https://vimeo.com/517108360 

Kel Nwanuforo from Asset Intelligence gives us an update on developments in Japan this month. 

 If you would like to receive more information or have any questions, please get in touch. Please note, these are the views of Asset Intelligence. For advice on your personal circumstances, please speak to your Financial Adviser in the first instance and they will recommend the right solution for you.  

If you would like to receive more information or have any questions, please  get in touch. Please note, these are the views of Asset Intelligence. For advice on your personal circumstances, please speak to your Financial Adviser in the first instance and they will recommend the right solution for you.

Our Quarterly Macro update video from Investment Consultant, Kel Nwanuforo. If you would like to receive more information or have any questions, please  get in touch. Please note, these are the views of Asset Intelligence. For advice on your personal circumstances, please speak to your Financial Adviser in the first instance and they will recommend the right solution for you.

Why we remain positive on the outlook for technology firms at Asset Intelligence. Tech stocks have had a great run in 2020 as the Covid-19 crisis accelerated the spread of digital and online activity. After the historic stock market slump in March, the leading tech companies (that’s Facebook, Apple, Microsoft, Amazon, and Google/Alphabet, or the ‘FAMAGs) drove the fastest ever recovery¹ from a bear market. The fact that share prices in the sector have appeared to defy gravity of late can put investors on edge. 

Those of us with long memories will never forget how the dot-com bubble burst, causing the tech-heavy Nasdaq benchmark to slump around 78% between March 2000 and October 2002². And some warning lights are flashing. In August, Apple became the first US company to hit a $2 trillion stock market valuation³, just two years after passing the $1 trillion milestone. And tech companies now account for a higher proportion of the total market value of the S&P 500 since…1999. This gives the sector unprecedented influence over the overall equity market, regardless of which direction it is heading. However, when you look at the fundamentals, there are reasons why the sector’s valuation premium might be justified and why it could continue to prosper. 

Firstly, it’s important to note that the situation today is far removed from where things stood during the height of the dot-com bubble. Back then, a significant proportion of listed technology firms were hastily conceived start-ups with minimal profits and often even scanter business plans. Remember pets.com? Exactly. 

Today’s tech companies frequently count among some of the most cash-rich companies on the market. Often these profits have come courtesy of dominant market positions, astute business plans and brands held in extremely high regard by consumers. Most of us haven’t searched the internet in years… we Google things. Aside from the tech titans, a deep bench of up-and-coming names, often operating in niche areas, are also experiencing considerable success. 

But is this tech boom sustainable? As any investor would expect, one driver for considerable declines in share prices would be major falls in earnings. Yet there is little sign that this will occur anytime soon in the tech sector, with a number of these firms primed for a world that is increasingly moving online. Tech companies are having a disruptive impact in fields as diverse as retail, healthcare, transport, finance and the media. Almost every aspect of most people’s day-to-day lives has been changed technological innovations in the past twenty years or so. And with cloud computing, artificial intelligence, 5G, robotics, driverless transport, augmented reality and more all still in their infancy, there are plenty more advances to come. 

Of course, none of that means we should throw investment fundamentals out of the window. In addition to the intrinsic product and competitive strength that firms such as Apple, Microsoft and Google owner Alphabet boast, they appear to have economic conditions and market dynamics on their side. Historically, periods of market exuberance and high valuations have often come to an end when central banks remove support from the economy (the Federal Reserve in particular). Given where the global economy stands today, the chances of this happening anytime soon are miniscule. In fact, central banks have been falling over themselves in recent months to ease policy further, expanding Quantitative Easing stimulus packages and moving ever closer to negative interest rates.

 Indeed, the Fed’s recent adjustment to its inflation-targeting approach⁴ – it will target an "average" of 2% inflation, rather than making 2% a fixed goal – implies that it will be able hold interest rates lower for longer to stimulate US growth and employment. A world of ultra-low interest rates would also appear favourable for technology companies. With their relatively low earnings yields (the inverse of the P/E ratio) and promise of even greater future profits and dividends, growth stocks trading at higher valuations effectively count as ‘long duration’ assets, which perform well when interest rates are low. In a low-growth environment, companies with the ability to generate their own revenues and business expansion would appear to have the competitive edge. 

And there’s another important dynamic to consider. With returns on cash and bonds so low, property facing long-term structural challenges and value stocks still struggling for the most part, it is unsurprising that many investors are looking at growth stocks – with the tech sector leading the charge – and wondering ‘what is the alternative’? Are there any potential clouds on the horizon? US government policy after the elections could be one. Some in the Democratic Party have begun to express concern about the dominance of the top tech firms and could seek to pursue more restrictive regulation or even antitrust suits should they end up winning control of the US Senate in January. Still, with some notable exceptions, politicians are seldom so radical in government as they are in opposition, and with the election result so tight, the chances of significant action are relatively slim. 

Another argument is that the economic damage wrought by the Covid-19 pandemic will restrict firms’ capacity to invest in improving their technological capabilities. While this may be true for the very worst-hit firms in the short term, most CEOs and company boards are acutely aware of how fast industries and consumer habits are changing, and recognise the need to future-proof their business model. As such, shrewd management teams will likely recognise the importance of investing in technology to remain competitive, even when under financial stress. All in all, there seems to be much more going for technology stocks than there is against them. Arguably investors had the right idea back at the turn of the millennium – they just called it twenty years too early. 

What’s happening now? 

If there’s one thing Donald Trump knows how to deliver, it’s drama. And he certainly didn’t disappoint with his unprecedented statement this morning, amid an election result still very much in the process of being decided, that he has “already won” and that his opponents are guilty of perpetrating a “fraud on the American public”. This was of course a statement right out of the President’s typical playbook. Yet there is no evidence of fraud and in fact it is not yet clear that either Donald Trump or challenger Joe Biden has won the election. Unfortunately we may have to wait days for all of the votes to be counted in a number of key battleground states which will prove vital to the final outcome – including in Wisconsin, Michigan and Pennsylvania, all of which served to sink Hillary Clinton’s chances four years ago. Donald Trump has even raised the prospect that the election may have to be decided in the Supreme Court, invoking the unhappy spectre of the deeply controversial outcome in the 2000 contest between Al Gore and George W Bush. 

How has the election affected markets? 

Happily, the markets do not appear to be disturbed by what has unfolded overnight. European indices appear calm and at the time of writing, futures contracts for the S&P 500 suggest that the US market could even open slightly higher later today. However, investors should be prepared for the possibility of some turbulence should the uncertainty prove protracted. Whatever happens in the end, one thing is clear: the polls and the pundits have been found wanting yet again. Much commentary in the run-up to the election suggested a relatively easy path to victory for Joe Biden. That certainly has not been the case and there is no doubt that, yet again, Donald Trump has outperformed expectations. But whether that will be enough to get him over the line this time remains to be seen. 

Should we do anything differently? 

We will of course continue to monitor the situation closely and will be in touch to comment on further developments as and when we consider it necessary. 

Please note, these are the views of Asset Intelligence Research. For advice on your personal circumstances, please speak to your Financial Adviser in the first instance and they will recommend the right solution for you.   

Our Quarterly Macro update video from Investment Consultant, Kel Nwanuforo. If you would like to receive more information or have any questions, please  get in touch. Please note, these are the views of Asset Intelligence. For advice on your personal circumstances, please speak to your Financial Adviser in the first instance and they will recommend the right solution for you.

For Professional Financial Advisers only  Shinzo Abe has announced that he will resign as Prime Minister of Japan due to ill health. In this piece we look at why he has been a significant figure for investors as well as consider the possible implications of the impending change in leadership.  

Mr Abe was elected Prime Minister of Japan on a wave of optimism back in December 2012. His landslide victory put an end to a turbulent period in Japanese politics whereby the country had found itself getting used to a new leader every autumn for six years in a row. Abe-san promised reverence for traditional Japanese culture; more assertive foreign and defence policy and of most interest to investors, a revolution in economic policy quickly dubbed ‘Abenomics’ by the press. 

Abenomics involved the pursuit of three distinct ‘arrows’ of change: more spending from government; an enormous increase in central bank ‘money printing’; and reforms to policies and attitudes at both the corporate and national levels. The latter has involved measures such as improving firms’ treatment of shareholders through new corporate governance codes; encouraging dividends and share buybacks; increasing temporary immigration; signing ambitious trade deals with both the EU and Pacific partners; and encouraging more women into the workforce. Many of these measures have indeed borne fruit over the past few years. 

Abenomics also involved some bold targets and gestures. Chief among these was a promise to end the long-running state of stagnation and deflation in Japan and achieve 2% annual inflation on a sustainable basis. Mr Abe even ventured to the New York Stock Exchange early in his term to urge foreign investors to “Buy my Abenomics!” Also memorable was the public setting of a target by the Economic Minister back in February 2013 that the stock market should reach a certain level by the end of March of the same year. In the event, this goal was easily achieved. 

Though not everything came so easy. In particular, the pledge to generate consistent inflation has never quite come to pass, though both growth and employment have been healthier than before Mr Abe came to power in 2012. Although some of the initial excitement wore off – as is inevitable over a period as long as eight years – Abenomics was and remains a big deal for investors. The roaring US aside, Japan has been one of the top performing markets in recent years. Between Boxing Day 2012 when the current Abe administration took office and the end of August 2020, the Japanese TOPIX index returned 125% on a total return local currency basis compared with 75% from the MSCI All Countries World excluding USA Index. 

The good news for investors is that the broad thrust of Abenomics is likely to outlast its originator. The reforms to corporate behaviour have already bedded themselves into the established way of doing things. A tightening of economic policy is highly unlikely given the shock to the economy dealt by COVID-19, so both monetary and fiscal ‘arrows’ will remain set to maximum. Further, the outgoing PM has a strong base within his party and so any successor is likely to follow a similar course in any event. It is also worth noting that Mr Abe’s pick to head the Bank of Japan, investor favourite Haruhiko Kuroda, may remain in post for the time being. The next Prime Minister will be named on 14 September after the conclusion of an internal vote among Mr Abe’s conservative Liberal Democratic Party. He or she will in all likelihood serve at least until the next general election, which will take place by October 2021 at the latest. Continuity of easy and supportive policy would be welcome given the scale of the economic challenge currently facing Japan. As with almost all nations around the world, economic output has been badly hit by the coronavirus crisis. In the second quarter of 2020, aggregated sales for industry (excluding the finance and insurance sectors) fell by 18% when compared to the same period a year earlier. On the same basis aggregated profits were down by 47% – almost as a big a hit as the 53% annual decline recorded during the financial crisis. 

One thing is for sure: the next Prime Minister certainly has a big job ahead of them to get Japan’s economy back on track. When considering how to tackle their own challenges ahead, they could certainly do worse than to take inspiration from the ambitious programme put forth by Shinzo Abe eight years ago.   If you would like to discuss your financial situation, please speak to your financial adviser in the first instance.

Our Quarterly Macro update video from Investment Consultant, Kel Nwanuforo.   If you would like to receive more information or have any questions, please get in touch.   Please note, these are the views of Asset Intelligence. For advice on your personal circumstances, please speak to your Financial Adviser in the first instance and they will recommend the right solution for you.

Interest rates – not as simple as you might think… 

It may seem like a while ago but there was a time when the foundations of finance and economics were clear and straightforward. ‘Interest’ was a reward that you would get in  return for taking the risk of lending your money to a debtor or depositing your capital in a bank. Yet ever since the financial crisis hit back in 2008, it’s become apparent that things are not always so simple. We are starting to talk about negative interest rates, which some nations already have in place and there is speculation that the UK might be next. In more than three centuries of history, the Bank of England (BoE) has never seriously considered negative interest rates, at least not publicly. But with its benchmark policy rate currently at 0.1% and the BoE’s own forecasts¹ suggesting the UK could face its worst recession in 300 years², policymakers have admitted that this once unthinkable option is now under review. On 20 May, BoE Governor Andrew Bailey told the Treasury Committee that the Monetary Policy Committee (MPC) was “ looking very carefully” ³ at the impact of negative interest rates in other parts of the world, adding that it would be “ foolish” ⁴ to rule it out as a potential policy tool. Bailey and other members of the MPC have since stressed that they are reviewing all aspects of the policy toolkit and not anywhere near making a decision on negative rates. ⁵ However, the soft pivot in tone – Governor Bailey had previously said that negative rates were not being contemplated – has raised interest in the potential impact this move could have for investors. 

Why would a central bank impose negative rates? 

A negative interest rate policy (NIRP) effectively charges commercial banks to deposit reserves at the central bank. The aim of levying this penalty is to encourage banks to use their funds to lend to households and businesses instead, thus stimulating the economy. Negative rates on cash, which are likely to feed through into government bond yields too, also encourage savers to invest in riskier assets, thus providing additional capital to economic actors. Another objective may be to put downward pressure on the local currency to protect or stimulate exports, though few central banks would explicitly admit this. Though traditionally considered a last resort, both the European Central Bank and the Bank of Japan have adopted NIRPs in the last few years in order to support their challenged economies. Central banks in Switzerland, Denmark and Sweden have also held borrowing costs below zero over the last five years, though Sweden’s Riksbank brought its main repo rate back to zero at the end of 2019. ⁶ The BoE is now reviewing the experience of negative rates in these countries, with Bailey noting that there were “mixed reviews” over their effectiveness to date. 

How does it affect investors? 

The prospect of negative interest rates is a key driver for the local bond market. When rates are expected to fall, bond prices tend to rise (and yields fall). Bailey’s comments came the same day as the first ever sale of a three-year government bond (gilt) with a negative yield. ⁷ According to Tradeweb data, the value of UK gilts with negative yields at the end of May reached over £1 trillion, or around 45% of the total market⁸. Negative yields primarily affect fixed income investors who find themselves effectively paying to hold government debt. Historically low bond yields in recent years are one reason why income portfolios have tilted towards equity holdings that provide an alternative source of  income through dividends. ⁹ However, even negative yields don’t necessarily imply losses for a bond investor – 10-year German bunds returned nearly 6% in 2019¹⁰ despite carrying a negative yield for most of the year as their capital values continued to rise. Diversifying across the global market is another way of protecting against negative rates in the UK and other developed nations. However, investors should remember that any search for higher returns away from ‘risk-free’ sovereign bonds likely means accepting more risk in their portfolios. The outlook for the economic recovery and monetary policy remains highly uncertain, but it’s a good time for UK investors to gain a better understanding of how negative interest rates might affect their savings. Even in a negative-rate environment, maintaining a balanced and diversified portfolio will remain the best way to achieve investment goals. 

If you would like to discuss your financial situation, please speak to your financial adviser in the first instance. Past performance is not indicative of future results.