just reaffirms my attitude towards these types of products.

“Shouldn’t you be encouraging people to invest on a regular basis..?”

This is a question I do get asked when I do make my (negative…. but honest..??) comments about these savings plan products….. but funnily enough, the majority of the time it is from other offshore financial advisers.

The answer though is a resounding yes…

People should be encouraged to invest on a regular basis for their longer term financial future. BUT just because a product has ‘savings plan’ in its name, doesn’t automatically result in it being the best option for your current and future requirements.

Below is a summary of why I personally do not like contractual savings plans, which I will go into more detail later:

Lack of flexibility (especially in the first 12 – 24 months)
Restricted Investment options
Expensive

To be fair, there will be occasions where an Offshore Savings Plan will be the correct product and I have highlighted a few scenarios where this may be the case.

So what are the alternatives..?

I am a strong believer in the flexibility of investment products and where it has been appropriate, I have proposed the use of direct Platforms as this in many cases, provides greater flexibility, increased investment opportunities and potentially is much more cost effective. For more information on the Investment Platform, please click the link below.

Request Information

But back to my thoughts on contractual Savings Plans

As stated, I do encourage people to invest on a regular basis for their longer term financial future but there is a lot more that needs to be taken into consideration than just putting away an amount each month. And the following are my concerns:

* Lack of Flexibility

Unfortunately, there are some ‘advisers’ in the offshore market that their only analysis of what to do with regular savings is “how much do you earn, how much can you put away each month & when do you want to retire”. Let’s say they have a 38 year old earning good money, who can currently afford to put away $2,000 per month and would like to retire at age 60. So a contractual savings plan of $2,000 per month is set up with a maturity term of 22 years…… sounds pretty straight forward doesn’t it..??

The adviser has provided all of the growth projections based on the above scenario plus all of the promotional material from the Life Company (Bonus Payment on initial payment, Loyalty Bonuses and Enhanced Allocations on monthly contributions) ……. Seems like a GREAT OFFER. The Life Company is going to add to your contributions and the more you invest, the more they add. But not all is what it seems (more on this later).

But here is where the lack of flexibility (in my opinion) can end up being very costly.

Hopefully, the adviser would have confirmed with the client about the Initial Funding Period and that during this period, no changes to the contributions can be made. The length of the Initial Funding Period does depend on the different Life Companies product offerings as well as the term length of the policy. This will range from 4 months (rare) to the more common 18 – 24 months.

Using our example above and the product terms of a very common product promoted in the offshore market (RL360 Savings Plan**), the Initial Period would be 22 months and as such, $2,000 per month needs to be contributed for at least the first 22 months of the policy. So once the $44,000 has been contributed (22 x $2,000) the client does then have the flexibility to reduce or even suspend their regular contributions. But at a cost…..

So what can you do if your personal situation changes during this Initial Funding Period…??

The simple answer is not much if anything at all….!!! If you can not fund the monthly payments within the Initial Funding Period, you potentially would lose a large amount of what you had invested…… if this occurs in the first 12 months, then say goodbye to up to 100% of what you have contributed.

I think the above is absolutely critical for any prospective investor to understand completely, as the Covid19 crisis of 2020 is a prime example of how a personal situation can change considerably……

Start of the year, steady job with regular income…… a few months later, covid19 shuts down many industries & jobs are lost, so no income (& obviously can no longer fund the monthly savings). So not only would the investor feel the negative impact of reduced/no salary income but a significant penalty if they wanted to stop paying into their savings plan………..

While the covid19 was an unprecedented global event (hopefully not to be repeated), I still don’t accept the rationale of a long term contractual savings plan when so many other situations can occur that can affect your capacity to contribute each month. By signing up for a $2,000 per month x 22 year savings plan, that is realistically saying that over the next 22 years, you will always be in a position to contribute $ 2,000 per month to the plan…… I can’t speak for everyone, but there is no way I could with 100% confidence state that I could do that for even the next 5 years, never mind 22 years..!!

This is why I like the flexibility of a direct platform…… you can add to the platform account when ever you want to, with an amount that you are comfortable to invest. If your personal situation changes to where you need to reduce or not pay anything in, you have that flexibility. If you come into a bit of a windfall, maybe a salary increase or bonus, that this can be added to the platform with the knowledge that it is not locked away.

While the account may have been established for the longer term, maybe retirement plans, as the Direct Platform has no lock in periods, or funding periods or set length terms, you can access some or all of your investment and you are NOT penalized for doing so..!!

I am a very strong believer in establishing a regular savings habit….. But it needs to be flexible to meet the personal and individual changes that each person goes through in their working life.

* Restricted Investment Options

While the Life Companies will offer what appears to be a wide range of investment choices for your regular savings plans, investors are still restricted in only having access to the funds on their specific list. To their credit though, the list of funds available is generally quite extensive, but unfortunately doesn’t always results in the better Managed Funds being available. And the funds that they do have access to, very rarely do you see the use of the lower charging version of the fund

Learn how you can hold the same investments but with lower charges

Once again, I prefer to offer clients the option of flexibility of investment choices, whether it is for a regular savings strategy or a lump sum investment

The International Platform provides investors access to well over 80,000 different Managed Funds, as well as Exchange Traded Funds / Commodities (ETF’s / ETC’s) and direct shares. So even someone saving on a monthly basis can invest directly into say Nvidia, Microsoft, Tesla shares, they could also invest directly into the S&P500 index via an ETF or even physical gold via an ETC. Contractual Savings plans do NOT give you that flexibility and diverse investment choice.

Access over 80,000 managed funds, plus ETF’s and direct shares

* How expensive are contractual savings plans..??

Now, this is my personal opinion and I am sure that there are advisers and product providers out there that will disagree with me…… but my opinion is that they are very expensive. Plus, and this really annoys me, the charging structure imposed is very complicated to understand, especially when it comes to a situation where a monthly contribution amount has been changed (or stopped).

If your Financial Adviser can’t understand and explain it in simple terms, how is a client expected to fully understand and accept the terms & conditions.

In most cases, the policy / admin charges are predetermined at the outset, based on the monthly saving contribution and the term of the policy. So using our previous example again, the policy / admin charges would be calculated assuming that the client would be contributing the same $ 2,000 per month, every month (on time) for a full 22 years……. If a client reduces or suspends paying in to the policy for a period of time, it doesn’t affect the Life Company as their policy charges have already been calculated and will continue to be collected. This could be as high as 7.5%pa of the policy value if you were to stop contributing straight after the Initial Funding Period (even higher when you include the management costs).

But what about all of those promotional bonuses from the Life Company that get paid as an incentive…

Good question……… using the previous example of a $2,000 per month x 22 year plan, this particular Life Company would pay:

$ 9,180 Starter Bonus
Additional 2% for each monthly contribution (so an extra $40 per contribution)
Bonus Loyalty Payment of 5.5% of the plan total at the end of the 22 years (this is reduced if you don’t pay all of the monthly contributions)

So that seems to be quite a financial windfall then….. so why then on the illustration report does it state that you still require a growth rate of 1.41% net each year for an investor to get back just the amount that they have invested..?? This is just to cover the policy charges. And don’t forget, that is assuming that you make the $2,000 investment every month for 22 years, otherwise this bonus amount will be reduced (& you will need to achieve an even higher net growth rate just to break even).

If you are considering a new savings plan or already have one set up and would like to know what your actual bonus and/or policy charges are, please press Request Information and provide details of the policy type (do NOT include policy number(s)) and we will come back to you with the information.

And this is all before you take into consideration the individual investment Managed Fund charges. Every fund will have their own internal charges for the operational costs of managing that particular funds strategy. Fixed Interest / bond and passive type funds generally have lower costs with the more specialist equity funds (biotechnology, emerging market economies) being the more expensive due to the higher levels of activity.

There are different versions of each fund, structured for a specific end client. Unfortunately, it does appear that the share class version the savings plan policies use are the higher charging, retail versions of the fund…… maybe the Life Companies get some form of trail commission revenue from the fund managers for making it available on their list of available funds………..

Learn how you can hold the same investments but with lower charges

I am sure that there will be many an offshore adviser that will rubbish what I have stated above…… but at the end of the day, it is my personal opinion based on my 15+ years of working in the offshore investment industry (as well as the 20 years in the Australian financial Industry) and the information that I have gathered over the years.

I am a strong believer in the importance of flexibility, and the Covid19 pandemic in 2020 & 2021 is a perfect example of why it is so important. As an investor, wouldn’t you prefer to have the flexibility to reduce or stop making regular contributions without getting penalized..?? Also, wouldn’t you like to be able to access your money at anytime without penalty..?? I know that I prefer that with my own personal finances.

So when would I use a contractual savings plan?

For smaller regular contribution amounts (less than $1,000 per month) it may be more beneficial for a contractual savings plan due to the fact that you can ‘spread’ that contribution amount across a range of ‘their listed managed funds’. This means that the regular contribution can be invested in up to 10 different specialist funds for each contribution. So there is a definite advantage with asset and fund manager diversification in this situation.

However, you can access a low cost, global diversified index fund that would provide exposure to many different regions (& asset classes) within the 1 fund via a direct platform.

With an investment platform, as you would be investing directly into the relevant fund, there will be at times where a minimum investment amount is required.

Another situation where I would consider including a contractual savings plan as part of a longer term strategy is with Principal Protection savings plans offered through Investors Trust. These policies offer investors the option of investing into the S&P 500 Index or the MSCI World Index (ex US) and participate in the performance of these relevant indexes, while also benefitting from the Principal Protection feature that these products provide in the event that markets were to experience a significant fall when the policy was about to mature.

For example, the Investors Trust policy will provide Principal Protection of 100% for a 10 year term, 140% for a 15 year term and 160% for a 20 year term.

But I must stress that it would only form part of a savings strategy as to qualify for the Principal Protection, there are conditions that need to be met (example, all contributions due to be paid into the plan over the term of the plan, need to have been made) plus it can impact an investors flexibility in the event that their personal situation has changed.

Other Benefits

Being issued by a Life Company, there is the Insurance Tax Wrapper structure around the policy which can provide some tax benefits for certain nationalities / citizens while they hold the policy, and/or when it comes time to cash it in.

There is a definite benefit for Australians that return & become Aussie tax residents again with the 10 year ruling. In summary, if a policy has been held for 10 years or longer, and you have not contributed 25% more to the plan than the year prior, any gains made on the cashing out of the policy would not be subject to Australian tax (correct as at time of writing). If you are an Australian that is planning on repatriating back to Australia (or already have) and would like further information on the tax consequences of an offshore policy, please click Request Information and we will be in contact with you.

Also, as a Life Insurance product, it can be very beneficial when it comes to Estate Planning in that in the event of your death, with a valid beneficiary nomination on file, the proceeds can be paid directly to the beneficiaries without the need to wait for Probate or the Estate to be settled. In addition, as a Life Insurance product, there is an additional 1% of policy value paid out on death which is the insurance element of the policy.

So in summary, yes there can be situations where an offshore contractual savings plan could be the appropriate product…….. But before signing up, please check the terms & conditions, especially the penalties if your situation changes and you need to change the contribution amount or need to access some or all of the policy.

Remember, they have set the pricing on these policies based on you contributing the same amount each month, every month until the maturity date…….. ask yourself this…. “do you think that your situation will not change over that period..?”

Personally……. I would prefer the flexibility.

** The RL360 Savings Plan mentioned in this article is a product that I would propose for a potential client where a contractual savings plan is the appropriate option for the client. I am in no way suggesting that there is anything wrong or unethical with the product….. I just want to ensure that potential clients are provided with the most appropriate option for their personal requirements.

Request Information

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Investing in technology: Beyond the IT sector

Stephen Strowger — Tue, 18 Jun 2024 15:11:13 +0000

Investing in technology is investing in the future.

By Michael Lippert,

Baron Capital

It is indisputable that our lives are becoming increasingly entwined in – and reliant on – technology, for everything ranging from day-to-day tasks and interactions to medical diagnoses, procedures and treatments.

Simultaneously, businesses are actively integrating technology into their operations, supply chains, marketing and sales, and back offices.

The artificial intelligence industry alone is projected to grow from 2022 to 2030 by a compound annual growth rate (CAGR) of 21.6%. Over the same period, cloud computing is projected to grow at a similar CAGR of 20%.

These are just two of 20 distinct areas highlighting how technology is the epitome of growth and opportunity in the 21st century.

How can technology’s investment potential be captured? While difficult to give a definitive answer, we believe it is not by investing in a passive vehicle that tracks the GICS Information Technology (IT) sector.

The issues with the GICS classification system are three-fold.

First, many of the leading companies of today span multiple industry verticals. Amazon started as an online bookseller before evolving into the e-commerce giant, but it is also the world’s leading cloud computing vendor.

The difficulty in categorizing multi-industry businesses under one sector becomes immediately apparent when you consider that four of the seven companies that make up the ‘Magnificent Seven’ mega-cap technology stocks – Alphabet, Meta (both in Communication Services) Amazon and Tesla (both in Consumer Discretionary) – are not in the IT sector.

Second, technology permeates virtually every industry in today’s economy. Consequently, it can be challenging to determine which criteria should dictate a company’s categorization.

For instance, in May 2023, GICS reclassified eight payment processing companies – including Mastercard, Visa and PayPal – from IT to Financials. It did the same thing in 2018, with Meta, Alphabet and Netflix moved out of IT into the newly created Communication Services sector. With these companies and many others, while the bedrock of their business is technology, their end markets are not.

Lastly, as a result of the 2023 GICS reclassification, just three stocks – Apple, Microsoft and NVIDIA – now comprise more than two-thirds of the IT sector by weight. This lopsided weighting means that an investment in a passive fund tracking the IT sector is essentially a bet on these three stocks.

Technology should be seen as broader than just the IT sector. Technology-driven businesses are not just found in IT, but rather across virtually every sector.

There are a wide range of different industries that are technology driven. In addition to companies like Alphabet, Meta and Tesla, names like Equinix, a data centre company, and CoStar, a technology-enabled real estate service, both in the Real Estate sector, fit within the broader technology universe.

In Healthcare, Intuitive Surgical, maker of the da Vinci robotic surgical system, also falls within the technology rubric. In the Industrials sector, Space Exploration Technologies Corporation (SpaceX) manufactures reusable rockets, operates the satellite-based internet service Starlink, and has the ultimate goal of enabling people to live on other planets. While GICS does not include them within the IT sector, for all these companies and many more, technological innovation is at the core of their business.

A broader, more encompassing definition of technology companies requires an active investment approach because these stocks must be researched simply to be identified. The wide dispersion of returns is another reason the technology space favours active investing.

Results just within the IT sector over the past 10 years illustrate this point. IT stocks that performed in the top 10th percentile returned almost 40% on an annualised basis; stocks in the bottom 10th percentile lost more than 40% annualised.

Put simply, the performance of the companies within this sector varied significantly. This dispersion dynamic existed in nearly every sub-industry within IT, from application and system software companies to internet services to semiconductors and hardware.

The disruptive impact of the rapid pace of innovation and significant breakthroughs in technology is, in large part, responsible for this dispersion. Technology innovation has powered some of the biggest winners in stock market history and driven more upside than any other segment of the market. At the lower end, disruption has caused a significant loss of market share and some outright business failures.

There is little doubt that technology disruption will continue for many years. Generative AI (GenAI) is a case in point. GenAI, which was introduced to the public via ChatGPT in November 2022, is such a transformative technology it was the subject of a key negotiating point in the 148-day strike by the Writers Guild of America in 2023. Many industry experts consider GenAI to be the most revolutionary technology in decades and it is just getting started.

It is increasingly clear that durable secular trends will be the predominant underpinning of market leadership over the long term for both individual businesses and industries. The leading companies driving or riding these trends are finding better, more efficient and cost-effective ways to deliver goods and services. They are leveraging advances in technology – or developing technologies themselves – to disrupt their industries.

These trends include cloud computing software as a service (SaaS) and vertical software and services; artificial intelligence; cybersecurity; e-commerce and electronic payments; digital media, advertising and entertainment; electric vehicles and autonomous driving; and genomics, genetic medicine and modern surgery.

A broader approach to investing in technology can and does capture opportunities that a passive product tracking the IT sector will miss out on. This gap will only grow larger as innovations such as GenAI expand the scope of what technology can do.

For investors, the challenge lies in pinpointing the defining characteristics of the likely winners as a result of technological advancements. In addition to a strong moat and effective capital allocation, businesses must be willing and able to innovate and disrupt themselves to keep up with the rapid pace of technological change. Companies with these attributes are well positioned to maintain their existing success and leverage their competitive edge to expand into new areas, products and services, growing existing markets and even establishing entirely new ones.

Michael Lippert is a portfolio manager and head of technology research at Baron Capital. The views expressed above should not be taken as investment advice.

Please Note:

At Ethical Offshore, we can provide personal guidance on your investment opportunities within the various Technology Sectors.

Speak with Ethical Offshore Investments to learn how you can save on your investment costs.

Socially Responsible Investing – Ethical Business Standards

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The UK General Election and your finances

Stephen Strowger — Mon, 27 May 2024 08:35:57 +0000

How could the 4 July general election affect savings and investments?

By: Jonathan Jones,

Editor, Trustnet

So we’re heading back to the polls. This week Rishi Sunak announced there would be a general election, surprising some with the timing.

The under-pressure prime minister was expected by some to hold out for as long as possible in an effort to overturn the Conservative party’s flailing public image.

But inflation figures have come down markedly and are near the Bank of England’s target rate, GDP is growing (albeit mildly) and the economy appears in reasonable shape.

This may have given Sunak the confidence to press ahead with an election in which he will undoubtedly lean on his economic and financial achievements.

Myron Jobson, senior personal finance analyst at interactive investor said: “A general election could bring huge changes in economic policies, taxation and public spending that can reshape not only the nation’s economic landscape but also personal finances.”

For starters, a change in government could spell the end for a short-lived Great British ISA, which has many critics and may fall by the wayside under Labour – the bookies favourite to win in July.

The biggest topic in the financial sphere will be pensions. The ‘pot for life’ initiative outlined in the latest spring Budget would require an employer to contribute to a pension arrangement chosen by the employee, rather than one selected by the employer. Yet the scheme is in its infancy.

Alice Guy, head of pensions & savings at ii, said: “The new pensions minister has a big opportunity here to excite people about their pensions, by allowing more choice about where to invest their workplace pension.”

Perhaps the most impactful difference of opinion will be the lifetime allowance. Recently scrapped by chancellor Jeremy Hunt, Labour has said it wants it reinstated.

That’s before looking at the state pension, where the triple lock remains a contentious issue. While both Labour and the Conservatives are supportive of it, the current system puts the onus on the younger generation to shoulder the cost and it will remain under review by both parties, whichever should win in July.

From a stock market perspective there is likely to be little impact. Most are pricing in a Labour win – a prospect far less impactful than a few years ago when there were real concerns about a left-wing government under Jeremy Corbyn. Keir Starmer is viewed more market-friendly.

Perhaps the biggest spanner in the political works would be a surprise Conservative victory. While this seems unlikely, this too could have minimal impact on markets as it would be viewed as a continuation of the status quo – something that investors have generally responded well to.

Of course, with more than 100 current Conservative MPs not standing at these elections, there may be a new-look government even if the incumbent party does win.

However, the thing markets hate above all is uncertainty. With an election called earlier than expected, this should remove this worry fairly quickly, even if there may be more volatility in the weeks before the event.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said a decisive victory by one side or the other will “tend to bring more settled markets than a close-run thing” but noted that, as always, “it’s worth taking a long-term view”.

Jobson agreed: “As is often the case, the ‘keep calm and carry on’ maxim is worth remembering here. Investors should avoid a knee-jerk reaction based on what could happen and concentrate on their long-term goals.”

For what it’s worth, so do I.

Please Note:

Please note the above article was first published by Trust Net and should not be regarded as individual investment advice on whether to buy, sell or hold any of the funds mentioned. Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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The red flags retail investors should look out for

Stephen Strowger — Mon, 20 May 2024 06:40:45 +0000

Experts reveal what signals retail investors should monitor to avoid pitfalls with their fund selection.

By: Jean-Baptiste Andrieux,

Reporter, Trustnet

Researching and monitoring funds is a crucial aspect of investing and is indeed something that research teams at wealth management firms spend a significant amount of time doing.

Retail investors do not have access to the same level of tools and resources as manager research professionals and often have limited time available to do their own due diligence.

As such, they are at a significant disadvantage when it comes to spotting funds that might be going off the boil and identifying red flags before they cause problems.

Simon Evan-Cook, fund manager at Downing, said: “This is really hard for retail investors because the information and tools available to them are blunt at best. I suspect this is a regulatory thing, as there seems to be a view that if you give retail investors more tools and information, that they’ll end up doing themselves more harm than good. I have no idea whether this is true or not, but there you go.”

Trustnet asked experts what key aspects retail investors should keep an eye on to spot warning signals.

Put performance into context

Performance is of course a metric to monitor, but it must be assessed within a broader context.

Evan-Cook explained: “This doesn’t mean managers have to always outperform, far from it – we expect great managers to underperform from time to time.

“But it has to make sense, so if a manager follows a value style, we are fine with that if the wider value style has been having a tough time in the market. But if it’s the opposite, this is a red flag.”

Spot style drift

By the same token, Jason Hollands, managing director of Bestinvest, stressed that investors should understand their fund manager’s style and make sure they are not drifting from it.

He said: “When they appear to be straying from their professed approach, this can provide a red flag that something may be going wrong. That could be a value manager buying stocks on hefty multiples or one with a long-term ‘buy and hold’ approach significantly upping their portfolio turnover.”

Concentration isn’t always a good thing

Hollands has a preference for concentrated portfolios as they show that the managers have higher conviction in their picks.

He said: “When you see a notable change in the number of holdings, it might be indicative of lack of confidence creeping in.”

However, he also cautioned against heavy concentration, such as when three or four stocks have a disproportionate weight in the portfolio. “This does increase the risk of the fund and set the alarm bells running too,” he added.

Be wary of large funds

While performance may be the first port of call for retail investors, size also matters.

Darius McDermott, managing director of FundCalibre and Chelsea Financial Services, warned investors to be particularly careful with big funds as they are harder to manage.

“Be wary of big funds, particularly with small-cap, mid-cap or multi-cap, or bond funds. Being relatively small and nimble is key to alpha generation in these types of funds,” he explained.

Evan-Cook agreed and recommended looking for telltale signs, such as a gradual increase in the number of stocks in the portfolio or a growing exposure to mega-cap stocks instead of small-caps.

However, McDermott also called on investors to be wary of “sub-scale” funds that need to charge high fees to survive.

Keep an eye on flows

If a fund’s assets under management are shrinking rapidly, that might be because other investors may have noticed something concerning under the bonnet, according to McDermott.

Hollands agreed: “It is potentially a signal that large, institutional investors with deeper research resources and access to more portfolio information than private investors have concerns and are deserting the manager.

“Even where this is not the case, when a fund is experiencing major outflows, this can be hugely disruptive, as was the case with the collapse of the Woodford Equity Income fund.”

Yet Hollands also warned that the reverse situation is not ideal either, as rapidly growing assets under management can have an impact on the strategy.

“For example, if past successful performance has partially been driven by investing in smaller companies, rapid growth in assets may impact the ability to take such positions. Likewise, if a fund has historically had a high portfolio turnover approach, actively trading positions, growth in size may make it less nimble,” he explained.

Monitor managers’ behaviour

Investors should also observe the behaviour of their fund managers, said Evan-Cook, although he admitted that this is more of an art than a science.

“Signs of an ego getting out of control are hard to define, but if something arouses your suspicion, you might be better off out than in,” he said.

Evan-Cook also recommended that investors make sure their fund’s manager does not have too much on his or her plate in terms of other responsibilities, for instance if they manage several funds, as it might mean “they’ve taken their eye off the ball”.

Research key personnel changes

For Hollands, a manager departure is always a time for investors to consider whether the new manager has a credible track record or if they are “unknown quantity”.

He said: “Fund groups will often replace an incumbent with a deputy who may be highly familiar with the process or bring in a new team from outside.”

Corporate change could be a red flag

Finally, investors should also pay attention to potential corporate upheavals that may affect a fund group, be it a merger or acquisition and the subsequent integration or a controversy.

He said: “Institutional consultants – who advise large investors such as pension schemes – will typically freeze recommending companies going through such change until the situation stabilises.”

Please Note:

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Fund Insight – Baillie Gifford Positive Change

Stephen Strowger — Mon, 20 May 2024 05:18:17 +0000

If you were offered a net return of 95% for the past 5 years, I am sure most investors would have been happy to take that…….. however, the road to this return has been anything but smooth.

This article provides information on the Baillie Gifford Positive Change Fund which has held a position in our Sustainable Ethical Allocation portfolios since inception (1^st November 2018).

Overview

The Positive Change Fund aims to outperform (after deduction of costs) the MSCI ACWI Index (as stated in Sterling), by at least 2% per annum over rolling five-year periods. It also aims to contribute to a more sustainable and inclusive world through investing in companies whose products and/or services contribute to impact themes addressing critical social and/or environmental challenges, measured over at least a five-year period.

Please note – There is no guarantee that this performance objective will be achieved over any time period and actual investment returns may differ from this objective, particularly over shorter time periods.

Past performance is no guarantee of future returns.

The Baillie Gifford Positive Change Fund is an actively managed portfolio of 25 – 50 global high quality growth companies which can deliver positive change in one of four current areas:

Social Inclusion and Education, Environment and Resources Needs, Healthcare and Quality of Life; and Base of the Pyramid (addressing the needs of the world’s poorest populations).

The Positive Change Decision Makers generate ideas from a diverse range of sources. With a focus on fundamental in-house research, the team complete a two stage analysis of all holdings, looking at both the financial and positive change aspects case for each stock using a consistent framework.

At present, the fund currently holds the following 31 stocks:

Over the past 5 years, the fund has significantly outperformed most of its peers as well as outperforming the benchmark. But as the graph below indicates, a lot of this out-performance was achieved during the covid impacted times of 2020 through to 2021.

Baillie Gifford Positive Change B Acc (95.0%)
IA Global Index (60.2%)

The latest quarterly market commentary for this fund can be found HERE

As I stated at the start of this article, if 5 years ago you were offered a net return of 95% (that is 14.3%pa) for the next 5 years, I am quite sure most investors would have said that they would have been very happy to receive that return on investment.

But what the performance of the Baillie Gifford has shown is the importance of not relying on just one specialist investment, as the short term volatility can be quite extreme…… while it is still +95% over the past 5 years, it is down nearly 27% from its highest level recorded in early September 2021.

So what should investors do…??

Anyone that is invested in the Baillie Gifford Positive Change fund needs to have a longer term investment focus, and can accept that there will be very high levels of volatility in the short term.

While the strategy of this type of specialist fund has been ‘out of favour’ in recent times (high inflation, rising interest rates making smaller, developing & emerging companies less attractive), we still hold a high regard for the management team within the fund, and comfortable that they will continue to meet their long term objective (net performance +2%pa above the MSCI All World Index over a rolling 5 year period).

The current holdings are a very good example of the types of companies that can achieve significant business growth.

BUT……… I would be suggesting that investors consider to look at diversifying their specialist equity holdings.

Combing another long term favourite specialist equity fund of ours, the Guinness Global Innovators offers the potential for superior returns over the longer term….. but also, with short term volatility.

Past 5 years net performance:

Guinness Global Innovators Y Acc (121.4%)
Baillie Gifford Positive Change B Acc (95.0%)
IA Global Index (60.2%)

The Guinness Global Innovators fund has also outperformed the majority its peers and the IA Global Index and while it did lag against the Baillie Gifford Positive Change fund, its recent performance has actually now put it ahead of Positive Change over the past 5 years.

So what would have been the result of the past 5 years if we had combined an investment into the 2 funds..??

Guinness Global Innovators Y Acc (121.4%)
Combined Positive Change & Global Innovators (108.2%)
Baillie Gifford Positive Change B Acc (95.0%)

This would have resulted in once again market beating performance, but with a reduced level of short term volatility.

Both of these funds (in my opinion) have high quality management and an investment into either fund, has the potential to reward investors with superior returns over the longer term…. all be it with high levels of volatility.

But by combining an investment into both funds, will still have the same potential superior growth return to investors, but due to the different investment styles, potentially with lower levels of short term volatility.

And remember, clients of ">Ethical Offshore Investments get allocated to the lowest charging version of these funds with no additional entry or exit fees applicable.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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Are Commodities Telling US Something..??

Stephen Strowger — Tue, 07 May 2024 07:22:24 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

May 6, 2024 – Adrian Tout

Are Commodities Telling Us Something…??

Why I expect lower commodity prices in the second half
If true, then expect inflation to fall and the Fed to cut
And why the narrative will pivot from inflation risks to the dreaded ‘R” word

Forecasting things like (not limited to) GDP growth, unemployment and inflation is tricky business.

Very few get it consistently right (especially policy makers).

And whilst macro forecasting is generally a fool’s errand – there are things we can observe to improve our probabilities of success (or at least reduce our risk).

Consider inflation…

Whilst not perfect – there are a set of reasonably strong correlations which exist over extended periods.

And it’s these types of correlations we can use to our advantage.

As I will demonstrate shortly – over the past five decades (after the US dollar removed its peg to gold in 1971) – inflation levels have largely correlated to what we see with commodity prices.

And this makes sense – as commodities comprise the input cost of almost everything we consume (e.g. from energy to food to basic materials etc).

It follows that every inflationary spike we’ve seen has come with (short-term) spikes in commodity prices.

Here’s another way of framing it:

We’ve never experienced a surge in inflation without a rise in commodities.

And whilst the financial media (and specifically central planners) appear ‘wrapped around the axle’ on things like “Supercore PCE services” – is this the right metric when looking ahead?

Let’s take a look.

Where You Go… I Go

Let’s start with a long-term chart…

Below is the 20-year correlation between the Global Commodities Price Index vs Consumer Price Inflation (CPI)

May 6 2024

At first glance, we can see that the correlation is not perfect, however more than consistent.

For clarity:

The orange line is YoY % change with consumer price inflation (CPI) – currently running around 3.5% (as of April 10)

The light blue line shows what we see with the YoY % change with the global commodities price index.

It’s fair to suggest that commodities represent a “foundational layer” for inflationary events (e.g., note the corresponding peaks and troughs)

But consider what we’ve seen of late…

For the first few months of 2024 0 commodity prices on the whole (especially oil) moved higher.

Naturally, this added to inflation (cited by the Fed).

(n.b., read this post where I called the possible ‘oil problem’ for the Fed in March)

Now compare this to what we saw last year with commodity prices…

Here we saw rapidly declining prices for energy, agricultural and metals products (with inflation following suit)

Therefore, perhaps the right question to ask is where do we think commodity prices are potentially headed?

This is a very difficult question to answer.

But we can take a look at history (and specific ratios) to hazard a guess…

What Can We Learn?

Whilst things like services are adding to inflationary pressures (due to higher wages) – it’s worth asking whether they will continue to be the most impactful driver of higher prices?

My guess is potentially no…. especially if we continue to see the labor market weaken (which I think will be the case)

As an aside, the latest labor report showed more chinks in the employment armor.

From mine, commodities are arguably a more reliable long-term source of inflationary pressure.

And if the Fed are to get back to levels of 2% Core and Headline (PCE and/or CPI) – they will need to see lower commodity prices.

Period.

To that end, much lower commodities will play a major role in determining the Fed’s next step on (possibly easing) monetary policy.

And from there, we can hazard a guess as to what we see with speculative assets (which I will touch on in my conclusion).

Now over the past three years – the Fed has been forced to be restrictive with monetary policy.

Due to artificially suppressing rates well below market – this lead to excess money chasing too few goods (the very definition of inflation)

But what has eluded most investors (for now) has been the “long and variable” impacts of tighter monetary policy.

Look no further than massive amounts of fiscal spending (which I will talk to below).

From my lens, it would appear that the Fed’s restrictive policies could finally be playing catch up (and perhaps why Jay Powell & Co. are so confident in their inflation outlook)

Another chart (and coming back to fiscal spend):

The chart above plots the global commodity price index (blue) vs the fiscal deficit as a function of GDP (orange and inverted).

Again, it’s far from perfect… but it could be helpful with identifying what potentially lies ahead for inflation.

Now when the federal deficit-to-GDP ratio rises, the deficit shrinks, and fiscal stimulus becomes less accommodative.

The opposite also holds true; i.e., when the deficit expands (as we saw recently at a level not seen since WWII), this is both accommodative and inflationary.

For example, looking back, we saw this ratio rise with massive fiscal deficits – sending commodities (and inflation) higher.

To that end, one could argue the government was an opposing force to the Fed in their fight to squash inflation (and hence the delayed impact of monetary ‘long and variable’ lags.

(Note – Powell told us as much in this interview with 60-Minutes early Feb).

The “good news” is the government has started to moderate their post COVID spendathon (slightly)

For example, the federal deficit/GDP ratio has come down about 2.4% since last June (see below)

Now if our earlier correlation holds true (bearing in mind it operates with a lag) – this should result in decline in commodity prices towards year end.

For clarity, this is not to say it will, but all things being equal this is what we should expect (i.e., it’s a higher probability outcome)

So what sort of decline could we expect?

Well for that I will refer to the tape…

Today the GSCI commodity price index trades around 577 (according to tradingeconomics.com)

The chart below (which also plots the price of Crude Oil) suggests we could see this index ~16% lower by years end (i.e. the previous support level of ~$470)

And if that were to transpire – this would be disinflationary – giving the Fed scope to cut.

Put together, a reduced fiscal deficit as a function of GDP will likely see softer commodity prices.

And if that’s true – it follows that inflation heads lower – given the Fed latitude.

But what about bond yields?

Lower Bond Yields

Finally, the correlation between long-term bond yields and commodities is worth observing.

Again, this isn’t perfect, and what’s more suffers an ~2 year lag.

For example, two years ago the 10-year was trading ~3.0% (relatively accommodative)

This is helped push commodities higher…

However, as the 10-year continued to sustain a level well above 4.0% – the rally in commodities stalled.

And it makes sense…

Investment cycles tend to decline as the cost of money increases (e.g., which we saw with private investment in the latest Q1 GDP report)

Now consider the following 20 year chart:

May 6 2024

Commodities are yet to fully react to the 2.0% gain in rates over the past two years.

However, you can see it’s starting to bite. Commodity prices are stalling.

Given the historical two-year lag between the two – it’s my guess commodity prices will soon ease.

And if that happens – the conversation will quickly shift from ‘inflation concerns’ to that of economic growth.

And from there, we usher in Fed rate cuts.

It Starts with Falling Commodities

To help dimension the above shift, from mid-2022 to mid-2023 the GSCI commodity price index plunged 35%.

Given what we now know – the saw CPI decline from 9% to about 3%.

However, the dreaded “R” word also dominated the narrative.

Commodity prices are not only our cue for lower inflation but recessionary fears.

My expectation is commodities will suffer a large drawdown in the second half – giving the Fed more scope to cut.

Will we enter a recession?

That’s very difficult to answer… but it remains something we can’t rule out.

I think the answer to that will depend on what we see with employment.

For example, if we see the unemployment jump to levels of 4.50% over the coming few months, then I would be confident in calling for a recession.

But first, let’s see what happens to commodity prices…

If we see a 10% to 15% fall in the coming 6 months with the GSCI… that’s where the conversation will shift.

And no-one will be talking about unwanted inflation.

Putting it All Together

My argument is Powell has an itchy trigger finger when it comes to rate cuts.

A sharp fall in commodity prices (e.g. to the tune of 15%) would be just the tonic.

What’s more, I also believe Powell wants to ensure he “sticks the so-called landing”

He knows that a sharp decline in commodities will be a leading indicator of slowing demand and growth.

However, cutting rates at that point might be too late.

Meanwhile he has a US President election to contend with….

If Powell is successful in avoiding recession (and he might be with a lot of luck) – then equities will advance during the rate cut cycle.

If not – down they go.

From a risk management perspective, exposure to bonds looks very attractive in a disinflationary environment.

For example, if the 10-year is to fall from today’s 4.50% to levels closer to 3.50%, that will be a boon for anyone buying bonds today.

And in terms of equities – your tilt should be towards defensives over cyclical sectors.

Cyclicals do better during the early cycle… not late cycle (which we are in now).

But there’s a lot of water to pass under the bridge between now and then… keep an eye on commodity prices.

If they continue to decline… expect inflationary pressures to ease.

Regards
Adrian Tout

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The chart showing why you should keep calm and carry on investing

Stephen Strowger — Mon, 06 May 2024 10:59:43 +0000

There are plenty of logical reasons why investors might want to shift out of stocks but the data tells us not to

By: Jonathan Jones,

Editor, Trustnet

‘Time in the market is better than timing the market’ is an old adage used by financial experts and one that is typically thought to be the best way for new investors to think about how to put their money to work.

The idea of staying invested came up again this week in a blog post from Aberdeen Asset Management, in which its Asia Pacific team highlighted the below chart.

It shows how much an investor would have made if they had put $10,000 in the S&P 500 back in 2003 and left it fully invested for 20 years.

By comparison, the chart also shows the returns that same investor would have experienced if he or she had missed the 10 best days in the market or fared even worse.

How much an investor would have made with $10,000 over 20yrs

This phenomenon of lowering returns when missing out the best days is particularly compounded for income investors, the research noted, as investors will miss out on dividends throughout any periods their money is not being put to work.

It sounds simple: stay invested throughout and reap the rewards. But there will undoubtedly be some that believe they can do even better – why not try to miss the worst days and still reap the rewards of the best?

The reason this is so difficult to do in practice, however, is because quite often these best days come shortly, or even immediately, after the worst days – making it incredibly hard to time.

Yet it would not come as a surprise if investors have in fact been making changes to their portfolios during the past couple of tumultuous years. Indeed, there are plenty of logical reasons why they might want to consider pulling their money out of stocks.

First, cash and bonds now offer compelling yields for the first time in more than a decade, giving investors the chance to move down the risk scale and still achieve steady returns.

This has been compounded by several big events including Covid-19, war in Europe and the Middle East and – new to 2024 – an array of elections in countries around the world including the UK, US and India. All of these have at times posed significant risks to markets.

Then there are the macroeconomic pressures. Inflation has dropped but the final push to central banks’ 2% target is proving difficult to achieve, leaving interest rates in limbo at present and causing more concern that rates may stay higher for longer – something markets are not favourable on.

Lastly, turning to markets themselves, it is easy to come up with arguments as to why now may be a good time to take profits from expensive US stocks such as Nvidia and the other ‘Magnificent Seven’ names that have dominated for the past 18 months, or the ‘Granolas’ in Europe, which have rocketed in recent years.

An investor looking at any or all of these factors could be forgiven for making changes to their portfolios and shifting exposures, taking profits or selling out entirely.

Despite plenty of reasons to move your money elsewhere, whether it be to take on less risk through bonds and cash options, or to move outside of expensive areas such as the US, the data always reminds us that the best course of action is to stay the course and remain invested.

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Investing in the next wave of artificial intelligence

Stephen Strowger — Thu, 25 Apr 2024 09:19:11 +0000

James Yardley – 23/04/2024

In the landscape of technological advancement, 2023 emerged as a pivotal year marking the widespread adoption of artificial intelligence.

With the advent of ChatGPT, the public’s awareness of generative AI’s capabilities skyrocketed, while tech behemoths poured billions into solidifying their positions in the sector. This frenzy translated into remarkable share price returns, especially for the ‘Magnificent Seven’ tech giants.

However, the question looming large is: what comes next? and how active managers can take advantage.

2023 was the year that artificial intelligence (AI) entered the public consciousness. The launch of ChatGPT alerted people to the power and potential for generative AI, while the technology giants ploughed billions into ensuring their participation in the sector. This led to strong share price returns, particularly from the ‘Magnificent Seven’ technology giants, who were seen as the key beneficiaries.

But what happens next?

The growth of AI appears unstoppable. Few now doubt its ability to improve productivity, reduce costs and open up new pathways of economic growth. Precedence Research suggests that the global AI market will expand to more than $1.5 trillion by 2030*. Google CEO Sundar Pichai believes AI will touch every industry, every sector, every job role and change people’s lives, the way they work and way they live**.

It is already having an impact. Chris Ford, manager of the Sanlam Global Artificial Intelligence fund, points out that AI is making changes in a range of different areas: “What has AI ever done for us? We’d like to highlight the following – not an exhaustive list: protein folding, navigation, predictive maintenance, computer games, mapping of chemical space, translation, language generation, language processing, supply chain management, drug discovery, data flow management, targeted advertising, fraud detection, credit scoring and facial recognition.”

He also highlights the discovery of new materials. GnoME, the AI system developed by Google’s DeepMind unit, has accurately predicted the structure of 2.2 million new inorganic crystal substances (these are the substances that form the basis of the digital economy)***. He adds: “AI is delivering meaningful benefits for humanity and at pace – in the past, the discovery of new materials was essentially a ‘trial and error’ process.”

The problem for investors

This is all exciting, but for investors there have been wobbles. The early exuberance has passed, and markets have increasingly demanded that any AI growth is not just theoretical, but is reflected in companies’ earnings and business forecasts. This has seen the ‘AI winners’ of the ‘Magnificent Seven’ fracture with companies such as Nvidia and Microsoft seeing tangible progress on AI, while Apple and Tesla have lagged.

Even for those companies with clear strength on AI, there are risks. Nvidia, for example, saw its share price slide over 13% over the past month^ on concerns that the semiconductor cycle would not be as strong as expected. Weaker guidance from TSMC and ASML unnerved markets. Chris says it is plausible that the AI revolution will not be as data and semiconductor-intensive as is currently assumed and high expectations are embedded into valuations. He points out that the spending on data tends to settle at around 14% per year***.

Equally, even where fund managers are committed, AI may only be part of the thesis. Microsoft has been an AI pioneer, announcing the general release of Copilot for Office 365 in November 2023. Ben Peters, manager of the IFSL Evenlode Global Income fund, is an investor in Microsoft and supports its AI development, but adds: “While we remain somewhat sceptical of the ability of AI to revolutionise business models in the immediate future, its capacity to enhance productivity is undeniable. While our investment case for Microsoft focuses more on the cloud adoption trend than the sale of Copilot services, it demonstrates Microsoft’s innovative approach and its existing relationships with business can continuously add value.”

Looking further afield for opportunities

Investors may need to look further than the mega-caps for the next wave of opportunities within AI. Chris believes that the next step in AI development is to build appropriate infrastructure. He says: “The priority now has to be the building of infrastructure on which AI will be built and run. Companies can’t sell products and services until that infrastructure has been built. Companies are waiting for platforms and from there, products and services will emerge.”

The ‘killer apps‘ – the AI equivalent of, say, Amazon – seems some way off. The use cases for disruptive technology can take time to emerge. When these killer apps emerge, growth will not be linear, but could be significant. Ford believes these technologies will be exciting when they emerge.

The assumption has been that valuations are stretched across the AI complex, but Chris disputes this characterisation. He says: “Valuations are not a problem overall, but there are problems in certain areas. Companies such as Microsoft are seeing elevated valuations, with PE ratios in the 30s. Alphabet, in contrast, is relatively low compared to history.” He also believes there is some froth in the semiconductor market.

He instead points to companies such as IT consulting group Accenture and cloud-based data analytics group Snowflake, were there is “an airpocket developing” as investors focus elsewhere. For Snowflake, shares are less than half their peak seen in 2021^.

How can investors gain exposure?

While it is encouraging that there are still parts of the AI market with a strong runway of growth, and new opportunities emerging as the AI landscape changes, accessing these areas is likely to be more difficult than it was in the first wave. It was possible to access the early growth of AI through an S&P 500 tracker, or growth focused US equity fund, where the Magnificent Seven would often make up a significant chunk of the investments. Uncovering the second wave of winners is likely to require more forensic stock picking.

The Sanlam Global Artificial Intelligence fund is an obvious choice, with manger Chris Ford looking to identify the winners among the users of AI as well as the generators and enablers of AI. The fund has some exposure to the Magnificent Seven, but blends this with more eclectic ideas with companies such as Keyence, Siemens Healthineers and SAP^^.

Generalist global technology funds, such as the AXA Framlington Global Technology fund, will also be tapped into new developments in AI, alongside other areas such as semiconductors, healthcare technology, and technology hardware. Funds such as Baillie Gifford Global Discovery are broader in scope, but new development in AI is one source of ideas.

AI is a major growth area, but its growth will be bumpy, as markets work out the key use cases and likely winners. To date, the Magnificent Seven have been the winners on AI growth, but they now look expensive, and expectations are high. Finding the next group of winners may take a skilled hand.

*Source: NewMediaWire, 15 March 2023

**Source: Google Blog, 29 August 2023

***Source: Sanlam Investments, April 2024

^Source: MarketWatch, as of 24 April 2024

^^Source: fund factsheet, 31 March 2024

Please Note:

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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Top 7 reasons to use the Ardan International Platform

Stephen Strowger — Wed, 17 Apr 2024 09:17:31 +0000

Flexibility with Security……. we explore the key reasons for choosing the Ardan International Platform

Rather than trying to track your investments across various institutions, each with their own dealing processes, paperwork and charging structures, you and your financial adviser can manage them all efficiently, securely and in a cost effective way through the Ardan International Platform.

1. Group Strength

Being part of IFGL means that when you choose the Ardan wealth management platform, you can enjoy the reassurance and security of being part of a Group that has over 216,000 customers, US$ 25 billion assets under administration and employs more than 570 staff (as at 31 December 2023)

2. The Ardan Platform is multi-currency

Your portfolio(s) can hold cash in up to 11 currencies at the same time and portfolios can hold assets on the same basis. Portfolios can trade assets in multiple currencies, you can move monies between currency accounts and change the reporting currency at any time without cost. You have the flexibility to change the base currency at anytime.

Ardan also offer an easy to use online FX facility with very competitive rates.

3. Single access to multiple portfolios

The Ardan platform is suitable whether you are an individual, trustee or corporate entity. Each can hold multiple portfolios. You can hold everything in one place, under one platform log-in, which means it is easy to keep a bird’s eye view of your wealth.

4. Asset availability

The Ardan Platform is fully open architecture, so you can hold funds (institutional and retail), ETF’s, equities (listed on major stock exchanges) as well as specialist fixed term Structured Notes

5. Safeguarding your money

Your investments and monies are safeguarded by us in line with best global practice and the stringent rules and guidelines of the Isle of Man Financial Services Authority.

6. Simple charging structure

Ardan’s charges are fully transparent and competitive. The Ardan online technology increases efficiency and lowers the cost of managing a portfolio.

7. Free Beneficiary Trust

We strongly feel its imperative for an offshore platform to have a Beneficiary Trust available in order to order to avoid the complex and timely process of probate and distribution of assets on death.

Also, no assets are sold in the event of death allowing one portfolio to be easily split up into multiple portfolios for each beneficiary.

The Ardan Platform provides a flexible, cost effective option for the international and mobile investor. This platform can be a useful tool to help structure not only your portfolio management, but to also structure your Estate & Succession Planning strategies.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Speak with Ethical Offshore Investments to learn how you can save on your investments costs

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How About Zero Rate Cuts this Year..??

Stephen Strowger — Thu, 11 Apr 2024 05:01:03 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

April 7, 2024 – Adrian Tout

How About Zero Rate Cuts This Year…??

Markets see a 2% chance of no rate cuts this year
Several reasons the Fed can afford to ‘wait & see”
Still expecting a buyable pullback

At the time of writing, the market is pricing in three rate cuts for 2024.

But is this realistic?

My argument is no.

Let’s frame the discussion with the latest ‘dot plot’ following the March FOMC meeting:

With respect to this year – there is slight division among members. For example:

9 see 2 rate cuts;
9 see 3 rate cuts; and
1 envisages 4 cuts

As I wrote last Friday – if just one of the members forecasting three cuts becomes two (e.g. due to stronger than expected employment and/or inflation) – then two cuts will be the scenario.

However, what if zero rate cuts become a possibility?

This post attempts to explore reasons why that outcome should be considered.

Probability of No Rate Cuts

The probability of the Fed maintaining rates where they are is not something which is priced in.

For example, following last month’s “strong” employment data, the market sees this as a small 2.1% probability.

From the CME’s FedWatch Tool:

The column on the far right hand side suggests a 2.1% probability that rates stay the same (i.e., 525 to 550 bps).

However, that probability was just 0.2% one month ago.

Three rate cuts (a target rate of 450 to 475 bps) is still the favoured outcome.

But my feeling is 2% underestimates the possibility of the Fed taking a wait and see approach through the second half of the year.

And there are a few reasons for that…

The Wealth Effect

Outside of more common cited metrics such as employment and inflation – there are other factors which will weigh on the Fed’s decision to ease.

For example, one is the huge “wealth effect” from risk assets in recent months (which in itself is inflationary)

Let’s start with the stock market…

Since November 1 last year – the market is up around 25% or ~$10 Trillion Dollars

April 7, 2024

This 25% surge now finds the S&P 500 with a total market capitalization of ~$43 Trillion.

Naturally, investors have seen their wealth accelerate – whether it be their 401Ks or other investments.

Now let’s consider housing…

Property has also enjoyed stellar gains (thanks to record low levels of inventory) – up an incredible 46% the past four years – a CAGR of around 10% per year.

Below is the Case-Shiller House Price Index – a leading measure of U.S. residential real estate prices, tracking changes in the value of residential real estate nationally.

The table below shows the changes over the past few months, year-to-date and past 3 years (where gains are ~9.50% annualized on a national basis).

Rising property values are also another major source of the ‘wealth effect’

But there’s one more asset class we might be forgetting…

Here I’m talking about the $2.64 Trillion market that is “crypto”

Consider the most prominent coin – Bitcoin.

It has rallied from ~$15K at the start of 2023 to ~$70K at the time of writing.

Who knows…. Bitcoin could be “$80K” or more by the time you read this (or maybe less than $50K!)

So here’s the thing:

The leading cryptocurrency by market value has gained over 50% in 2024 – extending last year’s 155% surge.

April 7, 2024

There is little doubt this too has played a significant role in (some) investors feeling ‘wealthier’.

In fact, there is research to support this.

Consider this article from CoinDesk – who cite research from Harvard Business School on crypto’s wealth effect (especially with younger investors who have a higher propensity to spend):

A 2023 paper by Harvard Business School’s Marco Di Maggio and his team of economists estimated that the marginal propensity to consume – the amount spent on consumption for each additional dollar earned – out of unrealized crypto market gains is double that of stocks.

That means a sharp rally in crypto prices, like the current one, can lead to a wealth effect that injects inflation into the economy by creating extra demand.

“The rise in bitcoin and ETH and alts is inflationary as it creates more money-like assets and a strong wealth effect for young people with a high marginal propensity to spend,” Brent Donelly, president of Spectra Markets, said on X.

The wealth effect is a behavioral economics concept that says that individuals, households and businesses spend more when the value of their financial assets rises. That increased spending is financed, essentially, by wealth created out of thin air – asset price gains. However, it adds to demand-side forces in the economy, putting upward pressure on prices.

Therefore, when you consider the sharp rises we’ve seen in risk assets across the board (e.g., stocks, housing and crypto) — it’s not reasonable to think this is “injecting” further inflation into the economy.

Credit Spreads also Tightening

Something else which tells me the Fed are likely to hold are what we see with credit spreads.

They are starting to tighten.

For those less familiar – credit spread compression happens when the yield differences between Treasuries and other bonds (e.g. corporate debt) that share the same maturity shrink.

In recent months, the compression of credit spreads has proved beneficial for high-yield, bank loans, emerging markets, and corporate bonds.

As Treasury prices fall and their yields rise, investors generally move into other debt instruments.

This typically happens when the economic environment is positive or improving, causing narrower spreads.

On the other hand, when the economic environment turns negative (e.g., odds of recession increase) – then investors sell out of riskier investments like corporate bonds in favor of the safety of Treasuries.

This, in turn, causes the spread to widen.

Therefore, if we’re to experience a so-called “soft landing” (which the market anticipates) – expect spreads to narrow further.

April 7, 2024

Now if we were to see unease in credit markets – with spreads widening – it could support the case for rate cuts.

But this is not what we find.

Easing Financial Conditions

Last but not least – consider what we see with financial conditions.

I offered this Fed chart recently – asking why central banks believe financial conditions are “restrictive”?

Again, if conditions were considered tight, then it might support the case for the Fed to ease.

However, conditions are as “easy” as we’ve seen in 2+ years.

There’s no headwind here.

Tailwinds

Each of the above are all tailwinds for the economy.

What’s more, each of them are inflationary as they increase demand and consumption.

But what about the so-called lag effect of monetary tightening you might ask?

Well so far we have not seen it…

Typically the long and variable lag effect of rate rises will come into play up to 18 to 24 months after the Fed first hikes rates (March 2022)

But here we are two years later and it’s been negligible.

There was been a small impact with the unemployment rate moving from a very low 3.4% to 3.8% – but certainly not the “economic pain” Jay Powell told us to brace for.

From mind, there have been 4 major tailwinds which have effectively offset tighter monetary policy:

Cumulative $2T in excess consumer savings (which is now gone);
~$6 Trillion in fiscal spending;
70% of US home borrowers securing 30-year mortgages below 4% (minimizing the impact of rate rises); and
The wealth effect from appreciable gains in stocks, houses and crypto currency.

Each has culminated to keep the economy out of recession.

And when you also consider the record amount of immigration in the US (legal and illegal) – this has meaningfully added to the labor force (as I wrote last week).

For example, according to the CBO, the tightness in the labor market is likely to persist due to immigration.

“Using the new CBO estimates of net immigration released in January 2024, we estimate that the labor market in 2023 could have sustainably accommodated employment growth of 160,000 to 230,000. That is still below the actual monthly increases in employment in 2023, but far less so than previously estimated.

Similarly, for 2024 we estimate sustainable employment growth will be between 160,000 and 200,000, approximately double the sustainable level that would have occurred in absence of the pickup in immigration according to the pre-pandemic projections from CBO, BLS, and SSA”

They also add “…the unexpectedly high level of immigration also explains some of the surprising strength in consumer spending and overall economic growth since 2022. Moreover, we expect immigration flows to further boost economic growth in 2024″

All Reasons Not to Cut

Given all of the above – why would the Fed choose to cut rates three times before the end of the year?

This has been my question all year… even when the market was pricing in six rate cuts.

From mine, there is ample demand and inflationary forces at play for the Fed to “wait and see”

Last week’s employment result may force a few Fed members to moderate their dovish views.

And pending what we see this week with CPI – those who were thinking three cuts – may shift to just two.

As it stands right now – I think there is at least a 50% probability the Fed doesn’t cut at all this year.

That’s a long way from the 2% which is priced in….

What am I missing?

Putting it All Together

With respect to the S&P 500 – don’t be surprised to see further profit taking from current levels.

And if we are fortunate enough to see a correction in the realm of 7-10% – but that will be an opportunity to buy.

As an aside, in a non-recessionary environment, the average pullback in any one year is around 13%

There are some years where this doesn’t happen – but it’s unusual.

However, given how far stocks have come, I personally think the probabilities for a buyable pullback are high.

For clarity, I don’t think stocks are going to crash into some abyss this year.

For that to happen, we would need to see a material change to the unemployment picture (e.g. moving towards 4.50%)

However, if that were to happen, then we will see the Fed move aggressively.

But as things stands, I’m finding it hard to make the case for rate cuts.

Regards
Adrian Tout

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Why World Water Day Matters…

Stephen Strowger — Thu, 28 Mar 2024 04:38:26 +0000

21 March 2024

Today marks World Water Day. In this article fund manager Simon Clements of the Sustainable Future Investment team discusses just how vital it is for life and why improving the management of water is a key investment theme for the team.

A building block of life

Water is essential for life, and a pillar in the modern economy as a key input to many industries aside from agriculture. It is also unique – unlike energy, it cannot easily be transported from an area of abundance to that of scarcity. Furthermore, it is viewed as a human right, and therefore pricing is heavily regulated, causing it to be under-priced and thus overused.

As well as being a unique commodity, water also has a core input into the way our economy functions. We consume over four trillion cubic metres of water annually across the globe, but access is very unevenly distributed – around two billion people globally do not have access to safe drinking water, with a further 1.6 billion lacking waters for sanitation

Fig 1: Renewable internal freshwater resources, per capita of top 10 largest economies (2020)

Source: World Bank, Morgan Stanley Research, March 2024

Of all the water in the world, less than 3% is freshwater, and more than half of this is locked in glaciers or icecaps (which will melt into the ocean unless we decide cutting pieces off and towing them to shore is a viable idea).

Fig 2: The distribution of water on, in and above the Earth – Where is Earth’s water?

Source: U.S. Geological Survey, Water Science School. “World fresh water resources” in Peter H. Gleick (editor), 1993, Water in Crisis: A Guide to the World’s Fresh Water Resources. Figures subject to rounding.

Broken down by use, we can see that 70% of freshwater withdrawals come from agriculture globally. Industry is also the fastest growing area of water demand too. Municipal water is for domestic uses like cooking, cleaning, drinking, and washing.

Fig 3: Global water withdrawal

Source: Global Information System on Water and Agriculture

Demand for water has risen sixfold over the past century, and this is only due to increase as populations and incomes continue to rise, with estimates of growth of 30% over the next 30 years. The majority of growth is coming from non-OECD (Organisation for Economic Co-operation and Development) countries, namely the BRICS (Brazil, Russia, India, China, and South Africa). This rising demand, coupled with water scarcity in economically significant regions, amounts to an estimated 40% gap between demand and renewable supply of water in 2030 according to the United Nations (UN).

Climate change has a detrimental effect on water availability primarily through changes to the water cycle. Events like droughts and floods are due to increase in intensity and frequency as rainfall becomes more variable. The Intergovernmental Panel on Climate Change estimates that 4.8 billion people will be at risk due to water stress if business as usual continues on emissions, which includes areas where half of global grain production occurs. In turn, water scarcity is a factor driving biodiversity loss, and is already beginning to have geopolitical consequences over control of water sources.

Due to being a human necessity, utilities companies are highly regulated and have not historically charged for the true cost of water. As a result, there has historically been chronic underinvestment in water services, resulting in aging infrastructure.

While agriculture looks like a huge opportunity, there are significant barriers preventing investment in water efficiency. The primary issue is that we do not pay enough for water, and hence there is less incentive to reduce the cost of its usage. Approximately 85% of utilities companies worldwide do not cover their costs, instead relying on subsidies. Because of this, prices are heavily regulated.

Ultimately, water usage needs to behave more like a market. Australia has been active in trying to create this environment, creating a regional trade in the commodity so that water can be shifted towards high value uses at times of scarcity. This enabled agricultural production to fall by only 29% during the millennium drought that saw water availability drop by 53%. Similar systems globally, with accommodations for basic human consumption, are needed to create incentives for water usage to become less intensive and more efficient.

The Sustainable Future process invests behind 20 sustainable investment themes, and one of those is Improving the management of water. We target companies that help to solve the challenges we’ve discussed, from industrial water use to municipal use and even into the agricultural sector. Companies such as Veralto, Ecolab, Agilent and Advanced Drainage systems all address these key issues, and the management of water is becoming increasingly important as an investment opportunity within our portfolios.

The key to managing water effectively is ensuring markets begin to assign some sort of fair value to the resource. This basic market mechanism is at the root of the chronic misuse of the world’s most crucial resource. As water availability becomes more scarce, governments and markets will be forced to assign a more appropriate value to water, which will incentivise businesses to better manage water usage.

We believe this process is already underway, and the companies which we invest in behind the theme of Improving the management of water are set to benefit from this shift. The change that needs to take place will involve conserving water, and our investment in Ecolab benefits from this shift. Ecolab manages one trillion gallons of water a year, and its goal by 2030 is to help its customers conserve 300 billion gallons of water.

As well as conservation, reusing and recycling fresh water is also a key part of better water management. To do this we need companies such as Veralto and Agilent, whose water testing technology ensures reused water is safe.

We remain confident that the theme of ‘Improving the management of water’ can deliver companies which deliver strong performance, while ensuring the transition to a more sustainable economy stays on course. The theme also ensures we are collectively more responsible collectively with the planet’s most important resource.

Simon Clements

Simon Clements is a fund manager who joined Liontrust in April 2017 as part of the acquisition of Alliance Trust Investments (ATI), where he had managed funds for five years. Prior to this, Simon spent 12 years at Aviva Investors (previously Morley Fund Management) where, most recently, he was Head of Global Equities. In his early career, Simon worked as a Portfolio Accountant and Risk and Performance Analyst before joining Aviva Investors in 2000 to help develop its global equity and SRI propositions. Simon holds a Bachelor of Economics from the University of Newcastle, Australia, and a graduate diploma in Applied Finance & Investment from Securities Institute of Australia. Simon is a CFA Charterholder.

DISCLAIMER

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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Is 2024 the year of the goldilocks scenario?

Stephen Strowger — Tue, 19 Mar 2024 13:43:04 +0000

Darius McDermott – 12/03/2024

This article first appeared in Professional Paraplanner on 11 March 2024

The price of gold hit a record high in early March thanks to growing geopolitical concerns, coupled with optimism on US interest rates being cut in the late spring/early summer. As of writing, the spot price for gold hit $2,143.55* (about £1,683) an ounce, but is it just the start of the latest rally for the yellow metal?

I’ve often viewed gold as a great guide for the pulse of the economy, for example I remember gold-backed ETFs reached a record a high of 3,185 tonnes in the first quarter of 2020 – highlighting the uncertainty of Covid on the global economy at that point.

Recent moves have been more incongruous, on the one hand we have the aforementioned geopolitical and economic tensions – but we also have to remember the precious metal tends to underperform in higher interest rate environments because it doesn’t pay an income.

But 2023 (and the start of 2024) have seen a slight change in this traditional behaviour. The price of gold rose 13.1% in 2023** – following two years of negative performance. It should be noted that a big chunk of that performance came in Q4 (when it became clearer we had reached peak interest rates), but I’d point to performance in the second and third quarters – when the asset class fell 2.5 and 3.7% respectively**. To me, gold was remarkably resilient at a time when there were real fears about how high rates would actually go.

So why might this only be the start of the next gold rush? Well, gold-backed ETFs account for a significant part of demand for the gold market. In January, figures from the World Gold Council showed global physically-backed gold saw outflows of $2.8bn – this was the eighth consecutive month of outflows***. Last year, global gold ETFs saw a third consecutive annual outflow, losing 244t***.

So while you’re seeing central banks buying at speed – coupled with resilient jewellery consumption – it is being offset by ETF outflows remaining consistent.

Jupiter Gold & Silver fund manager Ned Naylor-Leyland says while the recent price action in gold is encouraging, there is plenty of scope for further growth.

Naylor-Leyland says gold is always forward looking and therefore has already largely digested a reduced outlook for rate cuts from the Fed in 2024. He also says there’s growing anticipation in the markets regarding the Fed’s expected transition towards a more accommodative monetary policy stance, which is why gold has started trending higher recently.

But there is more beyond this alone. Ned says: “Macro and rates aside, we are seeing massive buying from China, not only at a central bank level, but also from a wholesale level, with demand flows for January and February being the most on record. There’re also the black swan implications of seizing Russian FX reserves and knock-on implications for other sovereign nations to hold US debt. In short, there are plenty of fundamental drivers for gold, although we are yet to see the broader participation from Western investors (via ETF inflows) that is generally needed for the bigger breakout.”

Ninety One Global Gold fund manager George Cheveley also believes there is more headroom for the asset class, adding that the price has been held back by the Federal Reserve rate rises for the past 18 months.

He believes the combination of rate cuts and geopolitical tensions are encouraging many central banks to increase gold holdings, partly as a way of diversifying away from US dollar holdings into an asset that can be held domestically. In short, the risks to global gold prices are skewed to the upside.

Plenty of managers are wary of the ongoing geopolitical threat. For example, Orbis Global Balanced manager Alec Cutler told us he had a 10% position in gold towards the back end of 2023, with rising global conflict one of his principal concerns for the position.

Is breaking through the $2,150 barrier significant for physical gold and the potential for gold equities?

As of writing, the price of gold is approaching the $2,150 mark, a point that Ned believes could have a significant impact, particularly for gold equities. Gold miners have generally disappointed for a long time and have struggled to make their cost of capital, with inflation not helping in this respect. However, miners can offer more upside in a bull run for the metal, particularly when projects which weren’t viable suddenly become viable again as the price rises.

He believes investors are waiting for gold to reach a meaningful breakout above $2,150/oz, adding that the lack of participation has negatively affected gold equities more than bullion. “We see a brighter picture should $ gold break above $2150/oz as there is plenty of sensitivity in play and net asset value and free cash flow multiples are as low as we have seen them since the fund launched in 2016,” he adds.

WS Amati Strategic Metals manager Georges Lequime says while consensus is the Fed will cut rates in 2024, the question is whether this is on the back of lower than expected inflation or a weakening economy. He says: “Under both scenarios gold and silver prices should do well judging by the rallies that we have historically witnessed following the end of a rate cycle”.

So how high could gold go on this occasion? Research from J.P. Morgan believes the asset class could peak at $2,300/oz by 2025, although this prediction assumes a Fed cutting cycle initially delivering 125 basis points of cuts over the second half of 2024, pushing gold prices to new nominal highs^.

We often evaluate our portfolios based on valuations, but gold is arguably the outlier in this scenario as we feel it is a great diversifier and store of wealth. Things are looking more attractive now, but even for detractors I would say the one thing about gold, as an investor, is you never know when you are really going to need it.

The pros and cons of investing in gold

Pros

There’s a lot of geopolitical risk in the world. If tensions continue to rise this should be good for gold
Interest rates seem to have peaked and financial conditions show signs of easing
Some banks are still facing difficulties in the US. They may start printing money again which would benefit gold
China is starting to experiment with its own version of QE as it struggles with weak demand

Cons

Gold doesn’t yield. The opportunity cost of owning gold is considerably higher in a world of positive real interest rates.
Real rates have risen considerably and it hasn’t really hit the price of gold yet – potentially leaving it overvalued
Gold is facing challenges from digital alternatives like Bitcoin

Three funds to consider

Jupiter Gold & Silver

This fund combines physical gold and silver bullion with mining shares which offer deep relative value. The fund’s neutral position is 50:50 gold/silver. The fund is very sensitive to geopolitical risk and typically avoids mining companies which invest in dangerous parts of the world.

BlackRock World Mining Trust

This trust has significant flexibility to invest across various metals and mining companies, including unquoted companies. The trust also offers an alternative – and attractive – source of income to investors. The result is a conviction-led approach to investing in the mining sector, as opposed to focusing on the short-term direction of commodity prices. The trust currently has a 13.4% allocation to gold^^.

WS Amati Strategic Metals

This fund invests in roughly 40 internationally listed metals and mining companies whose revenues are sourced from the sale of strategic metals. These are metals that have strategic importance to the global economy and future macroeconomic trends. Gold and silver account for roughly 31.7% of the portfolio today^^.

*Source: bullionbypost.co.uk, data at 6 March 2024

**Source: Invesco Gold report, Q4 2023

***Source: World Gold Council

^Source: J.P. Morgan Research, 17 January 2024

^^Source: fund factsheet, 31 January 2024

Please Note:

This article was published by Fund Calibre and is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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Investors have no clue when central banks will cut rates

Stephen Strowger — Tue, 19 Mar 2024 10:46:18 +0000

We need to stop kidding ourselves – our forecasting is dreadful.

By: Jonathan Jones,

Editor, Trustnet

The market has become dominated by interest rates and the expectations of future cuts but it is time we as investors learned our lesson – we have no idea what’s going to happen.

Some will undoubtedly have moved their portfolio around based on expectations that inflation is coming down and that central banks around the world will start to withdraw the exorbitantly high rates that have stymied growth and caused a cost-of-living crisis.

Yet forecasting when these things will happen is foolish. Below are two charts that highlight just how ridiculous this is.

The first shows the implied rate of interest rate cuts from the US Federal Reserve at the start of the year, compared with last week.

In the span of just two months, expectations that rates would end the year at 3.75% (down from the 5%-5.25% range today) look farfetched. Now, ‘experts’ expect them to be around 4.25% by the start 2025.

Source: Waverton Investment Management

The same phenomenon has taken place in the UK. At the start of the year – with inflation plummeting – there were hopes of a 4% Bank rate by the end of 2024. Today that stands around half a percentage point higher, at 4.5%.

At the start of the year, five cuts were expected in 2024 – a figure which has dropped to three today. The first is anticipated to take place in August.

Source: Waverton Investment Management

Yet William Dinning, chief investment officer at Waverton, said: “Given that the UK economy is, at best, sluggish after being in a technical recession in the second half of 2023, it is possible that the current market projection for policy rates may end up being too pessimistic in the UK.”

This doesn’t seem like it should matter all that much. What’s a rate cut here or there? But it really does. Earlier this week, Jupiter fund managers Adrian Gosden and Chris Morrison explained the mind-boggling impact these prints have on the market.

At the end of last year, the FTSE 250 UK mid-cap index rose 5% in two days on the back of two better-than-expected inflation prints (3% on the November US consumer prices index (CPI) print and 2% on the UK December reading).

Fast forward to January and with UK CPI coming in a whopping 0.1 percentage points above expectations, the market dropped 2%.

So despite preaching fundamentals, focusing on the long term and buying good companies – this year looks like another that will be driven entirely by factors outside investors’ control – namely by central banks, who can’t afford a misstep.

It can be hard to look through all this – particularly as interest rates and inflation have dominated the financial pages for the past 18 months and look set to do so again in 2024.

But remember, investing is supposed to be about sound decision-making and getting rich slowly, so why gamble on the next interest rate decision? This seems counterintuitive at best.

If the experts can change their minds so dramatically in the space of two months, then what chance do the rest of us have of getting it right? It’s clear no one really knows what is going to happen.

Investors should continue to do what they have always done – pick good funds, stocks or investment trusts, put their head down, and ride it out. Yes there will be lumps, and yes the macroeconomic environment will make some picks look silly on certain days or even months, but as long as the rationale for owning an asset is right, it will correct itself eventually.

Please Note:

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UK slips into recession as economy contracts 0.1% in December

Stephen Strowger — Thu, 15 Feb 2024 08:28:23 +0000

GDP fell 0.3% in Q4 as a whole, marking second quarter of negative growth

Photo by Unsplash

15 FEBRUARY 2024 – Christian Mayes

The UK has slipped into a technical recession after the economy contracted 0.1% in December and 0.3% in Q4 as a whole, according to the Office for National Statistics.

It marked the second consecutive quarter of economic contraction, after UK gross domestic product fell 0.1% in Q3 2023.

The slight fall in December was mainly attributed to to persistently high inflation, structural weaknesses in the labour market and low productivity growth, alongside adverse weather conditions.

Marcus Brookes, chief investment officer at Quilter Investors, said: “These factors affected the performance of the services and construction sectors, which are the main drivers of the UK economy. Retail sales also declined sharply in December, in the face of ongoing high inflation and interest rates as well as changing buying patterns.

“Some of these challenges are temporary and have already started to ease. The inflation rate held steady at 4% yesterday when many were predicting an increase. Over the coming months, we expect inflation to fall, potentially easing the pressure on UK households, and supporting the recovery of the consumer-driven economy.

“The key indicator to watch is inflation in the services sector, which accounts for the bulk of the UK’s economic activity and employment and reflects the strength of wage growth and consumer demand, which are crucial for the UK’s recovery. As inflation steadies and then reduces, the Bank of England is more likely to cut interest rates to stimulate economic activity and investment.

“The UK economy faces challenges and uncertainties, but it also has many strengths and opportunities. It has a dynamic economy with a skilled and flexible workforce, and the UK is expected to overcome many of the current difficulties and emerge stronger and more resilient in the future.”

Jeremy Batstone-Carr, European strategist at Raymond James noted that the data is evident of deflated activity across all key sectors of the economy, from manufacturing to service and retail as well as construction activity, which was negatively impacted by poor weather.

“Nonetheless, while there is an impression of economic stagnation, brighter times surely lie ahead. As winter rolls away, the lagged impact of high inflation and interest rates will work its way through the economy and inflationary pressures will settle, allowing the Bank of England to lower the base rate come summertime,” he added.

Premier Miton CIO Neil Birrell was also upbeat, saying: “Given the modest nature of the contraction, we should not be overly concerned, but today’s figures are nonetheless below expectations.

“This number, on the back of better inflation data, may give rise to some concern over economic strength in the coming year. Most sectors of the economy were weak, but the optimists will point to the fact that there is plenty of scope to cut interest rates should the current trend in inflation and growth accelerate.”

Please Note:

This article was first published by Portfolio Adviser and is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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Guinness Sustainable Energy Report – 2024 Outlook for Sustainable Energy

Stephen Strowger — Wed, 14 Feb 2024 11:47:51 +0000

This is a marketing communication. Please refer to the prospectus and KID/KIID for the Fund, which contain detailed information on its characteristics and objectives, before making any final investment decisions.

Building efficiency: critical to the energy transition

January 2024

Executive Summary

Energy efficiency, energy security and access to critical material supply chains were the key drivers of the energy transition in 2023. A rapid increase in interest rates together with sluggish inflation negatively impacted the energy transition economics, but 2023 activity in solar, electric vehicles, batteries and energy efficiency all came in ahead of our expectations.

Some clarity was provided around key policy initiatives, but we expect more to come in 2024, spurring further growth in investment and activity. With renewable energy generation continuing to be relatively more economic than fossil fuels, we see the sector representing an attractive long-term growth opportunity.

Our portfolio, which offers broad exposure to companies that are well placed to benefit from the energy transition, now trades at a discount to the MSCI World Index despite offering more than double the earnings growth potential.

This month’s manager’s comments explore building efficiency, focusing on these four key areas.

Read the full report

After a year of highly accommodative fiscal policy in 2022, the dominant driver for 2023 became tightening monetary policy. A rapid rise in interest rates together with pockets of sluggish inflation led the economics of renewable projects to suffer relative to competing fossil fuel alternatives but, post these factors, we find that renewable energy generation continues to be relatively more economic than fossil fuels. Better relative economics as well as security of supply considerations will help to sustain strong demand for sustainable energy activities during 2024 and will keep the long-term driver of renewables adoption intact.

Much of the key policy support for the energy transition in 2023 was enacted with a focus on improved energy efficiency, energy security and access to critical material supply chains, including the following:

Further details were provided in Europe about how the EU will localise clean technology manufacturing and supply chains, in order to reduce its reliance on China, as part of its goal to achieve carbon neutrality by 2050. The EU plans include a 55% cut to emissions, 13% lower final energy consumption and 45% renewables in the energy mix by 2030.

In the United States there was a meaningful surge in activity thanks to the Inflation Reduction Act (IRA), with $369bn of tax breaks morphing into $1.6 trillion of capital being mobilised towards achieving net zero aims. According to the World Economic Forum, this will create over 170,000 jobs and more than 9 million jobs over the next decade. Importantly, with 2024 being an election year, 80-90% of these new jobs are within Republican states.

From a global perspective, 123 countries signed up to the Global Renewables and Energy Efficiency Pledge at COP28, committing to deep emissions reductions by 2030, requiring a tripling of global installed renewable energy capacity and a doubling of the rate of annual energy efficiency improvements.

Around 520 GW of new renewable generation capacity was installed in 2023, 100GW higher than the record installations seen in 2022 and well over double the 194GW installed pre-COVID in 2019. Solar was dominant (at just over 400 GW) with wind in second place (around 100 GW) followed by hydropower, then bioenergy.

Renewable electricity generation in 2023 increased by around 2.5%, reaching over 9,200TWh, and outpacing global electricity demand (estimated 1% growth in 2023).

Electric vehicles saw continued adoption in 2023, albeit at a slower pace than seen in recent years. After growing at over 100% and over 50% in 2021 and 2022, sales of plug-in vehicles grew by around 35% in 2023 to around 14 million units, representing an 18% penetration rate. After increasing in 2022, lithium-ion battery pack costs fell by 14% in 2023 to $139/kWh, driven by lithium and nickel prices that fell by 80% and 40% respectively.

The solar industry grew rapidly in 2023, with installations likely to have exceeded 400 GW for the full year (up tenfold over the last decade and 65% higher than 2022). This is materially ahead of our prior 2023 expectation of 310 GW and will represent the fastest annual growth rate since 2010 (following several years of 20%+ annual growth).

The wind industry returned to growth and is likely to have delivered record installations in excess of 100 GW, despite high-profile company profitability and growth concerns.

The onshore wind sector is likely to have delivered 91GW, with China accounting for 60% of the total and nearly 90% of the year-on-year growth. Offshore wind installations are likely to have reached 12GW (also led heavily by China) with clear policy support for the struggling industry at the end of the year.

Against this backdrop, the Guinness Sustainable Energy Fund delivered a total return (USD) of -0.4% in 2023 vs its benchmark the MSCI World Index (net return) of 23.8%. For comparison, the MSCI Alternative Energy Index was down by 25.2%. The underperformance of the Fund resulted almost entirely from multiple compression rather than earnings downgrades, with the Fund trading at a one year forward price/earnings (P/E) discount of 6% to the MSCI World Index at the end of the year. Since repositioning five years ago, the Fund has delivered a return in excess of its investment universe, based on an equal weighted average calculation.

Looking ahead to 2024 and beyond, we expect further acceleration of the transition:

Renewable power generation is expected to grow at around 7-8%, displacing some coal and gas power, which would result in the electricity sector’s CO2 emissions declining. Grid investment will increase to support the growth, growing at twice its historic rate from $300bn in 2022 to over $800bn per annum (pa) in the 2040s.

Building efficiency and electrification will see sharply greater investment, increasing from $340bn in 2022 to $600bn pa from 2026-30 (10% pa growth versus a historic rate of 5%pa) driven by energy security, economics and tightening building standards.

EV sales should exceed 16 million in 2024, representing around 20% of total passenger vehicle sales and coming in one year earlier than our long-held target of 20% EV penetration by 2025. Improved economics (lower lithium-ion battery prices in 2024) as well as better range and quicker charging times are the key drivers of improved EV sales. We expect the EV/ICE economic parity benchmark for EVs versus internal combustion engine vehicles (ICEs) of $100/kWh battery prices to come in 2027.

Solar remains the cheapest form of new electricity supply. We expect record low module prices at the end of 2023 to spur growth in all major geographies, with full-year global installations likely topping 500GW in 2024. China will still represent more than half of all installations with European and US solar demand set to rise to 70GW and 38GW respectively.

Global wind installations will grow in 2024 to a new record of 115GW, driven by policy support in China, Europe and the US. Beyond 2025 many of the current bottlenecks will dissipate, allowing installations to grow to around 170GW, a growth rate of 7% pa. Offshore installations are set to grow to 40GW by 2030, a 20% pa growth rate.

The outlook we summarise here is broadly consistent with current government activity and observable investment plans.

To be clear, however, the growth described falls well short of the energy transition activity needed to achieve a net zero / 1.5 degree scenario in 2050, as targeted by the IPCC and reiterated at COP28. In a net zero scenario, the deployment of renewable generation capacity, penetration of EVs and battery storage, use of alternative fuels and implementation of energy efficiency measures will need to accelerate markedly.

At 31 December 2023, the Guinness Sustainable Energy Fund traded on a one year forward (2024) P/E ratio of 16.6x, around 13% lower than one year ago. Over the year, the fund’s one-year forward P/E fell from a premium to the MSCI World of 35% to a discount of 13% in October (the largest discount since March 2020) before closing the year at a discount of 6%.

The consensus earnings per share growth outlook for the Fund remains strong at 19.1% pa, forecast between 2023-2026, relative to the MSCI World at 8.4% pa – a premium of over 10% pa. Each sub sector within the Fund is also forecast to see growth in excess of the MSCI World Index.

Current valuation multiples appear, therefore, to discount an earnings outcome that is far worse than that implied by current interest rates and inflationary conditions. Looking longer-term, we believe that the portfolio is likely to deliver normalised earnings growth of around 14% pa, well ahead of EPS growth in the MSCI World Index, that will bring the fund P/E ratio down from the current 16.6x for 2024E to around 10.6x in 2027E.

We expect further positive catalysts in the year ahead. The sector would be a beneficiary of looser monetary policy and lower inflation, while higher fossil fuel prices would further improve the relative economics of renewable technologies.

In terms of policy, further clarity around IRA tax credits and actions related to the EU Net Zero Industrial Act will help to bring greater investment into the sector. We expect investor interest in sustainable energy equities to recover in 2024, reflecting these catalysts, and that the current attractive valuation level will act as a further catalyst. Beyond these, the continuing importance of energy security and the increased individual, social and government pressures for consumers to become more energy efficient and for producers to increase their share of sustainable energy generation will support further growth in the sector.

We believe that the Guinness Sustainable Energy portfolio of 30 broadly equally weighted positions, chosen from our universe of around 250 companies, provides concentrated exposure to the theme at attractive valuation levels that are particularly attractive relative to consensus earnings growth expectation

Read the full report

The Managers

Will Riley – Portfolio Manager

Will joined Guinness in 2007 and has been managing energy funds since 2010.

Johnathon Waghorn – Portfolio Manager

Jonathan joined Guinness in 2013 and has been managing energy funds since 2008.

The value of this investment and any income arising from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you invested. Past performance does not predict future returns.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

At Ethical Offshore Investments, we can access the fund mentioned in this article on the various offshore investment platforms we offer. We do NOT CHARGE any additional entry and/or exit fees to purchase these funds for our clients.

Speak with Ethical Offshore Investments to learn how you can save on your investment costs by investing via Ethical Offshore.

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Trade the Tape – Three Cheers for 5,000!

Stephen Strowger — Mon, 12 Feb 2024 10:32:27 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

February 8, 2024 – Adrian Tout

Three cheers for 5,000….

How much further can this epic rally go..?
Monthly time frame offers useful perspective
Q4 earnings show only 2.9% YoY…. Good…. but not great

This week the S&P 500 closed above 5,000 for the first time.

Golf clap.

Another milestone as we climb the infamous wall of worry.

Over the past 100+ years the S&P 500 has averaged capital gains of ~8.5% per year plus dividends of ~2.0%

That’s a total return of close to 10.5% (on average)

If you compound 10.5% per year over 20 years – that’s a 637% increase.

But as we know, the pathway is rarely smooth.

For example, some years the market may “add 20%” and others it could give back a similar margin (or worse).

And we saw this happen recently.

However over the long run – markets will rise more often than they fall. Therefore, the percentage play is always from the long side.

One of the best charts offering perspective is this (which I shared last year):

This shows how the market has continually navigated numerous headwinds.

From World Wars to depression to recessions to numerous financial crises.

That market finds a way through…

In more recent times (post 2000) – we’ve experienced two pullbacks of around 50%.

I’ve traded through both.

The first one hurt a great deal. The second one less so.

I’m willing to bet we will experience a similar 50% drawdown before 2030.

And guess what – it’s something to look forward to.

Experience has taught me these events are (rare) opportunities… not reasons to panic.

Great returns are created from buying low.

Something else to take away from this chart – U.S. stocks have typically outperformed all other asset classes over time (a conversation I love to have with people – especially those ‘married’ to real-estate or gold).

Whether the asset class is property, gold, bonds or overseas markets – U.S. stocks reign supreme.

And that’s certainly been the case the past few years – as gains in U.S. equities dwarf those of the UK, Europe, China, Australia and most other countries.

But let’s take a look at this current market rally.

S&P 500 Closes Above 5,000

The equity rally from late October 2023 has been nothing short of extraordinary.

I doubt if anyone forecast the S&P 500 trading above 5,000 by early Feb.

I certainly didn’t. Not even close.

From example, the average S&P 500 end of year forecast in the first week of January was just below 4800.

I shared this table of 18 bank / analyst forecasts:

At this week’s close of 5026 – and ~6 weeks into the year – we’re already above most analyst’s EOY predictions.

Let’s start with a look at the weekly chart (followed by the monthly):

Feb 9 2024

A couple of observations:

First, there has only been one red candle (the first week of the year) since the week ending October 23.

That’s not typical. Generally stocks will pause for a breath over 6 months.

It’s little wonder we find the weekly Relative Strength Index (RSI) well in overbought territory.

The last time things were this (technically) extended was early 2022.

But as I remind traders – an overbought RSI is not a sell signal in isolation. The market can remain overbought for several weeks (if not months). For example, look at the period between May and September 2021.

However, typically sharp sell-offs occur from this zone.

Second, we’re around 25% higher than the 200-week exponential moving average.

And whilst this is less than what we saw in early 2022 – it’s also rare markets get this extended in this timeframe.

Bottom line – trade with caution – it’s difficult to say (with any conviction) there’s much left in this rally.

Let’s now shift our horizon using the monthly lens – as it paints a slightly different picture.

Feb 9 2024

Using this horizon – we are not yet overbought (as we were in both 2018 and late 2021)

However, things are looking extended in terms of distance from the 35-month EMA (which is similar to the 200-week EMA)

Two other observations:

61.8% to 76.4% outside the retracement from October last year is around 5,050 – where we are trading now. This zone could act as an area of resistance; and
We have seen 5 pull backs of at least 10.5% since 2016. In each case we traded down to the 35-month EMA (or slightly below) where it found support. That level is currently 4191

From mine, this is the zone where you would look to start adding exposure (more on this in a moment when I assess the forward PE based on Q4 earnings).

For example, pending what we see with the U.S. election, the tensions in the Middle East, Chinese slowdown, oil prices, monetary policy, bond yields and Q1 earnings – it would not surprise me to see us test this area.

Speaking of earnings…

Q4 Earnings Good… Not Great

Factset furnished us with the latest update on Q4 earnings this week.

In short, earnings have improved this week. However, the growth in earnings does not equate to the surge we have seen in equities.

The blended earnings growth rate for the 67% of S&P 500 companies who have reported fourth quarter is 2.9% YoY.

The good news is that’s up from 1.6% last week and an earnings growth rate of 1.5% at the end of the fourth quarter (December 31).

Looking ahead, analysts expect YoY earnings growth of 4.0% for Q1 2024 and 9.1% for Q2 2024.

That’s a rapid ascent higher which will require a robust (spending) consumer.

For the full year 2024, analysts are calling for YoY earnings growth of 10.9% (slightly down from the 12% a few weeks ago)

Factset also tell us the forward 12-month P/E ratio is 20.3, which is above the 5-year average (18.9x) and above the 10-year average (17.7x).

Echoing Leon Cooperman the other day – that’s too rich for my blood.

It’s worth noting that a 17.7x forward PE puts us around 4159 (i.e. the 35-month EMA zone shared earlier) – which implies a (potential) correction of ~18%

Putting it All Together

One thing I’ve learned over the past 25+ years in this game is markets will often go further than what you thought was possible (in both directions)

When you think they can’t go higher – they do. And when you think the selling is finished – it’s generally not.

For example, if you asked me whether the S&P 500 would be trading above 5,000 in early February late last year – I would have said it’s less than a 20% probability (a bet I would not take).

But here we are…

Fortunately I have long exposure (which I’ve since pared) – and did not put on any short positions.

So far that bet has been prudent.

Traders taking short positions on the basis the market is overbought have been crushed (in turn forcing them to cover – helping to drive up prices).

What’s more, it’s possible that zero-dated options (a relatively new phenomenon) is playing a role. Steve Sosnick – Chief Strategist at Interactive Brokers – wrote about this recently:

Last year, we saw exchanges list so-called “zero-dated” or “0DTE” options listed in a range of key indices and ETFs. They have proven immensely popular, with cumulative options volume setting a record last Thursday (the day after the FOMC meeting).

For better or worse, they have made speculation incredibly easy. It is likely that these products exacerbated December’s decline, and it is almost certain that they have accelerated this year’s rally.

Most traders are more comfortable trading from the long side rather than the short side, which explains the recent pops in volume on up days.… it would not be surprising if these ultra-short-term options lead to microbursts of volatility and the occasional spurious move

Who knows for certain – but I’m sure they are playing some part in this euphoria.

Trade safe. Stay patient. This is a long game.

Regards
Adrian Tout

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Five funds for the Year of the Dragon

Stephen Strowger — Mon, 12 Feb 2024 09:55:39 +0000

Staci West – FundCalibre (Equities, Asia & Emerging Markets)

6 February 2024

The Year of the Dragon is typically associated with good luck and fortitude. But can the Chinese stock market roar for investors in 2024 and beyond?

Since ending its three-year lockdown at the beginning of 2023, China’s stock market has been on a wild ride. China funds have faced setbacks due to economic and geopolitical concerns, causing a majority of them to decline by over 45% in the last three years*. Investor worries include rising authoritarianism, a property downturn, deflation risk, and slowing economic growth in China.

In November, foreign direct investment outflows surpassed inflows for the first time since tensions with the US escalated. However, market fluctuations highlight China as a long-term investment, and for those believing in its long-term potential, the current situation may present a favourable entry point.

Though some sectors like real estate face challenges, targeted government stimulus aims to revive the economy. Fidelity anticipates a “controlled stabilisation” in 2024, with the World Bank estimating a 4.5% GDP growth**. Key drivers for the economy, such as expanded services consumption and increased tourism, are expected to contribute positively.

Diversifying your portfolio with exposure to China

China’s significant role in global economic growth is likely to persist. Looking forward to the next five to ten years, while China remains high-risk, long-term investors may find potential for significant rewards. For those comfortable with higher risk and interested in investing in China, starting with a broad global emerging markets or Asian fund is recommended.

Despite a volatile decade for China, the Allianz China A-Shares fund topped the performance table for IA China/Greater China sector, delivering an impressive triple-digit return of 193.60%***. This return is nearly 70% greater than its nearest peer***. The fund concentrates on the stocks of companies that are incorporated in China and that are listed as A-shares on the stock exchanges of Shanghai or Shenzhen.

Invesco Global Emerging Markets is a highly active fund that consists of around 50 best ideas across emerging markets and currently has 22.7% allocated to China****. The managers look to exploit market inefficiencies caused by investor behavioural biases, giving the fund a slight value tilt. The fund has an outstanding long-term track record and has returned over 34% over the last five years^.

Another contrarian fund is the Federated Hermes Asia ex Japan Equity fund which invests in emerging markets within the Asia ex-Japan region. The manager actively invests in stocks that are currently out of favour but which he believes are likely to perform better in the future and currently holds 43% of the fund in China****.

JPMorgan China Growth & Income trust invests in Chinese companies or those which derive a substantial part of their revenues or profits from these territories. The managers are growth-oriented investors who target higher quality companies within their ‘best ideas’ approach to the region, while also paying an income.

The Guinness Asian Equity Income fund is another option for those looking for income in the region. This fund invests in companies across the whole Asia Pacific region, including Australia, and currently has roughly a third of the portfolio invested in China****. The fund has a current yield of 4.6%****.

*Source: FE Analytics, total returns in sterling, 29 January 2021 to 29 January 2024

**Source: World Bank, 14 December 2023

***Source: FE Analytics, total returns in sterling, 29 January 2014 to 29 January 2024

****Source: fund factsheet, 31 December 2023

^Source: FE Analytics, total returns in sterling, 1 February 2019 to 1 February 2024

*Source: S&P 500 Equal Weight Index Factsheet, 29 December 2023
**Source: FE Analytics, total returns in US dollars, 1 January 2023 to 29 December 2023
***Source: Guinness Global Investors, Webcast Q3 2023
****Source: Capital Group, 2024 Outlook

Please Note:

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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Nuts about Brazil: Latin America’s largest economy is having its moment in the sun

Stephen Strowger — Mon, 12 Feb 2024 08:20:27 +0000

Brazil’s inflation, monetary policy and fiscal discipline are the envy of the developed world.

23 January 2024

By Alison Savas

Falling inflation, falling rates and fiscal repair. It’s the backdrop the developed world is aspiring towards.

But the economy we’re referring to is Brazil – and there’s a lot to like, with both cyclical and longer-term structural opportunities.

While we’re excited about today’s improving fundamentals and attractive valuations, the environment hasn’t always been as prospective. In early 2022, Brazil was suffering from very high inflation driven by high food and power prices owing to drought from La Nina.

The target policy rate set by the central bank (the Selic rate) rose from 2% to 13.75% over an 18-month period which, amongst other things, put a lot of pressure on highly geared corporates.

Meanwhile, the election of the left-leaning President Luiz Inácio Lula da Silva added uncertainty around uncontrolled fiscal spending.

But today, Brazil is poised for recovery, providing an attractive window of opportunity for stock market investors.

An evolving cyclical setting

As a result of policy makers moving with such purpose, inflation has fallen back to mid-single digits and the central bank has embarked on a rate cutting cycle. Our analysis suggests inflation is on track to remain around 4% in 2024, leaving plenty of room for further rate cuts. The market has priced the Selic falling to 9.75% by mid next year.

Fears around unconstrained fiscal spending have not come to fruition. The Lula government is targeting a primary fiscal surplus in 2025 (government revenue less spending but excluding interest payments), which will be the first primary surplus since 2013.

This fiscal discipline comes at a time when nominal GDP growth has been resilient and government revenue has been supported by strong commodity prices. Government debt has fallen from 90% of GDP at the peak of Covid to 75% (Biden and co. could take note).

While the political backdrop looks relatively stable today, politics and regulation have not always been supportive, so a healthy dose of scepticism should remain around whether Lula can achieve his fiscal goals. Brazil has a large public sector and generous social security programs which are hard to reform, but the point remains that the government is taking a sensible approach to spending and the trajectory is promising.

Structural strength

Brazil’s structural opportunity may not be as well understood – or priced – by the market. Brazil, and Latin America more broadly, have the resources to feed the world and can be a key enabler of the energy transition.

When it comes to agriculture, it is Brazil’s key export sector.

The country is one of the largest exporters of soybeans and meat globally, as well as exporting corn and sugar (and let’s not forget coffee beans, the lifeblood of this investment team).

The global population is growing and with the middle class expected to reach 6 billion people by 2050, demand for Brazil’s soft commodities can remain strong. And while a large chunk of these exports find their way to China, demand for food staples should remain relatively resilient even with a slower-growth China.

Then there’s Latin America’s role in energy transition. Low carbon technologies require meaningfully more minerals. For example, electric vehicles require up to four times more copper than an internal combustion engine vehicle to electrify the power train. Latin America is a large and low-cost producer of many of these commodities. Brazil has exposure via graphite and nickel, key materials for batteries.

Brazil is also a large producer of crude oil, which may feel at odds with the energy transition.

Brazil exports crude but imports refined products, which washes out to oil accounting for a marginal share of the country’s net exports. This means Brazil has a greater degree of energy independence than many other emerging economies (for example, India) but arguably it isn’t dependent on continual pumping. That said, taxes paid on profits from oil and gas certainly support the government’s coffers.

In this context it may surprise many that Brazil generates two-thirds of its own energy from hydropower, so a pathway to cleaner generation is firmly in place.

An undervalued stock market?

Despite these cyclical and structural tailwinds, Brazilian equities are priced on just 8x forward earnings.

But this alone should not be reason to allocate capital. Investors must be selective.

Three examples of how we’re providing clients exposure to this turning point for Brazilian equities are Itau Unibanco (NYSE: ITUB), Sendas Distribuidora (NYSE: ASAI) and Nu Holdings (NYSE: NU).

Itau Unibanco is one of the leading private sector banks in Brazil with around 12% share of total loans. The Brazilian banking system is relatively consolidated – the top four banks account for almost half of system loans – and the private sector banks are taking share from the state-owned incumbents.

Household debt is still only 35% of GDP, which is low relative to other developing economies.

One-quarter of Brazil’s population still remains unbanked. We see an opportunity for loans to grow and credit penetration to increase in a more benign macro backdrop. We like Itau’s exposure to a wealthier customer base which can be a competitive advantage for profitable lending, e.g. cross selling products and managing non-performing loans through the cycle.

We see Itau’s earnings growing around 20% p.a. as loan growth accelerates in a stronger macro backdrop. The bank is well capitalised, has a dividend yield of c. 6.5%, is priced at just 1.3x book and has consistently delivered an ROE of circa 20%.

Alison Savas is an investment director at Antipodes Partners. The views expressed above should not be taken as investment advice.

Please Note:

This article was first published by Trustnet and is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Socially Responsible Investing – Ethical Business Standards

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Trade the Tape – Will the Bond Vigilantes Strike Back

Stephen Strowger — Fri, 09 Feb 2024 07:00:33 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

February 8, 2024 – Adrian Tout

Will the Bond Vigilantes Strike Back..??

US Government’s insatiable appetite for even more debt
Record Treasury auction this week – $42B in 10-Year Notes
Building the case for higher yields in the years ahead

Today the US federal government sold a record $42B of 10-year notes:

This was a closely watched bond auction – with the potential to push bond yields higher if there was a lack of demand.

But this wasn’t the case… it was well bid… fetching a yield of 4.093%

Markets exhaled.

Of particular note – international demand was at 71% versus a six-month average of 66.4%.

Makes sense…

The US is arguably one of the safer (or economically stronger) markets to put money to work.

For example, China is in the midst of debt-deflation spiral – with ratings agencies putting them on notice (following the imminent collapse of Evergrande – with the debts in excess of ~$300B)

Europe is in and out of recession – with the UK not much better.

From that lens, the US looks like a decent alternative.

The US Treasury said last week that it plans to continue gradually raising coupon auction sizes through April.

A $54 billion sale of three-year notes saw solid demand on Tuesday. The Treasury will also sell $25 billion in 30-year bonds on Thursday.

Why record debt issuance you ask?

Simple: widening budget deficits.

And that’s a problem.

Powell’s Warning

Last weekend Fed Chair Jay Powell gave a rare interview with 60 Minutes.

Not only did Powell tell people to expect rates higher for longer – he also sent less than subtle warnings to Congress. I quote:

“It’s probably time, or past time, to get back to an adult conversation among elected officials about getting the federal government back on a sustainable fiscal path”

Amen.

But good luck with that Jay.

When asked if this was an urgent problem – Powell said “…sooner is better than later. You could say that it was urgent, yes.”

I might be wrong – however I suspect the Chairmen is looking at this chart – where federal debt continues to outpace real GDP (i.e. output).

Another way to interpret this chart: it’s costing greater amounts of debt (at higher rates) to maintain the same rate of growth.

This is not a sustainable path.

Bloomberg reported that former Fed Chair – Janet Yellen – since taking the position in Treasury – has consistently said that the right metric to look at is real net interest as a share of GDP — in other words, the inflation-adjusted interest rate that the government is paying for its total debt, compared with the size of the economy.

However, this week she highlighted that the Biden Administration’s budget proposal last year would have kept that rate at around 1%, an “historically normal” rate, in coming years.

Originally the budget was said to include $2.5 trillion of proposed deficit reduction – however Congress failed to act.

There were no cuts… just increased borrowing and spending.

Efforts to reduce spending were blocked.

This has put Yellen in a bind.

When pressed on the ‘urgent issue’ of widening deficits (and increased debt) she said recently: “I don’t want to express a view – the jury’s still out”

This was in stark contrast to a year ago.

Powell explained the basic math to 60 Minutes (echoing my chart).

He said… “federal debt is growing faster than the economy. So, it is unsustainable.”

This isn’t rocket science.

As an aside, renowned investor Paul Tudor Jones, told CNBC this week that he agreed with Powell in thinking that the federal government is on an unsustainable fiscal path.

Someone want to tell Congress?

The Case for Higher Rates

With inflation coming down and the prospects of maybe two or three central bank rate cuts later this year – bond yields have retreated from their recent highs.

For example, the 10-year peaked just above 5.0% to trade almost 100 basis lower this month.

And from mine, this has been a large catalyst for the massive equity rally the past few months – especially longer-duration assets (e.g. tech)

But here’s the thing:

Given the troubling fiscal situation – there’s no guarantee the bond vigilantes won’t return with vigor.

In other words, they will demand higher compensation for buying US debt.

On this subject, I caught this CNBC interview with billionaire investor and hedge fund manager Leon Cooperman.

Cooperman is Chairman and CEO of Omega Advisors, a New York-based investment advisory firm managing over $3.3 billion AUM – the majority consisting of his personal wealth.

He echoes much of my sentiment:

Investors are too optimistic about the number of rate cuts the Federal Reserve will enact this year; and
The S&P 500 is now trading at 21 times forward earnings, which seems unsustainable.

As a complete aside, when I find too many people who agree with my thesis, I start to ask what I could be missing?

Here’s Cooperman:

“Everybody came into 2023 with a very negative view, and the market went up quite a bit. Everybody is now positive, and so my guess is that by the end of the year, maybe we will go down”

“I think the Fed will cut short rates, maybe two or three times.

Forget the six times that the market was discounting, but I think the long end will go up.

The 10-year at 4%, 5% or higher would not be a big surprise.

… And when you see the market multiple 21 times… it seems too rich to me

Too rich for me too Leon!

On the subject of unsustainable deficits and debt – he said this is a reason we could see much higher rates.

The U.S. government ran up another half a trillion dollars in red ink in the first quarter of its fiscal year.

The jump in the deficit pushed total government debt past $34 trillion for the first time (see my earlier chart)

“Given the amount of debt that we’re creating in the system, I wouldn’t be a buyer of government bonds at these levels”

Put another way, Cooperman does not feel a 10-year note yielding around 4.0% is adequate compensation.

If he (and Tudor Jones) are right – it could spell trouble for equities should bond vigilantes wake up.

Putting it All Together

From mine, this is a potential blind spot for equity investors.

They are paying a very high multiple to own stocks (e.g. 21x forward) and are pricing in as many as six rate cuts.

As Cooperman says – this is a risky bet.

Powell essentially ruled out a rate cut in March (as part of this 60 Minutes interview) – whilst stressing the urgency of the worsening US fiscal situation.

And from mine, Yellen’s unwillingness to answer the question of fiscal responsibility this week spoke volumes.

What happened to the $2.5 Trillion in planned spending cuts?

From mine, it’s unlikely Congress is going to find any agreement to aggressively cut spending.

However it needs to be done…

Which raises a question: who is going to vote for austerity measures?

Cutting spending is never popular.

But at some point, you don’t get a choice. Your hand will be forced.

Keep an eye on bond yields.

Regards
Adrian Tout

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Gold Investing – a simple & cost effective solution

Stephen Strowger — Tue, 23 Jan 2024 11:09:43 +0000

Xavier Blaise – Financial Adviser – OIBME Asia Ltd

23 January 2024

The following article is from Xavier Blaise, a financial adviser for OIBME Asia Ltd who is based in Kuala Lumpur, Malaysia.

Xavier prepares articles on a regular basis on financial subjects that are topical for the expatriate investor, which are published on his ‘Finance Enthusiasts’ WhatsApp group.

Dear Finance Enthusiasts,

I remember my childhood days when my grandma would gleam with joy, adorned in her gold jewellery – a cherished gift from my granddad.

For them, a generation that had just emerged from the shadows of war, gold was more than just an accessory. It was a beacon of security during uncertain times.

Fast forward to today, and we find ourselves amidst talks of Western economies potentially shifting towards an “economy of war”. With concerns about currency depreciation and an increasing demand for gold by central banks, it feels like history is repeating itself. The economic challenges of 2023 – market volatility, rising interest rates, and geopolitical tensions – have led various experts to predict a significant surge in gold prices in the coming years. Estimates range from a modest 10% to a whopping 125%! Factors such as the looming threat of recession, increased demand for gold in Europe, and geopolitical factors are fuelling this trend.

Gold, as we know, has traditionally been a safe-haven asset, especially during times of economic uncertainty, geopolitical tensions, and market volatility. It’s seen as a reliable store of value, often sought by investors looking to safeguard their wealth during challenging periods. It also serves as a means of diversification, providing a hedge against potential losses in other asset classes like stocks, bonds, or real estate.

But did you know that you can own physical gold without the hassle of storage or transport?

Physical Gold ETCs (Exchange Traded Commodities) offer investors exposure to gold prices, providing an easily accessible and liquid investment option compared to purchasing and storing physical gold. Renowned ETCs like iShares Physical Gold, Wisdom Tree Physical Gold, and Invesco are all backed by their holdings in physical gold bullion, which is held in storage and audited regularly.

Here are some benefits of Physical Gold ETCs compared to purchasing gold bullion:

Convenience and Accessibility: Physical Gold ETCs provide exposure to gold prices through exchange-traded funds (ETFs), offering an easily accessible and liquid investment option.

Diversification: ETCs allow investors to diversify their portfolios without the need to physically own and store gold bars or coins.

Lower Transaction Costs: Buying and selling Physical Gold ETCs typically involve lower transaction costs compared to acquiring and storing physical gold.

Liquidity: ETCs can be bought and sold on the stock exchange like shares, providing immediate liquidity.

Professional Management: ETCs are managed by financial professionals who handle the logistics of acquiring, storing, and securing physical gold.

Fractional Ownership: ETCs allow investors to own fractional shares of gold, making it more accessible to those with smaller budgets.

No Storage Concerns: Investors in Physical Gold ETCs do not need to worry about secure storage facilities for their gold holdings.

Transparency: ETCs often provide transparency into their holdings, allowing investors to track the performance of the underlying physical gold.

Feel free to reach out if you’d like to know more about this investment product.

And remember, always be mindful of your investment goals and risk tolerance. Happy investing!

Xavier Blaise is a financial adviser with OIBME Asia Ltd.

If you would like to obtain further information on how to invest directly into physical Gold ETC’s, please click on the More Information button at the bottom of this page or email Xavier direct at xavier.blaise@oibme.com

The above article is for information purposes only. The views of the author or any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy, sell or hold any specific investment or to adopt a particular investment strategy.

Please speak to Ethical Offshore Investors or your personal financial adviser BEFORE you make any investment decision based on the information contained within this article.

At Ethical Offshore Investments, we can access the physical Gold ETC’s (plus other gold related investments) on the various offshore investment platforms we offer. We do not charge any additional entry and/or exit fees to purchase these funds for our clients.

Speak with Ethical Offshore Investments to learn how you can save on your investment costs……. resulting in more of the investment growth staying in your pocket.

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Will ESG deliver in 2024?

Stephen Strowger — Tue, 23 Jan 2024 08:44:54 +0000

Joss Murphy 04/01/2024 in Sustainable investing – Fund Calibre

4 January 2024

2023 may have been less grim for ESG-focused funds, but it was still no picnic. A number of high profile ‘green’ companies ran into problems, while an apparent cooling on net zero targets from major governments around the world made investors think twice. However, the problems of climate change, biodiversity loss and waste remain as acute as ever. Is it time to re-examine these funds?

It has been a tough period of performance for ESG and sustainable funds. LSEG Lipper data shows both global and emerging market sustainable funds still lead their conventional peers (by 2.4% and 6.9% respectively) over five years, but this significantly reverses over three years, with sustainable global funds lagging by 6.3%*. It’s a similar picture over one year.

This weakness can partly be explained by the rotation from growth to value. ESG funds tend to have more of a growth focus because they will often leave out ‘value’ areas, such as conventional energy or mining. There has been a bounce in fossil fuel companies in the wake of geopolitical tensions, including the wars in Ukraine and the Middle East, and a better performance from ‘value’ companies as interest rates have risen.

But this is not the full story.

The problem areas

There have also been some specific problems in certain sectors.

Offshore wind, for example, has struggled in the face of rising costs. Flagship windfarm group Orsted – a large holding for many environmentally-minded funds – has been forced to scrap a number of projects on cost grounds and has seen its share price fall over 40% over the past year**.

Electric vehicle demand has slowed, as higher interest rates have raised costs for consumers. This has had an impact across the value chain.

It didn’t help that share prices were already very elevated for some of these companies. Three years ago, ESG funds were the flavour of the month. Fund groups were rolling out fund after fund and a lot of money was chasing some of the flagship environmental solutions companies. Strong performance helped short-term fund flows, but left valuations high. The ESG sector is feeling the slow unwinding of that exuberance.

There is another, less tangible factor that may have dented flows into the sector. A recent survey from the AIC found a growing disillusionment with ESG investing generally. In 2021, almost two-thirds of respondents (65%) said they considered ESG when investing***. This fell to 60% in 2022, and 53% in 2023***. A crucial factor has been that investors aren’t convinced by the ESG claims coming from asset managers. A majority of all respondents (63%) say they are concerned about greenwashing, and it appears these fears have grown***.

This backlash can be seen clearly in flows into responsible investment funds. The most recent Investment Association data showed flows into responsible investment funds remained negative in October 2023, with outflows of £530 million, only marginally down on the record outflow of £544m in September****.

A turnaround for ESG

So far, so grim, but there are reasons to be more optimistic for ESG funds in 2024. A new disclosure and labelling regime from the FCA is coming into effect, after a lengthy engagement between the regulator, consumer groups and investment managers. This aims to tackle the lack of confidence in sustainability-related claims, introducing an anti-greenwashing rule, clear product labels and naming and marketing requirements.

It is early days, but these new rules should ensure that no-one is simply slapping an ESG label on a fund and claiming their investment process fully integrates ESG analysis. There will be robust measures in place to ensure that funds conform to a clear set of rules. This should create greater confidence among investors and could help reverse outflows from the sector.

At the same time, the environmental and social problems these funds seek to address remain acute. The path of climate change is well-documented, but worth remembering.

The National Centers for Environmental Information reports that the earth’s temperature has risen by an average of 0.14° Fahrenheit (0.08° Celsius) per decade since 1880, or about 2° F in total^. The rate of warming since 1981 is more than twice as fast^. To prevent warming beyond 1.5°C, emissions need to come down by 7.6% every year from this year to 2030^^. Every year targets are missed, the level of difficulty and cost to reduce emissions goes up.

Neil Goddin, a manager on the Artemis Positive Future fund points out that we are overusing our planet’s resources by around 1.75 times each year^^^. He adds: “Earth Overshoot Day – the date in a given year by which humanity’s demand for ecological resources exceeds what our planet is able to regenerate in a year – arrived on 29 December in 1970. By 2000 it was 23 September. This year (2023), it arrived on 2 August.”

He says that around a million plant and animal species now face extinction, with freshwater, marine, forestry, grassland and wetland environments all impacted. Deforestation is also a major concern, with an area of forest the equivalent to the size of Portugal lost each year. Agriculture is the key culprit, driving three quarters of all deforestation^^^^.

What about performance?

Performance appears to be turning round for a number of the ‘problem’ companies. They have outpaced the recent rally, with Orsted seeing its share price rise 14% over the past month alone**. EV demand is stabilising, which is good news for companies such as Umicore. It is also benefiting from government subsidies for battery production around the globe. The more ‘risk on’ environment seen since the start of November should be a better environment for ESG-focused funds, particularly those that seek to make a positive impact with their investments.

However, for many investors it won’t simply be about performance. For example, the Artemis Positive Future fund has saved 1.1 tonnes of carbon, recycled 450,000 drinks containers and helped treat 12,000 patients, per £1m invested in the fund in 2022*^. The Ninety One Global Environment fund estimates that the companies in which it invests avoided a total of 1.5 billion tonnes of carbon, while 78% of them avoided more carbon than in the previous year**^.

The JPM Climate Change Solutions fund is another option for investors keen to make a difference. It invests across sustainable food and water, recycling and reuse, sustainable construction and transport, alongside renewables and electrification.

For something a little different – and a potential option for income seekers – there is the VT Gravis Clean Energy Income fund, which invests in a portfolio of infrastructure companies, involved in the operation, funding, construction, generation and supply of clean energy. It currently has a yield of 5.6%***^.

Strong investment returns tend to come where there is a big problem to be solved. This is not just climate change, but deforestation, biodiversity destruction and waste management – creating real opportunities for companies with the right solutions. This is a long-term theme that has suffered a short-term dislocation. It should present a major opportunity to investors who are willing to be patient.

*Source: LSEG, Everything Green Flows, Q1-3 2023
**Source: Stockopedia, data at 3 January 2023
***Source: AIC, ESG Attitudes Tracker, 9 October 2023
****Source: Investment Association, 5 December 2023
^Source: National Centers for Environmental Information, 12 January 2023
^^Source: UN environment programme, facts about the climate emergency
^^^Source: The World Counts, 7 December 2023
^^^^Source: Artemis, 12 December 2023
*^Source: Artemis Positive Future, impact highlights in 2022
**^Source: Ninety One Global Environment Impact Report, July 2023
***^Source: Gravis Capital, cumulative performance to 30 November 2023

Please Note:

This article was first published by Fund Calibre and is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Speak with Ethical Offshore Investments to learn how you can save on your investments costs

Socially Responsible Investing – Ethical Business Standards

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Fundsmith Equity Fund 2023 Annual Letter to Shareholders

Stephen Strowger — Wed, 17 Jan 2024 13:50:13 +0000

Fundsmith published Terry Smith’s 2023 annual letter to the shareholders of the Fundsmith Equity Fund.

Fundsmith Equity Fund 2023 Annual Letter to Shareholders

At Ethical Offshore Investments, we have been long term supporters of the Fundsmith Equity Fund and the way that the fund managers invest in high quality, global companies. The style and discipline of the management of this fund has rewarded investors well, significantly outperforming its peers and the various global indices.

Below is the performance of the Fundsmith Equity Fund over the past 10 years:

Fundsmith Equity Fund I Acc – 15.0%pa
FTSE World Index – 11.6%pa
IA Global Index – 9.0%pa
FTSE UK All Share Index – 5.0%pa

Important information:

At Ethical Offshore Investments, our clients can access the highly rated Fundsmith Equity Fund and not be subject to additional entry or exit fees. As we aim not to use commission paying funds, we will access the lowest charging version of the managed fund that is available on the relevant platform…… resulting in more of the investment growth staying in your pocket.

Speak with Ethical Offshore Investments to see how you can save on your investments costs by investing via Ethical Offshore.

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How to rebalance your portfolio and diversify the right way

Stephen Strowger — Wed, 17 Jan 2024 13:29:22 +0000

Investors sometimes misunderstand the benefits of diversification and that can be costing them between 1.8 and 3 percentage points of performance per annum, a study by Orbis Investment counsellor Rob Perrone showed.

17 January 2024

By Matteo Anelli – Senior reporter, Trustnet

While some concepts of rebalancing are widely understood, other “very impactful practices” can sometimes be missed, for example understanding the impact that different investment styles can have on returns – and this is exactly where the most money can be made or lost.

The problem arises when diversification-seeking investors unknowingly blend funds with similar styles, which does “very little to reduce risk” and results in portfolios that are diversified only in name, explained Perrone.

This is especially true today, as the past decade was “extraordinarily favourable” for the growth style, resulting in investors being highly concentrated in growth within active funds.

But it gets even worse. Three-quarters of funds within the IA Mixed Investment 40-85% sector have a growth bias, and funds in that sector also tend to be highly correlated to the largest fund in that peer group, making it even easier to end up invested in the same thing, despite apparent diversification.

“That’s a big deal because size is a very good proxy for popularity among investors and advisors, and so it’s completely plausible that someone’s sitting down and thinking to be diversified, but actually their funds might be up to 95% correlated with one another,” Perrone said.

To prove how effective rebalancing between investment styles can be, Perrone looked at the historic return of an equally-weighted blend of the largest passive fund and the largest active fund in the IA Mixed Assets 40-85% sector against the return of a combination of passive (25%), growth (25%) and contrarian value (50%).

The result shows investors balancing with the contrarian fund spurred returns by 28 percentage points in the 10 years between 2013 and 2023, while the average fund in the sector is stuck on much lower figures, as shown in the chart below.

Blending funds with different styles enhanced returns

Source: Refinitiv, Orbis

“You might expect, given how well the growth style did over the past decade, that adding a value-focused vehicle would dilute your returns, but in fact it didn’t, it actually enhanced long-term returns. The diversification benefit is really substantial,” said Perrone.

“Different styles come in or out of favour, and as you’re rebalancing, you’re taking advantage of that. Also, a significant part of an investment manager’s returns is driven by company-specific forces, it’s not just a case of tilting towards one factor or another. The combination of those two things means that blending value in with passive and growth actually enhances your returns.”

Not only that, it also reduces risk and maximum drawdowns, Perrone showed in the graph below.

Blending funds with different styles reduced risk

Source: Refinitiv, Orbis

Why now?

Rebalancing will be key in 2024, as the tech-heavy Nasdaq index, Latin America- and India-based investments returned 46.4%, 26.2% and 14% respectively last year, and most investors will understand that now it might be a good time to trim back on those exposures.

This is the most commonly understood side to rebalancing and what FundCalibre managing director Darius McDermott suggested to do in 2024. He said that now might be the right time to rebalance portfolios and take profit from the asset classes that have outperformed in the past 12 months, as “the winners in one year will often underperform in the subsequent period”.

Performance of indices in 2023

Source: FE Analytics

Rebalancing in this case allows people to sell assets as they become expensive and to buy back up into market declines, which is “usually a pretty good idea that enhances returns,” said Perrone.

“Investors who do not do this, will end up with underlying exposures and risk levels all over the place, and worse than that, it’s not just variable over time, it’s procyclical. And so they end up with their highest allocation at the top of market bubbles (the last time you want to be overweight) and their lowest allocation just after market crashes, which are very often pretty good buying opportunities.”

To illustrate this, he used the annualised return of the MSCI World Index as a proxy for equities and that of the JPMorgan Global Government Bond index as a proxy for bonds. Forgetting to rebalance cost investors 0.7 percentage points per year, as shown in the chart below.

Rebalancing between asset classes

Source: Refinitiv, Orbis

The solution

The key takeaways for Perrone were to diversify by getting active, getting away from the crowd by adding something different and looking at one’s portfolio through the following lens: if everything is working at the same time, diversification is lacking.

“It’s healthier to have some things in your portfolio that aren’t working at the moment. Going through periods of looking stupid compared to the other things that you own is a sign that you have diversification,” he said.

“And so we would encourage investors to ask themselves not only ‘how many different houses do I have represented?’, but also ‘are these bringing something fundamentally different to the portfolio?’, ‘are the underlying holdings meaningfully different?’ and ‘Do the returns of the funds behave in a meaningfully different way?’,” he concluded.

Please Note:

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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Emerging trends: 2024 landscape for global equities

Stephen Strowger — Wed, 17 Jan 2024 12:01:24 +0000

Chris Salih – Fund Calibre

2 January 2024

After a period when markets were preoccupied with the minutiae of inflation data and central bank decision-making, the last two months of 2023 gave a hint that the year ahead could be different. Markets rallied, and leadership broadened out. It is a welcome shift for investors from the AI-or-bust approach and could see more appetite for a range of themes in the year ahead.

The dominance of the AI theme in 2023 has been well-documented. The ‘Magnificent Seven’ (M7) (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) have done the hard graft for investor returns, while the remainder of the market has been lacklustre.

The S&P 500 equal-weight index returned 13.9%* over the year, compared to 24.2% for the standard S&P 500 index**, where the technology giants have a far greater impact.

Most believe that this dominance will not continue in 2024. Ben Leyland, manager on the JOHCM Global Opportunities fund, says: “The global index remains distorted towards the winners of the last cycle, particularly a handful of names in the US tech sector, which enjoyed an AI-driven ‘echo boom’ in the first half of 2023. Digitalisation still represents a significant weight in the MSCI ACWI, and valuations in this part of the market look stretched to us.”

That is not to say that these are weak companies, or that AI growth will stall in the year ahead. 2024 could be the year in which AI technology goes mainstream as companies find increasing uses for it. However, Mark Hawtin, manager on the GAM Star Disruptive Growth fund, says the winners will come from below the M7 names: “The artificial intelligence healthcare, storage, and Software as a Service (SaaS) themes will drive the best returns.”

The Guinness Global Innovators fund, for example, has exposure to AI, but also to a range of other themes***. Its technology holdings also include media & entertainment, robotics and automation, plus fintech and the internet of things. These areas may start to get more attention as investors have greater certainty about the economic environment and direction of interest rates.

Beyond technology

Healthcare is also an important area of focus for many managers this year. Anti-obesity medication has taken a leap forward in 2023 with the success of Novo Nordisk’s Ozempic drug, and there has also been significant progress on Alzheimer’s treatment. At the same time, the growth of mRNA technology and the development of precision medicine – personalised for each individual – promises to revolutionise patient care.

Gareth Powell, manager of the Polar Capital Global Healthcare Trust, gives an overview of the long term investment case for weight loss drugs in a recent video short.

In its 2024 update, Capital Group points out that AstraZeneca, the British-Swedish COVID vaccine developer and maker of lung cancer treatment Tagrisso, has invested aggressively in research and development, resulting in a deep pipeline of oncological and rare disease therapies in late-stage development****. This channel of innovation may prompt investors re-examine the sector in the year ahead.

Better time for renewable energy?

It has been a tough period for the renewable energy sector. The offshore wind sector has been hit hard by rising costs, and companies have had to abandon high profile projects. Demand for electric vehicles has been weaker. However, the sector has performed strongly amid the recent rally and may be set for a better 2024. There continues to be real innovation in sustainable technology, including areas such as energy storage solutions, and the problems of environmental destruction remain as pressing as ever.

Ben Leyland adds: “The consequences of long periods of underinvestment are now starting to be addressed, particularly in energy security and supply chain resilience. These beneficiaries could be found in ‘real world’ sectors like industrials, infrastructure and materials, which will likely see their quality and growth characteristics steadily re-evaluated over the medium term.”

Who are the wildcards?

There are two other major themes likely to dominate next year: the global election cycle, with almost half the world’s voting population going to the polls, and any potential revival in China.

Rob Lovelace, an equity portfolio manager on the Capital Group New Prospective fund, is sanguine about any political noise: “While markets can be volatile in election years, for long-term investors, which political party takes the White House has had little impact. Since 1936, the 10-year annualised return of US stocks (as measured by the S&P 500 Index) made at the start of an election year was 11.2% when a Democrat won and 10.5% in years a Republican prevailed.”

While Mark Hawtin believes China could be a wildcard: “Valuations have sunk to ridiculously low levels. Efforts to stimulate growth in the Chinese economy against a backdrop of ultra-low inflation should be rewarded with outsized returns in equities.”

Ultimately, it could be a far more interesting year in 2024, with market returns spread more widely. However, should investors get spooked – perhaps by a rogue inflation report or vacillation from central banks, – they could retreat to the familiarity of big tech. Investors may need to be ready for either scenario.

Please Note:

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Speak with Ethical Offshore Investments to learn how you can save on your investments costs by investing via Ethical Offshore.

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Five lessons from 2023 for sustainable investors

Stephen Strowger — Wed, 17 Jan 2024 11:28:19 +0000

Investors should navigate the volatile cycle of exuberance and disappointment by diversifying across the whole transition to a sustainable economy.

9 January 2024

By Daniel Babington

Lesson 1: In the short run the market is a voting machine

This quote from Warren Buffett’s mentor, Benjamin Graham, is a core tenet for money managers and it was particularly pertinent this year in the volatility observed in the drivers of the transition to renewable energy systems.

The chart below depicts the Gartner Hype Cycle, which I suggest the reader compare with a price chart of the MSCI Alternative Energy Index from its 2020 low to the present day. If anyone ever wanted a demonstration of the effect of how both greed and fear can drive markets, and how quickly they interchange then, Merry Christmas.

The Gartner Hype Cycle

Source: TAM Asset Management

Following a 150%+ gain in the MSCI Alternative Energy Index, firmly to a peak of inflated expectations, wind and solar company valuations capitulated on the back of a perfect economic storm. Runaway inflation and supply chain disruptions affected the bottom line, which was compounded by interest rate rises affecting projects while consumer demand faltered due to the cost-of-living crisis.

Performance of the MSCI Alternative Energy Index over 5yrs

Source: FE Analytics

Lesson 2: In the long run, the market is a weighing machine

Keeping with our hype cycle analogy, we are now moving from this ‘trough of disillusionment’ to the ‘slope of enlightenment’. I believe the storm these companies have passed through was what the sector needed to cull the herd, leaving just those who are resilient enough to lead the transition (if you ever needed an argument for active managers…).

Secondly, those left standing have the backing of a slew of legislation, most notably, the US’ Inflation Reduction Act and one hopes more, following the (way overdue) acknowledgement at COP 28 that we must transition away from fossil fuels.

Although the language could have been stronger, the key for this sector is the move to triple renewable energy capacity globally and double the global average annual rate of energy efficiency improvements through to 2030. A clear trajectory to a defined destination, which is what investors needed to regain faith in the sector at a time where valuations look compelling.

Lesson 3: Stay invested

This is, of course, not an attempt at financial advice but rather an acknowledgement of a fascinating studywhich found that investing $10,000 in the S&P 500 in January 2003 would have left said investor with a whopping $64,844 by December 2022. But, if you had missed merely the strongest 10 days in that period, you would have been $35,136 worse off when checking your portfolio last year.

This sobering statistic demonstrates the benefits of staying invested, even when the outlook is looking troubled, with seven of those 10 best days in this period taking place in bear markets.

Lesson 4: Diversification is king

I’m cognisant that most of my lessons so far have been derived from the energy transition market, and in many respects a belief that this was one of the only ways to invest sustainably is perhaps what led to sectoral overvaluation in the first place. So, this point aims to debunk this myth.

This year has been one where I have been thankful that we always look ‘under the hood’. Many sustainability focused strategies, which are often marketed as solving different issues and exploring different opportunities, are investing in similar sized companies, operating in the same regions, in the same sectors.

Consequently, they react to sentiment shifts and economic news (mainly interest rate expectations) in a frightfully similar fashion. Our approach will remain to spread our investments across the whole transition to a sustainable economy, investing directly in the development of sustainable water and waste systems, the circular economy, biodiversity restoration and protection and that is just on the environmental side of the equation.

When you consider society’s biggest issues, such as tackling the obesity epidemic, it was our investments in companies providing a solution, through the development of effective weight loss drugs, which performed exceptionally just as some environmental solution providers came under pressure.

Lesson 5: We must give the ‘S’ in ESG equal importance

The previous point denotes the importance of societal factors to offer diversification, but as a human being it goes further than that. I think we can agree, just as our planet is showing signs of significant stress, our society may be cracking too.

Many of the meetings I am fortunate to have with market leading fund managers often leave me increasingly concerned about the effects of climate change. But it is often my own research and discussions that leave me wary of the mental health crisis, burgeoning obesity epidemic, and most recently, thanks to the ground-breaking work from CCLA, the extent that modern slavery permeates our everyday lives.

I believe that a transition to a sustainable world is crucial but making that transition just and fair deserves equal consideration, as does bringing everyone along towards a brighter future through information sharing and endeavouring to tackle society’s greatest issues.

Daniel Babington is a portfolio manager at TAM Asset Management. The views expressed above should not be taken as investment advice.

Please Note:

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Socially Responsible Investing – Ethical Business Standards

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Tackling Cybercrime – A guide

Stephen Strowger — Mon, 30 Oct 2023 07:54:11 +0000

This guide on how to take precautions against Cybercrime is courtesy of one of our business partners, Ardan International (part of the IFGL Group)

Cybercrime, or online fraud, is one of the biggest threats faced by individuals and companies.

This guide is designed to help you identify and prevent attacks by explaining the steps you can take to protect your business and your customers.

Did you know that, so far this year, cybercrime has cost businesses worldwide upwards of USD 8 trillion?

It is a frightening figure and it is why we as a company are committed to helping you tackle the dangers of cybercrime.

And so, as Cyber Security Awareness month draws to a close, we wanted to let you know about our helpful guide, Tackling Cybercrime for Advisers.

The guide is designed to help you identify and prevent attacks by explaining the steps you can take to protect your business and your customers.

Download the Guide

Please Note:

This guide has been provided for the benefit of our clients by Ardan International – part of the IFGL Group (and provider of the award winning Ardan International Platform)

Socially Responsible Investing – Ethical Business Standards

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Trade the Tape – 4 Ways to invest in Bonds

Stephen Strowger — Mon, 30 Oct 2023 06:55:40 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

October 29, 2023 – Adrian Tout

4 Ways to invest in Bonds

A myriad of ways to invest in Bonds
Evaluating the risk / reward of each pathway
Compelling reason to increase exposure to fixed income

If you’ve been following my posts the past few weeks – I’ve suggested it’s a good time to start increasing your exposure to bonds.

As part of these missives – I’ve also had many reader emails asking me how?

Good question!

This missive will offer you a guide on some of the simple ways you can increase your exposure.

But let me offer a caveat… bonds are not risk free (nothing is)

As with equity investing – you should always consider your own risk profile and financial position.

What works for me may not work for you.

But first let’s set the scene as to why. And from there, I will follow with the what and the how.

Why Bonds Look More Compelling

Over the past three years – fixed income investors have been crushed.

In short, the prices of bonds decrease when interest rates rise.

Given we have seen the Fed funds rate go up more than 500 basis points over the past 18 months (the fastest increase in 40 years) – it’s caused widespread losses in bond markets.

It arguably caused three banks to collapse (due to forced (premature) sales of bonds which were underwater).

For example, consider the widely-held long-term (20+ year) treasury bond ETF TLT

October 29 2023

This $40B Bond ETF has lost the equivalent of 17% per year for three years.

And whilst these are a proxy for long-duration – the 50%+ price correction is indicative of what we’ve seen across the fixed income market.

The devastation is not unlike what we saw with equities in 2001 and 2008.

But I will go one further…

This is the worst three-year period for bonds since the 1780’s.

George Washington was President – where the fledgling U.S. was trying to figure out how it was going to pay its debts.

Over 200 years later and it’s still trying to figure out how to pay its debt!

I digress…

Now at some point (e.g., when the supply / demand equation shifts) – these assets will catch a strong bid.

But we are not there yet…

That’s when investors will decide the value is just too compelling.

Now we’re starting to see a sentiment shift in 2-year bonds – as these yields stabilize (i.e. there are buyers)

And should economic growth slow next year (my expectation) – it follows that yields will fall.

Put another way, buying will start to extend along the curve.

If correct, the price of bond ETFs like TLT will rise.

To give you an idea of the potential capital appreciation in bonds:

If 10-year yields fall ~0.5% (back to 4.50%) – the respective bond price would gain ~13%

You can read more about my thinking on bonds here.

Now you know the basics of “why” – let’s talk about the “what” and “how”.

How to Invest in Bonds

There are a number of ways investors can play the fixed income market.

I will explain at least four ways – starting with US treasury debt.

#1 – US Treasury Bonds

Perhaps the most direct way to own U.S. government debt is via the Treasury’s own website.

Alternatively, you can also do this via most leading banks and/or brokers.

But my personal preference is through exchange traded funds (ETFs)

If choosing an ETF – you can find any duration you wish.

For example, iShares offer the following three types of duration exposure:

This list is intentionally not exhaustive. There are many similar bond funds available.

For example, for long-term exposure, I’ve started accumulating Vanguard’s ETF EDV – which has a lower expense ratio than TLT.

But an important point to note is the concept of duration risk when choosing the fund.

For example, there’s far less duration risk in the SHY (1-3 Year) vs say the TLT (20+ Year)

I explained this concept in a recent post:

The good news is we’re now seeing safety in the front-end of the curve (e.g., what we see with the 2-year yield).

The 2-year has been fairly steady of late despite the action in the “10s” – in turn causing the un-inversion of the 10-2 yield curve (which bond investor Bill Gross said will likely turn positive this year)

For example, up until the last couple of months, there has been an argument that even the 2’s were not safe. I say that because there was uncertainty around where the terminal rate was for the Fed. In other words, how many more hikes were there to come?

That’s now changed. The 2’s are now seen as a much safer place to be and it’s attracting buyers… which is keeping yields steady.

Now to be clear, we don’t see this in the 10’s just yet – but it will come. And if the Fed is more or less done (and I think they’re close) – then it’s safer to start buying 2’s.

Let’s now turn to another form of government bond – however this one offers added tax advantages.

#2. Muni Bond Market

Muni bonds are perhaps the most popular market for individuals due to their compelling tax benefits.

Similar to treasuries – these are also looking very attractive at current yields.

For example, you can get 5.0% long-term returns on Munis with the added tax benefits that Treasuries do not offer.

Some ETFs to consider include (not limited to):

Now the tax equivalent yields on these bonds are getting closer to matching equity like returns (almost 8% in some cases).

I think these also warrant a place in your portfolio.

#3. High Yield Market

Let’s say you are less interested in the tax advantages of a Muni bond – and you’re seeking yields closer to 8% or 9%.

As Howard Marks’ of Oaktree pointed out in his latest memo – these yields are almost competing with the 100-year average annualized return of the S&P 500 (which is around 10.5% inclusive of dividends).

Naturally, with yields in this range, it comes with higher risk (not unlike equities)

For example, corporate bankruptcies are as high as they have been since 2010 – up something like 30% on last year.

Expect these to increase as yields remain high.

But that’s why you can demand a yield in the realm of 7-9% or more.

For example, when credit conditions were more favourable – the returns were closer to 4-5% for high-yield debt.

That doesn’t add up – you were better off owning the equity.

That said, there are “safer ways” to play high yielding corporate debt (but they are certainly not risk free)

For example, ETFs in this category include (not limited to):

An important point of difference here:

OSTIX is an actively managed fund; vs
HYG and JNK are Indexed based (and lower cost)

You should inspect each of these ETFs to see exactly the companies, quantity and concentration of debt they’re holding.

I’ve recently started adding exposure to HYG.

#4 Investment Grade Corporate Debt

The last approach I want to share is investment grade corporate debt.

The returns here are higher than government debt (due to the risk); however less risky than high-yield.

In this instance, yields are in the realm of around 6% (where debt includes the likes of say Apple, Google, Microsoft, Coke and other quality names)

An ETFs to consider here is iShares iBoxx Investment Grade Corp – LQD

As an aside, when we were at the peak of the pandemic – the Fed said they were willing to step up and buy LQD.

As soon as this was announced – its price rocketed higher.

Note: an alternative to LQD is iShares AGG – however AGG also includes a blend of treasury debt (about 42%)

Putting it All Together

In “Rethinking Asset Allocation” – I explained why I felt the longer-term risk/reward for bonds was now starting to make more sense.

Three reasons (perhaps not limited to):

Longer duration bonds are getting to a point where the value is just too compelling. When we consider 5-year, 5-year forward inflation expectations are 2.5% – this tells me the 10-year at 5.00% is value. Typically the difference between the 10-year and inflation expectations is closer to 1.0% to 1.5%
If Real GDP growth is to trend back to levels of 2.0% (or less) next year (which I expect) – and you’re getting the 10-year at 5.00% – that’s a great deal. Over time, the 10-year yield will track real GDP.
If you’re of the view inflation is trending lower (meaning the Fed will move back to easing within ~12 months) – bond investors will see capital appreciation

For example, when the US 10-year traded at 4.00% and below – you were arguably better off in equities.

And when these yields were below 3.0% – you really had to question your exposure to this debt.

Not now.

These yields are closer to 5.0% and could easily trade higher (given the current supply / demand imbalance in the market)

But at a guaranteed 5.0% – with the prospect of capital appreciation – this is starting to make a more compelling argument (especially in a slower growth environment)

If you are new to bonds – I consider starting at the shorter-end with the 2-year.

They do not carry the same duration risk as the 10+ year.

I highly doubt you will lose money (given you have the buffer of a guaranteed 5% return).

However, if you have a longer-term (3+ year) lens – you can start accumulating longer-term duration.

There’s no need to be too aggressive yet.

For example, if we see the 10-year yield inch higher (e.g., 5.25%) – consider adding more.

I don’t think anyone will be able to predict the top in yields.

In any case, you have a number of different bond vehicles to choose from.

Each has their own risk profile and none are risk free.

Typically if it’s a higher return – it implies far higher risk.

Please carefully choose what’s best for you and your own financial position.

Regards
Adrian Tout

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What’s Hot: Is Oil Headed for $100 or returning to $75?

Stephen Strowger — Thu, 21 Sep 2023 10:19:43 +0000

Mobeen Tahir

Director, Research

15 Sep 2023

Oil prices have reached their highest level since November of last year. Brent recently broke through the $90/barrel mark, following a sustained rally that began at the end of June. While oil’s behaviour in the first half of this year was largely characterized as ‘rangebound,’ recent price action is prompting a debate about whether oil is in a bull market.

The appreciation in oil prices carries profound implications for the hottest topic in financial markets over the last two years: inflation. Rising energy prices have been cited as the reason for an increase in the US headline inflation rate, which rose to 3.7% in August from 3.2% in July¹.

So, is oil in a bull market, or is it still rangebound despite briefly surpassing the upper limit of the range? Is the next step for oil $100/barrel, or will it return to $75? In this article, we outline arguments being made by both the bulls and the bears.

Source: Bloomberg, data as of 13 September 2023.

Historical performance is not an indication of future performance and any investments may go down in value.

What the bulls say

The recent boost to oil’s rally followed the September 5th announcement from Saudi Arabia and Russia that they would extend their additional voluntary production cuts until the end of the year. Originally, these voluntary cuts, amounting to 1 million barrels per day (mb/d) from Saudi Arabia and 300,000 b/d from Russia, were set to conclude in August. However, they will now continue through December, subject to a monthly review.

The influence of OPEC+² has been evident throughout the year, but this latest announcement has prompted the markets to take the group’s commitment to tightening oil markets more seriously. Bulls argue that there is no sign of a pivot from the group, which has maintained all year that the demand for oil is weak and, therefore, the cuts are warranted.

The International Energy Agency (IEA) continues to provide a contrasting view of oil market dynamics. In its September Oil Market Report, the IEA states that global oil demand is on track to grow by 2.2 mb/d in 2023, reaching 101.8 mb/d. The agency has consistently pointed to strong Chinese consumption as the primary driver in its monthly reports throughout the year. The latest report comments on the extension of output cuts from Saudi Arabia and Russia, suggesting that this move will maintain a substantial market deficit throughout the fourth quarter of the year. So, if the IEA’s outlook is correct and OPEC+ is wrong in its assessment of weakening oil demand, the bullish narrative could continue to find support.

The IEA acknowledges that additional oil supply from non-OPEC producers has partly offset the tightness created by Saudi Arabia and Russia. According to the agency, OPEC+ output has declined by 2 mb/d this year, while non-OPEC+ supply (led by the US and Brazil) has increased by 1.9 mb/d. Bulls will also argue that the US’s ability to further increase supply is limited, given the recent decline in rig counts (see figure 02 below).

Source: Bloomberg, data as of 13 September 2023.

Currently, markets are predominantly leaning towards the bullish case, and the backwardation³ in oil futures has increased over the past month⁴. This indicates that the market’s perception of tightness in the oil market has intensified.

The bear case

The bears remind us that even for OPEC+, an ever-increasing oil price is not the goal, as it can result in demand destruction. $90/barrel may be the sweet spot that OPEC+ is comfortable with. If the price exceeds $100, Saudi Arabia and Russia may reconsider their stance on additional voluntary cuts during one of the upcoming monthly reviews.

Bears also reflect on the last time oil exceeded $100 and point out the differences. Oil prices rallied in Q1 2022 when the Russia-Ukraine war began, and markets immediately began to factor in significant disruptions in supply. In the following months, the European Union banned the import of Russian oil. All of this was happening as global demand was swiftly recovering post-Covid.

Now, markets are aware that Russian oil is still finding its way into markets worldwide, and the global economy is showing signs of slowing down. Bears will also highlight that Chinese manufacturing has yet to demonstrate clear and sustained acceleration. If data from China disappoints again, markets may fear that China’s robust oil demand this year could take a hit.

Conclusion

There is also a third scenario in which oil neither reaches $100 nor drops to $75 in the immediate future but instead hovers around $90, a level Saudi Arabia might not object to. A stable oil price is possible, albeit relatively unusual, especially given the forces that are pulling it in either direction.

Sources

¹ Trading Economics, 13 September 2023

² The Organization of the Petroleum Exporting Countries and its partners

³ Higher spot prices than futures prices

⁴ Observed using Bloomberg data as of 13 September 2023

Related products

+ WisdomTree Brent Crude Oil (BRNT)

+ WisdomTree Brent Crude Oil 3x Daily Leveraged (3BRL)

+ WisdomTree Brent Crude Oil 3x DailyShort (3BRS)

About the Contributor

Mobeen Tahir

Director, Research

Mobeen is a member of WisdomTree’s research team where he focuses on a wide range of asset classes to offer strategic and tactical insights to our clients on global markets and investment products.

Before joining WisdomTree in December 2018, Mobeen worked at Willis Towers Watson as an investment consultant advising institutional clients as well as their in-house fund business on asset allocation and portfolio construction with his research focus being equity and multi-asset smart beta.

Mobeen has a BSc (Hons) in Accounting and Financial Management from Loughborough University and an MSc in Accounting and Finance from the London School of Economics and Political Science. He is also a CFA Charterholder.

Please Note:

Please note the above article was first published by Wisdom Tree and should not be regarded as individual investment advice on whether to buy, sell or hold any of the funds mentioned. Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Clients of Ethical Offshore can access the Wisdom Tree products mentioned in the article with with no additional commission…… resulting in more of the investment growth staying in your pocket.

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Fund fees: How much is too much..?

Stephen Strowger — Thu, 14 Sep 2023 11:53:45 +0000

Below is an article from TrustNet which involves a subject that we are passionate about addressing… Fees and Charges and how to minimise these costs.

At Ethical Offshore, we encourage clients to inquire about the charges that they are subject to, and furthermore, encourage clients to look at ways to reduce their ongoing charges….. the lower the costs, the more of the investment growth stays with the client.

Our highlighted Low Cost Index ETF portfolio has a total expense of 0.32%pa, the Sustainable Ethical Growth Allocation Portfolio has a total expense of 0.65%pa and the more diversified Sustainable Ethical Balanced Allocation Portfolio a total expense of 0.72%pa.

Speak with Ethical Offshore to compare the costs and see how much extra could be kept in your pocket…!!

13 September 2023

Experts explain how to assess whether a fund is too expensive or not and cap their spending limit on charges.

By Jean-Baptiste Andrieux,

Reporter, Trustnet

Passive funds’ low ongoing charge figures (OCF) have made higher fees charged by active funds unpalatable and driven prices down across the industry but many still charge relatively high fees.

This can be acceptable if the manager is able to demonstrate risk-adjusted returns over and above the charges, according to experts, but there is a limit.

Meera Hearndon, investment director at Parmenion, said: “There cannot be any compromise over this. If this delivery of consistent outperformance does not exist, it becomes difficult to justify high charges.”

Yet, few active funds actually deliver for investors. Using the IA Global and IA UK All Companies as proxies, only 23% of global funds have beaten the MSCI World over 10 years and 29% of UK funds the FTSE All Share.

To assess whether higher fees are justified, Nick Wood, head of investment fund research at Quilter Cheviot, explained that a first element to identify is the expectation of alpha generation.

He said: “We have recently seen a number of funds that are seeking to be very low tracking error, generating limited excess return. In these cases, having a low OCF is key as every basis point of cost really impacts ability to outperform. Conversely, higher alpha generators, if they achieve that, have less of an issue.”

It is also important to take the asset classes into consideration, as some naturally attract higher fees than others. For instance, fixed-income funds are generally cheaper as a high OCF is more likely to hamper returns than with other types of assets.

David Morcher, head of collectives at Avellemy, said: “We would have a lower tolerance for paying a higher OCF in fixed income instruments, where the expected return profile is likely more muted than equities through the cycle and thus a high OCF might more greatly impact our net returns through time.”

Within equities, small-cap and emerging market companies are more expensive to research and trade, which means product providers will generally charge higher fees for funds specialised in those markets.

In theory, managers investing in these markets are more likely to generate alpha, so one would expect the outperformance to make up for the higher fees, but investors should bear in mind that those sectors do not always live up to their promises.

Kamal Warraich, head of equity fund research at Canaccord Genuity Wealth Management, said: “Not all strategies are created equal. For instance, the performance of UK small-cap funds has been very strong over the long term, so the fees might be justified.

“Conversely, emerging market funds tend to be relatively expensive and have not justified their fees on the whole for a variety of reasons.”

Performance of indices and sectors over 10yrs

Source: FE Analytics

Another example of funds charging higher fees are those investing in less liquid asset classes which require a higher level of costs to transact. That includes commercial property or infrastructure, where transactions from start to finish can involve many ad-hoc costs, such as agent fees, a raft of legal advice fees and stamp duty.

Morcher said: “If you want exposure to those markets, presumably in order to obtain some form of diversification from other more liquid assets, then you might have to accept that transacting in these markets comes with a higher cost than some more liquid markets. You would expect these costs to be passed on through the OCF.”

Hedge fund strategies also attract higher fees, often using a ‘two & 20’ structure – 2% for the management and 20% for the performance. Warraich warned, however, that they do not really justify their charging structures.

How much is too much?

A lot will depend on the asset class and the investor’s expectation of alpha generation. For instance, a manager of a core active equity fund charging higher fees but consistently outperforming the index and delivering value net of costs is less of an issue.

Yet, Wood said that any fund with an OCF in excess of 1% has to justify its place in a portfolio, whereas Hearndon suggested that any additional charge of 0.1% on the top of a 0.75% annual management cost is too much for a large-cap fund.

She added: “Fund managers need to be able to strike the right balance between being profitable and being fair. Excessive pricing shouldn’t be tolerated.”

Wood also noted that it is worth considering the fund’s underlying resource.

He said: “If this is a very small team and resource, is the extra cost really justified? Conversely, a well-resourced team will be much higher cost for the asset manager, so perhaps justifies this.”

Finally, investors should remember that cheaper does not necessarily mean better and shouldn’t exclude funds from their buying list just because of the higher fees they may carry.

If they are convinced of the quality of a management team, their ability to be disciplined in their investment processes and to deliver the long-term risk-adjusted returns on a consistent basis, then it could be reasonable to buy this fund despite the costs.

Wood also gave the example of private equity investment trusts, which have larger costs attached to them.

He said: “Whilst investors still need to be aware of excessive charging, the ability to access illiquid private investments which have provided strong returns after fees in the long term and with an element of diversification is something investors may want to consider.”

Please Note:

Speak with Ethical Offshore Investments to learn how you can save on your investment costs by investing via Ethical Offshore.

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Trade the Tape – Have Jobs Slowed Enough for the Fed to Pause?

Stephen Strowger — Wed, 13 Sep 2023 07:14:44 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

September 2, 2023 – Adrian Tout

Have Jobs Slowed Enough for the Fed to Pause?

Unemployment rate moves up to 3.8%
Job picture is slowing – but enough for the Ted to pause..??
Oil prices above $85/b – how does that bring down inflation..??

Another August is now in the Trader’s Almanac.

Its reputation as a negative month lived up to its name – with the market giving back ground.

That said, we’re not too far off the highs, with the S&P 500 only retracing around 1%

September however boasts the worst record of all the calendar months – so don’t be surprised to see volatility pick up.

Last week offered plenty of macro data for traders (and the Fed) to consider.

For example:

Core PCE at 4.2% YoY – higher than June’s 4.1%
ADP private sector payrolls report shows gains of 177K – much less than expected
The BLS monthly payrolls (for all jobs) showed gains of 187K – also less than expected (where previous months were also revised lower)
The total unemployment rate ticked higher to 3.8% (up from 3.5%)

With the unemployment rate at 3.8% (mostly due to higher participation in the work force) – this has some believing the Fed is done.

But can we make that call?

I don’t think so… not yet

Fed Still Has Grounds to Raise

Popular opinion on Wall Street is the Fed is now finished raising rates.

For them, the labor report this week sealed the deal.

Take widely followed blogger Barry Ritholz…

It’s “unimaginable” the Fed will raise rates says Barry…

Really? Why?

Below I will offer a few reasons why I think it’s more than imaginable.

But it requires a bit of grey matter being put to use…

To start…

A total unemployment rate of 3.8% is essentially full employment.

And whilst it’s up from last month’s 3.5% – it’s still exceptionally strong (which can be inflationary).

Second – consider JOLTS (Job Openings and Labor Turnover)

The popular narrative is because this dropped to ~8.8M openings from a high of 12M a year ago – the job market has gone “cold”

But is it?

Below is the 20 year trend:

Sept 2 2023

Prior to the pandemic JOLTS were just above 7M.

And that was considered very strong.

We are still above that level but off the post-pandemic high (which is to be expected).

But this is not a weak labor market – not with over 8.8M unfilled job openings.

Finally, consider wage growth.

Based on the Atlanta’s Feds wage growth tracker, the three-month moving average of median wage growth is still above 5%

The good news is it’s below the 6.7% average pace of one year ago…

So yes – wages are gradually coming down.

But similar to what we find with JOLTS – wage growth is still historically very high.

Powell has said he would like to see this at levels closer to 3.0%

If I put these three things together:

Total unemployment at 3.8% (anything below 4.0% is considered full employment)
JOLTS at 8.8M (still well above the pre-pandemic peak); and
Wage growth above 5.0% (three month average)

What (if anything) suggests these are where the Fed needs them to be?

Sure, these trends might continue but at what velocity?

Core PCE Ticks Higher

For now let’s assume folks like (not limited to) “Barry Ritholz” are correct with their thesis that employment has cooled enough for the Fed to quit hiking rates.

And that might be right…

However, we still have a situation where the Core PCE rate sits at 4.2% – higher than last month’s print

Sept 2 2023

From mine, this is problematic.

Prior to the Core PCE print this week – my guess was this was still likely to come in with a 4-handle – more than enough to cause concern for the Fed.

But there’s something else we should be mindful of…

And that’s what we see with energy.

Take a look at the price of WTI Crude of late – it’s now back above $85/b

Sept 2 2023

Now before I explain why this will feed into higher inflation – take a look at this post from April earlier this year.

I argued that there was a good chance that WTI crude would find support around $65 and rally back towards $100 a barrel.

Here’s the chart I offered:

April 4 2023

My logic was simply enough – we were more likely to experience a supply shock (given the policies of the current administration on fossil fuels)

But here’s the chart that matters for Powell (and rates)

Sept 2 2023

The purple line shows the price action for WTI Crude (right axis)

The orange line shows the year-on-year change for consumer price inflation (left axis)

Since the last CPI print – the price of crude has moved from well below US$70/b to over $85/b.

This is yet to show in the rear-view CPI numbers.

So what happens if we also see another bounce in CPI?

As anside, the gas price in California (San Francisco) is back above US$6.00 for 1 gallon (where there are ~3.8 litres p/gallon).

With the Aussie dollar trading ~64.5c against the USD – that’s the equivalent of ~AU$2.45 p/litre (similar to the pump prices in Sydney)

Now whilst Core PCE excludes food and energy – the price of energy permeates through to everything that’s in the Core PCE calculation.

Essentially Core PCE is what you pay for goods and services.

And as we know, almost everything we consume requires energy to manufacture (specifically crude).

In summary, if we continue to see WTI Crude trade well above US$70/b (which appears likely due to supply constraints) – this does not bode well for inflation.

S&P 500 Recovers the 10-week EMA

Whilst the month ended lower – stocks made up some lost ground on the perceived ‘softer’ labor print.

Echoing Ritholz etc – the perception is 3.8% unemployment equals “no more Fed”

Maybe. But I’m less convinced.

However, this perception was enough to also drive yields lower – in turn giving a boost to stocks.

Again, this all comes back to bond yields.

Let’s take a look using the weekly chart:

Sep 2 2023

Technically it was a good win for the bulls this week by reclaiming the 10-week EMA (red-line)

The close below this moving average last week looked ominous.

Looking at the chart, I think there’s every possibility that the market now continues to grind higher.

For example, we could challenge the 4600 made late July.

And this is why you should maintain some exposure to the market.

I personally think it’s a mistake to be either:

overly long the market; and equally
hold onto too much cash (e.g., more than 50%).

For me, my exposure is 65% long with no short positions (or long puts).

My year-to-date performance is ~13.1%

I’ve underperformed the S&P 500 YTD due to sitting in ~35% cash.

That said, this was also the reason I outperformed last year by ~19%

For example, when the market dropped sharply the past few weeks – my downside was limited by comparison.

And as I’ve shared recently – I think the risks to the downside still meaningfully outweigh any potential upside gains.

Therefore, at this stage I’m not putting any new cash to work.

And if I did – it would be more in value (lower PE names) – which have trailed the market.

Putting it All Together

For me the economic data was certainly mixed.

My assumption is the lower JOLTS number (to “only” 8.8M openings) was a catalyst for lower bond yields.

Lower bond yields typically translate into stocks (especially tech) catching a bid.

Add to that a softer than expected nonfarm payrolls report and away we went.

But I ask the question of whether this is really a soft labor market that will bring down inflation?

3.8% unemployment is full employment. And 8.8M job openings exceed that of pre-pandemic levels.

However for me the big number is Core PCE at 4.2%

That’s still a long way above the Fed’s target of 2.0%.

And with oil prices rising of late – I think this will only add to any inflationary pressure.

Therefore, I can’t follow the likes of Ritholz (and most others) making a call of “3.8% unemployment equals Fed on hold” – it’s premature.

Irrespective – if the Fed were to hold rates here – I expect them to stay high for many months ahead (e.g., well into 2024).

And with inflation slowly falling – that means real rates are going up.

That will hinder both growth and earnings.

Regards
Adrian Tout

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Former rubbish dump in Essex becomes UK’s third largest solar farm

Stephen Strowger — Wed, 13 Sep 2023 04:13:46 +0000

Ockendon solar farm to generate enough clean electricity to power the equivalent of 15,000 homes

Jillian Ambrose Energy correspondent (The Guardian)

11 September 2023

Drone footage shows Ockendon solar farm

The largest solar farm in Europe to be built on a closed landfill site has begun generating renewable electricity from a former rubbish dump in Essex.

The Ockendon solar farm, the third largest in the UK, includes more than 100,000 solar modules covering 70 hectares (173 acres) of land.

Its owner, the waste company Veolia, expects the solar array to generate enough clean electricity to power the equivalent of 15,000 homes.

The company said it hoped to give “new life” to the former rubbish dump, which would otherwise have had limited options for redevelopment.

‘We’re just scratching the surface’: former landfills such as Veolia’s Ockenden site are considered a prime location for solar arrays. Photograph: Veolia

Donald Macphail, the chief operating officer of Veolia’s treatment division, said the project would have “minimal ground-level impact”, meaning that “the wildlife that has repopulated the restored land can continue to coexist with the technology”.

There could be hundreds of hectares of closed landfill sites across the UK that could play host to solar arrays, according to Philippe Queruau, the electrification services manager at Veolia UK. In addition, thousands of hectares of active landfill sites could be used for solar arrays in the future.

“We’re just scratching the surface for now,” he said. “But we need a lot more solar, and landfills are a prime location.”

The government aims to increase the UK’s existing 14 gigawatts (GW) of solar power capacity fivefold to 70GW by 2035. This would require a project on the scale of Ockendon being installed roughly every five days for the next 12 years.

Frank Gordon, the director of policy at the Association for Renewable Energy and Clean Technology, previously known as the Renewable Energy Association, said: “We urgently need more solar in the UK to help meet our legally binding net zero goals, and this summer’s extraordinary global weather has further underlined the need for climate action.”

Veolia is one of many companies installing solar power in urban rooftops such as hospitals and car parks. The company is also exploring the potential for floating solar installations atop water reservoirs as well as solar modules fixed to the top of diesel refuse trucks to help power the bin lifts or air conditioning.

The Ockendeon solar farm includes more than 100,000 solar modules covering 70 hectares of land. Photograph: Veolia

The greatest barrier to the UK’s solar ambitions is the high demand for a connection to the National Grid, which has led to a backlog of applications and a queue with a wait-time of between 10 and 15 years.

National Grid’s electricity system operator and the industry regulator have taken steps to address the problem in recent months in an attempt to halve the wait for renewable energy developers to connect to the grid.

Queruau said the Ockendon solar farm did not face a lengthy delay for a grid connection – and will share parts of the grid infrastructure with another major solar farm nearby.

This article is provided for information only and was taken from UK Yahoo Finance and was first published by The Guardian. The views of the author and any people quoted are their own and do not constitute financial advice.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

If you would like to get some investment exposure towards the exciting Solar Energy sector, at Ethical Offshore, we can provide guidance on a range of low-cost index funds that cover this sector, as well as specialist Fund Managers that take an active approach in their Solar Energy company investments and holdings.

Speak with Ethical Offshore Investments to learn how you can save on your investments costs by investing via Ethical Offshore.

Socially Responsible Investing – Ethical Business Standards

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Complaint Resolution Service

Stephen Strowger — Mon, 04 Sep 2023 10:30:56 +0000

Have you suffered a financial loss due to mismanagement of your Offshore portfolio or policy?

Our Complaints Resolution Service may be able to assist you in gaining financial compensation

No win = No cost

However, I am not that naïve to dismiss the fact that, all be it a small percentage of industry participants, that there are some with different motives for being in the industry with the sole purpose of making as much money as they can, as quickly as the can, with no care of the consequences of their actions on their clients…….. I am not that naïve as unfortunately I have witnessed this first hand and this was one of the driving forces for me in setting up Ethical Offshore Investments.

While a lot of the negative issues experienced by investors in the offshore industry is the result of those so called ‘cowboys’, there will be occasions where a client has been financially disadvantaged due to negligence or incompetence from the actions of a corporate entity, such as a Life Company, Pension Trustee, Discretionary Fund Manager or a financial advising firm.

This could be for example:

Incorrect or lack of disclosure of fees, charges and potential exit penalties
Inappropriate investments (too risky, lack of liquidity, lock in periods, lack of diversification)
Processing errors resulting in delays for payments
Unauthorised transactions

So how does Ethical Offshore Investments assist with this…?

First off, we obviously listen to the complainant about what has occurred & how they believe that the actions that were taken resulted in a financial loss.

If the Life Company / Product Provider disputes the allegations made and does not agree to compensation, the next step is approaching the relevant Financial Regulator for that particular provider.

United Kingdom – Financial Conduct Authority (FCA) UK
Isle of Man – Isle of Man Financial Services Authority
Guernsey – Guernsey Financial Services Commission
Cayman Islands – Cayman Islands Monetary Authority
Mauritius – The Financial Services Commission Mauritius
Labuan – Labuan Financial Services Authority

Recent Compensation Success

Over the past few years, we have been able to achieve the following compensation results for clients:

GBP 15,000 – incorrect processing of a withdrawal by an Isle of Man Life Company for a savings plan
GBP 12,000 – incorrect processing of an asset transfer by an Isle of Man Life Company for an offshore portfolio bond
GBP 10,031 – inappropriate investments allowed to be made by a Malta Pension Trustee Company
GBP 3,871 – incorrect processing of a surrender request by a Guernsey Life Company savings plan
US $ 8,000 – incorrect processing of an asset transfer by a UK regulated Discretionary Fund Manager

There have been many other successful smaller claims where fees have been waived and or reimbursed to clients.

How much does this service cost..?

Sustainable Offshore Investing using Ethical Business Standards.

Request Information

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Guinness Sustainable Energy Report – Building efficiency: critical to the energy transition

Stephen Strowger — Tue, 08 Aug 2023 11:06:13 +0000

Building efficiency: critical to the energy transition

August 2023

Executive Summary

Buildings are responsible for around 40% of global carbon emissions: 30% from their operational emissions and 10% from materials and construction. Space heating, water heating, space cooling and lighting are key drivers of operational emissions and are collectively responsible for two-thirds of the final energy use of buildings. Decarbonising buildings means tackling each of these areas by investing meaningfully in heat pumps, insulation, lighting, and efficient cooling.

This month’s manager’s comments explore building efficiency, focusing on these four key areas.

Clean energy investment

In 2022, global clean energy investment reached $1.6 trillion. Of this, roughly 60% is spent on decarbonising energy supply (renewable power, grids, other), while the remaining 40% is spent on the efficiency and electrification of energy demand (mainly building efficiency, EVs & batteries). The Guinness Sustainable Energy investment universe broadly mirrors this, with 60% of names exposed the installation and generation of sustainable energy and 40% of names exposed to the electrification and efficiency of energy demand.

We expect overall clean energy spending to increase by around 75%, averaging $2.8 trillion p.a. in the second half of the decade. We also expect the mix within clean energy to shift towards an equal split – i.e. 50% towards energy supply and 50% towards energy demand/efficiency. To be clear, though, spending of $2.6trn does not put the world on a ‘net zero’ path. For the world to achieve 1.5 degrees and hit net zero emissions by 2050, spending in the short term needs to nearly triple, averaging $4.6 trillion pa from 2026-30.

Annual investment in clean energy ($’bn pa)

Source: IEA, Guinness Global Investors estimates, as of 31.07.2023

Building efficiency spending

Despite the operation of buildings accounting for around 30% of global emissions, only 20% ($340bn) of global clean energy spending was allocated to buildings in 2022. Space heating (33%), water heating (19%) and space cooling (7%) and lighting (5%) are collectively responsible for 60% of the final energy use of buildings. Decarbonising buildings will require investment in heat pumps to electrify space and water heating; insulation to improve thermal efficiency; and LED lighting and efficient cooling to reduce the energy consumption of key end-use devices and appliances.

We see total building efficiency and electrification spending growing by around 75%, averaging $600bn pa from 2026-30.

Global building efficiency-related investment by scenario ($’bn)

Source: IEA, Guinness Global Investors estimates, as of 31.07.2023

Heat pumps

Space and water heating, used to keep homes warm in winter and provide hot water for washing and cleaning, accounts for half of all global energy use in buildings. Over one?sixth of global natural gas demand is for heating in buildings – in the European Union, this number is one?third. Heat pumps are a vital tool for decarbonising heat and reducing reliance on natural gas imports.

Global heat pump sales grew by 11% in 2022 after growing at 13% in 2021. Despite strong growth in recent years, heat pumps still only meet around 10% of global heating needs in buildings. We see installation growing at 11% pa out to 2030, resulting in the global installed stock more than doubling to meet 18% of global heating needs. However, to get on track with a net zero trajectory, sales need to grow at closer to 20% pa, with the global installed stock almost tripling to 600 million units, meeting 24% of global heating needs by 2030. Future growth is supported by financial incentives in over 30 countries and bans / phase outs on fossil fuel heating systems in 20 countries.

Europe has outpaced global sales in recent years, growing at 35% and 39% in 2021 and 2022 respectively, bringing the region’s heat pump sales to over 3 million units. This expansion was primarily driven by high gas prices and increased policy support as a result of Russia’s invasion of Ukraine. Heat pumps remain a vital tool to secure Europe’s energy independence from Russia. The EU’s target to install 60 million additional heat pumps between 2023-30 is expected to reduce the bloc’s household gas demand by 40% and would require installations to grow at around 20% pa over the period.

In 2023, the EU made further recommendations to introduce a ban on gas boilers from 2028 in new buildings and phase out the use of fossil fuel heating systems in all buildings by 2035.

European heat pump sales 2015-2030E (units)

Source: IEA, Guinness Global Investors estimates, as of 31.07.2023.

Insulation

The second law of thermodynamics states that heat moves away from hotter objects into cooler objects. Insulation can improve the thermal efficiency of a building’s envelope (e.g. exterior walls, roof), helping to prevent outside heat from entering the home in hotter climates and preventing indoor heat from leaking outside in colder climates. For the lowest rated building stock across Energy Performance Certificates (EPC), proper insulation can reduce energy consumption from space heating and cooling by 40% compared to uninsulated homes, with loft insulation offering to pay for itself in as little as 1-3 years.

We estimate the global insulation market has grown at around 6.5% pa from 2012-22, driven by government incentives, energy efficiency requirements, stricter building codes, and higher energy costs. The sector broadly follows the building construction market but has historically seen structurally higher growth of 3-7% pa on average. Going forwards, we expect global insulation industry revenues to grow at 5-7% pa out to 2030 driven by policy and economics. Thanks to a reasonably consolidated industry (the top 9 companies account for >70% of market share) and regulatory hurdles creating a barrier to new entrants, we expect this revenue growth to translate into earnings growth of 10-15% pa.

Over the past 20 years, most regions have seen a 10x increase in policies targeting building energy efficiency, including via increased insulation usage, jumping in 2016 after the adoption of the Paris Agreement. To date, markets representing over 50% of global emissions have pledged to target Building Insulation and Green Buildings solutions to meet their 2030 decarbonization targets.

This is only set to grow further, as even in developed economies such as the EU and US, 75% and 90% of all homes are still found to be under-insulated or energy inefficient.

Global policies targeting building insulation, envelope technologies and eco-design

Source: IEA, Goldman Sachs, to 31.12.2022

For instance, the European Commission launched the Renovation Wave strategy in 2020, aiming to double the current renovation rate from 1% pa to 2% pa, retrofitting 35m buildings by 2030. To achieve this, it is estimated that energy renovation spending would need to triple to €275bn pa. In March 2023, this was taken one step further. The EU ratcheted up its energy efficiency target, aiming to reduce final energy consumption by at least 11.7% in 2030 (up from 9%) and required member states to renovate at least 3% of the total floor area of public buildings each year.

If the renovation rate of the building stock in Europe increases by 2-3x, Goldman Sachs estimates that the region’s total addressable market for insulation could double over the next 10 years, equating to growth of 7% pa.

Efficient cooling

Space cooling is the fastest growing building-end use with cooling-related energy consumption having more than tripled since 1990. As the planet warms, ensuring access to energy efficient cooling is of primary importance. According to the IEA, between 2019-2021, the average number of heat-related deaths among people aged 65 years or older reached at least 300,000 deaths.

The number of air conditioning units in operation globally has increase by 2.5x in the past 20 years to 2 million units and is set to grow by a further 50% by 2030 to 3 million units. Thanks to industry consolidation (the top 6 players in any market hold 90% share) and a fragmented customer base (relatively few manufacturers selling to a larger number of distributors), the heating, ventilation and air conditioning (HVAC) OEMs enjoy strong pricing power.

Price increases of 1-3% pa has allowed them to grow their revenues at 6% pa, outpacing unit sales of 4% pa over the past decade. At the same time, improving operating leverage has seen profits grow at 10-12% pa. We expect a similar pattern to continue out to 2030, with installations growing at 4.5% pa and price increases of 1-3% pa resulting in sales growth of 6-7% pa and earnings growth of 10-11% pa.

CO2 emissions from and emissions intensity of air conditioning

Source: IEA, as of 30.06.2023

While highly efficient HVAC units are available, most efficiency standards have efficiencies well below best-in-class models. Without a move towards high efficiency cooling and improvements in the thermal efficiency of the buildings in which they operate, electricity demand for space cooling in could increase by as much as 40% globally by 2030. Despite the expected growth in demand for air conditioning, to achieve net zero emissions, final energy consumption from cooling must stay flat and emissions intensity of air conditioning must fall by 70% by 2030.

For this reason, more than 90 countries covering >86% of global residential space cooling energy consumption already have Minimum Energy Performance Standards (MEPS) and labelling policies in place for air conditioners.

For example, 2022 saw China update its minimum Energy Performance Standards for room air conditioners (ACs) allows for a transition from fixed-speed ACs to the more efficient variable-speed models. So far in 2023, we have seen further updates from the United States and India covering air conditioners and fans. These standards are only set to become more demanding and expansive over time. As a result of tightening standards, we believe an outsized share of future growth will be captured by OEMs offering more energy efficient models.

We believe the Guinness Sustainable Energy Fund is well positioned to benefit from increased investment in building efficiency in the coming decades through its exposure to Nibe, a leader in European heat pumps; Installed Building Products, the second largest insulation installer in the US; and Trane Technologies, a specialist in efficient residential and commercial cooling in North America. The Fund is also positioned to capture increased investment in electrical end-use efficiency and building automation through its ownership of low- and medium-voltage leaders Hubbell, Eaton, Legrand, and Schneider Electric.

To read the full commentary report, please follow the link below

Read the full report

The Managers

Will Riley – Portfolio Manager

Will joined Guinness in 2007 and has been managing energy funds since 2010.

Johnathon Waghorn – Portfolio Manager

Jonathan joined Guinness in 2013 and has been managing energy funds since 2008.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Speak with Ethical Offshore Investments to learn how you can save on your investment costs by investing via Ethical Offshore.

Socially Responsible Investing – Ethical Business Standards

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Trade the Tape – Buffet is buying Bonds

Stephen Strowger — Mon, 07 Aug 2023 10:39:40 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

August 6, 2023 – Adrian Tout

Buffett is Buying Bonds

Why fixed income is very well placed here
Buffet is buying tens of billions in bonds
Quick update on my 2 favoured bond ETF’s

Warren Buffett is pouring tens of billions of Berkshire money into short and longer-term bonds.

And I’m not surprised…

For example, July 9th I offered this post “Think About Adding Bonds”

Shorter term bills were offering investors ~5.50% and the longer-date 10-year bond above 4.0%

That’s extremely attractive.

Here’s another way to frame it…

With the S&P 500 trading close to 4600 (at the time) – the Index would need to trade ~4850 over the next 12 months to offset what you can receive risk fee.

Now with earnings expect to come in around $220 this year – and perhaps $235 next year (which assumes we avoid a recession) – that’s 2024 PE of ~21x

From mine, that’s a high bar (and not without risk)

For example, if we are to suffer a recession in 2024 (my base case) – then earnings of “$235 per share” will not materialize.

Do you think we can rule-out either a recession or slow-down?

I don’t.

So why not secure between 4.00% and 5.50% with some of your portfolio?

That’s exactly what Buffett’s Berkshire Hathaway decided to do…

Smart.

US 10-Year Above 4.00%

Warren Buffett told CNBC he is actively adding exposure to both treasury bills (shorter duration); and longer term bonds.

In an interview with CNBC’s Becky Quick last week – Buffett said:

“We bought $10 billion in U.S. Treasurys last Monday. We bought $10 billion in Treasurys this Monday. And the only question for next Monday is whether we will buy $10 billion in 3-month or 6-month” T-bills.

For those less familiar – T-bills are shorter-term. Bonds are longer duration.

Personally, I think Buffett’s timing is quite good.

And whilst I think there is every chance yields could trader higher (i.e. bond prices fall) – Buffett is securing very attractive risk-free long-term returns.

If nothing else, it also acts as a great hedge in the event things turn negative.

And if we do happen to enter a recession next year – the capital appreciation on those bonds will increase meaningfully.

But let’s take a look at the all-important US 10-year yield:

Aug 6 2023

Last week, these yields traded as high as 4.22% – as high as we’ve seen since October last year.

Towards the end of the week – they pulled back closer to 4.0% (which resulted in stocks catching a small bid)

Again, my feeling here is they could easily go higher.

For example, one scenario is these yields surge above 5.0% (also ~61.8% outside the distribution I’ve flagged) – which would likely see stocks trade meaningfully lower.

I would be surprised if that were the case – but you never know.

However, this is a bet billionaire investor Bill Ackman is willing to make…

Bill Ackman sees Long-Term Yields Surging

Ackman thinks bond yields still have a long way to go…

He believes inflation will be far more persistent than what the market is pricing – betting the US 30-year yield will trade at 5.50%

Today the US 30-year treasury trades at 4.20%

Put another way, Ackman sees bond prices crashing…

From CNBC:

“We implement these hedges by purchasing options rather than shorting bonds outright,” Ackman said late Wednesday. “There are many times in history where the bond market reprices the long end of the curve in a matter of weeks, and this seems like one of those times.”

Ackman argued that if U.S. inflation is 3% in the long term instead of 2%, 30-year Treasury yields could hit 5.5% “and it can happen soon.”

“I have been surprised how low US long-term rates have remained in light of structural changes that are likely to lead to higher levels of long-term inflation, including de-globalization, higher defense costs, the energy transition, growing entitlements, and the greater bargaining power of workers,” he said.

Ackman pointed to several factors including the desire of China and other countries to decouple financially from the U.S., growing concerns about U.S. governance, fiscal responsibility and political divisiveness — the latter three issues prompted the latest Fitch downgrade.

“I have also been puzzled as to why the (U.S. Treasury Department) hasn’t been financing our government in the longer part of the curve in light of materially lower long-term rates,” Ackman said. “This does not look like prudent term management in my opinion.”

Now Ackman could be right… however it will be disastrous for equities if he is.

Further to what I outlined last week – the market is bracing for a deluge of new (longer-term) treasury bonds being issued from the US government.

Deutsche Bank strategist Steven Zeng said in a recent research note he expected net bill issuance of $400 billion in June, followed by $500 billion between July and September.

In total, Zeng estimated $1.3 trillion in net bill issuance by the end of the year.

Investment firm Glenmede added that this influx of funds into Treasury securities in the coming weeks may have the adverse effect of reducing overall liquidity (e.g., as investors like Buffett take money out of the market to take advantage of these yields)

Again, if true, that could be a negative for equities.

Two Bond ETFs to Watch

Last week I was adding to my bond exposure as yields rose.

In other words, I was taking the opposite side of the trade to Bill Ackman.

I chose to do this via two bond ETFs

AGG – iShares Core U.S. Aggregate Bond ETF (note: similar ETF is LQD)
EDV – Vanguard Extended Duration Treasury ETF (note: similar ETF is TLT)

Again, I talked about the composition of these (low cost) bond ETFs here.

With the sharply higher move in yields – both ETFs were marked down to what I think are attractive (long-term) levels.

1. EDV – Extended Duration Treasury ETF

Let’s start with the long-term chart for Vanguard’s EDV:

Aug 06 2023

When I issued the post ‘Think About Adding Bonds’ – I suggested there was no need to rush into this trade.

My expectation was the Fed would not only raise rates – but also use more hawkish language – sending yields higher.

However, US yields also got a surprise boost from the Bank of Japan, allowing their interest rates to go higher.

The ETF subsequently dropped from $82 (when I wrote the post last month) down to around $78.91 at the time of writing.

The long-term low for EDV is around $73 (which we could re-test if yields keep rising).

However, I think adding some exposure around the current level is a good long-term risk/reward bet.

Not only do you secure an attractive yield – there is the opportunity for capital appreciation should yields fall (opposite the increased risk of recession and/or economic slowdown).

And if we see a price closer to $73 – I would add more.

2. AGG – iShares Core U.S. Aggregate Bond ETF

The other ETF I added exposure to last week was AGG.

This is quite different to EDV as it gives me exposure to high quality corporate debt.

Aug 06 2023

AGG also moved sharply lower on the back of higher yields.

Similar to EDV – I think this also represents a good long-term risk/reward bet at current levels.

Again, it’s an attractive yield with the likelihood of meaningful capital appreciation next year.

Putting it All Together

Most investors will yawn at the prospect of buying a bond ETF.

And I get it…

There is nothing exciting about owning fixed income.

But the game of investing isn’t supposed to be exciting.

It’s meant to be lower risk and boring.

Now given the staggering ~30% rally in equities over ~9 months – the pathway higher feels narrower.

What’s more, it’s now laced with risks.

For example, if economic growth and the labor market continues to be strong – it justifies the Fed to continue with rate hikes.

On the other hand, if the economy shows signs of weakening (as we saw with the most recent labor report) – investors will once again start worrying about recession.

Recessions typically mean lower bond yields / higher bond prices.

My view is economic growth slows into next year – where the ‘long and variable’ lags of the Fed’s higher rates start to bite.

What’s more, I think banks continue to restrict lending.

If I’m right (and I may not be) – then bonds are a good hedge.

For example, longer-term treasury debt (EDV); and high-quality investment grade debt (AGG) offer investors strong yields and a hedge against a weaker economic outlook.

Now if the S&P 500 was trading around ~3800 and interest rates were closer to 3.0% – I would be betting on stocks.

But that’s not the equation…

We now have the S&P 500 trading at 4478 with an effective Fed funds rate of 5.50%

With earnings per share expected to come in ~$235 next year – the asking forward PE isn’t attractive.

For me, fixed income looks well-placed at this juncture.

Regards
Adrian Tout

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How the Bank of England’s 25 basis point rate rise will affect your finances

Stephen Strowger — Mon, 07 Aug 2023 09:43:47 +0000

03 August 2023

Trustnet looks at the likely implications of the BofE’s latest interest rate hike.

By Jonathon Jones,

Editor, Trustnet

The Bank of England has raised rates by 25 basis points to 5.25% at its latest meeting, the 14th consecutive increase dating back to January 2022. It is the highest rates have been since 2008 but the latest hike is a slowing from the previous increase of 0.5% last time out.

It chose to hike despite slowing inflation, which cooled to 7.9% in June, down from 8.7% the previous month, as shown in the chart below. This is still some way from the Bank’s 2% target and puts pressure on the Monetary Policy Committee to keep going.

The BofE’s decision chimes with that of the Federal Reserve last week, which upped rates by 25 basis points taking the range to 5.25%-5.50%, however most expect the US central bank to be closer to the end of its hiking cycle, with headline inflation across the pond at 3%, while core inflation stands at 4.8%.

Richard Flax, chief investment officer at Moneyfarm, said the Bank of England had chosen the “safer route” with the latest increase to tackle sticky inflation.

He noted that rate hikes are “intentionally hard on the economy, the public and businesses – to cool down activity and bring down costs”.

The other option on the table today – raising by 50 basis points –would have “inflicted shaper economic pain”, he explained.

“With the UK economy already tipping towards a recession and growth flatlining, a 50-basis point hike would have exacerbated the decline. Therefore, the BofE did not intend to destabilise the fragile economy and had to rule out the larger rate rise,” said Flax.

Consumer price index since 1989

Source: The Office for National Statistics

James McManus, chief investment officer at Nutmeg, agreed that the Bank has a difficult balancing act between hitting people’s everyday finances immediately (rising rates increase mortgage and other debt payments), while trying to stymy inflation – a more medium-to-long-term consequence.

“Unfortunately, what is good for one can be bad for the other” he said, but noted that the rise was “anticipated” by markets and lenders alike, adding that there was some reason to be cheerful on the news.

“On the positive side, the chances of a recession this year are slim – previously almost considered a certainty – and the labour market remains strong,” he said.

Below, we look at how the latest rate rises may impact people’s personal finances.

Savings

The latest hike could be good for savers, according to Rosie Hooper, chartered financial planner at Quilter, who said that it should feed through to higher yields on savings accounts.

However, some of the high street banks have been slow to pass these rate rises on to customers and the amount of interest offered is variable.

“Therefore, it’s crucial to survey the market for the highest rates as not all banks accelerate their rate increments at the same pace. Additionally, other forms of savings products such bonds, ISAs or investments should be taken into account,” she said.

Mortgages and other debt

Rachel Springall, finance expert at MoneyFacts, said the latest news will be “disappointing” to borrowers worried about rising mortgage repayments.

“Interest rates on mortgages are much higher than some may realise, so borrowers will need to ensure they have surplus funds to meet higher repayments when they come off a lower rate deal,” she said.

Springall added that fixed rate mortgages, for two, five and 10-year terms are around 3 percentage points higher on average compared to December 2021 while the average standard variable rate has risen consecutively over the same period, “so a fixed mortgage can give borrowers some peace of mind by securing their monthly repayment”.

Credit card interest may also rise, with users urged by Hooper to clear down outstanding balances as soon as possible while avoiding high-interest debt.

Pensions

The increase in interest rates could be positive news for those looing to take out an annuity, as they have a direct correlation with government bond yields.

Hooper said: “This suggests that retirees on the brink of acquiring an annuity could enjoy a superior income throughout their retirement phase. Those nearing their retirement should vigilantly track interest rates and bond yields, and seek financial advice to help plot the optimal retirement course.”

Investing

Investors looking to cash in on higher rates should consider buying bond funds, according to Rachel Winter, partner at Killik & Co, as yields are at their highest in more than a decade.

“Now could be an important time for investors wishing to take advantage of opportunities presented by this turning point. Fixed income products are one such area where the window of opportunity needs to be seized ahead of rates coming down. For savvy investors who wish to bolster their portfolios with these assets, now is the time,” she said.

The outlook for rates

Expectations are for more rate rises this year, according to Rob Morgan, chief investment analyst at Charles Stanley, although the level at which they will settle has been reduced.

“Market expectations for the peak rate have receded in recent weeks thanks to June’s inflation surprise. Having reached 6.5% on July 11th in the wake of data showing record wage growth, the latest consensus is 5.75% by the year end,” he said.

“From that point markets are pricing in rates remaining at this sort of level for a while with no significant cuts coming in the first half of 2024. Today’s announcements have not adjusted these market expectations significantly.”

Marcus Brookes, chief investment officer at Quilter Investors, also said savers should expect at least one more increase before we reach 2024, but that the rate is unlikely to reach 6% as previously predicted.

“The UK economy and consumer has been incredibly resilient but are clearly now beginning to be hit. Inflation is falling and should continue to do so for the rest of the year, even if not to that magic 2% number. The next few sets of inflation data will be crucial to see just what impact the BoE has managed to have and what is still likely to come,” he noted.

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Berkshire Hathaway’s operating earnings rise nearly 7%, cash pile approaches $150 billion

Stephen Strowger — Mon, 07 Aug 2023 08:33:47 +0000

This article was originally published on CNBC.com

PUBLISHED Saturday, August 5, 2023

Yun Li @YUNLI626

KEY POINTS

The Omaha-based conglomerate’s operating earnings totaled $10.043 billion last quarter, 6.6% higher than the figure from the same quarter a year ago.
Net income totaled $35.91 billion, compared with a $43.62 billion loss during the second quarter last year.

Berkshire’s massive cash pile grew to $147.377 billion at the end of June, near a record and much higher than the $130.616 billion in the first quarter.

Warren Buffett tours the grounds at the Berkshire Hathaway Annual Shareholders Meeting in Omaha Nebraska.

David A. Grogan | CNBC

Berkshire Hathaway on Saturday reported a solid increase in second-quarter operating earnings, while the cash hoard at Warren Buffett’s conglomerate swelled to nearly $150 billion.

The Omaha-based giant’s operating earnings — which encompass profits made from the myriad of businesses owned by the company, like insurance, railroads and utilities — totaled $10.043 billion last quarter, 6.6% higher than the figure from the same quarter a year ago.

Net income totaled $35.91 billion, compared with a $43.62 billion loss during the second quarter last year. The strong results were bolstered by a jump in Berkshire’s insurance underwhttps://www.cnbc.com/quotes/AAPL/riting and investment income.

Berkshire reported a near $26 billion unrealized gain from its investments as its gigantic stake in Apple led the market rally in the second quarter. The tech giant soared nearly 18% during the quarter and Berkshire’s bet has ballooned to $177.6 billion.

The “Oracle of Omaha” trimmed his Chevron stake by $1.4 billion to $19.4 billion at the end of June. Shares of Chevron have significantly lagged the broader market this year, down more than 11%. The S&P 500 has rallied almost 17% in 2023.

Cash hoard swells

Berkshire’s massive cash pile grew to $147.377 billion at the end of June, near a record and much higher than the $130.616 billion in the first quarter.

Share repurchase activity slowed down as the conglomerate’s stock climbed back to a record high. The company spent just about $1.4 billion in buybacks during the quarter, bringing the year-to-date total to $5.8 billion.

The conglomerate’s Class A shares hit a new record close of $541,000 on Thursday, exceeding the conglomerate’s previous high of $539,180 reached on March 22, 2022. The stock has gained 13.8% this year.

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Trade the Tape – Will a US Debt Downgrade be a ‘Bearish’ Catalyst..?

Stephen Strowger — Thu, 03 Aug 2023 07:30:13 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

August 2, 2023 – Adrian Tout

Will a US Debt Downgrade be a ‘Bearish’ Catalyst?

Fitch downgrade US Debt
Interest payments relative to GDP sky-rocket
Could the market stumble if bond yields continue to rise..?

Earlier this week, Fitch Ratings downgraded the U.S.’ credit rating.

Stocks slipped a little on the news and bond yields ticked higher.

The US 10-year treasury yield is now north of 4.10%

Fitch cited “expected fiscal deterioration over the next three years” and an erosion of governance.

Hard to argue…

Fiscal restraint is not one of the government’s strengths.

But this isn’t entirely new news…

For example, the credit agency placed the nation’s rating on watch in May following a near-default after members of Congress butted heads over raising the debt ceiling.

However, this put the wheels in motion.

The debt ceiling was raised (surprise surprise) which meant the spending was set to continue.

As a result, yesterday Fitch marked the country’s rating down to AA+ from AAA.

Here’s what they said:

“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025”

I will show what a “deterioration in standards” looks like in a moment.

But first, there were some people who were ‘less than thrilled’ by the announcement.

“Ridiculous” says JP Morgan CEO

Never one to mince words, Jamie Dimon called the credit downgrade “ridiculous”

Here’s what the CEO of the US’ largest bank (by assets) told CNBC:

“It doesn’t really matter that much because it’s the market, not rating agencies, that determines borrowing costs.

Still, it’s “ridiculous” that other countries have higher credit ratings than the U.S. when they depend on the stability created by the U.S. and its military.

To have them be triple-A and not America is kind of ridiculous. It’s still the most prosperous nation on the planet, it’s the most secure nation on the planet.

We should get rid of the debt ceiling. It’s used by both parties in ways that sow uncertainty for markets.

Dimon makes a good point… the U.S (specifically its debt) remains the ‘center’ of the financial universe.

I often say the US 10-year treasury is the most important financial asset on the planet.

Every financial instrument is tied to it.

Your mortgage, car loan, student debt, credit card debt – all tied to the US 10-year yield.

And if that goes… so too does the entire financial system.

However, just because you are the “prettiest girl at the dance” (which is what Jamie Dimon is trying to tell us) – it doesn’t mean you don’t make poor decisions.

The U.S. is the world’s reserve currency and that comes with enormous responsibility.

What’s more, it doesn’t mean you can abuse it.

And when I look at the data (vs people’s opinions) – there are reasons to raise some ‘yellow flags’.

Total Public Debt to GDP

The first chart worth noting is the level of total public debt to GDP:

Aug 2 2023

This chart is slightly older than me (I was born in ’71) – going back to 1966.

For context, just after World War II, the total public debt to GDP managed to exceed 105%.

However, in the absence of any additional ‘world wars’ – the debt contracted as the economy grew faster than the debt needed.

And that’s what should happen…

As an aside, the debt is never really paid down. We just assume the economy continues to grow faster.

Now there are two key points to highlight on this chart:

During the 1980’s we had a period of massive fiscal deficits. This saw the debt balloon to a level which many thought was simply not sustainable. Ross Perot’s Presidential campaign was based on the US not being fiscally responsible. Wiki states “Perot focused the campaign on his plans to balance the federal budget, further economic nationalism, strengthen the war on drugs” (he wasn’t successful)
The second point of significance is the period of the Global Financial Crisis. The US economy crashed – we had the Troubled Asset Relief Program – massive public debt was issued (‘bail outs’) – and we had the S&P downgrade US debt.

Which brings us today… where we touched a level of 135% opposite the ‘COVID debt binge’ and fiscal stimulus.

However, given recent economic growth (and need to stimulate less) – the debt ratio has come back to around 119%.

Still very high – but better in relative terms.

This led Treasury Secretary Janet Yellen to say “Fitch’s timing is a little odd”:

“Fitch’s decision is puzzling in light of the economic strength we see in the United States. I strongly disagree with Fitch’s decision, and I believe it is entirely unwarranted“

“Its flawed assessment is based on outdated data and fails to reflect improvements across a range of indicators, including those related to governance, that we’ve seen over the past two and a half years.”

Yellen is clearly talking to the move down from 135% to around 119%

But there is more work to be done…

However there is another chart which may help explain why Fitch issued the downgrade.

Federal Interest as a Percentage of GDP

Whilst a public debt ratio to GDP of more than 100% could be cause for concern – the growing interest bill on that debt deserves attention.

This brings me to this chart:

Aug 02 2023

This shows the interest expense of the total public debt relative to the size of the economy.

Through the 1980s – when Fed Chair Volcker was raising rates to ~18% to squash inflation – the interest expense got very high.

Not only was it above 3.0% of GDP – it was also a whopping ~10% of the total federal budget.

This chart above is only current to the end of 2022 (you can find it here)

However, as it stands at the time of writing, the current ratio of interest expense is now pushing 2.50% and many fear on track to challenge 3.0%

This is what should be ratcheting up the ‘heat’ on the current Administration to curb spending.

But this is real money flowing out (which could be spent elsewhere)

Remember:

The denominator is the size of the economy.

Therefore, if the economy continues to grow north of 2.5%, this helps.

But what doesn’t help is if the primary source of that growth is government spending (which it has been)

The growth needs to come from the productive (revenue generating) private sector.

And when (not if) we suffer a recession, this will only push the interest expense ratio higher.

As regular readers know, I think we are going to suffer a recession at some point towards the end of the first half of next year.

If the fiscal situation has not improved by then (and I don’t see why it would given the policies) – this could be a problem.

And I think this is where Fitch is coming from.

Could be wrong.

Stocks Could Stumble on Downgrade

The market lost a small bit of ground today on news of the downgrade.

However, it could be more to do with the strong upward move in bond yields we have seen the past week or so.

For example, the US 10-year is back above 4.0%

What’s more, that move isn’t done.

I say that because the US Treasury is set to issue over $1 Trillion in new bonds in the next month or so… and they will need to offer higher yields to attract investors.

This is going to put pressure on bond prices (given the torrent of new supply) — which is an opportunity for long-term holders.

But in the short-term – bond prices will likely fall.

From my perspective, I would like to see the 10-year closer to 5.0% (vs 4.0%) – but that’s not what the stock market has in mind.

Anything north of 4.0% on the 10-year will act as a headwind (particularly for growth based stocks)

What’s more, that hurts economic growth – placing more pressure on the interest expense ratio to GDP (i.e. where you need economic growth to outpace debt).

Let’s take a quick look at the S&P 500 using the weekly chart…

Aug 2 2023

Using this timeframe, we can see how stocks have barely reacted to the news of the credit downgrade.

Over the weekend, I said to readers to act with some caution – as we were overbought using the weekly RSI.

I also said the RSI is not a signal I use in isolation to “sell” or “go short”.

It simply means we could be about to see a pullback.

For what it’s worth, I don’t think stocks have pulled back yet.

When the Index moves higher or lower by “2-3%” – it’s par for the course.

I don’t pay zero attention to those moves (in either direction)

However, I will pay closer attention once we test the 10-week EMA (around ~4400)

At that point, we will be trading around 5% off the highs.

But I won’t be buying…

5% is not a lot given how far we have come.

But it may be enough for tactical buyers to come back in after some profit taking?

Could we see a bigger move lower?

Yes…

For example, if bond yields continue to push higher (especially on the back of $1T in new Treasury issuance), this could act as a tipping point for the bulls.

And if we see 4200 on the S&P 500 (which acted as a strong level of resistance for ~12 months) – this would be an area to add to quality positions.

To be clear, if earnings are to come in around $220 this year (which I think is still optimistic) – you’re paying ~19x forward.

That’s not a bargain… so be very selective.

Putting it All Together

Downgrades to US credit are not new.

Is this one deserved?

Well that all depends on your lens.

I can understand why the likes of Jamie Dimon and Janet Yellen were not impressed. They see the US as the best looking girl at the dance.

But do other countries see it the same way?

I’m sure they have a very different frame of reference.

Irrespective of your lens, there is no debating the US is going to be paying a lot more in terms of its interest expense.

What’s more, that money could be used for things like (not limited to) education, health or defense.

Instead it’s being ‘wasted’ on interest (due to excessive spending)

Now whilst bond yields traded near zero – no-one was paying too much attention to the interest payments.

“We can afford it” was the mantra…

Not now…

The level of debt (relative to the size of the economy) deserves scrutiny when interest costs grow 35%+ for two years straight.

The CBO project by 2030 – the US’ interest expense will exceed 3.3% of GDP (which would exceed previous levels).

Here’s another way to frame it:

Within 10 years, net interest costs will exceed federal spending on crucial programs like Medicaid and defense.

Is that a good thing?

A healthy debate is needed on the levels of borrowing and spending by government.

No government has ever spent their way to prosperity.

And if a credit downgrade (or two) is needed to have that discussion… that’s a good thing.

In the near-term – continue to keep an eye on the US 10-year yield.

It’s not finished going higher and that could pressure equities……

Regards
Adrian Tout

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Trade the Tape – Half Way Through Earnings: 81% Beat on EPS

Stephen Strowger — Sat, 29 Jul 2023 09:43:35 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

July 28, 2023 – Adrian Tout

Half Way Through Earnings: 81% Beat on EPS

Earnings & Revenue are beating expectations
Why lower inflation could be headwind to earnings growth
Is paying 21x forward earnings a good risk / reward bet..?

This week was the busiest week of earnings on the calendar.

Half of all S&P 500 companies have now reported for Q2.

And so far… so good!

81% of companies have beaten earnings per share (EPS) expectations – by an average of about 6.4%

By way of comparison – prior to COVID – the average EPS beat was in the realm of ~3%

What’s more, about 64% of all companies have also beaten top line expectations.

Here is a list of what sectors are performing best (relative to expectations)

Consumer Discretionary – up 36.3%
Communication Services – up 16.1% (dominated by Google and Meta)
Industrials – up 11.5%
Technology – up 0.3%

What’s interesting (to me) is tech is basically flat.

However, with prices rallying, what we have seen is simply multiple expansion. I will talk more to why this is a risk shortly…

And in terms of the worst sector performers:

Energy – down 48.5% (which is now a good sector to start looking)
Materials – down 29.3%; and
Health Care – down 29%

In summary, the market is celebrating the stronger-than-expected numbers.

And this has some asking – is the bottom in for earnings (after what will be three consecutive quarters of contraction)?

Is the Earnings Trough In?

Given the above, it’s little wonder stocks continue to rally.

But another reason we’re seeing new highs are improved expectations looking forward.

That is, they think the bottom is in.

And whilst that assumption could be true – it also assumes there is not a recession next year.

Earnings will always contract during a recession. No exceptions.

For example, below is what the market is pricing in with respect to EPS growth YoY:

Q2 2023 – Down 6.4% (vs initial expectations of around 7%)
Q3 2023 – Up 1.1%
Q4 2023 – Up 9.3%
Q1 2024 – Up 8.4%
Q2 2024 – Up 14.5%

From Q4 onwards, the market has set high expectations.

And that’s the essence of the bullish thesis; i.e.,

Very strong earnings; and
Strong economic momentum

Now the S&P 500 commands a forward multiple of close to 21x – on the basis we will grow into these valuations.

So what could go wrong?

Reasons to Challenge the Bullish Thesis

Look, there’s a lot to like with what we have seen with earnings so far.

There is very little ‘blood on the streets’… basically none.

What’s more, we’ve seen exceptionally strong fund flows – with over $70B going into mutual funds.

That’s a good sign of bullish momentum.

But does that translate into everything will “come up roses” the next 12 months?

That’s hard to say but let’s try and think of a few questions we should ask.

Let’s start with what the market is asking you to pay.

Remember:

It’s not just about what you buy – it’s equally how much you pay.

For example, no-one debates that “Apple or Microsoft” are great stocks. But that doesn’t mean you can’t get badly hurt paying 31x forward earnings.

To start, with EPS for 2023 forecast around $220 per share – with the S&P 500 at 4582 – that’s 20.8x forward.

If we take the inverse of this PE ratio (1 / 20.8) – we get an earnings yield of 4.8%

That’s far less than the risk-free money market yield of around 5.25%

As a benchmark – the last time we saw this happen was in 1999.

Not surprisingly, it was also when tech stocks traded at 31x forward.

We all know what happened next…

But think of it this way…

With a risk-free rate of ~5.25% (or thereabouts) – the S&P 500 would need to rally to 4834 to match what you can get risk-free today.

From mine, that’s a tall order, where the forward PE would be closer to 22x.

Therefore, you need to ask yourself two things:

Is the risk to the upside? or is it
More towards the downside?

If you ask me, it’s the latter.

However, if you believe that earnings are about to explode higher (and economic conditions are going to become more favorable) – then maybe you think the risks are to the upside.

But that’s not me…

What are the Potential Triggers?

From mine, the most important thing to consider is what we are being asked to pay for earnings.

Again, if everything goes to plan, earnings will see:

Q3 2023 – Up 1.1%
Q4 2023 – Up 9.3%

But is that unrealistic?

Let’s consider the following…

One of the primary beneficiaries of inflation are earnings.

That is why it’s always good to buy stocks in a high inflationary environment.

Consider Walmart as a basic example.

Last quarter they reported sales growth of 6% YoY.

But guess what inflation averaged over that time? You got it – it was ~6%.

Put another way – in real terms their sales were flat.

Company revenue is always reported in nominal terms. Therefore, they benefit from inflation.

Now consider the alternative…

When inflation is cooling (as it is) – then earnings do not stand to enjoy the same “free” ride.

That will be headwind in terms of year-on-year comps… making those double-digit growth assumptions very aggressive.

The other factor is what is happening in the broader economy.

I talked to some of the questions we should be asking here… below is a recap:

Consumer excess savings falling from $2.3T (2022) to less than $1.0T;
Credit card debt exceeding $1.0T – carrying an average interest rate of 24% (where banks have doubled their loss provisions);
Retail sales are slowing;
Fiscal spending is starting to be curtailed (after record deficits the past two plus years);
The Fed likely to continue to hold rates where they are – meaning real rates are rising (as inflation falls);
Central bank also continue to reduce their balance sheet (a form of monetary tightening); and finally
The 18-24 month lag effect of the 525 basis points of rate increase (which is only just starting to bite)

All of these are potential triggers for a generally slowing economy.

With that let’s take a look at how the market finished the week.

S&P 500: Euphoric

The price action so far this year has been nothing short of euphoric.

Rarely do we see the S&P 500 up ~20% in the space of just 7 months.

But here we are…

And whilst the market has the potential to keep going (as it has a lot of momentum) – one needs to be mindful of the downside risks.

The one technical thing to call out is what we see with the weekly RSI (lower window)

It’s now in overbought territory (above 70)

For clarity, this is not a trading signal where you sell or go short.

The market can remain in an overbought zone for weeks or months.

For example, look at what happened through April to September 2021.

The market was overbought during this entire time (based on the weekly RSI). However, it rallied from 4220 to 4535 before correcting to the tune of around 6%

We could easily see something similar…

But I would not be surprised to see the S&P 500 trading closer to the 10-week EMA (4377) at some point over the next 4 weeks (e.g. ~4.5% lower)

Finally, in terms of how I’m trading this – I continue to maintain 65% long exposure.

I do not have any short positions and/or puts (nor have I through this entire rally).

Year-to-date my returns are 13.2% – underperforming the market due to maintaining lower exposure.

I had a solid week – with banks doing well (where I added exposure to the likes of BAC, JPM and WFC during the so-called banking crisis).

It’s too early to call that trade a win (ask me in 3 years) – but so far they are doing okay.

I also accept I will continue to underperform the S&P 500 should the market continue to rally from here.

However, I’m happy maintaining around 35% cash to buy at more attractive levels (which could happen very quickly)

I’m not willing to put new capital to risk at these valuations.

Putting it All Together

If you are wondering what to do – you should answer these two questions :

Is it a good long-term risk / reward bet to pay 21x forward earnings for stocks with interest rates at 5.25%; and
Is it a good strategy to buy on the assumption of double digit earnings growth – in the face of a potential recession (next year)?

For example, with respect to #1, history shows that buying the market at this multiple has not been a successful strategy.

Sure, it may rally another 5% or so, however the risks are to the downside.

With respect to the #2 – if we are to experience a recession next year (and I still think we do) – then earnings will contract (they will not expand double digits)

But your view will be different to mine…

In summary, both the forward PE is far too high (at 21x) and earnings expectations feel naive.

That said, I continue to maintain a healthy level of long exposure.

Regards
Adrian Tout

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Gold could hit record high of $2,500, says WisdomTree

Stephen Strowger — Tue, 18 Jul 2023 12:22:19 +0000

In a best-case scenario the asset class would soar, but there are also reasons to be bearish.

18 July 2023

By Jonathan Jones,

Editor, Trustnet

Gold is on track to hit a new record high of $2,225 per ounce by this time next year, according to Nitesh Shah, head of commodities and macroeconomic research at WisdomTree. However, if things go right, the precious metal may shoot even higher to $2,500 per ounce.

Investors in the yellow metal have had a rollercoaster over the past few years. In 2020, when the pandemic caused investors to duck for cover, it held up as a safe haven, with prices rising 17.2%. In 2021, with expectations of a recovery, it softened 3.4%.

Last year was another upswing as markets were shook by rising interest rates and inflation, war in Ukraine and the prolonged lockdown measures in China. As a result, gold surged another 11.8%.

This year, with investors taking a sanguine view on markets, it has nudged 1.4% lower. Overall, it leaves investors that bought the metal at the start of 2020 up a glistering 24.7%, with the spot price at $1,955 at the time of writing.

Gold spot price since start of 2020

Source: FE Analytics

Shah said much relies on macroeconomic data, specifically from the US. Consensus expectations are “for inflation to continue to decline (although above the Federal Reserve target), the US dollar to depreciate, and bond yields to continue to fall”.

Theoretically, rising rates is poor for gold, as the better yield on offer from low-risk bonds means investors move from the speculative gains from the precious metal to the certainty of yield.

However, rising rates this time around brings the world closer to recession – an environment where its safe haven status should prop up the price.

“Gold tends to perform well in times of economic stress. As the chart below shows, when composite leading indicators turn strongly negative, gold performs positively while equities tend to be negative. Gold also outperforms Treasuries, which are seen as competing defensive assets,” said Shah.

Source: WisdomTree

As such, in the consensus case scenario, gold could reach $2,225 per ounce by the second quarter of 2024, clearing the previous all-time nominal highs of $2,061 per ounce set in August 2020.

Invesco’s Paul Syms, head of EMEA ETF fixed income and commodity product management, was also bullish on the precious metal.

Last month he wrote: “We believe gold remains an asset worth holding especially given uncertainties around the US debt ceiling, any further banking crisis, a correction in stock markets, escalation in the war or countless other geopolitical concerns.”

But things could get even better, said Shah, if we get a scenario where the Federal Reserve “pays heed to the recession warning signs and pivots its monetary policy to cutting rates faster” before inflation is below the target level.

“If the Fed begins monetary expansion by autumn 2023, bond yields will be falling and, assuming it moves before the European Central Bank and other major central banks, we could see the US dollar depreciate at a faster rate.

“We assume inflation will be stronger than in the consensus scenario as a result of the Fed loosening monetary conditions. Assuming that the recession fears that the Fed is responding to are real, we expect positioning in gold futures to remain elevated.”

In this scenario, gold could reach $2,490 per ounce, 22% higher than the all-time high.

The bearish view, which is that inflation falls below the Fed target meaning the central bank overdoes its monetary tightening, would cause the US dollar to appreciate and bond yields to rise.

While this increases recession risk and could be positive for gold as a hedge, it does pose the most risk to the yellow metal.

In this scenario, gold would reach $1,710 per ounce, bringing prices back to November 2022 levels.

This article is provided for information only and was first published by Trust Net. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

At Ethical Offshore Investments, clients can access very low cost Exchange Traded Funds that are backed by Physical Gold Bullion holdings, that track the spot price of Gold.

Speak with Ethical Offshore Investments to learn how you can save on your investments costs by investing via Ethical Offshore.

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Trade the Tape – What Banking Crisis..??

Stephen Strowger — Tue, 18 Jul 2023 08:23:27 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

July 17, 2023 – Adrian Tout

What Banking Crisis..??

S&P 500 now up ~ 30% from the October 2022 low
Financial conditions continue to ease; and
Will the Fed remove their ‘liquidity put‘ with the banking crisis over..?

Are things actually looking up?

If your measure is the equity market… you would say absolutely.

Stocks continue to charge higher on the back of lower inflation and optimism the Fed is closer to the end of its hiking cycle.

What’s not to like?

However, there’s something else giving markets a boost.

Easy money!

Financial conditions are as easy as they’ve been all year.

For example, it was only 4 months ago and we had a mini banking crisis… where funding was a lot tighter.

That’s now a distant memory.

Take a look at the Chicago Fed’s Financial Conditions Index:

Jul 17 2023

The spike higher in financial conditions happened in March (when SVB went belly up) – coupled with a distinct loss of risk appetite.

That’s mostly now rear-view mirror…

However, what it led to deserves comment.

Banking ‘Crisis’ Led to a Narrow Market

Last Friday marked the unofficial start to the Q2 earnings season.

We heard from the US’ largest bank by assets (and stock I own) – JP Morgan Chase (JPM).

Revenue rose 34% as JPM took advantage of higher rates and solid loan growth.

It was an incredibly strong quarter.

Wells Fargo and Citi also beat expectations… commenting that consumers remain in good shape.

We will hear from Bank of America tomorrow (which I also own) and other key regionals.

Now March 10 this year – Silicon Valley Bank (SVB) collapsed.

The sentiment was very different… it was ‘risk off’.

I had some readers (who unsubscribed at the time) telling me I was totally wrong – and this was a repeat of 2008.

I wished them well with the short bets on banks (and the market).

As it turns out, it was not the end of the US banking sector (as they predicted) – and it was the start of a very narrow rally:

July 17 2023

From mine, this tells an interesting story.

What we saw was money finding its way to whatever offered the best return opposite the lowest risk.

Stocks like Apple, Amazon, Google, Meta, Microsoft, NVIDIA, Tesla, Netflix all ticked that box.

Strong predictable cash flows with great balance sheets.

But this behaviour isn’t new…

In fact this is a pattern we have seen many decades ago.

For example, almost 30 years ago a hedge fund known as Long-Term Capital Management collapsed – which saw the Fed rush in to ensure there was liquidity.

The Fed – under Alan Greenspan – also announced an intra-meeting cut in the fed funds rate and the effect was immediate.

Here’s Bloomberg:

Rinse and repeat in 2023.

Now the events which caused the collapse of LTCM were nothing like what we saw with SVB and First Republic.

But the (central bank) remedy and subsequent market impact were similar.

For example, whilst effective Fed funds rates continued to rise, the extra liquidity offered from the Fed acted like a “put” in the market.

I talked about effect on May 20 – with a post titled “The One Thing Driving the Market”

But here’s the thing:

It’s unlikely the Fed has any motivation in creating a new asset bubble.

But that’s what we might have (in tech at least) – where forward PEs (in many cases) are now above 30x for popular stocks.

From Matt Maley of Miller Tabak framed it this way (bold emphasis my own):

A big part of the reason for the very positive action in the stock market (and other asset classes) since March has been the return of the “Fed put”; there is little question in our minds that this has been the case.

The very large injection of liquidity that they engaged in during the regional bank crisis in March (which can be seen by the BIG jump in their balance sheet at that time) shows that the Fed took a page from their emergency playbook from the pandemic-induced crisis in 2020.

The question now… is whether the banking crisis has calmed down enough to allow the Fed to remove their “Fed put” once again (or to at least push it to a level that is more “out of the money” than it has been in recent months)… or if the situation is still more precarious than anybody is letting on.

Listening to most of the “Fedspeak” recently, it sure looks like they want to be much less accommodative with their “Fed put” than they have been over the past few months.

And therein lies the rub…

S&P 500 Optimism

Below is the ‘straight up‘ price action we have seen the past few months.

July 17 2023

If we look back to October – we are up a staggering 30%

But for me, what makes this rally even more curious is its been without any increase in earnings.

In fact, according to Factset, we are about to see the third consecutive contraction in earnings.

In other words, what we have is meaningful multiple expansion.

Most of that has been less than 10 tech stocks – however more recently – we have seen other sectors catch a bid

For example, banks, energy and industrials are now participating.

Irrespective, the market clearly thinks that conditions are only going to get better.

What’s more, they believe the Fed is not about to take away the punchbowl.

For me, stocks are too expensive given 2-year bond yields are trading close to 5%

That’s the equivalent of a forward PE of 20x (where 1/5 = 20) – where it’s risk free.

Now by comparison…

With the S&P 500 trading 4522 and earnings expected to be ~$220 (which feels optimistic) – that’s a forward PE of 20.6x

That’s an earnings yield of 4.9%

From mine, that is not a compelling risk / reward opposite the risk-free rate.

Putting it All Together

I do think that Matt Maley is asking the right question:

Whether the banking crisis has calmed down enough to allow the Fed to remove their “Fed put” once again (or to at least push it to a level that is more “out of the money” than it has been in recent months)… or if the situation is still more precarious than anybody is letting on.

With respect to the latter – banks are in the process of telling how precarious things remain.

So far so good… but most of the uncertainly sits with smaller regionals.

The big banks will be fine (as I wrote at the time).

But in terms of the former – should the Fed remove their liquidity “put” – it will be interesting to see whether this continues to buoy markets.

More on that July 28/29 when the Fed gives their most recent update on monetary policy.

Until then, the focus will be earnings and whether current prices justify the frothy valuations.

Regards
Adrian Tout

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Trade the Tape – Fed can Keep Raising

Stephen Strowger — Fri, 14 Jul 2023 08:48:01 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

July 12, 2023 – Adrian Tout

Fed Can Keep Raising w/Core CPI 4.8% YoY

Market celebrates headline CPI at 3.0%
However, Core CPI remains well above the Fed’s objective
Bond yields quick to fall on anticipated cuts – but I think they overshot

From the market’s perspective – today was “beer o’clock”

The inflation job is done! Tools down!!

The market cheered the news of the latest monthly CPI and Core CPI print.

Here’s a quick summary:

Headline CPI rose 0.2% in June and was up 3% from a year ago, the lowest level since March 2021.
Excluding food and energy, Core CPI increased 0.2% MoM and 4.8% YoY
Soft gains in food prices and declines in used vehicle and airline prices helped keep inflation down, while shelter prices continued to rise.
Worker wages adjusted for inflation increased 1.2% from a year ago.

In fairness, there is good news.

Headline CPI down to 3% from a year ago is a welcomed relief.

That said, it was mostly inline with expectations given the baseline effect (i.e. it’s coming off a very high inflation number last year)

But…

Core CPI at 4.8% for the past 12 months (4.6% over the past quarter) should temper some of the enthusiasm.

July 12 2023

From mine, it’s still meaningfully above the Fed’s 2% objective (green line).

Question is – how much of that was considered?

Bond Prices Rally / Yields Fall

Last Sunday I talked about how it was time to consider adding bonds to your portfolio.

I offered readers a couple of helpful ETFs for exposure.

For example, with the US 10-year, you were paid paid ~4.0% with the chance of considerable price appreciation on the basis:

(a) inflation continues to cool over the next 12+ months; and
(b) Fed could start reducing rates late next year (pending Core PCE inflation)

In other words, if rates start to fall with a lower inflation risk, it means bond prices could materially appreciate.

But for now, you are being paid 4.0% risk free at the longer-end (and near 5.0% at the front end)

That’s attractive.

Since I wrote that blog – bond yields have dropped (which means bond prices have gone slightly higher)

Following today’s CPI print – yields saw another move lower.

But here’s the thing:

I think both equities and bonds are getting a little too ‘trigger happy’.

To be fair, the market is slowly getting on board with the fact the Fed is closer to its terminal rate (e.g. perhaps another 50 basis points from here).

But the pattern I have observed is investors will often get “bulled up” on the back of one positive print.

Identifying patterns and investor psychology is critically important (more on why in my conclusion).

From there, the market is making the (bold) assumption the Fed is pretty much done.

Presumptuous?

I think so.

Core inflation is likely to only come down slowly over time. For example, it could something be closer to this:

For example, it would not surprise me to see Core CPI still above 3% 12 months from now.

And if that’s true (and it may not be) – then the Fed could comfortably hold rates where they are.

Powell has said (and I’m paraphrasing here “we will get to the policy rate where we want it” (likely to be at least 25 bps higher) – and they will keep it there for a long time.

He has said this could easily be one year or two.

And for me, that’s the disconnect in the market.

Here’s what I mean:

After today, the market now believes we will see 125 basis points of rate cuts in 2024.

Last week that was 80 basis points

Question:

Do you think the Fed is thinking of cutting rates by 125 basis points next year (or more like 150 bps after they raise 25 the next meeting)?

My best guess is not if Core inflation is anything above 3%.

When Powell talks at the next Fed meeting – he is going to remind investors that Core inflation is still far too high and their work isn’t done.

And when we get Core PCE on July 28 (their preferred inflation metric) – that will probably reinforce the case.

Yield Curve to Remain Deeply Inverted

The other reason to hold on “breaking out the bubbly” is what we see with the yield curve.

The longer this stays inverted (i.e., below 0%) – the more pain this is inflicting on business.

And at some point later this year – it’s likely to have a meaningful impact on the real economy (if not already).

For example, take the popular 2-year / 10-year curve:

July 12 2023

Another way of reading this chart is it’s the (bond) market saying the Fed is far too tight.

In other words, they need to lower rates at the short-end (so they are below that of the longer end).

However, as I discussed last week, the US 2-year yield was close to ~5% and the 10-year ~4% – resulting in a 100 bps inversion.

But if the Fed continues to hold rates higher (with core inflation well above its objective) – the yield curve will remain inverted.

And from mine, only when the Fed starts to cut rates will we see this curve back above 0%.

To be clear, the curve may steepen a little if the market thinks the Fed is closer to being done (like it did this week).

That’s simply the short-end getting “in front” of the Fed.

But in terms of the shorter-end trading at a lower yield than the long-end (implying it moves above 0%) – that could be at least 12+ months away.

And that hurts.

Keep Watching Bonds

As I was saying last week – keep your eye on treasuries as a great risk / reward play into next year.

With yields dropping this week – bond prices have rallied (along with stocks)

However, they may have overshot on just one data point.

That’s the typical pattern.

I think once we see the Fed raise rates again July 26th – reminding investors their work is far from done – yields will resume their upward move.

That’s the point where you can add bond ETFs like:

AGG – iShares Core U.S. Aggregate Bond ETF (note: similar ETF is LQD)
EDV – Vanguard Extended Duration Treasury ETF (note: similar ETF is TLT)

… as you position your portfolio to be more “recession ready” for 2024.

Putting it All Together

On an unrelated note – I encourage readers to subscribe to Howard Marks’ free newsletter.

His latest memo is titled “Taking the Temperature”

He provides a great review of the various times (in his 50+ year career) when the market was showing either irrational exuberance or extreme pessimism.

However, the ability to identify these patterns is difficult.

For Marks… it took him three decades to really understand. I quote:

You may have noticed that the first of the five calls described above was made in 2000, when I had already been working in the investment industry for more than 30 years. Does this mean there were no highs and lows to remark on in those earlier years? No, I think it means it took me that long to gain the insight and experience needed to detect the market’s excesses.

That gives you some perspective on how much time it takes to really understand markets. It’s both time and continued study.

To that end, he adds:

Hopefully we learn from our experiences as we go through life. But to really learn from them, we have to step back on occasion, look at an entire string of events, and figure out the following: (a) what happened, (b) is there a pattern that has repeated, and (c) what are the lessons to be learned from the pattern?

Could not agree more.

I think what we’re seeing with bond yields and the shape of the yield curve is a pattern that has consistently repeated.

And given the pessimism in bonds (with yields high) – and the risk of recession next year – that could represent opportunity.

But please read Marks’ latest memo – it’s packed with timeless insights and perspective.

You will be smarter for it.

Regards
Adrian Tout

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Trade the Tape – Think About Adding Bonds

Stephen Strowger — Tue, 11 Jul 2023 09:55:00 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

July 9, 2023 – Adrian Tout

Think About Adding Bonds

Two bond ETF’s: AGG and EDV
Some insurance here could pay longer-term dividends
US 2-Year Yield at its highest level in 16 years

For me, 2023 has been a year of repositioning and managing risk.

I lowered my exposure to large-cap tech (down to ~20% portfolio weight) and increased exposure to banks, energy and some industrials (which all trade at reasonable valuations).

In hindsight my move was a little early – as large cap tech added to their recent gains.

However, I don’t trade with the mindset of ‘weeks or months’.

These things are always very difficult to time.

Due to my (mostly) defensive position – my YTD returns are 11.47% (~3% lower than the Index)

July 9 2023

Keeping a large cash position (~35% at the time of writing) can pay dividends in the event of a market downturn (like last year).

However, when the Index surges (as it has done this year) – it will result in underperformance.

As part of my repositioning – I’m adding to fixed income.

For example, with the US 2-year yield now above 5.0% (first time in 16 years); and the 10-year yield above 4.0% – this is attractive.

July 9 2023

Let’s explore why some quality bond exposure deserves a place in your portfolio and vehicles to consider.

But first, some helpful context.

10-Year Yield Back above 4.0%

The US 10-year yield closed at 4.06% on Friday – the highest level since early March.

The last time a rate-hike cycle saw the 10-year yield this high was 2008.

July 9 2023

Obviously with rates artificially low for some 15 years – risks assets boomed (i.e. houses and stocks).

That’s now changed.

The risk/reward for stocks (and houses) now comes at a premium.

What’s more, the market now (finally) appreciates that the Fed is likely to keep rates high.

Inflation is not falling at the velocity many expected (especially stickier forms)

As an aside, we will get an important read on CPI and Core CPI later this week.

Should Core continue to trade with a 5-handle – it will only reinforce the thesis that the Fed is likely to keep rates in restrictive territory.

Beyond rates, the Fed can also tighten another way.

For example, they have no intent of participating in the bond market (QE) whilst inflation stays above their 2% target.

With the banking system now stabilized – the Fed has resumed reducing their balance sheet (QT)

With respect to QT – the Fed has reduced their balance sheet by ~$60 billion a month post the SVB collapse.

My view here is they will continue to reduce their balance sheet by as much as $1 Trillion over the next two years (in turn pressuring stocks)

Why Add Bond Exposure?

Over the next 6-9 months – it’s most likely that bond prices continue to drift lower (i.e., yields rise)

And whilst lower bond prices is not a great outcome for bond investors… investors are being compensated with attractive yields

For example, if you are of the view that:

Inflation will gradually come down over the next 12 months; and
A recession is likely later this year (or early next)…

… it’s plausible yields fall and bond prices rise.

In this scenario – bond investors will receive both price appreciation and the yield they secure today (vs a lower yield if buying at the time of recession)

Two Bond ETFs to Consider

There are many bond ETFs available for investors (here’s a list)

However all bond ETF funds are not created equal.

Not only do each vary in terms of bond duration and composition of assets held (e.g. short and long term; government vs corporate debt) – they also vary in terms of management fees.

Two bond ETFs you should be aware of:

AGG – iShares Core U.S. Aggregate Bond ETF (note: similar ETF is LQD)
EDV – Vanguard Extended Duration Treasury ETF (note: similar ETF is TLT)

Let’s take a look.

#1. AGG – iShares Core U.S. Aggregate Bond ETF

AGG boasts an Assets Under Management (AUM) of over $91B.

Similar to many other funds in Blackrock’s iShares stable – they feature very low management fees (only 0.03%).

The ETF is described as an intermediate bond fund, which means it holds a mix of bonds with different maturities with an average effective duration of ~6 years.

There are more than 10,000 investment-grade bonds in the ETF – 72% of which are AAA rated (the highest quality).

That said, it also contains exposure to BBB (14.1%) and A-Rated (11%) bonds which are higher risk.

But overall – this is considered a higher quality corporate bond fund.

At the time of writing, the average yield to maturity for AGG is 4.98%

Let’s look at the weekly chart from 2008:

July 9 2023 – AGG 15-Year Chart

The fund is well off its $120 high it hit in August 2020.

At that time, bond yields were close to zero (e.g., the US 5-year was just 0.2%)

Bond prices trade inversely to their yields.

At the time of writing, AGG is trading $96.53 – close to as low as we have seen since 2008.

Again, this is due to the Fed raising rates some 500 bps in 12 months.

Now should interest rates continue to rise (which I expect in the near-term) – then it’s likely we see AGG drift lower.

However, I think the longer-term upside reward meaningfully outweighs the downside risks.

Two things:

If buying AGG around $96 – you’re securing a yield of ~5.0%
On the basis rates fall next year (as inflation cools) – this ETF could appreciate 10-15%.

The other consideration is should the economy fall into recession (which I expect) – this will result in fund rotation to fixed income.

As an aside, the ETF AGG is similar to the LQD ETF (comparison below)

#2. EDV -Vanguard Extended Duration Treasury ETF

Unlike AGG – EDV is long-dated US treasury bonds only.

It has AUM of around $2.18B with a management fee of just 0.06% (lower than TLT)

From Vanguard:

Tracks the performance of the Bloomberg U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index.
Provides current income with high credit quality.

This ETF is very similar to Blackrock’s TLT – however offers a lower management fee.

Similar to AGG – the fund is designed for investors looking to lock in relatively high bond yields in anticipation of a fall in inflation (and decline in rates).

The fund offers a yield of 4.07% – which is higher than long-term inflation expectations (and expectations for GDP growth).

However, what is most attractive is the hedge EDV (and TLT) offers during times of recession.

And it’s not hard to explain – high quality bonds act as a source of (valuable) portfolio protection during times of economic contraction.

Let’s look at the long-term chart (from 2008)

July 9 2023

Note how EDV is a lot more volatile than AGG – however the direction of the charts are similar.

Similar to AGG – I see the potential for at least 10-15% upside on the basis we see a decline in rates the next 12+ months.

Again, it’s likely this ETF continues to drift lower should the Fed continue to hike.

However, I think the downside move is limited – where you are also compensated by the ~4% yield.

Should we see a recession next year (my base case) – this ETF is likely to move higher.

Below is comparison between EDV and TLT ETFs:

Putting it All Together

Two important questions you need to ask.

What is your outlook for:

Inflation; and
Economic growth?

With respect to the former – I see both Core PCE and Core PCI staying higher for longer.

Headline inflation will continue to fall (we will get a read on CPI this week) – however the Fed are more focused on Core PCE.

To that end, with Core PCE trading with a 4-handle – they are likely to raise at least twice more this year.

The bond market has now come to this realization.

What’s more, rates will likely stay high for a sustained period (until Core PCE is closer to their 2% objective)

Given this (and what we see with the depth and duration of the inverted yield curve) – the Fed are likely to cause a recession (later this year or early next).

In the unlikely event we avoid recession – GDP growth will be subdued (as consumers and corporates struggle under the weight of higher rates)

On that basis, the yields offered by both AGG (~5.0%) and EDV (~4.0%) are attractive.

What’s more, these ETFs offer a strong risk-reward in the event of recession.

In closing, you don’t have to rush into these trades.

Higher rates will keep these bond ETFs anchored near their all-time lows.

However, don’t try to get “too cute”.

We never try to pick bottoms (or tops). And if we do – it’s more luck than skill.

Our primary interest lies in whether the long-term upside meaningfully outweighs the downside risks.

I think the probabilities are in our favour here.

Regards
Adrian Tout

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Fundsmith Equity Fund – 2023 Semi-annual Letter to Shareholders

Stephen Strowger — Tue, 11 Jul 2023 07:27:27 +0000

Fundsmith published Terry Smith’s semi-annual letter to the shareholders of the Fundsmith Equity Fund today. In case you would be interested in reading it, a copy can be found here:

Fundsmith Equity Fund 2023 Semi-Annual Letter to Shareholders

Below is the performance of the Fundsmith Equity Fund over the past 10 years:

Fundsmith Equity Fund I Acc – 14.3%pa
IA Global Index – 8.7%pa
FTSE UK All Share Index – 5.1%pa
FTSE All World Index – 11.0%pa

Important information:

Speak with Ethical Offshore Investments to see how you can save on your investments costs by investing via Ethical Offshore.

Socially Responsible Investing – Ethical Business Standards

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Trade the Tape – Fed Minutes Suggest More Hikes

Stephen Strowger — Thu, 06 Jul 2023 11:09:18 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

July 5, 2023 – Adrian Tout

Fed Minutes Suggest More Hikes

The bull vs bear debate
Fed minutes suggest more hikes to come
Three consecutive quarters of earnings decline?

Today the market poured over the latest Fed minutes…

No real surprises – expect rates to be higher for longer.

Almost all Federal Reserve officials at their June meeting indicated further tightening is likely.

And whilst the pace of hikes is expected to be slower – they are not done.

Citing the lagged impact of policy and other concerns, Fed officials saw room to skip the June meeting after enacting 10 straight rate increases.

Officials felt that “leaving the target range unchanged at this meeting would allow them more time to assess the economy’s progress toward the Committee’s goals of maximum employment and price stability”

They add:

“The economy was facing headwinds from tighter credit conditions, including higher interest rates, for households and businesses, which would likely weigh on economic activity, hiring, and inflation, although the extent of these effect remained uncertain,” the minutes said.

Here’s the thing:

There is a 12-24 month lag in terms of the full impact of rate hikes (in combination with QE)

We are about 15 months in.

And whilst they are starting to have some impact (e.g., mostly for anyone with a variable loan and/or buying a new asset) – we are early in terms of the impact.

This was mostly offset by the massive amounts of government stimulus (well over $2 Trillion) still sloshing around in the economy.

We remain awash with liquidity.

But over the next few quarters (as the Fed reduces its balance sheet) – those lag effects will likely become more pronounced.

Or will they?

The Bull Bear Debate

Perhaps the question of whether you are a bull or a bear is not whether the economy is about to endure a recession early next year…

But rather…. what is the expected state of liquidity and monetary conditions?

After all, excess liquidity was the primary reason stocks had a blockbuster first half of 2023.

Put another way – it was not growth in earnings.

Earnings contracted for the second consecutive quarter… and are now expected to contract again (more on this in my conclusion).

But there remains strong debate on the outlook for monetary conditions.

For example, it’s my view rates will remain higher for longer.

And let’s say the Fed simply holds rates where they are for the balance of the year (as inflation slowly falls) – this means real rates will rise.

But that’s the bearish view…

However, if you’re bullish heading into the second half, you expect rates will ease and monetary conditions will loosen.

If that’s true, it’s likely stocks will continue to rally.

However, the level of rates is only one part of the equation.

With respect to inflation, many are of the view that higher prices are less a monetary phenomenon – but more supply chain related.

And now that the bottlenecks are clear – inflation will fall rapidly.

I agree with that logic for goods related inflation (which has already come down to pre-pandemic levels in many cases).

However, I believe inflation is largely a monetary phenomenon.

Consider the definition of inflation:

“Excess money chasing too few goods”.

Put another way, without excess money in people’s pockets, it’s very difficult for prices to rise (irrespective of whether the goods are available)

On that point, I think the Fed will continue to reduce its balance sheet.

And if I were to guess… their intent is by as much as $1 Trillion over the next 24 months.

However, that is not what the bulls are betting on.

In summary, we all know the economy can’t get out of first gear.

Some of us think it will likely go into reverse towards the end of this year (or perhaps early next).

That is mostly due to the expected lag effects of restrictive monetary policy.

However, the bulls believe central banks will reignite the liquidity spigots before long.

I’m not buying it… certainly not with Core PCE still well above 4.0%

Putting it All Together

Beyond all things monetary policy – earnings season is almost here again.

What’s interesting (to me) is expectations are slowly but surely being ratcheted down.

It’s curious because stocks have been going higher.

That’s multiple expansion.

Investors are being asked to pay a high multiple for certain stocks today – mostly in tech.

However, there are sectors which offer reasonable (long-term) value (e.g. banks, energy and industrials)

But in terms of the outlook for earnings – they continue to fall opposite a softening economy.

Here’s a chart I came across via Bloomberg this week:

Mmm… expectations are falling.

As I said earlier, don’t be too surprised to see earnings contract for three straight quarters.

A positive for stocks?

We will see.

Regards
Adrian Tout

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Why is Solar the Big Winner of the Energy Revolution?

Stephen Strowger — Wed, 05 Jul 2023 14:54:41 +0000

The following is a marketing newsletter issued by Active Niche Funds S.A. (ANF) and is intended for professional investors.

This is the June 2023 monthly update.

“Solar PV becomes the new king of electricity supply.”
International Energy Agency – World Energy Outlook 2020

NEWS OF THE MONTH

Active Solar returned a positive performance in June (+3%). The negative sentiment in regard to trade tensions between the USA and China is still holding back our stocks. In addition, we are witnessing an increased competition in China on sales of solar panels, which will have an impact on some companies’ margins in the second half of the year. We are logically reducing our exposure to these Chinese stocks.

Global Market Outlook 2023 – 2027 (SolarPower Europe)

SolarPower Europe released its main report called “Global Market Outlook 2023 – 2027”. The report gives an overview of the global solar market with historical data as well as expectations to 2027.

It is worth noting that last year solar PV accounted for 2/3 of every new renewable capacity addition:

Bordier conference : “Les enjeux du solaire”

Pascal Rochat was a speaker at a Bordier conference focusing on all aspects of solar. Other speakers were Raphaël Domjan (SolarStratos), Prof. Christophe Ballif (EPFL) and Vincent Rittener (Romande Energie).

In 20 minutes, Pascal gives an overview of the worldwide solar market and the potential investment opportunity (in French):

Pareto podcast with Pascal Rochat

Pascal was the guest at a well-known financial podcast in Scandinavia: the Pareto Podcast.

A 36 min conversation covering all aspects of the solar sector and Active Solar. Very enlightening, in particular if you are not familiar yet with the sector or the fund!

ACTIVE SOLAR IS A « DARK GREEN » FUND

Active Solar complies with article 9 SFDR (EU Sustainable Finance Disclosure Regulation), which means it is a “dark green” fund with a sustainable investment objective. Active Solar’s primary environmental objective in the framework of the Taxonomy Regulation is Climate Change Mitigation.

Several criteria related to Environment, Social and Governance are analysed and rated for each company. The results of these analyses play a significant role in the investment decisions

WHY IS SOLAR THE BIG WINNER OF THE ENERGY REVOLUTION ?

1) Decarbonisation

European Union
Target of being carbon neutral by 2050 and reducing CO₂ emissions by 55% until 2030 vs. 1990 levels. REPowerEU targets 740 GW of solar capacities by 2030.

China
Target of being carbon neutral by 2060 and reducing CO₂ emissions before 2030.

USA
Target of being carbon neutral by 2050 and reducing CO₂ emissions by 50% until 2030 vs. 2005 levels. Power generation to be 100% decarbonised by 2035.

Other countries
Almost every industrialised country is aiming to decarbonise its economy by mid-century, which is only possible with a massive increase in solar installations.

CO₂ market
CO₂ emissions prices should keep increasing and a global CO₂ market could progressively be implemented.

2) Consensus of the energy sector

International Energy Agency

In the « World Energy Outlook 2022 », the IEA expects in the “Announced Pledges Scenario” that solar PV will generate 13% of global electricity in 2030 and 31% in 2050 (3.5% in 2021). The “Net Zero Emissions by 2050” scenario sees solar producing 20% of the world electricity in 2030; this means that ca. 3’800 GW of solar PV capacities will be installed worldwide in the next 8 years, allowing global solar capacity to jump from around 1’200 GW at the end of 2022 to 5’000 GW by 2030.

Utilities and oil majors
Not only the utilities, but also the oil majors, are now all investing billion into solar PV: they unanimously recognise solar as a key driver of the energy transition.

Impact on other sectors
Every industry is now facing the pressure to set net zero targets.

3) Growth and maturity of the solar sector

The solar sector benefits from three mature environments: technology, industry and markets. Annual installations of solar PV will keep growing significantly to potentially reach 520 GW in 2025:

4) Investors’ interest

All institutional investors in the world are progressively aligning their portfolio with ESG criteria and disinvesting from fossil fuels in order to invest in renewables.

The stocks momentum is absolutely huge; it will last several years.

IT’S TIME TO INVEST

The revolution of the energy sector is only beginning thanks to large scale solar installations at extremely low costs. Solar generated 3.5% of the world electricity in 2021… and will probably account for 20% in 2030, which means new installations of ca. 4’000 GW in 8 years (350 GW expected in 2023).

Not only are we convinced that the world is now on a path to full decarbonisation, but we are clearly witnessing the decarbonisation of the power sector as the first and obvious step towards net-zero; most industrialised countries will be 100% renewables in the 2030s.

Francesco La Camera, Director-General at the International Renewable Energy Agency (IRENA), explains why renewables are absolutely key to limiting global warming:

“First, the costs of renewable technologies have plummeted to the point that new fossil-based electricity is no longer an attractive option. Second, the progress in the power sector is spilling over to end uses, allowing a re-imagining of possibilities with the abundance of renewable options at hand. Third, a consensus has formed that an energy transition grounded in renewable sources of energy and efficient technologies is the only way to give us a fighting chance of limiting global warming by 2050 to 1.5°C.”

Active Solar gives investors the best exposure to the main revolution of the 21^st century:

Issued by Active Niche Funds S.A. (ANF), Avenue de la Gare 1, 1003 Lausanne, Switzerland. ANF is authorised and regulated by the FINMA. This newsletter is a marketing material intended for ‘Professional Client’ only. Any reference to specific securities, sectors or markets within this document does not constitute investment advice or a recommendation or an offer to buy or sell any security or fund, and is not intended to substitute the offering documents or prospectus of the Fund. This material may not be distributed, published or reproduced in whole or in part. ANF may terminate marketing at any time. All financial investments involve an element of risk. Therefore, the value of your investment will vary and your initial investment amount cannot be guaranteed. The indicated performance data does not take account of the commissions and costs incurred on the issue and redemption of units. Past performance is not an indication or guarantee for future performances. Investors should understand all characteristics of the Fund’s objective before investing. The Prospectus, the most recent financial reports and the Key Information Documents, which are available in registered jurisdictions in their respective local language can be found at www.fundinfo.com on the relevant product pages. Active Solar Fund is domiciled in Luxembourg. Carnegie Fund Services S.A., 11, rue du Général-Dufour, CH-1204 Geneva, Switzerland, phone: +41 22 705 11 78, www.carnegie-fund-services.ch, is the Swiss Representative of the Fund where legal documents are also available. The Swiss Paying Agent of the Fund is Banque Cantonale de Genève, 17, quai de l’Ile, CH-1204 Geneva, Switzerland. Current share prices are available on www.swissfunddata.ch. For information on investor rights and how to raise complaints please go to www.activenf.ch/investor-rights.

Please speak to Ethical Offshore Investments (or your personal adviser) BEFORE you make any decision on investing in the fund and to make sure that they are appropriate for your personal investment objectives.

At Ethical Offshore Investments, for clients where this fund is appropriate for their investment needs and objectives, we can access this fund with no additional entry, buy/sell spread or exit fees via the various Life Company and direct Investment Platforms.

Sustainable Investing – Ethical Business Standards

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Global Exposure for a Fraction of the Cost

Stephen Strowger — Mon, 03 Jul 2023 15:29:10 +0000

Global Exposure for a Fraction of the Cost

Investment Charges – How much is it really costing you & your future.

Our solution keeps more of the investment growth in your pockets.

Before we show you how low the total charges are if you become a client of Ethical Offshore, below is an illustration of why reducing your costs is so important.

Don’t let high costs eat away your returns

There is the common saying that you have to spend money to make money…. But the money you spend to invest has a big effect on what you have left in your own pocket.

Points to know

All investments have costs

Money you pay for costs compounds (rises exponentially) over time

Because some investments with higher costs have to overcome these expenses, their performance tends to suffer vs. lower-cost investments.

Understand what you are paying

Every investment has a cost, even if you don’t realise that you are paying it

There are many different kinds of costs, but they all have one thing in common: if the money is going somewhere else, it is not going to you.

Why do costs matter

If on the other hand you had paid a combined 2% a year in investment costs & charges, after 25 years, you would have an investment value of only $ 266,580

That’s correct: the 2% of total charges you paid every year would reduce your investment value by nearly 38%……. that 2% doesn’t sound so small anymore, does it..??

Costs can eat away at your investments

The above example & image is provided by Vanguard Ltd

What can you do to control your costs..??

A Diversified Global Exposure for less than 1%pa

For clients that would like to invest in a dedicated US equity or a UK equity portfolio, the total cost is even lower at 0.75%pa

This is done through a selection of high quality Exchange Traded Funds (ETF’s) from the likes of Legal & General (L&G), iShares (Blackrock) and Vanguard. Our Global Allocation will result in exposure to over 1,600 of the worlds biggest and most successful companies, which includes Apple, Microsoft, Amazon, Nvidia, Alphabet (Google) and Tesla. This can be invested in a range of different currencies.

Vanguard LifeStrategy 100% Equity
Vanguard LifeStrategy 80% Equity (20% Fixed Interest / bonds)
Vanguard LifeStrategy 60% Equity (40% Fixed Interest / bonds)
Vanguard LifeStrategy 40% Equity (60% Fixed Interest / bonds)
Vanguard LifeStrategy 20% Equity (80% Fixed Interest / bonds)

The total maximum cost with utilising the Vanguard LifeStrategy range of funds, along with the platform and client servicing costs would be 0.92%pa

What is the benefit to you…… the investor.

That cost saving would result in a portfolio value after 25 years of $ 355,140…….. that is $ 88,560 more in YOUR POCKET…!!!

At Ethical Offshore Investments, we are determined to show how clients can invest in a global portfolio of quality companies, but ethically through low cost, flexible investment structures.

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The seven deadly sins of investors: Avoid these common investing mistakes

Stephen Strowger — Sat, 01 Jul 2023 11:40:35 +0000

Bestinvest’s Adrian Lowery warns of seven key investing sins that should be avoided.

By Adrian Lowery,
Bestinvest

We are all human when it comes to matters of money and our financial affairs don’t always benefit from the most rational behaviour. And nowhere is this probably more true than in the field of investing, where it is easy to let emotion and impulse get the upper hand. In order to keep a portfolio on the straight and narrow, there are seven key investing sins that should be avoided.

Sin 1 – Lust: Following the latest hot trend

There is always an alluring new investment theme to get excited about and the investment industry is notoriously faddish. During the pandemic crisis it was stay-at-home technology and renewable energy, all accessible by a raft of – in many cases recently established – thematic funds, investment trusts and ETFs.

That’s not to say all of these are poor long-term investments: looking past short-term volatility to see a good long-term case is important. But it’s easy to forget the basics, the steady-Eddie investments that should be the core of a portfolio, and end up with a lot of sparkly, risky and volatile peripheral assets.

Sin 2 – Gluttony: Buying too many funds

Sin 1 leads naturally to sin 2: as the years go by many investors are tempted each year by the latest hot themes and end up with sprawling collections of investments that were once in vogue.

It is easy to pick up dozens of investments this way, which will almost certainly not form a coherent, well-planned investment portfolio that works together. The portfolio will end up being ‘over-diversified’ (i.e., you own everything including all the bad stuff), poorly constructed, difficult to monitor and often too risky.

Any more than 20 funds is probably too many for most private investors, and reasonable diversification can be achieved with around a dozen carefully researched and selected investments.

Sin 3 – Wrath: Reacting to short term events

Impulse and impetuosity are not useful attributes for investing.

Panic selling during market sell-offs is rarely the right thing to do, and can very often result in missing out on subsequent gains when the market recovers. Likewise, when markets are soaring to new highs and valuations are frothy, over-confidence can mean taking too much risk.

If investors find themselves unnerved by short-term market volatility, then they should consider de-risking their portfolio into more stable, defensive assets. Investors can protect against some of the volatility in equity markets this way, but the most important tactic is to take the long-term view. Markets have consistently provided positive returns over the long run.

Sin 4 – Greed: Chasing gains

It can be very tempting to keep ploughing ever more cash into the same, favourite funds in a portfolio that have done particularly well. This is not always a bad thing to do, as long as it is done with consideration and is consistent with a well-balanced and diversified portfolio strategy.

But often that is not the case and the extra investment in the star funds means they can dominate a portfolio, leaving the investor too narrowly exposed to a particular manager and their investment style. In many cases, after stellar gains, the sensible thing to do is to top slice and take some profits, not double down.

As a rule of thumb, it is wise not to hold more than 15% of a portfolio in a single fund.

Sin 5 – Sloth: Not reviewing one’s portfolio

Looking for the next big thing to buy into is a lot more interesting and exciting than reviewing what is already there. Doing a portfolio MOT at least once a year is a good discipline to follow.

This can involve rebalancing the asset allocation so the portfolio remains suitable for the investor’s risk profile; checking whether each fund is performing well against the part of the market it invests in; lifting the bonnet to see whether there have been any changes to the way a fund is being managed; and assessing whether the economic outlook means you need to switch into slightly different investment style.

This is the time to be honest with oneself about mistakes and not to fall into the trap of sin 6…

Sin 6 – Pride: Refusing to sell

It can be difficult to admit one has made a bad decision, or that to recognise that a once sound investment has gone off the boil because of a change in circumstances such as the fund becoming too large, or the appointment of new managers.

Many investors will hang on in there in the hope that a disappointing investment will eventually return to form or are reluctant to sell until it has made up lost ground. Many investors end up with what is known as a ‘long tail’ of funds that have fallen from favour but have not been sold.

Sometimes switching and moving on can be the right move. This is one of the most difficult aspects of investing, realising what is a short-to-medium term patch of disappointing performance, and what is a deeper problem that needs to be acted upon; when to keep faith and hold on in hope of better days ahead, and when to cut one’s losses and exit.

Sin 7 – Envy: Choosing investments on a hot streak

Even the very best funds will go through weaker periods and so it is unrealistic to expect a fund to always be near the top of the performance rankings. It is often a mistake to put too much store by short-term performance tables.

Looking at three- or six-month, or even one-year, returns across the whole investing market will probably throw up many funds that are surpassing anything that’s in your portfolio.

There can be a time and a place for different styles of investing such as backing growth or value stocks, and more active investors may be prepared to adjust a portfolio in favour of different styles over time depending on the market environment. But for many the right approach will be to hold a portfolio that blends different approaches and to hold these over the long term.

Adrian Lowery is an analyst at investing platform Bestinvest.

At Ethical Offshore Investments, we can provide guidance on a range of high quality Fund Managers and Exchange Traded Fund (ETF’s) providers that offer exposure to a wide range of global investment opportunities. As we aim not to use commission paying funds, we will access the lowest charging version of the managed fund that is available on the relevant platform…… resulting in more of the investment growth staying in your pocket.

We will also NOT CHARGE any additional entry and/or exit fees to purchase these funds for our clients.

If you would like to discuss your investment options, including the low cost opportunities, please press the Contact Us button below and we will contact you personally.

Socially Responsible Investing – Ethical Business Standards

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Trade the Tape – S&P 500 Meets Resistance

admin — Wed, 28 Jun 2023 10:46:33 +0000

Please find below the latest update from Adrian Tout from his regular newsletter, “Trade the Tape”.

Please note that this is for general information only and should not be considered personal financial advice.

June 21, 2023 – Adrian Tout

S&P 500 Meets Resistance

Weekly initial jobless claims the key to a ‘soft landing’
Market trading through a key area of resistance
Bulls need the Fed liquidity spigots to remain wide open

You can only laugh…

Apparently markets extended their ‘sell-off’ after Powell stuck to the (rate hike) script:

Here’s my question: what constitutes a sell-off?

Turns out that if stocks inch lower by less than 2%… well… that’s now a sell-off.

Reality of course is stocks have barely moved:

June 21 2023

As the weekly chart shows – the S&P 500 is still up ~20% from the October low; and 13.7% year-to-date.

Sell-off?

You tell me.

I might be off the mark – but I consider a sell-off as something we saw in the first part of the year – where the S&P 500 fell from around 4200 down to 3800.

Similarly, mid-last year when the Index dropped from ~4300 down to ~3600, that’s a sell-off in my book.

And there are other examples.

But less than 2%?

It’s just more mainstream noise… a headline written to get you to ‘click’.

That said, I think there is the potential for the market to give back a little more ground.

My math indicates that could be in the realm of 7-10%

But rather than call that a sell-off… my headline would be “healthy market development”

Resistance

Over the weekend I said be ready for a 7-10% correction.

I don’t know if that will play out (it probably won’t now that I’ve called for it) – but that’s what I see.

Specifically I was looking at the distance above the 35-week EMA (blue line).

Below is a closer look:

June 21 2023

Now before you ask…

I don’t have some “hard rule” that when the price extends a given amount – that it’s about to reverse.

No.

And markets can extend a lot more than 8% higher than the 35-week EMA.

What’s more, they can remain extended for several weeks.

However, when I see this order of extension (as I did in Q4 2021) – things deserve our full attention.

This is also reinforced with the weekly Relative Strength Index (RSI) (middle window)

Last week it was challenging 70 – an overbought environment.

Again, this is not a sell signal as it can go far higher and stay above 70 for weeks on end.

But it is an area to be watchful.

Now a few weeks back – I flagged the zone of 4400 to 4500 as the next target for the S&P 500.

Last week we traded as high as 4447.

This is 61.8% to 76.4% outside the distribution (“A-B”) I’ve been watching for over 12 months.

So far that call has been accurate but it’s too early to call a coupe yet.

My feeling however is the market gives back a little ground (e.g. up to 8%).

The challenge of course is we will need to hold that level once we pull back.

If we do – it’s a big win for the bulls.

However, if we don’t, then the rally of the past few weeks was nothing more than a head-fake.

It can go either way.

But I think the bulls need a few things to continue to go their way.

Liquidity

This is the market’s oxygen.

Take it away and the market will suffocate.

The good news for the bulls is they have plenty (and not just from QE)

I talked about this a few weeks ago here.

On various occasions, I’ve highlighted the striking correlation between the Fed’s purchasing of bonds (QE) and the performance of the S&P 500

We saw something very similar post the global financial crisis of 2008.

Billionaire Hedge Fund manager – David Tepper – famously called it at the time – when the Fed first announced QE.

It’s since been dubbed the “Tepper Rally”

But what’s perhaps confusing some bears is despite the obvious slowdown in the economy – when the Fed turned on their liquidity spigots – stocks rally.

The market and the economy are not the same thing.

Now if you jump up and say “hang on Adrian… aren’t the Fed reversing QE”?

Yes they are…

But as I explained in here and here – the Fed can inject liquidity outside of just bond purchases.

For example, the liquidity provided by making it easier for banks to borrow has made its way into risk assets.

And from mine, this was the single most important 2023 pivot point for the market.

Bears were saying “this is a repeat of 2008…. banks are going bust…. time to sell and/or short the market”

Trust me, I had readers telling me it was the GFC all over again.

However, the bulls were saying “here come the liquidity spigots and up we go”

As for me, I was stepping up and buying banks at around 1x book value.

I will let you know if 2-3 years if the trade works out.

The “crisis of confidence” (which now seems to be idiosyncratic and not systemic) provided more impetus for the Fed to keep the spigots open.

For example, in fear of more banks potentially failing, they went to extraordinary lengths to make sure institutions had enough access to cash.

They didn’t want any accidents.

And whilst we can argue whether this has worked counter to bringing down inflation – the effect on risk assets is clear.

Putting that all together – if the liquidity is there – that bodes well for the bulls.

And right now – it is.

However, should we see signs of liquidity drying up… then we cue the exits.

A ‘Soft Landing’

The other premise the bulls are leaning into is the prospect of a so-called soft-landing.

Every second day you will hear some talking head saying “we expect a soft landing”.

It’s now consensus from Wall St.

For clarity, this language implies immaculate disinflation down to ~2% without unemployment exceeding 4.5%

Now whilst I buy the liquidity argument…. a soft-landing is a harder theory to swallow.

And here I come back to the indicators I talked to here.

For example, the inverted yield curve suggests a soft-landing is most unlikely.

Possible? Yes. Probable? No.

Let me explain:

When interest rates over short periods are higher than over longer periods, it implies the market expects rate cuts soon.

In other words, the curve itself implies a recession will force the central bank’s hand.

But what did Powell tell us today?

From the Financial Times:

Jay Powell reiterated his defence of the Federal Reserve’s recent decision to forgo an interest rate rise at a high-stakes congressional hearing on Wednesday, but signalled further tightening as he said the battle against inflation was not over.Powell, chair of the US central bank, told members of the House financial services committee that skipping a rate rise last week was “prudent” given “how far and how fast” the Fed had lifted its benchmark rate since March 2022.

We are now approaching 11 months of inversion.

By way of comparison – it was inverted for 18 months going into 2008

Sure, the curve steepened slightly after the idiosyncratic bank failures. At the time, the market was certain rates were about to be cut.

Wrong.

Now we know that is not going to be a systemic problem (as the bears were betting on) – we are back down to almost 100 basis points inverted.

June 21 2023

As I explained here – it can take between 12 and 24 months after the initial point of inversion for the recession to take hold.

The bulls are saying history is unlikely to repeat.

But from mine, that is a lower probability outcome.

Putting it All Together

In closing, there are a few arguments not to be overly bearish.

For example:

Q1 earnings were better than feared;
Bank deposits have stabilized;
Inflation is slowly (but surely) working its way down (there’s more work to do);
The Fed is closer to its terminal rate (vs where they began); and
We’re yet to see any major deterioration in credit

The last point is critical.

Neither businesses (or consumers) are collapsing under the weight of the Fed’s tightening.

For now, things appear to be relatively robust.

The most direct way for tighter monetary policy to slow the economy is through stemming the flow of bank loans.

And whilst we have seen some of this – so far credit conditions are good.

To be clear, credit growth has stalled (which is not a bad thing) – however we are not seeing any credit squeeze.

Not yet at least.

Before I close, tomorrow we get initial weekly unemployment claims.

The last two weekly initial claims came in around 260,000.

If we see this start to inch above 300,000 (and hold around that level)… it’s a sign the job market is weakening.

That’s the risk to any so-called ‘soft landing’ script.

Regards
Adrian Tout

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What does the Credit Suisse fallout mean for bond holders?

Stephen Strowger — Mon, 27 Mar 2023 09:29:09 +0000

Sam Slator – published by FundCalibre – 23 March 2023

It’s not often the Swiss Central Bank makes headlines. It is even more rare that bonds are a subject of breaking news.

But both were the main topic of conversation this week after the Swiss Central Bank sent shockwaves through bond markets when it wrote down some of Credit Suisse’s bonds to zero.

What happened? Why was it a shock? And what does it mean for bond holders? We try to explain…

Why has Credit Suisse’s share price fallen?

Credit Suisse shares have been under pressure for some time. The company has managed to find itself in embroiled in scandals almost annually that have hit both the bank’s reputation and its bottom line. It was not a profitable group by some margin.

Things came to a head a couple of weeks ago when the bank announced “material weakness” in its financial reporting. The share price plummeted, and the Swiss Central Bank had to set in to stop one of the country’s biggest and oldest banks from failing.

What did the Swiss Central Bank do?

To ‘save’ Credit Suisse – or rather stop contagion in the banking sector – the Swiss Central Bank agreed an emergency deal for another Swiss bank, UBS, to buy its stricken rival for 3 billion Swiss francs – a deal which meant that Credit Suisse shareholders received the equivalent of just 0.76 Swiss francs in UBS shares for stock that was worth 1.86 Swiss francs on the previous trading day.

Another part of the deal – and the part that shocked investors – was that the Swiss authorities also said that AT1 bondholders would receive absolutely nothing.

“The extraordinary government support will trigger a complete write-down of the nominal value of all AT1 shares of Credit Suisse in the amount of around 16 billion [Swiss francs],” the Swiss Financial Market Supervisory Authority said in a statement Sunday.

What are AT1 bonds?

AT1 bonds were created after the Global Financial Crisis in 2008 as a way for failing banks to absorb losses, making a taxpayer-funded bailout less likely.

In a company’s capital structure, they are the riskiest bond you can invest in. This is because if a lender gets into trouble, this class of bonds can be quickly converted into equity or written down completely.

But because they are higher-risk, AT1s also offer a higher yield than most other bonds issued by the same borrower. So, for example, if Barclays Bank – which is seen as a very secure financial institution – offers an AT1 bond at say 4% yield vs another bond at 2% yield investors have seen this as somewhat of a ‘no-brainer’ in the past.

Why was the market shocked?

If investors have always known that these bonds were risky and could be converted to equity and written down to zero, why was the market shocked?

Well, it’s not the write-down itself that is the shock but the fact that the banks shareholders still have some value in their shares when these bond holders will not. What is supposed to happen is that shareholders lose their capital first, then AT1 holders.

In other words, the move was at odds with the usual hierarchy of losses when a bank fails.

What happened next?

As you might expect, other AT1 bonds lost value as investors worried that the same could happen to them.

So, in a swift move to calm markets, the European Banking Authority (EBA) and Bank of England) (BoE) were quick to come out and reassure markets on the merit and hierarchy of AT1s and European Central Bank (ECB) President, Christine Lagarde, went one step further in her direct rejection of Switzerland’s approach stating that “Switzerland does not set standards in Europe”.

In the ensuing days, this seems to have calmed fears in the market and AT1s have rebounded.

What do the bond fund managers say?

The team at TwentyFour Asset Management, whose Dynamic Bond, Corporate Bond and Absolute Return Credit funds are rated by FundCalibre, commented: “AT1s fell sharply on Monday. Nonetheless, the importance of the European and the UK’s regulatory rebuttal to the weekend’s proceedings became apparent as post their respective statements, a quick rebound took place and by the end of the session roughly half of the move down had been recovered. The positive momentum has continued through yesterday and this morning with some bank AT1 bonds now back to last Friday’s prices – i.e. recovering all of the post-Credit Suisse action, but still lower than pre the US regional bank led sell off.

“The situation is still fluid and of course we are keeping a very close eye on both banking fundamentals and market moves going forward, however we have been very reassured by both the statements from the EBA and BoE and by the way the AT1 market has functioned, particularly in the wake of the regulatory rebuttal on Monday.”

Alexander Pelteshki, co-manager of Aegon Strategic Bond fund was less surprised than the market saying: “We feel that the market angst following its absorption by UBS was somewhat misplaced; it was already clear for several days during the past week that in each of the three most likely outcomes for the distressed situation (a sale, a nationalisation, and a breakup), the AT1 capital stack was going to be impaired. The fact that there was a residual value in the bank’s equity rather than in its AT1 bonds seemed to have taken centre stage for a few moments, but it does not change the fact that the Credit Suisse AT1 bonds had few positive prospects.

“To be clear, the Swiss regulatory regime that covers, amongst other things, the treatment of AT1s in a bank’s capital stack, was always much riskier compared to the rest of the EU (and the UK). You need only to look at the terms and conditions of the Credit Suisse AT1s to see that “Notes could be cancelled in whole or in part prior to the cancellation of any or all of
CSG.”

“In simple terms, Credit Suisse AT1s could be (and were) zeroed before any loss on the firm’s equity was imposed. This is materially different from how these instruments are treated in the rest of the European Union and the UK (which essentially is the rest of the AT1 market).

“Just like any other investment, proper fundamental credit research helps identify weak borrowers in any sector. Swiss AT1s will continue to be inherently riskier than EU or UK AT1s. We suspect that going forward this risk might be better reflected in their price, but markets have a short memory. Time will tell.

“For the rest of the AT1 market beyond Switzerland, the simple story is that this changes little. And, after several days of mayhem, we are left with an AT1 market that offers a tremendous opportunity.”

Jim Leaviss, manager of the M&G Global Macro Bond fund concluded: “The key question markets are now trying to answer is the extent to which the recent issues in the banking sector are systemic or idiosyncratic. On the face of it, the issues appear to be idiosyncratic. Silicon Valley Bank (SVB) had suffered sharp losses on its unhedged long-dated government bond holdings, while it had a largely uninsured deposit base which was heavily concentrated in tech start-ups. Credit Suisse had been involved in a series of scandals over the past few years and had reported heavy losses – this had damaged confidence in the bank and led to a flight in deposits.

“However, it is clearly impossible to disentangle recent developments from the actions of central banks. The Fed [US central bank] has been hiking rates aggressively and tightening of this scale has historically been associated with crises within the financial sector. Markets are clearly worried about the impact of further rate hikes. The Fed will need to take note of this given the key role they play in maintaining financial stability.

“On a more positive note, we think central banks will do whatever it takes if we see further contagion, whether this be a pausing in hikes, further quantitative easing or bailouts. Given the fragility of the global economy, we do not believe policymakers will have the appetite to stand aside and allow things to deteriorate. The situation is fast moving, and it is difficult to say how events will unfold from here, although it does feel like a changing point in the cycle, and we are perhaps now approaching the end of the Fed’s current hiking agenda.”

_{Photo by Janosch Diggelmann on Unsplash}

Please note the above article was first published by Fund Calibre and should not be regarded as individual investment advice on whether to buy, sell or hold any investments or investment styles mentioned. Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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Jeremy Hunt’s UK Spring Budget 2023 speech in full

Stephen Strowger — Wed, 15 Mar 2023 16:47:05 +0000

The chancellor has just delivered his first Budget. Here’s what he said.

Madam Deputy Speaker, in the face of enormous challenges I report today on a British economy which is proving the doubters wrong.

In the autumn we took difficult decisions to deliver stability and sound money.

Since mid-October, 10-year gilt rates have fallen, debt servicing costs are down, mortgage rates are lower and inflation has peaked. The International Monetary Fund says our approach means the UK economy is on the right track.

But we remain vigilant, and will not hesitate to take whatever steps are necessary for economic stability.

Today the Office for Budget Responsibility forecast that because of changing international factors and the measures I take, the UK will not now enter a technical recession this year. They forecast we will meet the prime minister’s priorities to halve inflation, reduce debt and get the economy growing.

We are following the plan and the plan is working.

But that’s not all we’ve done.

In the face of a cost-of-living crisis we have demonstrated our values by protecting struggling families with a £2,500 Energy Price Guarantee, one-off support and the uprating of benefits with inflation.

Taken together, these measures are worth £94bn over this year and next – one of the largest support packages in Europe. That averages over £3,300 of cost-of-living help for every household in the country.

Today, we deliver the next part of our plan.

A budget for growth. Not just the growth that comes when you emerge from a downturn.

But long-term, sustainable, healthy growth that pays for our NHS and schools, finds jobs for young people, and provides a safety net for older people all whilst making our country one of the most prosperous in the world.

Prosperity with a purpose.

That’s why growth is one of the prime minister’s five priorities for our country.

I deliver that today …

…by removing obstacles that stop businesses investing;

…by tackling labour shortages that stop them recruiting;

…by breaking down barriers that stop people working;

…and by harnessing British ingenuity to make us a science and technology superpower.

Meeting the prime minister’s priorities

I start with the forecasts produced by Richard Hughes and his team at the independent Office for Budget Responsibility whom I thank for their diligent work.

They have looked in detail at the prime minister’s economic priorities.

Halving inflation

The first of those is to halve inflation.

Inflation destroys the value of hard-earned pay, deters investment and foments industrial strife.

This government remains steadfast in its support for the independent monetary policy committee at the Bank of England as it takes action to return inflation to the 2% target. Despite continuing global instability, the OBR report today that inflation in the UK will fall from 10.7% in the final quarter of last year to 2.9% by the end of 2023.

That is more than halving inflation.

High inflation is the root cause of the strikes we have seen in recent months.

We will continue to work hard to settle these disputes but only in a way that does not fuel inflation.

Part of the fall in inflation predicted by the OBR happens because of additional measures I take today.

Firstly, I recognise that even though wholesale energy prices have been falling, there is still enormous pressure on family finances. Some people remain in real distress and we should always stand ready to help where we can.

So after listening to representations from Martin Lewis and other experts, I today confirm that the Energy Price Guarantee will remain at £2,500 for the next three months.

This means the £2,500 cap for the typical household will remain in place when energy prices remain high, ahead of an expected fall in prices from July. This measure will save the average family a further £160 on top of the energy support measures already announced.

The second measure concerns over four million households on prepayment meters.

They are often the poorest households, but they currently pay more than comparable customers on direct debit. Ofgem has already agreed with suppliers a temporary suspension to forced installations of prepayment meters.

But today I go further, and confirm we will bring their charges in line with comparable direct debit charges. The energy premium paid by our poorest households is coming to an end.

Next I have listened to representations from the hon members for East Devon, North Cornwall, Colne Valley and Central Suffolk and North Ipswich about the risk to community facilities, especially swimming pools, caused by high costs. When times are tough, such facilities matter even more.

So today I am providing a £63m fund to keep our public leisure centres and pools afloat.

I have also heard from my RHF the charities minister and his Secretary of State about the brilliant work third sector organisations are doing to help people struggling in tough times.

They can often reach people in need that central or local government cannot, so I will give his department £100m to support thousands of local charities and community organisations do their fantastic work.

I also note the personal courage of one of my predecessors, my RHF from Bromsgrove, in talking about the tragedy of suicide and the importance of preventing it.

We already invest a lot in this area, but I will assign an extra £10m over the next two years to help the voluntary sector play an even bigger role in stopping more families experiencing such intolerable heartache.

My penultimate cost of living measure concerns one of our other most treasured community institutions, the great British pub. In December, I extended the alcohol duty freeze until 1 August, after which duties will go up in line with inflation in the usual way.

But today, I will do something that was not possible when we were in the EU and significantly increase the generosity of draught relief, so that from 1 August the duty on draught products in pubs will be up to 11p lower than the duty in supermarkets, a differential we will maintain as part of a new Brexit pubs guarantee.

Madam Deputy Speaker, British ale may be warm, but the duty on a pint is frozen.

And even better, thanks to the Windsor Framework negotiated by my RHF the prime minister, that change will now also apply to every pub in Northern Ireland.

Finally, I have heard the representations from the Honourable Member from Stoke on Trent North, my Rt Hon Friend for Witham and my Rt Hon Friend from South Thanet and the Sun newspaper about the impact on motorists of the planned 11p rise in fuel duty.

Because inflation remains high, I have decided now is not the right time to uprate fuel duty with inflation or increase the duty.

So here’s what I am going to do: for a further 12 months I’m going to maintain the 5p cut … and I’m going to freeze fuel duty too. That saves the average driver £100 next year and around £200 since the 5p cut was introduced.

Our Energy Price Guarantee, fuel duty and duty on a pint – all frozen in today’s budget.

Something that doesn’t just help families, it helps the economy too because their combined impact reduces CPI inflation by nearly ¾% this year, lowering inflation when it is particularly high.

Reducing debt

I now turn to the prime minister’s second priority, which is to reduce debt. Here too our plan is on track.

Underlying debt is forecast to be 92.4% of GDP next year, 93.7% in 2024-25; 94.6% in 2025-26, and 94.8% in 2026-27, before falling to 94.6% in 2027-28.

We are meeting the debt priority.

And with a buffer of £6.5bn, it means we are meeting our fiscal rule to have debt falling as a percentage of GDP by the fifth year of the forecast.

As a proportion of GDP our debt remains lower than the USA, Canada, France, Italy and Japan.

And because of the decisions I take today, and the improved outlook for the public finances, underlying debt in five years’ time is now forecast to be nearly three percentage points lower than it was in the Autumn.

That means more money for our public services and a lower burden on future generations – deeply-held values which we put into practice today.

At the Autumn Statement I also announced that public sector net borrowing must be below 3% of GDP over the same period. The OBR confirm today that we are meeting that rule with a buffer of £39.2 bn.

In fact our deficit falls in every single year of the forecast, with borrowing falling from 5.1% of GDP in 2023-24, to 3.2% in 2024-25, 2.8% in 2025-26, 2.2% in 2026-27 and 1.7% in 2027-28.

Even better in the final two years of the forecast our current budget is in surplus, meaning we only borrow for investment and not for day-to-day spending.

Day to day departmental spending will grow at 1% a year on average in real terms after 2024-25 until the end of the forecast period, and capital plans are maintained at the same level set at Autumn Statement.

We will uprate tobacco duty, and we will freeze the gross gaming duty yield bands. We are also maintaining the starting rate for savings and the ISA subscription limits, and we will bring forward a range of measures to tackle promoters of tax avoidance schemes.

But Madam Deputy Speaker, taken together today’s measures lead to a slightly lower overall tax burden for the rest of the parliament compared to the OBR’s Autumn forecast.

We are reducing borrowing and improving our public finances.

By doing so we make sure we are on track to…

… halve inflation

… get debt falling

…and grow our economy, which I turn to next.

Growth

Growth is the prime minister’s third priority and the focus of today’s budget.

13 years ago, we inherited an economy that had crashed. But since 2010 we’ve grown more than major countries like France, Italy or Japan and about the same as Europe’s largest economy Germany.

We’ve halved unemployment…

… cut inequality

…and reduced the number of workless households by one million.

For the first time ever, because of the rises in tax thresholds made by successive chancellors, people in our country can earn £1,000 a month without paying a penny of tax or national insurance.

Those tax reductions have helped lift 2 million people out of absolute poverty, after housing costs, including 400,000 pensioners and 500,000 children. That averages 80 pensioners and 100 children lifted out of poverty for every single day we’ve been in office.

Today we face the future with extraordinary potential.

The World Bank said that out of all big European countries, we are the best place to do business.

Global chief executives say that apart from America and China, we are the best country to invest in. We became the second country in the world to have a stock of foreign direct investment worth $2trn.

And London has just pipped New York and 53 other global cities to be the best place in the world for female entrepreneurs.

Declinists are wrong about our country for another reason, which is our newfound strength in the innovation industries that will shape this century.

Over the last 13 years we have become the world’s third trillion-dollar tech economy after the US and China.

We have built the largest life sciences sector in Europe, producing a Covid vaccine that saved six million lives and a treatment that saved a million more.

Our film and TV industry has become Europe’s largest, with our creative industries growing at twice the rate of the economy.

Our advanced manufacturing industries produce around half the world’s large civil aircraft wings.

And thanks to a clean energy miracle we have become a world leader in offshore wind. Other parties talk about a green energy revolution, so I gently remind them that nearly 90% of our solar power was installed in the last 13 years – showing it’s this government who fix the roof while the sun is shining.

Let’s turn now to what the OBR say about our growth prospects.

In November, they expected that the UK economy would enter recession in 2022 and contract by 1.4% in 2023.

That left many families feeling concerned about the future.

But today, the OBR forecast we will not enter a recession at all this year with a contraction of just 0.2%.

And after this year the UK economy will grow in every single year of the forecast period: by 1.8% in 2024; 2.5% in 2025; 2.1% in 2026; and 1.9% in 2027.

They also expect the unemployment rate to rise by less than one percentage point to 4.4%, with 170,000 fewer people out of work compared to their Autumn forecast.

Defence

Madam Deputy Speaker, that return to growth has direct consequences for our role on the global stage.

I am proud we are giving the brave people of Ukraine more military support than anyone else in Europe.

On Monday we were able to go further with my RHF the prime minister announcing a £5bn package of funding for the Ministry of Defence, an additional £2bn next year and £3bn the year after.

Today, following representations from our persuasive defence secretary, I confirm that we will add a total of £11bn to our defence budget over the next five years and it will be nearly 2.25% of GDP by 2025.

We were the first large European country to commit to 2% of GDP for defence and will raise that to 2.5% as soon as fiscal and economic circumstances allow.

Following representations from my RHF the minister for veterans affairs, I am today also increasing support for our brave ex-servicemen and women.

We will provide a package worth over £30m to increase the capacity of the Office for Veterans’ Affairs, support veterans with injuries returning from their service and increase the availability of veteran housing.

But to be Europe’s biggest defender of democracy, we must build Europe’s most dynamic economy. That means tackling our longstanding productivity issues including two in particular which I address today: lower business investment and higher economic inactivity than other similar countries.

Too often companies struggle to recruit and even when they do, output per employee is lower.

So today I set out the four pillars of our industrial strategy to address these issues.

Colleagues will know from my Bloomberg speech, they all start with the letter ‘E’: Enterprise, Employment, Education and Everywhere.

I start with ‘Everywhere’, our measures to level up growth across the UK.

Everywhere

This government was elected on a mandate to level up.

We have already allocated nearly £4bn in over 200 projects across the country through the first two rounds of the Levelling Up Fund. A third round will follow.

Since we started focusing on levelling up, 70% of the growth in salaried jobs has come from outside London and the South-East.

Today we take further steps.

Investment Zones

Canary Wharf and the Liverpool Docks were two outstanding regeneration projects.

I pay tribute to Lord Heseltine for making them happen because they transformed the lives of thousands of people. They showed what’s possible when entrepreneurs, government and local communities come together.

So today I announce that we will deliver 12 new Investment Zones, 12 potential Canary Wharfs.

In England we have identified the following areas as having the potential to host one: West Midlands, Greater Manchester, the North-East, South Yorkshire, West Yorkshire, East Midlands, Teesside and, once again, Liverpool. There will also be at least one in each of Scotland, Wales and Northern Ireland.

To be chosen, each area must identify a location where they can offer a bold and imaginative partnership between local government and a university or research institute in a way that catalyses new innovation clusters.

If the application is successful, they will have access to £80m of support for a range of interventions including skills, infrastructure, tax reliefs and business rates retention.

Local investment

Working together with our formidable Levelling Up Secretary, I also want to give some further support to levelling up areas under the ‘E’ of everywhere.

First, I will invest over £200m in high quality local regeneration projects across England including the regeneration of Tipton town centre and the Marsden New Mills Redevelopment Scheme. I am also announcing a further £161m for regeneration projects in Mayoral Combined Authorities and the Greater London Authority.

And I will make over £400m available for new Levelling Up Partnerships in areas that include Redcar and Cleveland, Blackburn, Oldham, Rochdale, Mansfield, South Tyneside, and Bassetlaw.

Having listened to the case for better local transport infrastructure from many hon members, I can announce a second round of the City Region Sustainable Transport Settlements, allocating £8.8bn over the next five-year funding period.

And following a wet and then cold winter, I also received particularly strong representations from my hon friends from North Devon, South-West Devon and Newton Abbot as well as councillor Peter Martin from my own constituency about the curse of potholes.

The Spending Review allocated £500m every year to the Potholes Fund but today I have decided to increase that fund by a further £200m next year to help local communities tackle this problem.

For Scotland, Wales and Northern Ireland this Budget delivers not only a new Investment Zone but an additional £320m for the Scottish Government, £180m for the Welsh Government and £130m for the Northern Ireland Executive as a result of Barnett consequentials.

On top of which in Scotland, I can announce up to £8.6m of targeted funding for the Edinburgh Festivals as well as £1.5m funding to repair the Cloddach Bridge.

I will provide £20m of funding for the Welsh Government to restore the Holyhead Breakwater and, in Northern Ireland, I am allocating up to £3m to extend the Tackling Paramilitarism Programme and up to £40m to extend further and higher education participation.

Local leadership

But Madam Deputy Speaker, for levelling up to truly succeed we need to unleash the civic entrepreneurship that is only possible when elected local leaders are able to fund and deliver solutions to their own challenges.

That means giving them responsibility for local economic growth and the benefit from the upside when it happens.

So the government will consult on transferring responsibilities for local economic development currently delivered by Local Enterprise Partnerships to support local economic development to local authorities from April 2024.

I will also boost Mayors’ financial autonomy by agreeing multi-year single settlements for the West Midlands and the Greater Combined Manchester Authority at the next spending review, something I intend to roll out for all Mayoral areas over time.

I have also agreed a new long-term commitment so that they can retain 100% of their business rates, something I also hope to expand to other areas over time.

Investment zones, regeneration projects, levelling up partnerships, local transport infrastructure and business rates retention…more control for local communities over their economic destiny so we will level up wealth generation and opportunity everywhere.

Enterprise

Today’s budget is about the prime minister’s promise to grow the economy.

We’ve talked about making that growth happen everywhere, so I now move on to my second ‘e’. Enterprise.

We need to be Europe’s most dynamic enterprise economy. And under this government that is exactly what’s been happening.

Since 2010 we have one million more businesses in the UK, a bigger increase than in Germany, France or Italy.

But I want another million and another million after that.

So today I bring forward enterprise measures in these three areas: to lower business taxes, reduce energy costs and support our growth industries.

Business taxes

Let’s start with business taxation.

We know the importance of a competitive tax regime. We already have lower levels of business taxation than France, Germany, Italy or Japan.

But I want us to have the most pro-business pro-enterprise tax regime anywhere Even after the corporation tax rise this April, we will have the lowest headline rate in the G7.

Only 10% of companies will pay the full 25% rate.

But even at 19% our corporation tax regime did not incentivise investment as effectively as countries with higher headline rates.

The result is less capital investment and lower productivity than countries like France and Germany.

We have already taken measures to address this.

For larger businesses we have had the super deduction, introduced by my RHF the prime minister, which ends this month.

For smaller businesses we have increased the Annual Investment Allowance to £1m, meaning 99% of all businesses can deduct the full value of all their investment from that year’s taxable profits.

If the super deduction was allowed to end without a replacement, we would have fallen down the international league tables for tax competitiveness and damaged growth.

I could not allow that to happen.

So today, I can announce that we will introduce a new policy of “full expensing” for the next three years, with an intention to make it permanent as soon as we can responsibly do so.

That means that every single pound a company invests in IT equipment, plant or machinery can be deducted in full and immediately from taxable profits.

It is a corporation tax cut worth an average of £9bn a year for every year it is in place.

And its impact on our economy will be huge. The OBR says it will increase business investment by 3% for every year it is in place. This decision makes us the only major European country with full expensing…

…and gives us the joint most generous capital allowance regime of any advanced economy.

Madam Deputy Speaker, I also want to make our taxes more competitive in our life science and creative industry sectors.

In the Autumn, I said I would return with a more robust R&D tax credit scheme for smaller research-intensive companies.

So today, I am introducing an enhanced credit which means that if a qualifying small or medium-sized business spends 40% or more of their total expenditure on R & D, they will be able to claim a credit worth £27 for every £100 they spend.

That means an eligible cancer drug company spending £2m on research and development will receive over £500,000 to help them develop breakthrough treatments.

It is a £1.8bn package of support helping 20,000 cutting edge companies who day by day are turning Britain into a science superpower.

This government’s audio-visual tax reliefs have helped make our film and TV industry the biggest in Europe. Only last month, Pinewood announced an expansion which will bring another 8,000 jobs to the UK.

To give even more momentum to this critical sector I will introduce an expenditure credit with a rate of 34% for film, high end television and video games and 39% for the animation and children’s TV sectors. I will maintain the qualifying threshold for high-end television at £1 million.

And because our theatres, orchestras and museums do such a brilliant job at attracting tourists to London and the UK, I will also extend for another two years their current 45% and 50% reliefs.

Energy

Madam Deputy Speaker, an enterprise economy needs low taxes. But it also needs cheap and reliable energy.

We have already announced billions of support to help businesses reduce their energy bills through the Energy Bills Relief Scheme and the Energy Bills Discount Scheme.

We have appointed Dame Alison Rose, chief executive of NatWest, to co-Chair our national energy efficiency taskforce and help deliver our national ambition to reduce energy use by 15%.

To support her efforts, I will extend the Climate Change Agreement scheme for two years to allow eligible businesses £600m of tax relief on energy efficiency measures.

But the long-term solution is not subsidy but security.

That means investing in domestic sources of energy that fall outside Putin or any autocrat’s control.

We are world leaders in renewable energy so today I want to develop another plank of our green economy, carbon capture, usage & storage.

I am allocating up to £20bn of support for the early development of CCUS, starting with projects from our East Coast to Merseyside to North Wales – paving the way for CCUS everywhere across the UK as we approach 2050.

This will support up to 50,000 jobs, attract private sector investment and help capture 20-30 million tonnes of CO2 per year by 2030.

We have increased the proportion of electricity generated from renewables from under 10% to nearly 40%.

But because the wind doesn’t always blow and the sun doesn’t always shine, we will need another critical source of cheap and reliable energy.

And that is nuclear.

There have been no more powerful advocates for this than the hon members for Ynys Mon, Copeland, Hartlepool and Workington.

They rightly say that increasing nuclear capacity is vital to meet our net zero obligations.

So to encourage the private sector investment into our nuclear programme, I today confirm that subject to consultation nuclear power will be classed as ‘environmentally sustainable’ in our green taxonomy, giving it access to the same investment incentives as renewable energy.

Alongside that will come more public investment.

In the Autumn Statement, I announced the first state-financed investment in nuclear for a generation, a £700m investment in Sizewell C.

Today I can announce two further commitments to deliver our nuclear ambitions.

Firstly, following representations from our energetic Energy Security Secretary I am announcing the launch of Great British Nuclear which will bring down costs and provide opportunities across the nuclear supply chain to help provide up to one quarter of our electricity by 2050.

And secondly, I am launching the first competition for small modular reactors. It will be completed by the end of this year and if demonstrated as viable we will co-fund this exciting new technology.

Boosting innovation

Finally under the ‘E’ of Enterprise I come to our innovation economy, a central area of national competitive advantage for the United Kingdom.

Over the weekend, I worked night and day with the prime minister and the Governor of the Bank of England to protect the deposits of thousands of our most cutting-edge companies.

We successfully secured the sale of the UK arm of Silicon Valley Bank to HSBC, so the future of those companies is now safe in the hands of one of Europe’s biggest and most creditworthy banks.

But those events show that we need to build a larger, more diverse financing system, where the benefits of investment in high growth firms are available to more investors.

So I will return in the Autumn Statement with a plan to deliver that. It will include measures to unlock productive investment from defined contribution pension funds and other sources, make the London Stock Exchange a more attractive place to list, and complete our response to the challenges created by the US Inflation Reduction Act.

However when it comes to our innovation industries, there are two areas I want to make progress on today.

Nigel Lawson made the City of London one of the world’s top financial centres by competitive deregulation. With our Brexit autonomy, we can do the same for our high growth sectors.

So today I want to reform the regulations around medicines and medical technologies.

We are lucky with the MHRA to have one of the most respected drugs regulators in the world, indeed the very first to licence a Covid vaccine.

From 2024, they will move to a different model which will allow rapid, often near automatic sign-off for medicines and technologies already approved by trusted regulators in other parts of the world such as the United States, Europe or Japan.

At the same time from next year they will set up a swift new approval process for the most cutting-edge medicines and devices to ensure the UK becomes a global centre for their development.

And with an extra £10m of funding over the next two years they will put in place the quickest, simplest, regulatory approval in the world for companies seeking rapid market access.

We are proud of our life sciences sector which received more inward investment than any in Europe last year.

Today’s change will make the UK an even more exciting place to invest – as well as speeding up access for NHS patients to the very newest drugs.

Today together with our talented science, innovation and technology secretary, I also take measures to strengthen our position in artificial intelligence, where the UK hosts one third of all European companies.

I am accepting all nine of the digital technology recommendations made by Sir Patrick Vallance in the review I asked him to do in the Autumn Statement.

That means I can report to the House that we will:

…launch an AI sandbox to trial new, faster approaches to help innovators get cutting edge products to market;

…work at pace with the Intellectual Property Office to provide clarity on IP rules so Generative AI companies can access the material they need;

……and ask Sir Patrick’s successor, Dame Professor Angela McLean, to report before the summer on options around the Growth Duty for regulators.

Because AI needs computing horsepower, I today commit around £900m of funding to implement the recommendations in the independent Future of Compute Review for an Exascale supercomputer.

The power that AI’s complex algorithms need can also be provided by quantum computing.

So today we publish a quantum strategy which will set our vision to be a world leading quantum enabled economy by 2033 with a research and innovation programme totalling £2.5bn.

I also want to encourage the best AI research to happen in the UK so will award a prize of £1m every year, for the next 10 years, to the person or team that does the most ground-breaking British AI research.

The world’s first stored-programme computer was built at the University of Manchester in 1948, and was known as the ‘Manchester baby’.

75 years on, the baby has grown up, so I will call this new national AI award ‘the Manchester Prize’ in its honour.

Madam Deputy Speaker we want the UK to be the best place in Europe for companies to locate, invest and grow so today’s enterprise measures strengthen our technology and life science sectors, invest in energy security and for three years – but I hope permanently – cut corporation tax by £9 bn a year to give us the best investment incentives of any advanced economy.

Employment

An enterprise economy can only grow if it can hire the people it needs, which brings me to my third pillar after ‘Everywhere’ and ‘Enterprise’, the ‘E’ of Employment.

Brexit was a decision by the British people to change our economic model.

In that historic vote, our country decided to move from a model based on unlimited low skill migration to one based on high wages and high skills.

Today we show how we will deliver that with a major set of reforms. The OBR say it is the biggest positive supply side intervention they have ever recognised in their forecast.

We have around one million vacancies in the economy…

… but excluding students there are over seven million adults of working age who are not in work.

That is a potential pool of seven people for every vacancy. We believe work is a virtue.

We agree with the road haulage king Eddie Stobart who said: ‘the only place success comes before work is the dictionary.’

So today, I bring forward reforms to remove the barriers that stop people who want to from working. I start with over 2 million people who are inactive due to a disability or long-term sickness.

Long-term sick and disabled

Thanks to the reforms courageously introduced by the Rt Hon Member for Chingford and Woodford Green, the number of disabled people in work has risen by two million since 2013.

But even after that we could fill half the vacancies in the economy with people who say they would like to work despite being inactive due to sickness or disability.

With Zoom, Teams and new working models that make it easier to work from home this is more possible than ever before.

So for that reason, the ever-diligent Work and Pensions Secretary, today takes the next step in his ground-breaking work on tackling economic inactivity.

I thank him for that, and today we publish a White Paper on disability benefits reform. It is the biggest change to our welfare system in a decade.

His plans will abolish the Work Capability Assessment in Great Britain and separate benefit entitlement from an individual’s ability to work. As a result, disabled benefit claimants will always be able to seek work without fear of losing financial support.

Today I am going further by announcing that in England and Wales, after listening to representations from the Centre for Social Justice and others, we will fund a new programme called Universal Support.

This is a new, voluntary employment scheme for disabled people where the government will spend up to £4,000 per person to help them find appropriate jobs and put in place the support they need. It will fund 50,000 places every single year.

We also want to help those who are forced to leave work because of a health condition such as back pain or a mental health issue.

We should give them support before they end up leaving their job, so I am also announcing a £400m plan to increase the availability of mental health and musculoskeletal resources and expand the Individual Placement and Support scheme.

And because occupational health provided by employers has a key role to play, I will also bring forward two new consultations on how to improve its availability and double the funding for the small company subsidy pilot.

Young people in care

There is another group that deserves particular attention, which is children in care. They too should be given all possible help to make a normal working life possible when they reach adulthood.

Often, they depend on foster families who do a brilliant job, so I am today nearly doubling the Qualifying Care Relief threshold to £18,140 which will give a tax cut to a qualifying carer worth an average of £450 a year.

I will also increase the funding we provide to the Staying Close programme by 50% to help more care leavers into employment.

And I will support young people with Special Educational Needs and Disabilities with a £3m pilot expansion of the Department for Education’s Supported Internship programme to help them transition from education into the workplace.

Madam Deputy Speaker, no civilised society can ignore the contribution that can be made by those with challenging family circumstances, a long-term illness or a disability.

So today we remove the barriers we can with reforms that strengthen our society as well as strengthening our economy.

Welfare recipients

The next set of employment reforms affects those on Universal Credit without a health condition who are looking for work or on low earnings.

There are more than 2 million jobseekers in this group, more than enough to fill every single vacancy in the economy.

Independence is always better than dependence, which is why we believe those who can work, should. So sanctions will be applied more rigorously to those who fail to meet strict work-search requirements or choose not to take up a reasonable job offer.

And for those working low hours, we will increase the Administrative Earnings Threshold from the equivalent of 15 hours to 18 hours at national living wage for an individual claimant, meaning that anyone working below this level will receive more work coach support alongside a more intensive conditionality regime.

Older workers including doctors

The next group of workers I want to support are those aged over 50.

My younger officials have termed these people ‘older workers’, although as a 56-year-old myself I prefer the term ‘experienced’.

Fully 3.5 million of pre-retirement age over 50 are not part of the labour force, an increase of 320,000 since before the pandemic.

We now have the 23rd highest inactivity rate for over 55s in the OECD.

If we matched the rate of Sweden, we would add more than one million people to our national labour force.

Madam Deputy Speaker, I say this not to flatter you, but older people are the most skilled and experienced people we have.

No country can thrive if it turns its back on such a wealth of talent and ability.

But for too many, turning 50 is a moment of anxiety about the cliff edge of retirement rather than a moment of anticipation about another two decades of fulfilment.

I know this myself from personal experience. After I turned 50, I was relegated to the backbenches and planned for a quiet life. But instead I decided to set an example by embarking on a new career in finance.

So today I take three steps to make it easier for those who wish to work longer to do so.

First, we will increase the number of people who get the best possible financial, health and career guidance ahead of retirement by enhancing the DWP’s excellent “Mid-life MOT” Strategy.

They will also increase by fivefold the number of 50+ Universal Credit claimants who receive mid-life MOTs from 8,000 to 40,000 a year.

Second with my RHF the Education Secretary, we will introduce a new kind of apprenticeship targeted at the over 50s who want to return to work.

They will be called Returnerships, and operate alongside skills boot camps and sector-based work academies.

They will bring together our existing skills programmes to make them more appealing for older workers, focussing on flexibility and previous experience to reduce training length.

Finally, I have listened to the concerns of many senior NHS clinicians who say unpredictable pension tax charges are making them leave the NHS just when they are needed most.

The NHS is our biggest employer, and we will shortly publish the long-term workforce plan I promised in the Autumn Statement.

But ahead of that I do not want any doctor to retire early because of the way pension taxes work.

As chancellor I have realised the issue goes wider than doctors.

No one should be pushed out of the workforce for tax reasons.

So today I will increase the pensions annual tax-free allowance by 50% from £40,000 to £60,000.

Some have also asked me to increase the Lifetime Allowance from its £1 million limit.

But I have decided not to do that.

Instead I will go further and abolish the Lifetime Allowance altogether.

It’s a pension tax reform that will…

… stop over 80% of NHS doctors from receiving a tax charge.

… incentivise our most experienced and productive workers to stay in work for longer.

… and simplify our tax system, taking thousands of people out of the complexity of pension tax.

Madam Deputy Speaker, a comprehensive plan to remove the barriers to work facing those on benefits, those with health conditions and older workers. That is the ‘e’ of the employment pillar of today’s growth budget.

Education

Which brings me to the final pillar of our growth plan. After Employment, Enterprise and Everywhere I turn to the ‘E’ of Education.

Over more than a decade, this government has driven improvement in our education system.

We have risen by nearly 10 places in the international league tables for English and maths since 2015 alone.

In the Autumn Statement, I built on this progress with an extra £2.3bn annual investment to our schools.

We are reviewing our approach to skills with Sir Michael Barber.

We have set out our plans to transform lifelong learning with a new Lifelong Loan Entitlement…

…and My RHF the PM announced plans to make maths compulsory till 18.

But today I want to address an issue in our education system that is bad for children and damaging for the economy.

It’s an issue that starts even before a child enters the gates of a school.

Today I want to reform our childcare system.

We have the one of the most expensive systems in the world.

Almost half of non-working mothers said they would prefer to work if they could arrange suitable childcare For many women, a career break becomes a career end.

Our female participation rate is higher than average for OECD economies, but we trail top performers like Denmark and the Netherlands.

If we matched Dutch levels of participation, there would be more than one million additional women working.

So today I announce a series of reforms to start that journey.

Supply

I begin with the supply of childcare. We have seen a significant decline in childminders over recent years – down 9% in England in just one year.

But childminders are a vital way to deliver affordable and flexible care and we need more of them.

I have listened to representations from my hon friend from Stroud and decided to address this by piloting incentive payments of £600 for childminders who sign up to the profession, rising to £1,200 for those who join through an agency.

I have also heard many concerns about cost pressures facing the sector.

We know this is making it hard to hire staff and raising prices for parents, with around two thirds of childcare providers increasing fees last year alone.

So we will increase the funding paid to nurseries providing free childcare under the hours offer by £204m from this September rising to £288m next year.

This is an average of a 30% increase in the two-year-old rate this year, just as the sector has requested.

I will also offer providers more flexibility in how they operate in line with other parts of the UK. So alongside that additional funding, we will change minimum staff-to-child ratios from 1:4 to 1:5 for two-year-olds in England as happens in Scotland, although the new ratios will remain optional with no obligation on either childminders or parents to adopt them.

UC claimants

I want to help the 700,000 parents on universal credit who, until the reforms I announced today had limited requirements to look for work. Many remain out of work because they cannot afford the upfront payment necessary to access subsidised childcare.

So for any parents who are moving into work or wants to increase their hours, we will pay their childcare costs upfront.

And we will increase the maximum they can claim to £951 for one child and £1,630 for two children, an increase of almost 50%.

School age children

I turn now to parents of school age children, who often face barriers to working because of the limited availability of wraparound care.

One third of primary schools do not offer childcare at both ends of the school day, even though for many people a job requires availability throughout the working day.

To address this, we will fund schools and local authorities to increase supply of wraparound care so all school-age parents can drop their children off between 8am and 6pm.

Our ambition is that all schools will start to offer a wraparound offer, either on their own or in partnership with other schools, by September 2026.

Pre-school children

Madam Deputy Speaker, today’s childcare reforms will increase the availability of childcare, reduce costs and increase the number of parents able to use it.

Taken together with earlier reforms, they amount to the most significant improvements to childcare provision in a decade.

But if we really want to remove the barriers to work we need to go further for parents who have a child under 3.

For them childcare remains just too expensive.

In 2010 there was barely any free childcare for under 5s.

The government changed that with free childcare for 3- and 4-year-olds in England.

It was a landmark reform.

But not a complete one.

I don’t want any parent with a child under 5 to be prevented from working, if they want to, because it is damaging to our economy and unfair, mainly to women.

So today I announce that in eligible households where all adults are working at least 16 hours, we will introduce 30 hours of free childcare not just for 3-and-4 year-olds, but for every single child over the age of 9 months.

The 30 hours offer will now start from the moment maternity or paternity leave ends.

It’s a package worth on average £6,500 every year for a family with a two-year-old child using 35 hours of childcare every week…

… and reduces their childcare costs by nearly 60%.

Because it is such a large reform, we will introduce it in stages to ensure there is enough supply in the market.

Working parents of two-year-olds will be able to access 15 hours of free care from April 2024, helping around half a million parents.

From September 2024, that 15 hours will be extended to all children from 9 months up, meaning a total of nearly one million parents will be eligible.

And from September 2025 every single working parent of under 5s will have access to 30 hours free childcare per week.

Today we complete a landmark reform…

…we help the economy

…transform the lives of thousands of women

…and build a childcare system comparable to the best.

A major early years reform for our education system, the ‘E’ of education alongside the three other pillars of our growth plan, enterprise, employment and everywhere.

Madam Deputy Speaker in November we delivered stability.

Today it’s growth.

We tackle the two biggest barriers that stop businesses growing – investment incentives and labour supply.

The best investment incentives in Europe.

The biggest ever employment package.

For disabled people, more help.

For older people, barriers removed.

For families feeling the pinch…

…fuel duty frozen.

…beer duty cut.

…energy bills capped.

And for parents, 30 hours of free childcare for all under 5s.

Today we build for the future with…

…inflation down

…debt falling

…and growth up.

The declinists are wrong, and the optimists are right.

We stick to the plan because the plan is working.

And I commend this statement to the House.

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Developed market equities to deliver 8.3%pa return over the next decade

Stephen Strowger — Wed, 15 Mar 2023 15:56:34 +0000

Why is now a good time to invest..??

14 March 2023

The next 10 years will be more positive for both stock markets and fixed income investors, digital wealth management firm Moneyfarm has predicted.

They have predicted that developed equity markets is likely to be the best performing asset class, with annual return of 8.3%pa over the next 10 years, with emerging market equity and emerging government bonds set to be the next two best performing asset classes, with annual returns of respectively 6.6% and 6.4%.

More broadly, fixed income should experience a revival, with the different categories of bonds delivering returns of at least 3% each year.

Last year was generally not a good year for investors, with most equity indices significantly lower. And investments in Fixed Interest and Bond assets also experienced losses with some bond sectors suffering even more than the riskier equities. At time of writing, we are now seeing an increase in volatility due to the small regional bank collapses in the US. And just to add to the current negative sentiment, there appears to be some serious concerns with Credit Suisse which is pushing equity markets further into negative territory.

Moneyfarm warned, however, that parking money in cash has not historically been the best course of action. From 1930 to 2022, there were a total of 71 positive and 21 negative years for stock markets, which have typically outperformed.

Chris Rudden, head of investment consultants at Moneyfarm, said: “A market downturn should not be seen in a negative light entirely. There is, after all, an opportunity to capitalise on lower valuations.”

Rudden added: “Cash investments have their place for short term needs and can be useful for those ‘raining day’ events, however, history has shown that investing in stocks and shares portfolios tends to provide investors with a better outcome on longer term savings.”

The wealth management firm does not expect cash investments to offer similar annual returns over the next 10 years as stocks or bonds.

Commodities and real estate were the only asset classes that they have forecast to offer returns below the Bank of England’s inflation target of 2%, with annual returns of 0.3%.

Source: Moneyfarm

During a downturn or a bear market, it can be tempting to panic and sell off your investments.

However, historical data from 1950–2022 shows that this is unlikely to be the best course of action.

In fact, after a market correction, the median one-year performance is 30%, while after a bear market, it is a median of 37%. This performance then normalises in three years to a median of 18% and 20%, respectively. History also shows us that there are generally more positive years than negative ones (see second chart below). That’s why it’s crucial not to miss out on the rebound.

You could beat inflation through compounding…

The real value of £100,000 left in an account could fall to £75,000 in 10 years with the current trajectory of inflation. The firm forecasted levels of inflation for 2023 and 2024 of 6.7% and 2.4% respectively. Inflation should then return to 2% from 2025 onward.

With current levels of inflation, your capital could lose over 10% of its purchasing power within the next year. Even if you assume a 2% inflation rate, which is the Bank of England’s target, your capital could still lose a further 15% (or more) of its purchasing power in the next 10 years. For example, if you have £100,000 in the bank, its real value could decrease to less than £75,000 in a decade if just kept in a cash account. With the right investment strategy and by taking advantage of compounding you can potentially earn returns that outpace inflation and help secure your financial future.

There’s been a lot of talk about a recession. But fear of a recession shouldn’t keep you out of the market.

While market downturns can sometimes come before recessions, it’s also true that market rallies can happen during economic downturns in anticipation of a recovery. Avoiding the market during these times can have a negative impact on your financial outcomes for many years to come, so investing now can be hugely beneficial.

Please note the information for the above article was obtained from Trustnet as well as from Moneyfarm. This article is for general information only. The views of Moneyfarm and any people quoted are their own and do not constitute financial advice.

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

At Ethical Offshore Investments, our clients can access a wide range of high quality managed funds, low cost ETF’s and direct shares and not be subject to additional entry or exit fees. As we aim not to use commission paying funds, we will access the lowest charging version of the managed fund that is available on the relevant platform…… resulting in more of the investment growth staying in your pocket.

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Guinness Sustainable Energy Report – March 2023

Stephen Strowger — Thu, 09 Mar 2023 07:25:30 +0000

An improving outlook for the wind industry

March 2023

Executive Summary

Wind is the second most significant renewable power generation source. In recent years, the industry has faced headwinds as it has wrestled with COVID-related disruptions and various regulatory “air pockets”. Recent policy announcements as well as the slowing of raw material and energy cost inflation means that sentiment towards wind appears to be turning more positive in recent months.

Recent policy support for the wind industry

Recent policy announcements in the US, Europe and China have been positive for the wind industry, benefitting in particular the onshore wind sector, which had started to lag the growth outlook of the offshore sector.

In early 2022, Europe announced its REPowerEU plan which committed a further EUR 86bn in incremental renewables investment out to 2030. While the scale of investment is significant, the Act particularly benefits onshore wind because it seeks to remove Europe’s permitting bottlenecks and to streamline the permitting process from an average of 6 years to an average of 2 years. Streamlining this process is critical, we believe, because onshore wind farms typically face higher levels of local opposition. If achieved, we would expect the onshore industry will see a big step up in demand: the backlog of projects awaiting permitting in Europe is around five times the level of annual installations.

Subsequently, the US announced its Inflation Reduction Act which outlined a $369bn package targeting climate and energy security, focusing on reducing emissions from (amongst other things) electricity generation and transport. The Act changes the investment outlook for onshore wind because it extends current tax credits (the Investment Tax Credit (ITC) and the Production Tax Credit (PTC)) to 2033. For a longer cycle investment activity such as wind, this provides much needed visibility around project economics. Historically, the PTC has been made available for much short periods, providing visibility for perhaps one or two years at certain points – a period that is not helpful for wind projects that typically takes at least three years for development. According to Princeton University, the combined incentives may help increase US wind installations by 2x over the next three years compared to 2020 levels.

To remain competitive with the IRA, the EU proposed an EU industrial strategy in early February 2023. We expect to hear more details at the 23rd-24th March EU Council meeting but initial plans suggest the introduction of a “European IRA”, designed to increase significantly the manufacturing of clean energy equipment and the installation of clean energy products. One of three key attributes of the plan is better regulation and the removal of bottlenecks which would require each member state to speed up the permitting of renewable facilities via a single “approval entity”, so removing the current multi-step approval process that exists in many countries. The introduction of a time limit for the process (that would allow delayed projects to be approved centrally by the EU) as well as further administrative capacity would help to speed up project development timelines. In response, Germany have already announced plans to speed up its own permitting process including proposed legislation that will scrap the environmental impact assessment for wind generation projects. Onshore wind will also benefit from the other areas of increased financial support for clean energy projects and the proposal of a Critical Raw Materials Act that would allow for the diversified sourcing and recycling of raw materials critical to the energy transition.

The scale of the task ahead for the EU was highlighted by Vestas in its recent full year 2022 results commentary as follows “the EU Green Deal Industrial Plan aims to accelerate renewables with EU funding to be stepped up but also easing state aid approvals. 2022 installations were 50 percent below climate target and 2022 orders were down 47 percent year-on-year due to slow permitting”.

Less talked about has been the Chinese 14th 5-year renewable energy plan which aims to double the installed capacity of both wind and solar by 2030. This has led to China’s major state-owned power companies setting goals to increase total wind and solar capacity by 600 GW by 2025 (5 years ahead of schedule). This could potentially provide significant opportunity for many of the wind developers and wind power generators that we track in our universe, although it is unlikely that European and US wind turbine manufacturers will be able to benefit since the Chinese market is essentially closed to them.

Improving price and margin outlook for turbine manufacturers

Recent policy support actions coincide with signs that wind turbine pricing is starting to improve and raw material costs are starting to fall.

There has been delay in turbine manufacturers passing on cost inflation, reflecting the fact that wind turbine manufacturing is a reasonably long cycle activity with around three years between order and delivery for a wind development.

However, in its latest update, Vestas indicated that the average selling price of its wind turbine order intake was Eur1.15m per MW in Q4 2022, up nearly 34% from the Q4 2021 level of Eur0.86m per MW. Broader industry data from Bloomberg indicates that average per MW wind turbine order prices are up 23% in 2022 versus 2019. We expect the inflationary pricing trend to continue as wind turbine manufacturers sign new contracts, providing an opportunity to pass on raw material, energy and wage increases to their customers.

To the benefit of turbine manufacturers, we note that some of the key raw materials (for example steel, copper and aluminium) appear to be past their periods of highest price rises. Indeed, the current picture suggests that the manufacturers may now start to enjoy a period of turbine price inflation coupled with raw material cost deflation.

The result of the policy initiatives and the raw material and product price movements mentioned above is that we expect onshore installation growth to triple from our prior 2022-2030 growth rate estimate of 5-6%pa, allowing global onshore wind generation capacity to nearly triple by 2030.

Complementing the improved picture for onshore wind is a positive outlook for the offshore wind industry, which still represents only 7% of global wind capacity. We expect offshore capacity to grow nearly five times by the end of the decade, driven by broader geographic penetration, improving economics and supportive policy. These dynamics have seen us increase our 2030 capacity outlook for offshore wind to close to 300 GW, implying 20%pa growth versus 2021. By then, we expect Europe and China to account for the majority of installations, with the US still accounting for less than 10% (even if President Biden’s target 30GW plan is enacted).

Annual onshore and offshore wind installations (GW)
source: BP, IEA, BNEF, Guinness Global Investors estimates

The long-term outlook for the wind industry remains very positive as the sector plays a critical role in global decarbonisation and the energy transition. We are increasingly confident that these issues will inflect positively over the next few years as a result of policy as well as price increase and a slowdown in raw material cost inflation, leading to a sustained ramp in global wind installations out to 2030 which will bring total installed capacity to around 2.2 TW in 2030.

However, this base case outlook is not sufficient for a net zero outlook. The Guinness net zero scenario indicates that total installed capacity would need to be 3.1 TW in 2030 (a compound growth rate of 16%pa from 2021) and that reaching this level of installed capacity would require annual installations to reach as much as 400 GW pa. While there appears to be significant policy support to grow the wind industry, we note that it has a very significant way to go in order to be fully aligned.

Global wind annual installations, base case and NZE scenario
source: IEA, IPCC, Guinness Global Investors

To read the full report, please click HERE.

The Managers

Will Riley – Portfolio Manager

Will joined Guinness in 2007 and has been managing energy funds since 2010.

Johnathon Waghorn – Portfolio Manager

Jonathan joined Guinness in 2013 and has been managing energy funds since 2008.

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Terry Smith: Idiots, Armageddon and ‘pain in the arse’ stocks

Stephen Strowger — Thu, 02 Mar 2023 06:27:31 +0000

The fund manager told investors at the Fundsmith Equity AGM that they should watch the new Madoff drama if they want positive returns in all periods.

BY: JOHN SCHAFFER

1 March 2023

Fundsmith’s annual general meeting (AGM) was certainly an entertaining show for investors.

Terry Smith took to the stage at Central Hall Westminster for his first annual in-person presentation since the Covid-19 pandemic.

The fund manager acknowledged that last year was ‘not the finest hour’ for his giant £22.6bn Fundsmith Equity strategy, but reiterated that a period of underperformance had been ‘inevitable’.

The portfolio was down 13.8% last year, underperforming the MSCI World index, which was down 7.4% in sterling terms.

Smith said: ‘If you want the fund to outperform in every market and every quarter, then watch the new Madoff documentary on Netflix’.

The quip raised a chuckle from the audience of Fundsmith investors, including this journalist and hundreds of others.

1% growth ‘joke’

Smith had addressed that weaker performance in his annual letter to shareholders, where he wrote: ‘Frankly, we are surprised there was any growth at all in our portfolio companies, and if 1% growth worries you, it may not be wise to read next year’s letter.’

The Mauritius-based fund manager noted that this statement had been highlighted by media outlets, including Citywire, but said it was something of a joke.

‘I wasn’t making a prediction of Armageddon, I was just trying to be funny,’ he said.

Meta regrets: ‘A pain in the arse to own’

Discussing holdings which have contributed to underperformance, Smith said that Meta was the ‘cheapest stock’ he owns, noting that it was trading on a price-to-earnings (PE) ratio of 15x but is still one of the top two global advertising businesses.

However, he acknowledged that owning the social media giant had been a tumultuous ride.

‘Meta is a pain in the arse to own,’ Smith said.

‘I regret buying Meta at the time I bought it, but the stock is up 40% year-to-date and our holding is now slightly in profit.’

The fund manager has previously been a critic of the firm’s investment in the metaverse, and said that its share price ‘would roof’ if it stopped spending in the area completely.

However, he admitted that he wasn’t sure whether this was a good plan of action, adding that the metaverse wasn’t merely a ‘pipe dream’ and could be a good source of innovation.

Not happy’ with Adobe buy

Smith said he regretted his purchase of Adobe last year, due to its recent M&A activity, and described the firm’s acquisition of creative software collaboration firm Figma as ‘problematic’.

‘[Adobe] is almost certainly paying too much. It almost certainly reveals a side of competitive weakness in its business,’ he said.

‘At the moment I can’t work out if I will be happy or sad if competition authorities rule it out. We’re not very happy with that purchase.’

Investing in idiots

The fund manager also discussed questionable decisions by the management teams at portfolio companies. ‘We always invest in companies that can be run by idiots, because eventually they all are,’ Smith said.

However, he added that this adage was more challenging when investing in tech companies.

‘I wouldn’t want to describe anyone as an idiot, I know how boomerangs work,’ Smith added.

He pointed to the fund’s investment in Microsoft, noting that the business had been fundamentally turned around under new CEO Satya Nadella, who took over the tech giant from Steve Ballmer in 2014.

The Unilever megaphone effect

Smith also addressed his vocal critique of Unilever’s management. He said that public criticism was not his preferred route and that it was generally far better to engage with companies privately.

‘It’s not good to use a megaphone, but we could end up here again,’ the fund manager explained.

Smith said that he is often asked why he doesn’t sell Unilever.

‘We like Unilever, we just don’t like the management,’ he said, noting that the consumer goods firm had significant growth potential in developing economies like India.

Smith added that he was unimpressed by Unilever selling its tea and spreads businesses, while attempting to buy GSK’s over-the-counter health business. The fund manager also questioned Unilever’s focus on cosmetics.

‘It needs to focus on areas such as cleaning and personal care,’ he said.

However, Smith said that he was ‘mildly encouraged’ by more recent communications with Unilever’s management team ‘They talked to us!’ he exclaimed.

He added that he was confident that further M&A was not a focus for the firm after recent conversations.

Non-exec steps down and fires shots at FCA

Jeff Randall, an ex-Sky Business News presenter, also stepped down at the AGM from his position as Fundsmith’s non-executive director.

Randall said that regulatory changes had primarily prompted his decision.

The former journalist said that scandals such as Woodford and British Steel had caused the FCA to become more ‘muscular’, and that it was trying to be ‘seen to be active’ and was now looking in the wrong places in terms of enforcement.

Smith thanked Randall for his service, and fondly said ‘he’s difficult sometimes, but he’s meant to be’.

Fundsmith was the subject of a Section 166 order last year but came through the probe unscathed, with the FCA not mandating any further action following a review of Smith’s funds business.

Please note the above article was first published by CityWire and should not be regarded as individual investment advice on whether to buy, sell or hold any of the companies or the fund mentioned. Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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How to avoid making mistakes with your investments

Stephen Strowger — Tue, 21 Feb 2023 09:08:19 +0000

Christina Kubu– published by FundCalibre

Over the long term, investing can be a very rewarding journey. But it can also be a perilous one, with plenty of potential pitfalls for the unwary. Some of these are caused by unexpected events that are out of everyone’s control. Others, however, are due to avoidable mistakes.

Here, we outline some of the most common errors that can deal a punishing blow to your investment portfolio.

Trying to time the market

Buying into the stock market at its lowest point and selling when it hits highs is the ideal scenario for any investor. Unfortunately, these points are impossible to accurately predict.

No-one knows for sure when the bottom and top points have been reached. That’s why the old saying that, “Time in the market is more important than timing the market,” rings true.

The best approach is to invest for the long-term and avoid becoming overly concerned by peaks and troughs encountered along the way.

Buying past performance

A fund may have delivered spectacular returns over the past few years – but that doesn’t mean it can be repeated. Its performance may have been down to the manager’s style being in favour, benefitting from global economic events, or a surging stock market lifting all share prices.

While a manager’s track record in different environments is worth considering, a fund’s recent performance is only one piece of evidence to bear in mind.

Not revisiting your portfolio

You may have spent a long time constructing the perfect portfolio – but it’s vital to review your investment decisions regularly to ensure it is performing as expected.

Everything is constantly changing: the performance of companies and funds, the global economic conditions, and your financial requirements. Ideally, you should carry out a full portfolio analysis every year but be prepared to make alterations more regularly should there be a change in circumstances.

Failing to consider your needs

We all have different reasons for investing. Some of us want to generate a particular sum for a purpose such as buying a house or securing a comfortable retirement. Others may need a regular monthly income to help cover day-to-day living costs. This is particularly important when the cost of living is rising.

Don’t worry about what other people are doing – you’ll need to factor your own requirements, reasons for investing, and attitude to risk into your investment decisions ,as this will dictate which products are most suitable.

Not being diversified

Pinning all your hopes on one or two investments is very dangerous. While you stand to benefit if they perform strongly, if they underperform it may leave you very exposed.

Diversifying your overall portfolio in terms of exposure to uncorrelated asset classes and funds is a less risky strategy for longer-term investing. The hope is that not all investment types will fall at the same time or to the same magnitude.

Not having a safety net

A golden rule is not to invest what you can’t afford to lose. Of course, no-one wants to see their portfolio’s value plummet, but it all depends on how you’d be impacted. If you’ve put every last penny into the investment then the chances are that you’ll be seriously affected by such a fall, even if it’s relatively short-lived. That’s why it’s vital to have some money in easy access savings accounts as a back-up.

So-called rainy day funds will give you confidence to ride out challenging markets.

Being too greedy

When a stock market position is soaring, it can be very tempting to stay invested in the hope of enjoying even greater gains. However, leave it too long and it may start a rapid decline. This is where being too greedy could potentially cost you. Bagging a decent profit – even if it ends up being lower than it might have been – is a win and can help fund your next purchase so should be considered.

Overlooking fund charges

You overlook fund charges at your peril as they can seriously affect returns. In the worst cases they can be enough to wipe out much of your profit. It’s particularly important to establish whether the portfolio manager will qualify for a bonus from you in the form of a performance fee for beating targets.

Pay close attention to the general fees and bear in mind that multimanager products will usually be more expensive as they are investing in other funds.

Reducing your Investment Costs…. more money stays in your pocket.

Quitting an investment too early

Short-term underperformance can be a red flag, but you shouldn’t bring the axe down on a fund until you know what’s happened. For example, it may have performed badly because its investment style or focus was out of favour, rather than being down to the manager’s mistakes. That’s why the returns generated – or losses sustained – should be considered in context and not viewed in isolation.

Overlooking fund focus

No two funds are identical. Even those apparently investing in the same type of asset class and size of company could be run very differently. One manager may prefer to buy businesses that are at the top of their game and the market leader in their particular field.

Others, meanwhile, may take a contrarian approach and only choose stocks that have underperformed or fallen out of favour with the market.

Ignoring investment style

There are various investment styles. For example, some funds may have a growth focus which sees them investing in ambitious companies that are focused on expansion. Others may be income oriented and put their money into established stocks that have a reliable track record of paying dividends to investors.

You’ll need to decide your preferred investment style from the outset and then pick your manager from those following this discipline.

Falling for marketing hype

Fund management companies want you to buy into their funds so it’s important not to unquestioningly fall for marketing hype. The product in question may be unsuitable for your needs, have a track record of underperforming, or be likely to underperform in the current environment.

Careful research is required to ensure you’re making the right calls in terms of both your own objectives and the fund itself.

_{Photo by Sarah Kilian on Unsplash}

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Can emerging market equities outperform in the next decade?

Stephen Strowger — Mon, 13 Feb 2023 06:33:25 +0000

Chris Salih – published by FundCalibre

The early part of the 21st century saw emerging markets outperform. Having survived a number of currency crisis in the late 1990s, the noughties were a time of stabilisation and growth for these areas.

In fact, while developed markets recovered from the tech bubble and then slid towards the sub-prime disaster that was the great financial crisis, emerging markets returned over 240%* in the first ten years of the new millennium. In contrast, the FTSE All-Share turned just over 25%* and the S&P 500 made a loss of 12%*

Then everything changed. A decade of easy monetary policy meant the US stock market was really the only show in town. Since the start of 2010 to date, the S&P 500 has returned just shy of 493%** compared with 149%** from the UK stock market and 92% for emerging markets**.

But now the investment environment has changed once again, is there reason to think emerging markets could excite investors once again? Could past performance be repeated?

How emerging markets have changed in the past decade

Over the past decade, the composition of emerging markets have changed significantly. Where South Africa once dominated, China has risen. Brazil and South Korea have fallen in prominence while Taiwan and India have grown***.

Sectors have also changed. Energy, materials and communication services sectors have all seen their market share decrease, while information technology in particular has flourished***.

And stock picking in this asset class has become key, as the number of companies in the MSCI Emerging Market index has ballooned by almost 50%. The index is now home to 1239 constituents***.

_{Graphic 1: Emerging Markets have changed in the last decade****}

^{Graphic 2: Technology now dominates the EM index****}

The attraction of emerging markets today

Developing economies have always been a growth story, and that has not changed.

They make up 45% of the global economy (vs 38% in 2012)*** and are experiencing population growth of 1% per annum compared with just 0.2% in developed markets***.

Today, the environment could be far more favourable for this area of investment – peaking interest rates, a weaker dollar, falling energy prices, and a more normalised economy in China, could bode well for the asset class in 2023. And, while it may take some time for these dynamics to play out, there could be good reason to be optimistic.

Fund managers around the world seem to be of this view. According to the latest Global Fund Manager survey by the Bank of America, their allocation to US equities collapsed in January, with respondents stating that their net underweight in the asset class stood at 39%, the lowest since October 2005 (52%). Instead, professional investors reallocated towards emerging market stocks, increasing their net overweight to 26% – the highest since June 2021.

What the fund managers are saying

Daniel Hurley, portfolio specialist at T. Rowe Price, believes there are several factors that should see a strong period of relative performance for emerging markets going forward.

“Valuations are highly compelling relative to developed markets, that, combined with China re-reopening, earnings momentum and the US dollar falling, could see a sustained period of outperformance,” he said.

“China re-opening is clearly the biggest catalyst after almost 3 years of pandemic restrictions; this will be very supportive for the consumer sector domestically also the asset class globally.

It will also be supportive for earnings momentum; emerging markets had the painful reset of earnings in 2022 and should inflect from a low base, this contrasts with markets where earnings have yet to reset and will be of key focus going forward.

“Finally, with the US economy weakening, the dollar could continue to depreciate from high levels. This is supportive for emerging markets; importers will benefit from the falling price of dollar priced imports and countries with dollar-denominated debt loads will also benefit from some respite.”

Tim Love, investment director, at GAM describes emerging market valuations as being, “like a coiled spring,” and says there could be a number of catalysts that spark material up-side for investors.

“15 years of choppy sideways performance is comparable to compressing a coiled spring,” he said. “A series of positive risk return opportunities are now in place (market downturn/Covid/oil shock), which rhyme with the situation in 2003-2008 (post Asian crises/SARS). Light liquidity, low positioning and negative sentiment could drive an attractive prospective risk/return for EM equities in 2023, in our view. Playing defence is yesterday’s game.”

Rob Brewis, co-manager of the Aubrey Global Emerging Markets Opportunities fund, adds that while there is inevitably some de-risking underway in global supply chains as manufacturers seek to diversify their production away from China, “this is all turning up in India (viz Apple’s vast new phone-making cluster outside Chennai), Vietnam, Mexico, and Indonesia to name a few.” In other words, it is very positive for most emerging markets.

“With one or two notable exceptions, the latter part of 2022 has been a period of weakening commodity prices. For most emerging market consumers, this is very good news,” continued Rob. “The changing energy landscape is also a long-term positive for most emerging markets. India is the standout winner in this, being short oil and long solar, at least in terms of potential. Russia, to which we have had no exposure in recent years, is the standout loser.

“Perhaps the final positive for emerging markets is US monetary policy. Whether US rates are near a peak is open to debate, but there are signs that the dollar strength might at least be abating, which makes it much more comfortable for emerging market central banks.”

“Whether it is the formalisation of the Indian economy, the continued financialisation of the South African population or the growing adoption of enterprise resource planning software in Brazil, there are plenty of growth opportunities to tap into,” concludes Rasmus Nemmoe, manager of FSSA Global Emerging Markets Focus.

Five emerging market equity funds to consider

Investors considering emerging markets could consider the following Elite Rated and Radar funds:

Aubrey Global Emerging Markets Opportunities invests in companies offering products and services to the upwardly mobile, ambitious, and aspirational population centres in emerging markets which account for over 70% of the world’s growth.

Federated Hermes Global Emerging Markets SMID Equity is a concentrated fund focusing on small and medium-sized companies across global emerging markets. It can also invest in frontier markets should opportunities arise.

FSSA Global Emerging Markets Focus fund invests in 40-45 large and medium-sized companies in emerging markets. Manager Rasmus Nemmoe has an absolute return mindset and looks for quality companies that can demonstrate sustained and predictable growth over the long-term.

GQG Partners Emerging Markets Equity is a concentrated portfolio of high quality companies with durable earnings. The emphasis is on future quality, rather than companies which have simply done well historically.

JPMorgan Emerging Markets Investment Trust has an established long-term track record of investing in emerging market equities. The extensive team at JPM take a long-term approach and focus exclusively on companies, rather than countries, in the emerging markets space.

*Source: FE fundinfo, total returns in sterling, 31 December 1999 to 31 December 2009

**Source: FE fundinfo, total returns in sterling, 31 December 2009 to 3 February 2023

***Source: Alquity, October 2022

****Source: Alquity, Bloomberg, October 2022

_{Photo by Joshua J. Cotten on Unsplash}

Please note the above article was first published by Fund Calibre and should not be regarded as individual investment advice on whether to buy, sell or hold any of the funds mentioned. Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

Speak with Ethical Offshore Investments to learn how you can save on your investments costs by investing via Ethical Offshore.

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SustainAbility – Goldilocks & the two Bears

Stephen Strowger — Mon, 23 Jan 2023 11:38:37 +0000

One of the few things that we can be certain about is that the future is uncertain.

The events since early 2020, which have included a global pandemic, a war in Europe and a rise in inflation of historic proportions should have taught us that.

Mike Fox – head of Sustainable Investments at Royal London Asset Management

This said, it surprises us that many investors still talk with certainty about what 2023 will hold. In the best and more predictable of times, investment is a game of probabilities: there is no single future. These are not the most predictable of times, however, and we think it more beneficial to think about scenarios for this year rather than a singular outcome.

Investors often use the term ‘Goldilocks’ to describe the perfect financial conditions – neither too hot, nor too cold. This allows a decent level of growth without inflation at levels that would cause central banks concern. In today’s markets, this would be inflation coming back down to close to target levels of 2% without a significant recession, allowing interest rates to be reduced before the end of the year. In this scenario, most assets and investment styles would do well.

A modest recession would mean corporate profits remain robust, supporting equity investments generally, while the fall in interest rates would help growth investors. Bonds should also hold on to their recent gains and revert to playing their conventional role in portfolios.

Our first bearish scenario is centred on there being no historical precedent for inflation being brought under control without interest rates moving above the level of inflation, thereby creating positive real rates. Until this happens there is a risk that interest rate policy remains too accommodative. This implies that further rate increases are needed to bring down inflation, which would impact economic activity more negatively. Under this scenario, equity investing would be more challenging with defensive and more structural growth names probably outperforming. Bonds should hold their own, as rising rates and a recession more-or-less offset each other with respect to yields.

The second bear argument, perhaps paradoxically, involves economic growth this year being better than expected. Towards the end of 2022, the consensus view was that there would be a recession as much tighter monetary policy impacted areas such as employment and housing. Two events have challenged this view, however. First, the re-opening of China, which has happened much sooner and quicker than anyone expected. The world’s second largest economy has been constrained for three years, so consumers have significant money to spend on travel and all the things that we bought when we unlocked. After initial disruption as Covid spreads, this is likely to stimulate global growth and inflation.

The second event is the huge slice of luck that Europe has had with the weather. On Christmas Day it was 15°C in Berlin, something that has only happened twice before in history. This has removed the worst-case scenarios for energy shortages following the invasion of Ukraine. This has seen energy prices fall significantly – in some cases back to where they were before the invasion of Ukraine. Government support schemes will be significantly less expensive than expected, with businesses and consumers also benefiting.

In essence, the world’s second largest economy, China, and its largest economic region, Europe, are in much better shape than expected just a few months ago.

In this scenario, growth and inflation would surprise on the upside, which would create a dilemma for central banks. Do they raise interest rates further as inflation expectations increase again? Or do they accept more inflation? We would expect something of a repeat of last year, with rising interest and inflation expectations impacting both equity and debt markets, and energy/value outperforming.

Three scenarios and three different portfolio outcomes. It is hard to know which one will play out. ‘Goldilocks’ is clearly the most positive for asset owners, but the others require serious consideration. We observe the global economy being more resilient than expected, with higher employment and fewer catalysts for a global recession than a few months ago. This suggests growth and inflation may prove to be more resilient. However, we will only know in the fullness of time, so for now it is worth keeping an open mind.

Back in the real world

One of the defining characteristics of financial markets in the last year has been their almost-universal macro nature. It has mattered relatively little what a company does, simply whether it is ‘value’ or ‘growth’, and short duration or long duration. However, there is plenty going on at the company and industry level that we think will be positive for all investors, and sustainable investors in particular:

Meaningful progress is being made in the treatment of cancer. A confluence of factors, including a greater understanding of the immune system and genetics, is allowing the next generation of cancer drugs to be developed and approved. We see AstraZeneca as a leading player in these developments.

Renewable energy is being supercharged. In the short term, due to the war in Ukraine, more carbon-intensive forms of fuel, such as coal, are needed to ensure sufficient energy for all. However, far from creating a carbon renaissance, this is accelerating the rollout of renewable energy, both in the UK and abroad. Renewable energy is the energy of freedom and we believe that SSE will benefit.

China is finally unlocking its population and country. After three years of Covid lockdowns, its citizens can now travel and consume as they did pre-pandemic. Given the lack of a government-backed health system and in the wake of the pandemic, many consumers are looking to purchase health and life insurance. Prudential could be a key beneficiary of this.

The adoption of electric vehicles (EVs) is accelerating. Bloomberg estimates EV sales increased by 60% in 2022 and there are now 30m on the road compared to 10m at the end of 2020. In Norway, EVs are now four out of every five new cars sold. We believe that Texas Instruments benefits from this.

The US Inflation Reduction Act that was passed in 2022 is an infrastructure investment programme to combat climate change, rebuild infrastructure and reduce dependence on foreign semiconductors. With $370bn of incentives and grants, this will be significant for both the US economy and those companies that provide relevant services to it. In our portfolios, Ferguson and Trane Technologies in particular could benefit from this.

(Please note: companies mentioned are held in at least one of our portfolios, but these are for illustrative purposes only and are not recommendations).

Balance is key

There are plenty of reasons to be optimistic, pessimistic or somewhere in between. There are risks, as ever, but also opportunities – and we will only know in time which are the most potent. In the meantime, having a balance of exposures across a range of industries that benefit from the observable trends is sensible. In addition, sustainability remains a key issue in business and society, and is an area worth focusing on. At some point, the outcome of the inflation / interest rates debate will be clear; once it is, the ‘real world’ of companies and their customers, rather than the purely macroeconomic one, will drive investment returns.

This is a financial promotion issued by Royal London Asset Management and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

At Ethical Offshore Investments, we still have a high regard to the Sustainable Investing management skills of Mike Fox and his team at Royal London Asset Management. The Royal London Sustainable World Trust is held across our Sustainable Ethical Allocation model portfolios and the Sustainable Leaders Trust is also a recommended fund for exposure to UK sustainable and ethical companies.

And the long term performance has rewarded investors…..

Royal London Sustainable Leaders Trust C Acc (GTR 11.0%pa)
Royal London Sustainable World Trust C Acc (GTR 11.5%pa)
IA Global Index (GTR 9.7%pa)
FTSE All Share Index (GTR 6.5%pa)

The above returns are net after management fees and dividends re-invested over the past 10 years.

Please note that this should not be regarded as individual investment advice and a recommendation to invest in the mentioned funds. Please speak to Ethical Offshore Investments (or your personal adviser) BEFORE you make any decision on investing in these funds to make sure that these managed funds are appropriate for your personal investment objectives.

Clients of Ethical Offshore Investments that invest into any of the Royal London Sustainable range of funds, will not incur any additional entry fee or buy/sell spread plus we will place the trade in the lowest charging version of the fund.

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