McLaren Market Insights January 2023

McLaren Insights

Investors should expect further volatility in the markets in 2023, experts suggest.

Economies around the world are facing recession due to factors including high inflation and rising interest rates. The International Monetary Fund’s Kristalina Georgieva predicts that a third of the global economy will be in recession this year.

 The World Bank also has a similar outlook, as it cut its global growth forecast from 3% to 1.7% after risks identified six months ago materialised. The organisation warned that fresh setbacks could lead to the second global recession in three years.

As an investor, remember that volatility in the markets is normal. Take a long-term view of your portfolio’s performance and focus on your overall goals rather than short-term market movements.

Here are some of the factors that affected markets in January 2023.

 

UK Financial News

There was a positive sign that the UK could avoid the long recession that some experts have predicted – the economy grew by 0.1% in November.

The UK inflation rate also dipped slightly to 10.5% in the 12 months to December. It suggests that inflation is starting to ease, but it’s still far higher than the Bank of England’s (BoE) target of 2%. However, the BoE’s chief economist Huw Pill warned that the UK could face persistent challenges if domestically generated inflation gained momentum. For example, if firms try to maintain real profit margins, it could prolong the high inflation environment.

High energy prices in particular continue to be a challenge for both households and businesses. Chancellor Jeremy Hunt will slash the current energy support scheme for businesses in March. He told business leaders that the current scheme is “unsustainably expensive”. Trade body MakeUK, which represents around 20,000 manufacturers, criticised the news. It warned that two-thirds of businesses expect to cut production or jobs as a result of energy prices.

The UK government’s borrowing reached a record high in December, which highlights the cost of the energy support scheme. The government borrowed £27.4 billion, the highest amount recorded since records began in 1993. The high figure was linked to the cost of energy and interest rates rising. The figure was £9.8 billion more than the Office for Budget Responsibility forecast, potentially leaving little room for Hunt to cut taxes in the upcoming spring Budget. 

According to the Office for National Statistics (ONS), industrial action also affected firms, with a quarter of businesses said they were unable to obtain the necessary goods for their operations during the month. The ONS data suggests that some businesses plan to make cuts to their staff in the next three months. 5% say they could make redundancies, while two-thirds plan to take action to cut staff costs. Yet, the figures also show that a third of businesses are experiencing a shortage of workers.

Readings from the S&P Global Purchasing Managers’ Index (PMI) indicate that sectors are struggling. A reading below 50 indicates contraction.

  • The manufacturing sector ended 2022 in a downturn, with a reading of 45.3. It’s the fifth consecutive month of decline.

  • A fall in new orders affected the service sector, but only marginally, with a reading of 49.4.

The ONS has warned that some households could face a significant rise in their outgoings. In 2023, 1.4 million fixed-rate mortgage deals will end, and many of them have an interest rate below 2%. As interest rates climbed throughout 2022, this means homeowners could face a much larger mortgage bill than they expect when their current deal ends.

Figures from the BoE also show that consumers are borrowing more to cope with the rising cost of living. £1.5 billion was borrowed in November. Most of this, around £1.2 billion, was on credit cards and was the highest figure recorded since 2004.

 

European Financial News

Inflation in Europe could be stabilising. In Germany, the figure for the 12 months to December 2022 fell to 8.6% from 10% a month earlier. However, food prices (20.7%) and energy costs (24.4%) are still much higher than a year ago.

The PMI data suggests the construction sector in the eurozone is suffering a “sustained contraction” after the reading fell to 42.6. All three of the largest economies the survey covers in the eurozone – Germany, France, and Italy – suffered a drop.

Total output is still in the contraction territory, but it is easing with a reading of 49.3, and the service sector moved back into growth with a reading of 50.2.

While still challenging, the pressure easing is reflected in a survey from the Ifo Institute. It found that German business morale is up as the economic outlook improves.

Unemployment figures from the eurozone also indicate that businesses are feeling confident about their prospects. Eurostat reported that unemployment remained at a record low of 6.5% in November.

 

US Financial News

There are positive signs for the US economy – inflation fell and the number of jobs increased. In the 12 months to December 2022, US inflation fell to 6.5%. It indicates that the cost of living pressures are starting to ease. The US job market ended 2022 on a high. The Department of Labor reported that 223,000 jobs were added to the economy at the end of the year. Unemployment also fell to 3.5%, taking it to its pre-pandemic low. Yet, some businesses are still struggling. The PMI for the factory sector suggests it suffered its fastest rate of decline since May 2020, with a reading of 46.2.

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McLaren Market Insights December 2022

McLaren Portfolios

December returns were mixed but overall, the marketplace felt it was having a bear rally towards year end. As fund managers wound up for the year end and contemplated the prospects for 2023 many now have the outlook that the second half of the year will be much more settled once inflation is calmed, and positive gains will be possible across most sectors.

 

The key highlights for McLaren portfolios were,

  • The McLaren portfolios all made a strong recovery over the last six months

  • The positioning in healthcare equity continued to deliver positive returns

  • Asian and European equity assets in general saw some rebound

  • Short-dated bond funds avoided most of the sell-off seen in the bond market and look well-placed to have a good year ahead

  • Infrastructure assets which were affected by the big sell-off in Gilt markets but partially recovered some of the losses made

Whilst it has been a challenge to make and keep any gains for investors in 2022 it has been reassuring that the strategy and diversification has continued to dampen the worst of the market sell-off.

 

Global Financial News

Developed markets had another mixed month reacting to political and economic news flow.

  • The market anticipated a slowdown in the rate of interest rates hikes from the US Federal Reserve as data started to point more to a pull back of inflation and an increasing concern of recession hitting the US economy in 2023 pervaded. The US Dollar weakened slightly on the news as well after having a period of strengthening. Capital markets started to factor in a lower peak in Fed rates and bonds priced higher as a result.

  • The continued war in Ukraine and the pressure on commodities continued however a milder winter in Europe, so far, together with more constrained demand from China, has seen oil prices fall back from $100 to $80 per barrel. Continued high levels of European gas storage aided by increased global production volume, has eased fears of a deep recession, however the doubling down of Russia’s military offensive meant that a resolution to the war felt less likely.

  • European markets were much less certain despite the huge inroads in securing gas supply, the build out of LNG (Liquified Natural Gas) infrastructure, and EU cohesion, as this was offset by slowing economic activity, labour shortages and inflationary pressures starting to factor into consumer activity. The logjam of up to 51 LNG container ships awaiting to unload was not sufficient to ease the financial pain of consumers being hit by higher food and fuel prices.

 

Domestic News

A change in the UK Prime Minister, the third this year helped to calm market nervousness and the FTSE100 rebounded to make a small gain over the month. However, the damage was done especially in the Gilt market which sold off aggressively and caused a chain reaction of selling from pension funds caught up in hedging losses. Aside of the bond market the focus continued with the cost of living and inflation, with may in the UK suffering economically from the fast rise in prices, especially housing costs, and a rising level of industrial action is adding to the sense of a repeat of the 1978/9 Winter of Discontent.

 

Looking Forward – Where to for 2023

Our views of 2023 are that the dilemma of inflation versus recession will continue, and the likelihood of avoiding a global recession is shrinking by the day. Having put up rates aggressively in 2022 the US Fed and other central banks may well be faced with prospect of dropping rates swiftly in 2023.  

Inflation is less likely to fall back to pre-Covid levels, with higher energy, mortgage, and commodity prices and the re-setting of labour costs keeping inflation higher. However, the advent of spring and the slow recovery of China, will likely see a falling of gas prices and a further pull back in inflation.

The race to secure non-Russian energy supplies will be a major issue around the world and investors can expect to see wider use of LNG and inevitably coal for a few more years until renewables and efficiency can be ramped up further. The race is on to build more alternative energy generation, distribution, and storage globally as the impact of the war in Ukraine has spread to all areas around the globe. We expect to see greater opportunities for energy related investments as governments strive to avoid another expensive winter, and to have more resilient networks.

Unlike western economies many parts of the world are still struggling to get out of the impacts of Covid, notably China with its zero-tolerance policy and poor vaccination levels, however this looks likely to be phased out by next summer and should mean that economic activity should ramp up again. A better functioning China should mean that on aggregate there is a higher level of global economic activity. Chinese shares, which are already at low valuations could well see a recovery and drive the region higher.

Outside US large company growth and Indian equity markets share valuations look cheap and whilst may take another step down, the medium-term outlook for strong companies looks benign. If employment can remain high and financial institutions are prepared then it could be a mild downturn, but the risks of an over-reaction remain, especially if the housing and construction sectors are badly disrupted. This looks to be a good market for good fund managers who can invest into strong companies with resilient revenues. Resilient businesses will be as important as strong macro themes such as healthcare which we continue to like. The backlog and added work due to Covid will take many years to overcome, which with the aging of populations and the increasing demand for healthcare will mean this sector has a good tailwind behind it.

 

And finally,

There was no ‘pigs in blanket’ shortage this festive season, further proof that supply chains are healing.

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McLaren Market Insights November 2022

OUR REVIEW OF KEY EVENTS DURING THE LAST MONTH

21/11/2022

McLaren Portfolios

November was a better month for McLaren portfolios as all strategies delivered a positive return spurred on by a Rishi Sunak relief rally and a calming of the interest rate outlook. The key highlights are:

  • The positioning in healthcare equity continued to deliver positive returns.

  • Equity assets in general saw some rebound from poorer returns earlier this year.

  • Short-dated bond funds avoided most of the sell off seen in the bond market.

  • Infrastructure assets which had been doing well were hit by the big sell off in Gilt markets but have already started to recover now markets have calmed down.

Whilst it has been a challenge to make and keep any positive returns this year it has been reassuring that the strategy and diversification has meant that we are performing resiliently.

Global Financial News

Developed markets had a rather mixed but positive month, reacting to mainly economic news and data.

  • The anticipated fall in US inflation data led to some relief but the Federal Reserve will want to rely on a trend of data to be confident it is curtailing inflation. Whilst markets rebounded during the beginning of November this does seem somewhat premature. Bond markets began to factor in a slowing of interest rate hikes and yields pulled back.

  • The continued war in Ukraine and the pressure on key commodity supplies remained especially with gas. Despite this the EU has successfully been buying up marginal supply at elevated prices. A moderate season so far has meant the EU has been able to ramp up storage reserves to high levels, access a wider source of supply, and to take a range of demand management actions, which has meant a log jam in unloading LNG (Liquidified Natural Gas) at European ports is now materialising. All of these has increased the probability for Europe to survive a cold winter without any significant Russian gas supply.

  • The continuing woes in Asia, especially China, where the zero-Covid tolerance program is curtailing economic recovery has meant that Asian equity markets have remained weak as a slower China, commodity, food, and fuel inflation, and unsettling politics continued to weigh down on this region.

  • Major western markets saw a bit of a relief rally and some recovery of the poorer returns experienced over the last year, with European markets leading the charge. This may continue if the US Fed signals a slowing in the pace of interest rate slows, but this is likely to run out of momentum and a re-focus on economic slowdown, interest rates, and supply shortages will pervade.

  • Housing markets, lower quality loans and leveraged assets faltered as the increasing cost of capital will cause these sectors to come under increased stress. Housing in US and UK markets has already seen a some pull back in deal volume, as well as increased delinquency and foreclosure rates.

Domestic News

  • The FTSE100 and especially the UK bond market had a tumultuous time as the focus on a change in government and then the shock of a poorly crafted and unfunded budget unsettled the market and led to a big selloff in Gilts. This weakened the pound and long-term Gilt yields rose to where the Bank of England had to intervene.

  • The FTSE100 continued to make a positive return over the month despite political uncertainties held up by energy, banks, and foreign earnings. Company reporting has been in line with expectations and whilst profits reduction has appeared many companies are still in good shape.

  • The swift and subsequent change of government, the third this year, has started to settle markets down as a more measured economic and budgetary outlook is being formulated, and a chaste and more cohesive edifice is presented to the public.

Market Data

[Image 1] - Market movements of various global stock indices.

[Image 2] - Gold and Currency prices vs Pounds Sterling

Looking Forward

As before we think the rest of the year will continue to be dominated by two key factors - Gas and inflation.

  1.  Gas – as we have discussed the race is on for Europe to avoid a deep recession and wean itself off Russian gas. Outside a cold winter it looks like the EU has done enough to survive without a major shutdown of industrial production, avoiding an even deeper recession.

  2. Inflation/interest rates – the downturn in recent US inflation data has given markets some relief, however the US Fed is unlikely to pause its interest rate hiking phase until real evidence of an economic slowdown and the curtailing of inflation can be demonstrated. US Federal Reserve policy is likely to dominate global monetary policy for some while as a weakened Europe and China/Asia overcome regional issues and local inflation. The impact on consumers and producers will continued to be felt, and the likelihood of a recession in 2023 looks feasible.

And finally

Whilst market pricing has been volatile and poor, the underlying assets held within McLaren portfolios are much more realistically priced and dividends can be maintained for now. Bond assets have also seen yields improve substantially, and whilst we expect interest rates to go up further, we believe that inherent returns from bonds will continue to improve.

We believe 2023 is the year that the headwinds of Covid lockdowns, energy security, and interest rates will be allayed, and financial assets will resume on the long road to recovery out of any recession.

If you would like help with your investments, pensions, insurance, or financial planning please complete the form below and one of our financial advisers will be in touch.

Remembering Charlie Cullen

We mourn the sudden and tragic passing of Charlie Cullen.

Charlie joined us in 2018 and left in 2020 and immersed himself in the firm and rapidly became a key member of our administration team. His industry knowledge was excellent but his technical skills with systems was unrivalled and he made a genuine difference to our core processes here at McLaren.

His true love in life was his music and in the past had been an eminent member of the international DJ community within which he was well known and highly respected. He wrote many songs.

We will all remember him fondly for his boundless energy, tremendous character and infectious sense of humour. He is sorely missed and our thoughts are with his Mother, family and girlfriend at this tragic time.

McLaren Market Insights July 2022

OUR REVIEW OF KEY EVENTS DURING THE LAST MONTH

31/07/2022

Global Financial News

Developed markets largely had a positive month and clawed back some losses made earlier this year as investors digested the impact of the war in Ukraine, the rise in inflation and the monetary response, amongst many other things. The resumption of Ukrainian grain exports was a relief for many poorer nations in what has become a war of attrition. This together with increasing sanctions, the militarisation of Ukrainian forces, and a huge drop in gas imports to Europe, is putting a lot of pressure on Russia and the sustainability of the war. The second-round effects of the loss of Ukrainian and Russian exports are still filtering through as countries and companies scramble to find alternative sources. This has been a primary source of the inflation surge seen since February but second-round effects such as increased logistics and labour costs are still filtering through to consumers. Unsurprisingly perhaps inflation has reached double digits and Central Banks have responded with rate hikes, however, future inflation pricing continues to project the level of inflation to curtail to more reasonable levels.

Asian and Emerging Markets had a more mixed month with the Japanese Nikkei index performing well, whereas the Hang Seng pulled back. The overcoming of Covid, Chinese geo-political tensions, global inflation, the strength of the US Dollar and increased competition for food and fuel weighed in, as a slowdown in global consumption and increased costs is a negative drag for these regions.

Domestic News

The FTSE100 had a good month again due to its defensive nature, a bias toward Oil & Gas sectors, and stalwart banks. The political machinations of the Tory party have somewhat overshadowed the real concerns around the increased cost of living, the lack of available labour, increasing industrial unrest, and the increasing impacts of Brexit that are coming to light. The housing market despite increasing costs continued to perform strongly for most of the country, but this remains a constrained market. Consumption patterns however have started to change with a greater emphasis on services, evidenced by queues at airports and ports, but the effect of a big rise in the cost of living will be an increasing focus if consumers start to defer spending.

The lack of available skilled labour is another factor as companies struggle to fill vacancies and compete for existing labour. This is impacting throughout the economy from fruit pickers to brain surgeons and is impeding many businesses and public service's ability to recover to pre-Covid levels.

Market Data

Looking Forward

We think the rest of the year will be dominated by two key factors - Gas and inflation.

1.     Gas – as we have discussed before the race is on for Europe to avoid a deep recession and wean itself off Russian gas. Russian imports are currently down to 33% normal volumes, with German storage now at the 65% full level (the target is 95% full by 1st Nov). The ramp-up of finding alternative gas supplies, building infrastructure, and political management of Russian gas propaganda has been impressive, but the time horizon for the next major dialling down of Russian gas is probably next year, and therefore how cold this winter is will be a key focus. Energy costs are therefore likely to remain elevated and spot prices volatile.

2.     Inflation – will be a major global focus whilst a stabilisation and pull back in headline rates is anticipated, the medium-term level of inflation and how quickly this is arrived at is a key concern. The impact on consumers and producers will continue to be felt and could lead to a potential global slowdown, industrial action, and political decisions on benefits and subsidies, at a time when the post-Covid costs are a heavy burden.

And finally, despite the shortage of microchips, the latest UK electric cars sales data for 2021 saw a 66% growth in numbers with 175,000 new vehicles, and 2022 promises to be an even better year. Great for reducing the UK’s oil dependence, jobs, and the environment.