Monday Espresso Podcast - 21st February 2022

[00:00:00] Sheldon MacDonald: Last week we saw weaker equity markets around most of the world, certainly developed markets, US, UK, Europe, Japan, all down around about 2%, but the one positive shining light was Asia, where we saw markets in the green.

[00:00:15] We're joined today by Scott, who covers Asia for us and emerging markets, Scott, what's your take on that?

[00:00:21] Scott Truter: Yep. So it was a bit more nuanced than that, most countries were weaker, but the headline was China. So the onshore market was up over 1% for the week. We saw lower inflation data that leaves the door open for more economic stimulus.

[00:00:34] We saw China's top finance minister vow to further cut corperation tax, strengthen targeted fiscal spending and tighten fiscal discipline.

[00:00:42] So really targeting those areas that they want to grow. And we also saw the head of the people's bank of China said that the Central Bank would continue to maintain supportive policy throughout this year.

[00:00:53] Sheldon MacDonald: So it really is still playing into the narrative that we've been seeing there with China on a different trajectory compared to develop markets, really supporting continued growth, particularly in equity markets and also targeting specific areas where they want to see the growth.

[00:01:06] So weaker equity markets all around, except for China.

[00:01:09] Bond markets were surprisingly a little bit stronger last week, as well, particularly here in the UK where we saw Gilt yields declining, slightly and pushing prices up.

[00:01:19] Nathan, you will take on that?

[00:01:20] Nathan Sweeney: Yeah. So one of the key indicators we had out last week was UK inflation data. So that data came in at 5.5%, but the market was expecting maybe higher numbers.

[00:01:31] As a result of that, the concerns about inflation and inflation continuing to rise maybe less of a concern now, and this is why bonds rallied last week.

[00:01:40] Sheldon MacDonald: Yeah, of course we're still going to see prices rise. We're still going to be hitting our back pockets with the energy price hike, really still to come in the months ahead, but perhaps that's all now priced into the bond market.

[00:01:53] We also saw wage rises around the world, really?

[00:01:56] Nathan Sweeney: Yeah. So if we think about wages, January tends to be the month that a lot of wages are negotiated.

[00:02:02] So this should be the month where we see the kind of biggest increases coming through for the year.

[00:02:07] So again, that should feed through, into inflation here and now, but it could mean that we get lower inflation going forward, but obviously there's lots of inputs to keep an eye on, and the oil price is obviously one of the key ones to focus on as well.

[00:02:20] Sheldon MacDonald: We'll come to the oil price in a second, but those wage rises in line with the higher inflation numbers, probably giving latitude to central banks for continued hawkish moves.

[00:02:31] The expectation still is for a further rate hike here in March in the UK, the US is expected to rise in March and perhaps also the latitude for a lift-off in rates in the EU later this year?

[00:02:43] That's, you know, having previously stated that they'd be not looking to do anything until 2023, at least.

[00:02:49] So, a slightly difficult picture on inflation, but again, bond prices doing okay in this environment, so perhaps also bond markets starting to look beyond the current cyclical recovery and growth to a slight easing of the growth picture in the months ahead.

[00:03:05] Now, I said, we'd come back to the oil price, we couldn't not mention Ukraine this week, and of course the potential for rising energy prices because of that.

[00:03:14] Nathan Sweeney: Yeah so if we look at markets, there's two key things that markets are concerned about. It's inflation, and the other thing is geopolitical tension.

[00:03:23] Now, historically geopolitical tension doesn't really tend to spill over into markets unless there's kind of any economic spillover.

[00:03:33] So we know that Russia is one of the largest oil producers in the world, and this is the reason why we're seeing the oil price move up over the last couple of weeks. But interestingly, last week, the oil price fell.

[00:03:44] So if we look at the oil place was off 1.7%, why is this? It's because the US was talking about maybe lifting sanctions on Iran, which would actually increase oil production and therefore the oil price was off for the week, and actually it was off again this morning and that's on news that we are set to see potentially, and this is an interesting development, President Biden and Putin sit down to talks on Russia and Ukraine. So this is quite a big development that we're seeing this morning.

[00:04:15] Sheldon MacDonald: Yeah, certainly a big development and obviously we hope for a resolution.

[00:04:19] To my mind though, it seems that if there were to be an invasion, it would really hardly be a surprise. We've been speaking about this for weeks and weeks now so you know markets have already priced this in.

[00:04:28] So potentially if there is a resolution of some sort, then the potential for a rebound to some extent.

[00:04:34] Anyway, wrapping all this up, the moves that we've seen this past week really play into our positioning at the moment.

[00:04:40] We're still underweight the US on the revaluation of overvalued growth.

[00:04:44] We're overweight in Asia, them being on a different cycle to the rest of the world, giving us a bit of diversification and overweight in the UK, the value bias and the old economy stocks really doing well in this environment.

[00:04:57] On the bond side, yes, we're underweight, but we do still have bonds, we're not out of bonds completely. We do still like bonds as a hedge in case there was a shock to the global growth system.

[00:05:08] So that was it for this week. We look forward to speaking to you again next week.

[00:05:12] Thank you.

[00:05:12] Thank you.