Monday Espresso Podcast 16th May 2022

[00:00:00] Sheldon MacDonald: It's the 16th of May today. Good morning, Nathan difficult week in markets last week, struggling early on, more or less globally, but at least we did see a decent rebound right towards the end of the week.

[00:00:11] Nathan Sweeney: Yeah. So, we did see strong moves on Friday and it actually pushed some of the equity markets into positive territory.

[00:00:17] Nathan Sweeney: So, we had positive returns in the UK, we had positive returns from Europe, actually US lags, but as mentioned, we did have that strong bounce. So, what was driving that? I think there's a couple of things really.

[00:00:28] Nathan Sweeney: Firstly, if we look at valuations, the market is definitely a lot cheaper because obviously markets have been falling but aside from that, corporate earnings have been very resilient.

[00:00:38] Nathan Sweeney: So, about 91% of companies in the US have reported their earnings and to date, we have 10% earnings growth. So that's pretty positive and you know, the market is looking for those positives at the moment.

[00:00:50] Sheldon MacDonald: Certainly, need some positives and we did see the inflation reading coming out of the US last week and some signs that inflation may just perhaps have peaked. That inflation number just slipping back a little.

[00:01:01] Nathan Sweeney: Yeah. So, the question here is, are we over the hump? Are we at peak inflation? So, if we look at that inflation data, you can see that a lot of the inflation has been driven by good prices rising.

[00:01:12] Nathan Sweeney: Think of oil, think of things like cars and that's starting to come down.

[00:01:16] Nathan Sweeney: So, I suppose the question from here is, do we continue to see that inflation trending down?

[00:01:20] Nathan Sweeney: And if that is the case, that'd be very positive for markets.

[00:01:23] Sheldon MacDonald: This week in the UK, we see April's inflation reading that though expected still to be rising, perhaps it could peak this month. This month though, will include the energy price cap jump. So probably going to take us to a figure of over 9% on the inflation front.

[00:01:39] Sheldon MacDonald: Now that's raising fears for economic growth, looking ahead, and that shifted the focus on the bond side, away from the inflation story and more onto the growth story and that saw long duration bonds actually gaining on the week, despite the fears of higher inflation.

[00:01:57] Sheldon MacDonald: We saw that in the US as well, focus more on the growth picture than the inflation side and so bonds in the US also doing okay.

[00:02:05] Sheldon MacDonald: On the other hand, in UK, as I mentioned, the inflation data, that might be a scary picture. What we'll also get this week is the unemployment data, that's due and we still expecting, or we still know that we are in a strong and jobs market, and that's perhaps the saving grace for the economy here in the UK, as well as in the US, indicating as Nathan said, companies are still in reasonable health.

[00:02:25] Sheldon MacDonald: Moving across to China. We haven't spoken about China for a couple of weeks. We have seen COVID based lockdowns, and those are starting now to impact the Chinese growth outlook.

[00:02:36] Sheldon MacDonald: We're seeing impact on pollution levels in China, really again just showing how restrictive some of these measures have been, certainly impacting the growth outlook for China, but as well, it's exacerbating some of the supply chain issues that never really went away.

[00:02:51] Sheldon MacDonald: Global supply chains still under pressure and that again will put pressure on inflation, keeping inflation slightly higher for slightly longer. Again, there's a central bank meeting in China this week and they, like other central banks, have to balance the worries about the slower economy versus inflation. And they also have a weaker currency to deal with.

[00:03:10] Sheldon MacDonald: Changing tack now, let's talk about ESG again, something that we haven't spoken about for a little while and BlackRock coming out with an announcement last week, Nathan.

[00:03:19] Nathan Sweeney: Yeah. So if you think of BlackRock, largest asset manager in the world, so they've got custody of a lot of assets, so they get to vote on, you know, various different shareholder resolutions and one of the things they came out last week and said was, they're actually probably not going to support a lot of the climate related resolutions because they believe that companies have gone too far in terms of what they want companies to achieve in a very short period of time and the whole point here is that we do need oil companies, etc, as we all can see from the recent volatility within oil.

[00:03:51] Nathan Sweeney: So, their whole approach is that we should be engaging with these companies, not excluding them. So, I think that that is, it's almost like a step backwards. It's a practical step, but it just highlights the need for continued work in this space.

[00:04:05] Sheldon MacDonald: Absolutely continued work. The debate in the ESG space, definitely ongoing.

[00:04:10] Sheldon MacDonald: We've seen a lot of measures, a lot of talk, a lot of discussion, in the industry around greenwashing and so on. How do we focus on ESG going forward? And this, perhaps as Nathan mentioned, just a signal that perhaps investors, perhaps the shareholder's going too far in their expectations, maybe now slack pushback against that, that maybe we need to take a more measured approach.

[00:04:32] Sheldon MacDonald: As Nathan mentioned, we can't do without oil just yet and so we do need to engage with the oil companies to figure out how to transition to a greener world. Anyway, that's it for this week. Thank you very much for listening and we'll speak to you again next week.

[00:04:46] Nathan Sweeney: Thank you.