elstonviews

- Growth rates cut compared to pre-referendum estimates - Inflation estimates raised on weaker sterling, but possibly not far enough - Focused spending on infrastructure and innovation is welcome Growth estimates cut UK GDP’s growth rate has been downgraded relative to pre-referendum expectations, with a cut from 2.2% to 1.4% for 2017E and from 2.1% to 1.7% for 2018E. Inflation estimates raised Following post-referendum sterling weakness, estimates for UK inflation were increased from 1.6% to 2.3% for 2017E and from 2.0% to 2.5% for 2018E.    This compares to 2.4% and 2.8% for 2017E and 2018E respectively for UK swap breakeven rates. Rising interest rate environment With higher inflation expectations there is upward pressure on Bank Rates after a protracted “lower for longer” regime. Spending focus: infrastructure and innovation   The government spending plans shows clearly defined cous – with budget to increase infrastructu...

Trump looks set to become next US President Both pollsters and bookies called this totally wrong Asymmetric downside risk means near-term mark down of risk assets Voting results Trump swept to victory with 42 of 50 states declared, Trump leads Clinton 244 electoral votes to 215, with 26 to win, collecting 48.2% of the vote vs Clinton 47.1% (as at 0630 GMT today). The result with 46 of 50 states declared gives a Trump win of 278 electoral votes to 218, with 48.0% of the Vote vs Clinton 47.3% (as at Trump acceptance speech). Impact EQUITIES: expect US equities (NYSEARCA:SPX; LON:CSPX) and global equities (NYSEARCA:ACWI; LON:SSAC) to be volatile, with emerging markets (NYSEARCA:EEM; LON:IEEM) to be negatively impacted, particularly Mexico (NYSEARCA:EWW; LON:CMXC). From a sector perspective expect a positive reaction for financials (NYSEARCA:XLF; LON:SXLF), healthcare (NYSEARCA:XLV; LON:SXLV) and US infrastructure/utilities (NYSEARCA:XLU; LON:SXLU). BONDS: expect ...

Following the Brexit Referendum a private legal challenge was mounted against the Government. The challengers argued that Parliamentary approval (rather than prerogative power) was needed before Article 50 was triggered. A High Court ruling yesterday agreed with the Challengers, throwing the Brexit timetable and the viability of the current Cabinet into doubt. Who’s right? Given Referendums are only advisory in nature, and sovereignty rests with Parliament alone, the case had merit. And yesterday’s ruling in the High Court, the three ruling Judges agreed. The challengers maintain they are not contesting the referendum results, they just want legal process to be upheld.  Others suspect the campaign is partisan, but even if so, the case still deserves to be heard. Parliamentary approval was required on the way in to Europe.  It should be required on the way out. Rather than backing the down, the Government is taking the ruling to the Supreme Cou...

October saw a sharp one month loss for global sovereigns owing to inflation fears, raised interest rate expectations and declining Central Bank appetite for QE. In the US, prospects of a December Fed Rate hike saw 10 year yields clime 30bp on month and 76bp from summer lows to 1.26%, whilst stronger growth numbers raised inflation expectations and positive performance for TIPS. The USD performance for inflation-linked treasuries was -0.33% (LSE:ITPS), compared to for -1.32% (LON:IBTM) for conventional treasuries. In the EU, fears over the ECB’s commitment to QE contributed to the sell off.  The EUR performance for inflation-linked Euro government bonds (LSE:IBCI) was -1.78%, compared to for -2.14% for conventional Euro government bonds (LSE:IEGA). In the UK, the inflationary potential from Brexit, and vanishing expectations of any further BoE rate cuts on stronger economic growth led to a gilts sell off.  The GBP performance for inflation-linked gilts (LSE:INXG) was -0.6...

Inflation The Bank of England has raised its 2017 inflation estimate to 2.7%, from the current rate of 1%.  The Bank does not expect inflation to return to its 2% target until 2020. The rise in inflation expectations was explained by the decline in the pound since the EU referendum, which is driving up prices of imported goods . Fig 1. Projections for UK CPI based on market interest rate expectations Source: http://www.bankofengland.co.uk/publications/Pages/inflationreport/2016/nov.aspx Growth The economic growth rate forecast was also raised from 0.8% to 1.4% for 2017, whilst expectations were cut for 2018 from 1.8% to 1.5%, signalling that the Brexit impact will be felt later than originally expected. Further interest rates considered in August have been clearly ruled out. Fig 2. Projections for UK GDP based on market interest rate expectations Source: http://www.bankofengland.co.uk/publications/Pages/inflationreport/2016/nov.aspx NOTICES: I/we have no posit...

In Emerging Markets, when a new political regime comes to power by fair means or foul, they are often wise enough to keep the incumbent finance minister and central bank chief in place to ensure stable access to capital markets and to maintain international investor confidence.  The hardcore Brexiteers in the new cabinet got rid of the incumbent Chancellor and seemed to line up their sights on Britains’ suave Central Bank chief too.   While the UK is not an emerging market, after a shock as big as Brexit, the same rationale applies:  In a post-Brexit world, we need more, not less, certainty.  Thankfully that Carney held is head and non-resigned. NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.  I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. This article has been written for a US and UK audience.  Tickers are s...

Private clients and families wanting wealth advice, typically want holistic wealth advice. That's why it's worth remembering that investment capital is only one form of capital. Client fact finding should go well beyond understanding an investment portfolio, to account for other forms of capital - what it is and how it's structured. What are the other key forms of client capital to consider: Land: the oldest capital of all, since "they just don't make it anymore" - how is it held, how is it managed. In the UK agricultural yields nose-dived when the US prairies got going and crisis-related spikes aside, have never fully recovered. But "green gold" remains a resilient, and tax-efficient, store of value, and a source of collateral where productive. Property: principal, residential, and commercial property all require attention and management. Providing a store of value, an income yield and a source of collateral, it's no wonder that br...

UK commentators are looking for data points that vindicate the Referendum result one way or the other Sterling’s slide and the FTSE 100 Index level together or in isolation are not the best indicators for a Brexit fear gauge The potential inflationary impact of a ‘hard Brexit’ has caused UK breakeven rates to spike, creating a real challenge for the Bank of England Give me a sign Just as high priests in Roman times, after slaughtering their offering, examined its entrails to gauge the Gods’ favour,  so too have UK commentators been searching for any statistical insight or market data point to declare whether the shock Brexit result is likely to lead to economic success or failure. The data point phoney war The data that has come out since the EU Referendum on 23 rd June 2016 is meaningless as we still don’t know what Brexit looks like.  It’s been a phoney war for headlines, as stunned commentators search for a gauge to measure policymakers by. ...

BlackRock announced today that is cutting its fees on its iShares Core (US) range.  Investors can gain broad market exposures for 4-14bp.  This compares to 7-25bp for the iShares Core (UK) range. A diversified multi-asset 70/30 ETF portfolio will cost US investors can 8bp (that’s 8 cents per $100), compared to 14bp for a similar strategy for UK investors. Might the UK follow suit? We’ll see. Big dreams The cuddly  caption announcing the move says “Smaller Fees means Bigger Dreams”, which is warm-hearted.  But it’s also sort of fair.  Today’s retail investor has more access to breadth and depth of international markets than our parents ever dreamed of (if they ever dreamed of that sort of thing). What does this mean, apart from being cheaper? Well firstly, Moore’s law applies to ETF pricing & capacity as much as it does to semiconductors.  That’s not  new or surprising.  But the sustained deflationary pressure on fund fees is ...

Confidence that UK equities having "made up lost ground" post-Brexit is misplaced. The largest UK companies that make up the bulk of the FTSE 100 and the MSCI UK Index have high exposure to global earnings. Apparent "strength" in the largest UK equities is just a translation effect of that revenue exposure. So the apparent uptick in UK equities offers no real comfort for global USD-based investors. For GBP-denominated ETFs tracking MSCI UK Equity (e.g. LSE:CSUK) performance is +3.7% since the EU Referendum Day 23rd June 2016 before votes were counted. Over the same period, the USD version of the same ETF (e.g. NYSEARCA:EWU) performance is -9.3% while sterling has weakened -12.4% (FXB). Performance of MSCI UK (LSE:CSUK) in GBP since EU Referendum Performance of MSCI UK (EWU) in USD since EU Referendum Chart Source: Google Finance

Trading in UK property funds totalling £9bn AUM has been suspended, locking investors into an asset class exposure they may no longer wish to have. This is a stark reminder that the liquidity of any fund is only as good as its underlying holdings Investors using UK property ETFs are unaffected owing to the more liquid nature of the structure and of the underlying Post-Brexit fears around commercial property values has led to managers of three UK property funds locking investors in.  They fear a potential rush of investors to sell units following the Brexit result in the EU Referendum.  Decisions to suspend will typically reviewed every 28 days.  The funds affected are those managed by Standard Life, Aviva and M&G, totalling some £9bn of assets (see table). While the justification given – to “protect the interests of all investors in the fund” – is fair and reasonable, some investors may not be too happy to be locked in for potentially quite a s...

The average all-in cost of a managed portfolio is approximately 1.82%p.a. A 1.25% fee reduction saves £1m in fees for £1m invested over 30 years Advisers offering portfolios of Exchange Traded Funds can help reduce cost of investing for Trustees Trustees could reduce investment costs by up to £1m on a £1m investment over 30 years by using low-cost “Exchange Traded Funds” within portfolios instead of relying on active management. Focus on fees Traditional wealth managers’ fees average 1.82% each year to cover costs of fund research and stock selection, according to some reports [1] . However a broad body of investment research [2]  suggests that the main driver of portfolio risk and return is not which stocks to choose, but the mix of assets that make up the overall portfolio. By using low-cost Exchange Traded Funds that track major asset classes, fees can be saved on the selection of funds and shares, to focus on the mix of assets instead. Exchange Traded Funds ...