- Inflation could rise more rapidly than expected and cause an interest rate shock
- Inflation will more often surprise to the upside
- Disinflation drivers make better narrative stories than real economic sense
David Jane, manager of Miton’s multi-asset fund range, comments:
“2018 has continued where 2017 left off with strong rises in global equity markets, the UK excepted, and a healthy corporate bond market, at least in terms of new issues. The only cloud on the horizon appears to be the prospect of rising bond yields and interest rates as inflation creeps back into the system.
“Against this seemingly bullish background, it pays to consider what might go wrong. Among the more likely scenarios at present is that inflation rises much more rapidly than is currently considered likely. Following 30 years of disinflation, the greatest majority of observers seem to believe that inflation is beaten and if it returns at all it will be only temporary. It was this environment that led to the huge 30-year decline in government bond yields. Some commentators now suggest that this very long-term trend is coming to an end or has indeed already finished. We would broadly concur with that view, although such a long-term trend will not reverse instantly.
“The reasons given for the disinflationary period vary and tend to reflect the view point of the commentator as much as any real understanding. Economics is far from scientific. For a long time, the most popular theory was central bank prudence and independence. During the rise, monetarist economics inflation targeting became a popular central banking approach and many central banks were freed from government interference to focus on reducing the dreaded inflation.
“Obviously it’s natural for central bankers to presume they were successful for what they did, not for when they were working, so for many years the falling long term inflation rate was presumed to be because central bankers were now more sophisticated and successful in their policy implementation. This viewpoint is not consistent with the post financial crisis era, where interest rates have been low or even negative, a huge amount of money has been created and still inflation hasn’t returned to any meaningful degree. Therefore, other explanations have become popular more recently.
“A much more credible explanation is the rise of China. The introduction of a huge new workforce to the world economy in China clearly led to a massive reduction in wage pressures worldwide. Numerous data points exist which suggest that outside those highly specialised roles, who could sell their skills to a greatly expanded global marketplace, more mainstream workers struggled to achieve any growth in their earnings as they compete with a much larger global workforce. This condition no longer exists, China’s working age population is now expected to decline and there are no obvious huge untapped work forces about to join the world economy on the horizon.
“A related factor was globalisation, the rise of China coincided with a material reduction in the barriers to global trade, via China joining the WTO and a generally supportive political environment worldwide for free trade. Not often talked about was the reduction in technical barriers to trade such, as the introduction of containerised shipping, which led to a huge fall in the logistical costs of long distance trade.
“It’s quite clear that the political environment, at least in the West, is no longer as supportive of free trade, and the US is by far the biggest market for traded goods. China’s One Belt One Road strategy may lead to the opening up of trade in the Central Asian region through to Europe and reduce the cost of transport throughout the region, but this is unlikely to be as deflationary as the growth of US/China trade from 1980 onwards.
“Technology also plays a part. Perhaps better communication (the rise of the smartphone and the internet) has led to greater price competition due to the reduction in barriers to price discovery. Or maybe consumers are spending more of their incomes on less resource intensive products, experiences rather than physical goods. Or maybe the products consumers now buy have vastly greater economies of scale (obviously an app can be downloaded at miniscule marginal cost) making increased demand less inflationary.
“These arguments all make much better narrative stories than they do real economic sense when you consider that the size of the economy is the sum of all its inputs. Broadly, improvements in productivity such as these lead to increased incomes to be spent elsewhere.
“It seems that none of the factors which gave rise to the broadly disinflationary era apply anymore, which doesn’t mean we are necessarily in an inflationary era but other things being equal the future is as likely to be one of rising inflation as falling inflation.
“In the near term, are we likely to see an upside surprise in the inflation data, leading to an interest rate shock? Quite possibly, labour markets are tight, the oversupply of natural resources seems to be much reduced and OPEC appears to be determined to not allow material falls in the oil price. To us, the balance is that inflation will more often surprise to the upside than the downside compared to the past. Therefore, our preference is for assets that have defensiveness against rising interest rates and benefit from inflation, compared to what has recently been regarded as defensive, such as beneficiaries of falling interest rates with strong pricing power.”
Estate planning for wealthy celebrities or UHNWIs
By Sean Sheridan, Client Director, ZEDRA Isle of Man
Estate planning often gets pushed aside…sometimes with disastrous knock-on effects for a family. With today’s evolving regulatory environment, future planning can be challenging and often daunting.
Despite inevitable obstacles, there are ways to minimise the burden to enable even celebrities to have future generations enjoying the benefits of their wealth. In this article we explore why estate planning gets overlooked, and why it’s so important to protect prosperity and interests.
It’s easier to put off estate planning than you’d think – even for people like celebrities or UHNWIs who have earned significant wealth. For example, it’s thought that the great Diego Maradona passed away without leaving a Will or other plans for his assets, despite recent years of ill health. There were already reports of a contested estate just weeks after his funeral. Michael Jackson, Prince, James Gandolfini and Philip Seymore Hoffmann all passed away with various issues with their estates, despite having amassed fortunes.
It’s not disorganisation or a lack of desire that stops people planning their estate. In fact, often the last thing people want is to leave family or loved ones having to deal with probate and complex legal affairs at an already difficult time. Many people simply put off estate planning, thinking they will have time later…whenever that is. Alternatively, they may not comprehend how challenging it can be to untangle an intricate estate, and what legal rules there are that surround how an estate will automatically be divided amongst heirs and spouses if forced heirship laws apply. Equally, many people may not know that some loved ones may not get any assets or be looked after if provisions aren’t made in advance.
For UHNWI a properly planned estate can also mean more privacy for family at a challenging time. Many HNWI will choose – along with advisors – a structure that will allow for maximum confidentiality and will keep the details of the estate and any beneficiaries private. Information about beneficiaries of an estate becoming public can also make them a target for press or other unwanted attention. As structures which allow for both discretion and succession planning, trusts can be very popular for this reason.
Trusts also allow for settlors to stipulate the conditions under which beneficiaries may have access to or be given money from a trust.
Trusts allow the settlor the ability to lay out one or more conditions. For example, a settlor could put aside assets in trust to support beneficiaries but not make all the assets available to them at once. This might be to support good governance or simply to protect beneficiaries from some of the hazards associated with wealth, as perceived by the settlor.
Practically, this means a settlor and their advisors might look at different conditions for a trust’s assets. For example, beneficiaries might only receive a lump sum every 10 years. Alternatively, they might get a monthly pay-out, similar to a salary. The settlor might wish that funds are paid out to beneficiaries for the sole purpose of paying for their college education or to purchase a property.
Corporate trustees like ZEDRA ensure that the settlor’s wishes are met, and the assets of the trusts are used in the way the settlor would like and as laid out in the trust deed.
Planning ahead with advisors is vital – especially for anyone with a complex assets and interests that span various geographies may be complex in terms of nature, like IP rights.
Expert advice that’s tailored around an individual’s personal situation is a must, so thinking ahead is crucial. It’s never too early to make sure you’re planning your estate and making sure loved ones or important causes will be looked after when you’re gone.
Dollar edges lower as investors favor higher-risk currencies
By Stephen Culp
NEW YORK (Reuters) – The dollar lost ground on Friday as market participants favored currencies associated with risk-on sentiment over the safe-haven greenback.
Risk appetite was stoked by better-than-expected economic data and expectations that U.S. President Joe Biden’s proposed $1.9 trillion coronavirus relief package will come to fruition.
“The dollar’s down against other currencies but not by a whole lot,” said Oliver Pursche, president of Bronson Meadows Capital Management in Fairfield, Connecticut. “I expect the dollar to be where it is now at the end of the year, and the main reason for that is while I see some signs of improvement in the economy, monetary policy is going to stay where it is.”
“I don’t think the dollar is underpriced or overpriced,” Pursche added.
For the week, the dollar slid about 0.2% against a basket of world currencies, the euro was essentially flat, and the yen lost more than 0.5%. But the British pound advanced more than 1.1% against the dollar, its best week since mid-December.
Bitcoin continues soar to record highs. The world’s largest cryptocurrency was last up 6.6% at $54,961.67, hitting $1 trillion in market capitalization.
Its smaller rival, ethereum, was last up 0.7% at $1,953.28.
The digital currencies have gained about 89% and 1,420%, respectively, year to date, leading some analysts to warn of a speculative bubble.
“One concern I’ve always had (about cryptocurrencies) is how susceptible they are to manipulation,” Pursche said. “But they’re going to continue to gain legitimacy.”
“While it’s great that Tesla made an investment in bitcoin, I’m more intrigued by Blackrock and other major investment firms taking a hard look at cryptocurrencies as a viable investment.”
The Australian dollar, which is closely linked to commodity prices and the outlook for global growth, was last up 1.21% at $0.7863, touching its highest since March 2018.
The New Zealand dollar also gained, closing in on a more than two-year high, and the Canadian dollar advanced as well.
Sterling, which often benefits from increased risk appetite, rose to an almost three-year high amid Britain’s aggressive vaccination program. It had last gained 0.27% to $1.40.
The euro showed little reaction to a slowdown in factory activity indicated by purchasing manager index data, rising 0.21% to $1.2116.
The yen, gained ground against the dollar and was last at 105.495, creeping above its 200-day moving average for the first time in three days.
(Reporting by Stephen Culp, additonal reporting by Tommy Wilkes; editing by Jonathan Oatis)
Shares rise as cyclical stocks provide support; yields climb
By Saqib Iqbal Ahmed
NEW YORK (Reuters) – A gauge of global equity markets snapped a 3-day losing streak to edge higher on Friday, as the recent selling pressure on high-flying big technology-related stocks eased even as investors showed a preference for economically sensitive cyclical sectors.
Oil prices fell from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather, while the U.S. Treasury yields extended their recent rise.
The MSCI’s global stock index was up 0.47% at 681.88, after losing ground for three consecutive sessions.
On Wall Street, stocks steadied as cyclical sectors edged higher while tech names made modest advances after concerns about elevated valuations led to some selling in recent sessions.
“What we saw (this week) represents a market that is tired and may not do very much. So we are headed for some sort of a pullback, but I don’t think we’re there just yet,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.
“Investors are not really pulling out of the market, but they are becoming more cautious. It already has factored in another good positive earnings season.”
The Dow Jones Industrial Average rose 119.97 points, or 0.38%, to 31,613.31, the S&P 500 gained 12.93 points, or 0.33%, to 3,926.9 and the Nasdaq Composite added 92.58 points, or 0.67%, to 13,957.93.
The S&P 500 technology and communication services sectors, housing high-value growth stocks, were among the smallest gainers in early trading, while financials, industrials, energy and materials rose more than 1%.
European shares edged higher on Friday as an upbeat earnings report from Hermes boosted confidence in a broader economic recovery. The pan-European STOXX 600 index was 0.64% higher.
U.S. Treasury yields on the longer end of the curve rose to new one-year highs on Friday as improved risk appetite boosted Wall Street, while the yield on 30-year inflation-protected securities (TIPS) turned positive for the first time since June.
Core bond yields have pushed higher globally, led by the so-called reflation trade, where investors wager on a pick-up in growth and inflation. Growing momentum for coronavirus vaccine programs and hopes of massive fiscal spending under U.S. President Joe Biden have spurred reflation trades.
The benchmark 10-year yield was last up 5.1 basis points at 1.338%, its highest level since Feb. 26, 2020.
Oil prices retreated from recent highs for a second day on Friday as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude oil production and 21 billion cubic feet of natural gas, analysts estimated.
Brent crude futures were down 28 cents, or 0.44%, at $63.65 a barrel, while U.S. West Texas Intermediate (WTI) crude futures fell 66 cents, or 1.09%, to $59.86.
Copper jumped to its highest in more than nine years on Friday and towards a third straight weekly gain as tight supplies and bullish sentiment towards base metals continued after the Chinese New Year.
Spot gold XAU= was down 0.58% at $1,785.71 an ounce.
The dollar lost ground on Friday, extending Thursday’s decline as improved risk appetite sapped demand for the safe-haven currency and drew buyers to riskier, higher-yielding currencies. The dollar index was off 0.295%.
Bitcoin hit yet another record high on Friday, hitting a market capitalization of $1 trillion, blithely shrugging off analyst warnings that it is an “economic side show” and a poor hedge against a fall in stock prices.
(Reporting by Saqib Iqbal Ahmed; Editing by Nick Zieminski)
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