Monday Espresso Podcast - 14th February 2022

[00:00:00] Sheldon MacDonald: It's the 14th of February today, happy Valentine's day everybody.

[00:00:04] All eyes this week on Ukraine, the rising political tensions that we've seen, they're really coming to a head. We've got Raj joining us again. Raj, our resident expert on Europe.

[00:00:14] Raj, what are the implications of tensions in the Ukraine?

[00:00:18] Raj Manon: Yes, it certainly appears to be crunch time in the Ukraine and markets are watching closely.

[00:00:24] Now, any sanctions could then lead to gas prices rising, that could in turn lead to global energy prices rising, which will in turn lead to more inflation.

[00:00:36] That will continue to impact an already struggling consumer and effect consumption. That of course could mean lower growth ahead.

[00:00:46] Sheldon MacDonald: Yeah, so some pretty significant consequences potentially, if things really do get out of proportion.

[00:00:51] Of course, we had the ECB or certain members of the ECB anyway, last week, speaking about potentially more hawkish policy talking about winding down their asset purchase program as a precursor to raising rates in Europe.

[00:01:04] But Christine Lagarde the head of the ECB, still talking the party line saying, well, raising rates won't actually help on decreasing inflation, so some uncertainty there with policy in the ECB.

[00:01:16] Of course over in the US we had a surprisingly high inflation number last week, Nathan?

[00:01:22] Nathan Sweeney: Yes, we had higher inflation numbers coming out of the US last week.

[00:01:25] So what we saw is that inflation figures came in at 0.6% higher for the month of January. So that's prices increasing over the month by 0.6%.

[00:01:36] So what that meant is that the inflation figures for the year have come in at 7.5%. So the key question everybody's asking. What's driving that number? And the answer is food and fuel.

[00:01:50] So the cost of your food bills are rising, the cost of eating out is rising. But the question I have is, is there a correlation between climate change and food prices?

[00:02:01] More unpredictable weather patterns lead to more damage to crops? So perhaps food price inflation is not transitory?

[00:02:10] Sheldon MacDonald: Yes, and well, not transitory and certainly very high inflation and that's pushing bond prices weaker with the potential for rate hikes to come.

[00:02:17] Nathan Sweeney: Yeah, so actually, if we look at what's happening in markets generally last week, it was actually a good week for equities. So a lot of the equity markets were positive. The FTSE was up over 1.9%.

[00:02:29] EM and Asia markets were up over 1.5 as was Europe. It was the US which was the lag art, so US markets were down 1.8% for the week, and because of all this concern about inflation, that meant that bonds sold off pretty much across the board.

[00:02:45] Sheldon MacDonald: Yeah, bonds really starting to anticipate the potential for a 50 basis point rate hike in the US in March.

[00:02:52] All eyes this week will be on the minutes of last month's fed meeting, just to see if there's any clues there.

[00:02:59] As you mentioned, though, markets elsewhere were up and particularly the UK, perhaps benefiting from the concerns on the energy price.

[00:03:07] The UK, as we know, has a high proportion of energy stocks in the index, so that perhaps helping push markets up in the UK.

[00:03:14] In the meantime, though, obviously concerns here in the UK, if energy prices rise, it's all been in use in the last weeks in terms of rising heating costs. And that will play into rising interest rates here potentially aswell.

[00:03:27] What we've seen around the world though, is these different policies being enacted from the different central banks? So we've seen in the UK, we've already had a rate hike, the US we're waiting to see eminently, Europe, we mentioned earlier again, wait and see.

[00:03:41] But elsewhere we're seeing differential policies?

[00:03:43] Nathan Sweeney: Yes, I think that's quite an interesting point. If you think about what's happened previously is central banks have worked together to stimulate the economy to step in, provide support?

[00:03:53] But now we have central banks acting independently.

[00:03:56] So as you mentioned, the UK is raising rates. The US is talking about raising rates. Europe is talking down raising rates, and then we've got central banks in Japan, actually buying bonds last week, trying to get their bond prices down. And the bank of China actually intervening and trying to help the property market. So a different picture there.

[00:04:16] So it means that you have the potential for different regions to act independently, particularly their stock markets.

[00:04:24] Sheldon MacDonald: And of course that's where the benefits of active management can come into play.

[00:04:29] Now, just wrapping it up. How does this all play out for the portfolios that we manage?

[00:04:34] We are overweight in the UK. We are slightly underweight in the US so last week's moves, certainly played into our hands and we are also shorter on duration. So underweight exposure to interest rate moves. So again, that's helping performance for us relatively.

[00:04:50] For us we're sticking with those positions, not seeing anything at the moment that changes our views.

[00:04:56] Anyway, an exciting week ahead and we hope you'll listen again next week. Thank you.

[00:05:01] Nathan Sweeney: Thank you.