Monday Espresso Podcast - 28th March 2022

[00:00:00] Sheldon MacDonald: The 28th of March today, almost a full quarter behind us in the year so far, would you believe it?

[00:00:06] Sheldon MacDonald: Inflation remains in the headlines, this has been the theme throughout the year, really focusing the mind last week on inflation was the autumn statement by the chancellor here in the UK, announcing some measures to try and ease the burden on beleaguered consumers and the man in the street, facing hefty rises in energy, heating, fuel and so on, even food prices rising.

[00:00:27] Sheldon MacDonald: And we saw the unemployment number released last week, Nathan, will speak about that in a second, but really the measures that the chancellor could put in place pretty much a drop in the ocean, not really doing much just yet to ease the burden.

[00:00:39] Nathan Sweeney: Yeah, so if we look at some of the figures we had out last week, the big one was inflation.

[00:00:44] Nathan Sweeney: So we had UK CPI, which is a measure of inflation, we saw that number came in at 6.2% for the year, so that's an increase in inflation in February, from January.

[00:00:54] Nathan Sweeney: So the figure in January was 5.5%, so this does create a problem for the government in terms of what they are doing for households and they probably need to do more.

[00:01:04] Nathan Sweeney: But also looking at Europe, we do have inflation figures out this week. So again, an expectation that we do see increases in inflation, so it's a big theme globally and it's continuing to rise.

[00:01:16] Sheldon MacDonald: We heard Jay Powell of the Fed last week, speaking about how they're willing to go further, so they increased rates by 25 basis points. They're pretty much as expected, but as I say, mentioning that in the next meeting, which will come in May, they might be willing to do more, really trying to manage those inflation expectations because if inflation expectations really get hold, then that becomes almost self fulfilling.

[00:01:39] Nathan Sweeney: Yes, so we did see him obviously come out and talk about that and central banks do use central bank speak as a way of managing expectations around inflation. But one of the things on the week, which stood out was the rise in the oil price, so the oil price was up over 10% for the week and this was about concerns around supply chain, disruption, and a shutting down of a pipe in the Caspian sea.

[00:02:01] Nathan Sweeney: But really this is feeding into those figures as well, so it's another consideration, so any kind of fall off in that price will be definitely welcomed.

[00:02:09] Sheldon MacDonald: Yeah, so getting back to the inflation, though, what that might mean for central bank policy at the moment, markets pricing a 73% chance of a 50 basis point hike in May.

[00:02:19] Sheldon MacDonald: However, the yield curve still remains positively sloped. Now that's important because they negatively sloped yield curve normally would be an indicator of a recession to come, so at the moment that positive slope indicating that market's not yet quite forecasting recession, they're not expecting the rate hikes that are coming, are going to push us into recession.

[00:02:39] Sheldon MacDonald: Another positive development and further indicating that is that corporate bond spreads have actually been tightening, so the price of credit has been rising, again indicating that markets believing that corporate US spreads, is still in a reasonable position.

[00:02:54] Sheldon MacDonald: Despite all this actually markets haven't done all that badly for the quarter.

[00:03:00] Nathan Sweeney: Yeah, so you're seeing actually some good performance coming through. If we look at the S&P last week, it was actually up close to 2% for the week. The FTSE was up over 1%. The standard performance was Japan. So we saw some really strong returns coming through there.

[00:03:13] Nathan Sweeney: But I suppose the key message here is that there are a lot of concerns at the moment in markets and yet equity markets are recovering quite well and have been over the last two weeks. The S&P, if we look at the performance quarter to date, the S&P is down, but it's only down about 5%, so we've seen a drastic improvement over the last couple of weeks.

[00:03:32] Nathan Sweeney: So that's definitely positive.

[00:03:33] Sheldon MacDonald: The UK market actually positive on the year to date the VIX index, this is a measure of volatility, the price of insuring your portfolio, actually that's back down at its long run average levels, so despite the volatility that we have seen, markets now, certainly beginning to settle at slightly more positive levels.

[00:03:51] Sheldon MacDonald: So definitely a pleasant trend in the market to see the rebound that we've seen. We Haven't spoken about ESG for some time, Nathan, you've picked up some moves on that front last week.

[00:04:01] Nathan Sweeney: Yes, I did see that BP have announced that they're looking to invest about a billion over the next 10 years in electric vehicle charging infrastructure.

[00:04:09] Nathan Sweeney: This is highlighting one of the big issues with ESG, because if you think about it, we have manufacturers making cars, and yet we don't have the charging infrastructure in place and this is also similar to the way that people assess ESG.

[00:04:23] Nathan Sweeney: So we've had initially people looking at ESG and excluding companies, opposed to looking to see these companies transition over time on that journey to really improve what they're doing.

[00:04:35] Nathan Sweeney: So this is about looking at how these companies transition and engage on ESG, over time and move towards a landscape where they're looking to fundamentally change the way that they operate and I think that's the way that we should be thinking about ESG.

[00:04:50] Sheldon MacDonald: Yeah, it's also often we look at the disruptors because they bring the new and exciting concepts and we forget about the fact that the existing players are the ones that actually could be the biggest agents for change, the ones who have the existing infrastructure, the capital and the resources to really make change, so definitely an ongoing debate within the ESG space and one to watch.

[00:05:11] Sheldon MacDonald: Looking at markets ahead, you mentioned the inflation numbers out of Europe and unemployment numbers out of US.

[00:05:17] Sheldon MacDonald: The unemployment numbers still remained fairly low expected actually to fall further, so again, indications that economically, actually, the US still remains in a fairly healthy place. So thank you very much and we look forward to speaking to you next week.

[00:05:31] Nathan Sweeney: Thank you.