Our regular readers will be familiar: markets use reported economic data as evidence of what has happened, a useful hard reference point but seen through the rear-view mirror. However, equity and bond prices habitually reflect what investors anticipate in the future, not what has already taken place (for the technically-minded, the price of an equity or bond is based on the prediction of future cash-flows attributable to the share or bond holder, discounted back to derive today’s net present value for the instrument after applying a risk-adjusted discount rate).
With that in mind, the US Manufacturing PMI for November was reported at 47.6, down from 50.4 in October and well below market estimates. It is the first monthly recording for the US in sub-50 recessionary territory since the big collapse in confidence in Lockdown 1 in the first quarter of 2020 when the index plummeted into the 30s. To be fair, the index value has been steadily declining from nearly the mid-60s a year ago; the difference this time was that crossing of the magic ‘50’ barrier. The US Non-Manufacturing Business Activity Index was still positive at 55.7, though it fell from 59.1. In Germany, the November figures for manufacturing and services were 46.7 and 46.4 respectively (the manufacturing number improved slightly from 45.1). Here in the UK, our PMIs recorded 46.2 in the manufacturing sector and 48.8 in services.
Earlier this year, when the Fed deployed its first interest rate rise of a half-point instead of the usual quarter-point, the financial headlines were hyperbolic in their reaction to ‘unprecedented’ policy aggression (unusual, certainly, but not in fact unprecedented). Half points were quickly superseded by three-quarter points (even the use of a full point at one sitting in Canada); and yet now markets are all a-twitter at the prospect of a resumption of half-point increments representing some major reversal in policy, some even referring to it as a ‘pivot’. It is no such thing: the Fed will still be employing quantitative tightening, merely with slightly less vim and vigour than in the past couple of months, but still twice as aggressively than at any point in the last three decades. It is all a matter of perspective and proportion!
The market’s interrogation of the chicken’s entrails, particularly regarding the Federal Reserve’s policy, has produced another effect: a weakening of the US dollar (If you Google ‘DXY’ you will find several websites which chart the fortunes of the dollar trade-weighted index against a basket of currencies including the pound, yen and euro). ‘DXY’ began the year at 96, the dollar subsequently appreciating by 18 percentage points to 114 at the end of September, since when it has retreated to 106 today. Despite a prolonged period of dollar strength going all the way back to 2008 (when the index was 72) and still being close to post-Global Financial Crisis highs, the dollar has plenty of supporters even if there is short-term weakness: the US is the world’s dominant economy at 25% of global GDP; its economic fortunes rely far less on international trade than any other major competitor; the country has very little reliance on others for energy; and the dollar remains the world’s most significant reserve currency, however much others including China and Russia have a long-term strategic aim to disintermediate it.
In sterling terms, on the other side of that trade and helped by market relief that the brief experiment with ‘Trussonomics’ and the brutal reaction to it are dead and buried, what a reversal of fortunes! If after the paroxysms of the post-Kwarteng ‘fiscal event’ and the predictions of our sinking to parity with the dollar, from a historic low of $1.07 on 27 September, sterling has recovered to $1.21 today, a rate last seen on August 12th (however, before we get too excited, in context it was $1.33 at the beginning of the year and reached a 2022 peak of $1.37 in January). For a nation which is a significant net-importer, that strengthening of sterling helps relieve some inflationary pressure on imported goods (on the other hand, it makes our exports more expensive and less competitive).
This year, most of the damage done to equities was due to a rating compression: investors were prepared to pay less for high-performing companies whose growth prospects were loaded further into the future (especially in sectors such as technology). Were it to happen, a deeper than expected recession would put pressure on companies’ earnings, dragging down the share prices of the more economically vulnerable.
Against this backdrop, as an investor it pays to have a diversified portfolio encompassing different asset classes, a variety of geographic exposures and not being wedded to a single investment style. And above all, to keep an open mind. Whether accurately attributed to Winston Churchill or John Maynard-Keynes, it matters little, the wisdom is enduring: “when the facts change, I change my mind. What do you do?”
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
The value of active minds – independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
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