Monday Espresso Podcast 24th October 2022

[00:00:00] Sheldon MacDonald: It is the 24th of October, another very exciting week in markets, so much going on, so much to talk about, not least on the political front here in the UK. Obviously we've all been seeing the news and following what's been going on, unprecedented turmoil.

[00:00:14] Sheldon MacDonald: In the meantime though, it seems that markets certainly sterling and the FTSE and bonds, all a stronger undertone to them over the past week, so some perhaps removal of the uncertainty discount that had been applied to markets, as I said, all of those three areas, the currency, equities, and bonds, all doing better last week. Raj, are we over the worst?

[00:00:39] Raj Manon: Some uncertainty has been removed, but there's still plenty in the UK. We'll find out who the new Prime Minister will be, and there's also some question marks over whether we'll see a general election.

[00:00:51] Raj Manon: But on the fundamental side, question marks still remain on economic policy, especially with the Bank of England meeting next week. Last week, on Wednesday, we saw inflation figures coming out and after some months of falling inflation, inflation figures actually increased to the upside, returning to double digits of 10.1%.

[00:01:15] Raj Manon: The key contributors to that were rising food and drinks prices. So that strengthens the case when the Bank of England meets for them to do more, to increase rates perhaps to 1%. On the other hand, on Friday we saw retail sales figures coming in worse than expected with a fall of 1.4% in September, and that followed a large fall in August of 1.7%, and that actually increases the case for the Bank of England doing less with the consumer already feeling the pinch.

[00:01:48] Raj Manon: So the Bank of England really is between a rock and a hard place when they meet next week on how much they do raise interest rates.

[00:01:55] Sheldon MacDonald: Yes, certainly tough decisions ahead, not only for the Bank of England, but elsewhere as well. This week we do have the ECB meeting and we'll see what they do with rates, perhaps that might give us a steer as to what's going to happen next week.

[00:02:10] Sheldon MacDonald: Returning to my theme of stronger markets, the US market was also stronger last week. Most of that being put down to the fact that there were rumors and that followed up by a Wall Street Journal article late in the week, that perhaps the Fed is considering a slower pace of rate hikes.

[00:02:27] Sheldon MacDonald: We're still looking at a 75 basis points hike in November, but the chances of December's hike being only 50 basis points is now about 50 50. So we did see a rebound for the week, as I said, almost 5% up on the week in equities. The other thing that's going on in the US is earning season, now we spoke about this last week.

[00:02:49] Sheldon MacDonald: We've now had about 20% of the S&P 500, which have reported. Margins generally are contracting, but despite that, about 72% of companies are still ahead of what had been expected for the earnings. Now, in general, companies do beat earnings, but this figure of 72% is slightly below the average number of companies that beat their earnings expectations.

[00:03:13] Sheldon MacDonald: That's earnings, what about revenues in the current environment? Well, we've still got 70% of companies beating their revenue expectations, and that's slightly higher than the average that we've seen over the past several years. Looking for the year ahead, so for the full year 2023, we're still expecting earnings growth of about 7%.

[00:03:34] Sheldon MacDonald: So earnings still expected to be 7% higher next year than they were in 2022, and that's despite the lingering fears of a recession. So markets still relatively upbeat on that front. Now let's turn further afield and we're going back to the political scene. Big moves in China in this past week. Scott, what's your take on what's going on?

[00:03:56] Scott Truter: Yep. So the weeklong, National Congress of the Chinese Communist Party has just finished, so that's where they set the political, economic, and social agenda for the next five years. So there's lots been going on. It's the reason why it's significant.

[00:04:12] Scott Truter: We've had the zero covid policy, issues in the property sector and geopolitical tensions. So the market was hoping to see measures announced, particularly around zero covid.

[00:04:22] Scott Truter: So we've seen President Xi Jinping receive his unprecedented third term as leader, and then there's been a bit of disappointment from the market. So there was the GDP figure out this morning, which was higher than expected.

[00:04:36] Scott Truter: However, the market slightly concerned that the Politburo Standing Committee, which is that key top committee President Xi, seems to have prized loyalty over expertise and experience. So another sign that he's got quite a strong grip on power.

[00:04:52] Scott Truter: So we think there's quite a lot of the bad news already in the price shares are near historical lows, so we could see some strong performance next year.

[00:05:00] Scott Truter: So we are starting to look at how we could increase our weighting in China, whereas over this year we've been slightly lower weight.

[00:05:08] Sheldon MacDonald: Yes, so on a tactical basis, perhaps some potential for a rebound given how much is in the price. Longer term though, definitely something to watch. With fewer checks and balances built into the system with President Xi's supporters in the Politburo, there is the potential perhaps for potential policy errors to go unchecked.

[00:05:28] Sheldon MacDonald: So certainly one worth watching in the longer term. Anyway, an exciting week ahead of us, as I mentioned, we have the ECB and we got further earnings figures coming out of the States, and of course here all the political shenanigans going on in the UK to keep us exercised.

[00:05:43] Sheldon MacDonald: We look forward to speaking to you again next week. Thank you.