Hung out to dry?
Or perhaps in a flap.
Odd how we keep getting our Budgets the wrong side of bigger global stories and greater uncertainty, thereby hitting a bond sell off.
Does anyone at the UK Treasury have a calendar?
Reeves, like Truss, is in the same old bind. Without structural reform, there is no growth, without money, no reform. Here are her voluminous supporting papers. So much effort for so little.
Both maybe thought Joe Biden did it on the never never, why can’t we?
And after so long, the outcome markets most desire in the US looks likely, in other words that no one wins. And on the bright side, one irritating candidate has to now leave the stage, for good.
CAREFULLY CRAFTED
So, the ho-hum budget first.
Reeves baked in higher inflation for longer by the post-election pay rises – creating less room for maneuver. The O.B.R now forecasts a very modest rise in inflation over the next year. However, real interest rates remain too high, although it will require cover from the US, to cut rates here. But that too will happen.
That embedded inflation also precluded raising consumption taxes, as they hit inflation - crazy, as excess consumption in many areas, is the core issue.
She also needs to be lucky. Tory chancellors weren’t, but one day that may happen to a UK chancellor. Luck is rather more likely than achieving the current rather puny growth forecasts, which still assume increased productivity, especially in the public sector.
She will seemingly stick with the usual populist nonsense on alcohol taxes and fuel duty (surely a major error). While the desire by HMRC to broaden the tax base and suck everyone into providing frightening amounts of data to them, continues.
This looks like a slightly demented and sinister desire, because it underpins a belief that with enough data, they will know everything. The way every budget has a whopping benefit from “closing the tax gap”, £6 billion of it this time, of tax due but not recovered, is extraordinary (link shows the 2023 position) and seldom challenged.
In reality this is about finding new ways to fine you, and the more people are drawn into tax, as well as the more complex it is, the more the resulting fines.
FUTURE HINTS
We also note the first step to closing tax advantages for charities, or at least those the current government happens to dislike. Once it can pick and choose charities, it will not stop at education, nor will a future government share their tastes.
Another theme is one rule for the private sector, another for the state. The attack on carers, allowing them to earn more (so kind) while at the same time introducing a marginal tax hike rate of some 17% on earnings between ÂŁ5,000 and ÂŁ9,100, is a very clever sting.
Against that at last acknowledging that pension surpluses on “bought out” schemes should not endlessly accrue to the buyers, never the workers, is good news. True, again, just so far, the miners, but if that’s the first step for one off pensioner payments, from massively over-funded buy outs, it is no bad thing.
Women get hit – the new £22 billion of employment tax, all to be raised from the private sector, will hit employment, in particular female part time employment. And in areas where the minimum wage has already driven large scale shifts from payroll to welfare, it will not make it any easier to reverse that slide.
Against that there is quite clear-eyed desire not to hurt the residential property market, in many ways the other big potential tax target. Nor, as yet most pensions.
And I am not that fussed over farmland, anything with a tax break gets overpriced and hoarded. We can get misty-eyed about farmers, but the guys hauling the hay are seldom the ones pocketing the cheques.
Lower asset prices and more liquidity are no bad thing.
An A-
So overall, given her hand, the limited number of big revenue targets left, and given prior restrictions on housing and consumption taxes, this was an elegant compromise. Aside from the childish swipe at private schools, it seemed balanced. A massive fiscal drag will also persist, of course.
The long list of departmental handouts sounded a lot, but really will not amount to much, even for the NHS - we still need to banish their ridiculous silos that absorb cash, but deliver no healthcare outcomes.
So, Wes Streeting at Health remains key in all this. Otherwise, Reeves will find, like Hunt, that just feeding the public sector beast, simply grows a bigger mouth.
Another, more consequential contest, for the next Prime Minister also closes, and Kemi is a genuine reformer, if she ever gets to No 10. We will see the end of the drift we have endured for much of this century; only early Blair was a comparable radical.
SIDEWAYS WOULD BE GOOD
Markets? Well, they don’t like much of any of it.
The cyclical fall in interest rates has driven a lot of them up this year, but the sense of too far too fast hangs heavy.
We will not stop inflation as long as governments are hooked on deficit spending, and as long as they keep passing inflationary laws on wages and job security.
Whoever wins in the US election on Tuesday night, like Reeves, has the same problems the day after. Too many wars, an uncompetitive economy, too much regulation, too much debt - those are not easy to solve.
Markets may rise on positions been unwound and new ones taken, but ultimately will respond to rate cuts and falling inflation.
So, whether they end up in a flap, or we end up hung out to dry, it all comes to much the same thing.
Halloween or Guy Fawkes Night?
There arrives a point at which our gaze lifts beyond the immediate chaos of politics, beyond the maelstrom, to the line of sight beyond, to calmer waters. We are there now, the US election (on November 5th) no longer matters much to how we trade out the year. The next administration can’t start enacting policies until January, the State of the Union speech and the new Congress.
In the UK, we have had a phoney war since July, awaiting a budget, due the day before Halloween. Budgets are (or should be) a process, albeit leaky. Sadly, most of the leaks and badly flown kites, to date, are predictable, telling of a cash strapped government desperate to pay off their supporters, by ever higher taxes. They hope markets won’t notice. Some chance.
Globally inflation is falling based on goods deflation, a fair bit of which is out of China. The ongoing normalisation of energy supply, post Ukraine, also contribute, and is offset by regulatory rises in labour costs, stagnant productivity, and out of control welfare. None of that changes.
Meanwhile investment and necessities are now the areas being squeezed hardest, and business confidence is elusive.
From this OECD update
So where are the dangers for investors?
One has been to ignore gold, a long running afterthought in our in-house momentum portfolios, at a steady one sixth weighting. Some afterthought!
A more dangerous mirage is fixed interest, because it has been priced for a massive set of rate cuts for far too long, and all you get is a speedy convergence back to negative real interest rates.
Indeed, for a lot of investors, service inflation, not goods, is already the pain point, and service inflation and post-tax interest rates have already converged.
Although with the internet, net interest margin for the banks is not as volatile as of old. There are no longer big pots of locked in money in current accounts. So, falling rates are not hurting bank earnings much, indeed the danger is more of elevated rates causing defaults. But is that denting profits? Not really. Banks are getting good at holding their margins.
Another dangerous deceit has been the flow into value and into emerging markets, that trend has lifted prices, has been doing so all year, but again quite slowly, while some sectors and markets, like aerospace and Latin America, have been pretty vile.
Both Value and Emerging Markets have now had an awful lot of false dawns. Those too feel like a mainly 2025 trade now.
Europe – where next?
Europe seems genuinely to be struggling. I notice credit default swaps on French debt remain elevated after Macron’s summer failures. While Germany still relies on China and the motor industry too much. Without peace in Ukraine, it will struggle, although the arrival of lower energy prices and more tariff protection against Chinese dumping, will slowly help.
We are (nearly) all protectionists now.
So? Well, what has worked, likely still works, and while October might (yet again) be seeing a leg higher, it feels hard to get too excited, until after November 5th.
Private Equity
Two other 2025 themes are private equity and competition.
Private equity is just about holding its own. Those big, expected, discount compressions are not yet happening, so conflicting market views persist. The bears who, judged by the discounts, are still winning, see overstretched balance sheets, unaffordable debt, at any likely refinancing rate and a closed IPO exit market. So, a lot of stale assets.
The latter is both a reflection of how thoroughly investors felt ripped off in the last IPO boom and the bypassing of over regulated, backward looking public stock markets. For hot stocks, in particular, capital is still easier to raise off market. You can buy into AI without buying IPO’s.
However some mid-market managers are quite happy to use trade sales instead, and those will pick up, once politics gets out of the way and interest rates get more sensible.
Some smaller tech areas, which never relied on debt, nor expected an IPO exit, are starting to look quite frisky, as recent buys have not been at such high prices and they have ridden the post COVID technology expansion well.
And tech has been moving very fast of late. So, buying debt free, post 2020 investments, as they now start to exit, can be pretty good, and decreasingly offset by the collapse of lockdown casualties.
Competition
On competition both Draghi and then Lagarde are saying loudly that competition policy in Europe, which has been seen as being by national market alone, will continue to weigh on productivity. Instead, the competition view must now be pan-European, and on that metric, for example, we have far too many telcos and banks. We now have a new EU Competition Commissioner, but also a desire for a “new approach to competition policy” clearly stated by the EU President in July.
So whatever nativist German noises there are, if Commerzbank has an Italian suitor, that deal is still possibly good for Europe. If Vodafone wants a merger in the UK (or any other) mobile market, that should be fine too. Indeed, clear evidence exists globally that low prices cripple investment in the telecom sector, and to keep investing, keep advancing, sensible returns are now needed.
Of course, that goes quite contrary to the idea of competition authorities (and regulators) as agents of social change and protectionism, but it is being said very loudly now by the ECB. This comes with clear warnings about the need for spending cuts, to get Euro budgets under control, aimed notably at France, presumably as Italy is deaf and Spain is behaving.
Yes, we have heard it before, but the clash between cheap services (but no investment, no stability) and a sensible return (with investment, and stability) is getting far clearer.
Lower inflation will at last allow the rates of basic services to rise, to give a sensible return, to create a real market.
Whistling in the Dark
Too much uncertainty, too much introspection; while the world roars by.
Expecting either Blair Mark II or Trump Mark II still feels unwise. As does the Franco-German led ostrich ensemble, burying its head in debt, not sand. And CrowdStrike highlights forgotten fragility.
Which leaves me uneasy. Markets have done very nicely since last autumn, but now feel as if they’re too dependent on delayed gratification, too relaxed about political earthquakes. I could do with more visibility, not just on who is elected, but what they do after elections.
So far this year, performance has come from the US, especially NASDAQ, which our momentum model recently sold for the first time in a year. Admittedly simply to correct an overweight, a substantive sell appears a way off, but a reminder that the ability just to buy US tech is diminishing. And markets need buyers to move up.
The market assumption seems to be the rally will broaden and move into the smaller stocks and round the globe. Possibly, certainly liquidity is plentiful, bitcoin and gold look high, a good indicator that there is excess cash about.
But the other source of cash, shifting out of term deposits and money market funds, has to now be slower, if we have replaced six US rate cuts this year with two. There really is no obvious reason not to just stay liquid, for a while. The dollar is also weaker, it has slid in fits and starts, but that also mounts up. Owning a depreciating currency is never great. It remains quite sensitive to short term rate differentials.
The global position is still inflationary, with no major developed economy addressing it’s out of control spending plans, all hiding behind each other’s failures.
Trouble comes when rational investors no longer accept out of kilter valuations, including for all three favoured assets, gold, bitcoin, US tech.
The US outlook – conflicted?
I also, I confess irrationally, do not expect either Trump or Biden in the White House next year, nor do I expect that much change down the ticket now. So, to the degree that the US market is rallying on Trump’s current resurgence, I find that dangerous too.
Polite society, and especially the UK fund manager, is caught between the social need to say Trump is evil incarnate and the reality that investors quite like the prospect. So, they concoct lists of the harm he will do, like cutting taxes, cutting regulation, boosting energy supply, enhancing security and decide that it is all terribly inflationary and so quite bad. But after that, conscience cleared, Â they amble over to their trader and buy a bit more.
This is an approach which is quite vulnerable to Biden getting turfed off the ticket. Especially with the need to then explain why the new Democrat candidate will raise taxes, reduce security, add regulation, reduce energy supplies, all of which is suddenly good for investors. An interesting pitch.
UK - Unmoved by Starmer’s Start
While in the UK, the large market indices are remarkably unmoved by Starmer’s start. At one level his King’s Speech was unremarkable. No surprises: Labour followers and unions given what they were promised, manifesto pledges kept.
Indeed, it was as if Gordon Brown and the Tories were all a bad dream, and Tony was at his desk, in 2007, working on the Queen’s Speech, which he dropped in a folder, and nailed to the back of a wardrobe door, for Keir to pick up 17 years later, change the pronouns and off we go.
How will housing engender growth?
Take housing, although how it is suddenly the engine of growth escapes me. The chances are the private sector could be the instrument to build them. But the timescale for that effort to cut prices is very long. Although the focus on land costs is good. Faster, cheaper consenting is also needed, based on where houses people want, will sell.
While the suggested mandatory targets didn’t work under Blair, they won’t work now. They just let the blame be shifted from local planners, to Whitehall mandarins. Stuffing more and more subsidised housing into new build sites, just raises prices (someone has to pay for them).
The Tories (oddly) had a viable idea: rather than identify where you can build, first identify where you can’t. But there is no sign of that scale of thinking, or speeding up the interminable appeals process.
The Commanding Heights
I assume the long-term plan is to demonstrate this old approach doesn’t work, create a crisis, then privatise something. I doubt if that weird solution will be confined to the railways, and almost certainly now to water. Just like Railtrack and British Nuclear Fuels under Blair, you legislate impossible outcomes, the private sector invariably fails, you take ownership and allow far worse outcomes (and need bigger subsidies) instead.
It also needs capital, which is being scared away from the water companies, by new harsher laws, the exact opposite of the current need.
It is as if lots of laws and smiling nicely at deep seated structural problems helps to resolve them. Here we see the old failing of opposition parties getting into power, but then wasting it fighting the last election: at least Blair, in his own right, innovated.
Stock markets simply didn’t believe the Tories and don’t believe Labour either; words alone won’t improve matters.
Although as ever because the index is so hated, that leaves some very underpriced stocks for sale.
We have no clear view of what the autumn brings, either in the US, or UK (the first Reeves budget), or Germany (although a budget has been concocted there, but seems impossible to deliver) or France, which one hopes will have sorted out a government by then at least. Macron’s current re-appointed appointee, looks highly unstable.
A lot of patches have been applied, a lot of whistling in the dark, but the money is running out. It has been for a while, but you can’t fight a war on several fronts : so, one of defence, welfare, health, or renewable energy, is not getting the funding splurge it wants.
Growth is the answer, but that, as Keynes noted, needs animal spirits. The animals look pretty caged just now, and Starmer is adding new bars to that prison.
So yes, the rate cut story holds, innovation possibly, but their heavy lifting is not supported by reforms which will help.
For our part sitting out the summer looks better.
We will resume these musings in early September. Under a new logo :
One suggested name is :
The Campden Snipe.
Thoughts, as ever, remain welcome.
In the real world, everything changes.
Sunak's Slaughter
FALLEN WALLS, FALLING VOTES
A few stats: Labour collected 9,698k votes, the Tories 6,835k, Reform 4,114k.
In vote share terms it was 34% Labour, 24% Tory, 14% Reform, 12% Lib Dem. A united right would have been ahead of Starmer on 38%. Labour dropped votes, (9,698k for Starmer against 10,269k for Corbyn), since the last general election.
What Boris did, and Sunak failed to do, was hold Reform, who did not stand in 2019 in return for some nebulous hint. Farage was scurrying off to the US, until Sunak bizarrely announced policies designed to outflank Reform. In doing so, quite apart from baffling his own party, he broadcast his fear. Once the ridiculous return of National Service was rushed out, Farage knew Sunak’s weakness and duly reversed course.
Farage is in little mood to stop, his victory speech highlighted “the building of a centre right party”. No, not hyperbole, he already holds the votes, in no small part, from demonstrating the tiresome habit of consistency.
Although it is simplistic to see Reform as right wing, it is (in so far as it has policies) populist, it won its toehold in Westminster in seats of deprivation, not just of big Tory majorities. Part of its vote was from Labour, although it poses no risk to Starmer. But the Tories, after a virulent set of campaigns to deny Farage a seat, lacked the firepower this time. Farage is in the building.
But surely a great night for the clown party and Ed Davey? He has taken the absence of policy and the primacy of performance (the wrong sort)Â to new depths. He lost votes too, getting nearly 175,000 fewer than in 2019. Ed Davey had 3,520k, against 3,696k for Jo Swinson.
WHICH TORY PARTY?
What of the Tories now? They still need Farage’s vote bank. Either they neutralise it, as Boris did, or absorb it as John Major did, or they are out of power for a decade.
That seems obvious.
What seems highly risky, but quite likely, is they just leave Reform to fester. So, the ruling cabal of centre left Cameron acolytes plough on, piling defeat upon defeat.
Across Europe these archaic centre right parties have blown up, their only preservation is the equally ancient UK electoral system, for which the Tories (24% of the vote) seem the only advocates, Labour adopted a pro-PR vote motion at their last conference, and the Lib Dems, Reform and Green votes would easily make that a majority.
It is coming at some point. In some form.
Clipped from the Labour Policy Forum Page
Do not read too much into that SNP wipeout in Scotland: in the face of the extraordinary mix of sleaze (much unproven) and a well-funded (compared to England) but disastrous NHS, the SNP vote share held up at 30%, suggesting the dream has not died.
It will probably hold on to a high number of Holyrood seats, based on PR in those elections. The sole Tory loss in Scotland, saw a messy local fight between candidate and party.
Labour now has its own issues of success; it will be unwise to treat the more rural seats they have won, as any more than loans. Like the Tory Red Wall seats, these are unstable, single term members, it is not practical to help them (as Boris showed).
While Labour have also unleashed some big beasts, most notably Rees-Mogg and Liz Truss. The Tory party would be wise to lasso both, less they graze elsewhere; their attitude towards them will be very telling.
NEXT TIME
After the last election, in early 2020, even pre-COVID, I predicted 186 seats for the Tories in 2024, none in the Red Wall.
I am inclined to repeat that.
I see this as a Lib Dem high tide. Devoid of policy or power, stripped of the virulent anti Tory votes, unable to add voters, I see them fall away. While Reform is not close to power either, but the SNP will probably be resurgent. So, Labour could easily suffer a loss of a hundred seats, down to about 310, still the largest party, but potentially needing a deal to rule.
That is the real reason for Starmer to govern from the centre. For that he might actually win votes next time.
The  extreme alternative outcomes are about the Tory/Reform issue: how the already dominant right-wing  vote is divided. As in Europe, they are now numerically strong, and the deals to stifle those voters voices’ increasingly seedy and unstable.
If the Tories spurn their right wing, it splits to Reform.
If the Tories spurn their left wing it splits to the Lib Dems.
Either split creates a third party with over 100 seats and hence a route to power.
Instead, the Tories need unity, a cap on recriminations, no triumphal ascendancy, no coups, and an end to the chaos of central office, and its hapless parachute candidates. The party needs true devolved powers to the associations – and the party must spend money on good agents. That is where they will rebuild to back over 200 seats.
Then it has a chance.
Will it take it?
Despite the noise, as we listed above, successful political parties don’t add voters, in the main, they just don’t lose them.
Otherwise, markets feel dull, and thin. Central Banks have a sparse diary. France might excite, but likely will see stalemate. The big story remains the clash of the dwarves.
Charles Gillams
Where will the cards fall ?
The half year approaches - what has happened? Two very different quarters so far. And Investment Trusts complain too much, having stuffed their boards with placeholders with minimal stakes in the shares and multiple appointments. In markets many things still depend on how the cards (and ballots) fall.
THE FIRST HALF
With current interest rates for hard currency, high yield bonds, around 6%, you would expect riskier equity markets to be giving you over 10% a year, made up of a mix of capital and dividends. That’s the bar; it is quite high just now.
Looking back a year, only Japan and America comfortably achieve that, the S&P up +24%, NASDAQ up +30%, Nikkei up +14%. Germany creeps in at +10%, neither France nor the UK do. Outside developed markets, it is largely dire, only India at +25%.
Then looking just at the first half, all of Japan and Germany’s gains came in the first quarter, so they are now sitting well off their twelve-month highs. While as we know the big three, S&P, NASDAQ and SENSEX, are now close to all-time highs, they powered through the second quarter.
So, the challenge is, do they go on up, do the markets that have fallen back, after a good first quarter, come back to life, or do some of the dogs perform?
Some major markets, Friday close and intra day
I have no great faith in the UK market, nor in a new government being much better at growth (it can hardly be worse) than the current mob. But there are cheap looking international stocks in the UK and the punishment meted out to real assets, by interest rates and shrinking bank balance sheets, might be finally ending.
While quite clearly the good middle tier stocks are easily cheap enough to lure in bidders from abroad or private equity, in some number. UK valuations are in short OK, not something you can necessarily say about the US.
The residual underperforming markets do often have a nice yield, but who cares? With bond yields high and staying high, in an appreciating currency, why take a cut in yield in order to buy equities? Plenty of time for that later.
Anyhow in most European and Emerging markets, equities seem not to be able to get out from under their own feet, endlessly tripping over their own fractured politics.
INVESTMENT TRUSTS
We are hearing a lot of moaning about Investment Trusts, which the FCA really do not like. EU law always struggled with the trust concept anyway. That the FCA has shown no interest in freeing us from those shackles is not a surprise, it seems they too would rather channel money to Nvidia than invest in the UK. Here is their Lordships’ briefing on what EU rules we might be repealing. Nothing for Investment Trusts.
I am on balance on the Trust’s side, I do think closed end structures (as they all are) allow long term decisions, while protecting daily dealing, one of Europe’s quirky hang ups. Daily dealing is fine in deep markets, but an illusion in many medium and small equity markets. With liquidity ever more narrowly focused, closed end funds seem more, not less, important, for balanced capital allocation, competition and growth.
Trusts directors should also protect investors from over mighty fund management houses, who treat closed end funds with disdain, as captive funds, with often high fees. Their greed lets in low-cost passive competitors. Instead, their permanent capital should come with an obligation to hunt down good, index beating performance.
Sadly, the FCA has perpetuated a system, where the fund management house appoints the Boards, not, in reality, the other way round. So, they are decorative, good for marketing, and highly unlikely to fire the manager. Too many are industry insiders, serving on multiple trust boards, often in sequence. Seldom do they have an investment of at least their annual pay cheque in their current Trust, and often, little investing expertise in the relevant area.
So, Investment Trust boards hardly ever sack fund managers for poor performance. David Einhorn explains the bigger issue very clearly, noting benchmark hugging over time is what investors now get. There is a clear link to poor performance and bigger discounts, and to big discounts and treating shareholders badly: One area where big certainly does not mean better.
Rather than sabotage the sector with old, irrelevant EU law, the FCA should be hunting down poor performance, and making the “independent” directors just that, including banning directors shuffling around a set of one-manager trusts.
INTEREST RATES
We have just had Powell hold US rates, saying it is all data dependent, and slightly oddly he conceded the expectation is for a pick up in inflation, on the technical grounds that the abrupt drop in inflation last year, creates base effects.
Although he rules out more hikes; you get the feeling if he had held his nerve last summer, and added a bit more, inflation could be beaten by now. Not that he wants to or can add such instability now, so he is stuck, and we with him, watching paint dry.
With no real distress there is no pressure to cut prices, service inflation remains too high, energy prices are still quite strong, so no longer giving a deflationary boost. Both the AI boom and the resulting stock price gains, encourage consumer spending and keep (in most sectors) a strong labour market.
Markets are evidently OK with that, falling rates, no recession, growing earnings, is almost ideal. Meanwhile we are all hoping that Congress will keep either of the two old men from doing anything unusually silly, and the electorate will keep Congress on a tight leash.
Quite a lot of hoping and several months still to go.