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THE UK REFERENDUM: PRAGMATISM OVER EMOTION

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THE UK REFERENDUM: PRAGMATISM OVER EMOTION

By Michael Stanes, Investment Director at Heartwood Investment Management

In February, when we first wrote about the UK referendum (”Brexit: The Investment Impact”), we highlighted the fact that the UK electorate would vote as much on emotion as opposed to complex economic arguments. Emotions have certainly run high in this campaign and probably more intensely than many of us had expected. Campaigning has temporarily ceased and there is now a time of quiet reflection, following the tragic and shocking murder of the British MP, Jo Cox, on the streets of West Yorkshire.

It is hard to know what direction this campaign will now take as voters make their decision next Thursday. Various opinion polls suggest that the result hangs in the balance and this has led to higher levels of market volatility, risk aversion and significant falls in government bond yields globally. Concerns are high that a UK exit from the European Union (EU) may well be realised. Non-UK authorities have responded by stepping up their vocal support for the UK staying in the EU; the Fed, the Bank of Japan and the Swiss central bank have all expressed their concerns about ’Brexit’, while Finland’s outgoing Finance Minister, has warned of a ‘Lehman Brother’s moment’ if the UK votes to leave.

Economic fundamentals are unchanged

We can expect further jitters in markets over the next few weeks, as investor behaviour is driven more by emotion and sentiment. However, it is worth reminding ourselves that amid the political rhetoric and uncertainty, the fundamental global economic backdrop remains unchanged. In fact, economic data has been improving globally:

  • The consumer appears to be coming back in the US, after several quarters of disappointments. Retail sales have rebounded in the second quarter and there are more signs that May’s disappointing employment report in the US could be an aberration. Other labour market indicators show underlying conditions remaining firm. Importantly, wage pressures are building as the US economy reaches ’full employment’. The Federal Reserve Bank of Atlanta’s wage growth tracker, a measure we find more representative of underlying wage trends, shows that median wage growth increased 3.5% year-on-year in May 2016 and follows a steady upward trajectory since October 2015. Meanwhile, the latest manufacturing reports also signal that the worst may have passed in this sector.
  • Notwithstanding concerns about the current EU referendum weighing on UK growth, recent data reports have delivered positive surprises. Retail sales saw healthy rises in April and May (6.0% year-on-year), supported by ongoing labour market improvements. There are also preliminary signs that the UK’s industrial sector’s malaise is easing.
  • European Central Bank stimulus measures are supporting the eurozone’s credit recovery, as household consumption measures have remained firm, owing to improving labour market conditions, low inflation and lower oil prices.
  • The economic effects of the recent earthquakes in Japan appear to have been short-lived, given better industrial production data. In addition, strong labour market conditions seem to be finally filtering through to the consumer, as spending has improved at the start of the second quarter.

If the UK votes to leave the EU, the short-term economic consequences will undoubtedly be painful for financial markets, as well as the UK and continental European economies. There are so many variables – In or Out, the durability of Prime Minister Cameron’s premiership, the stability and cohesion of the European Union itself – that it would be futile to position for any one definitive outcome. Even if the UK votes to stay in the EU, a close result may well provide more political uncertainty.

Portfolios positioned pragmatically

From an investment perspective, we have consistently taken the view that our portfolios need to be positioned pragmatically: able to defend in periods of capital loss and take advantage of valuation opportunities where there is fundamental justification. And it is at times like these when a multi-asset class investment strategy enables investors the flexibility to make those choices.

Over recent months, we have:

  • Raised cash and moved into more liquid instruments, such as large-cap equities.
  • Reduced overall levels of equity risk.
  • Reduced property risk, trimming our exposure to those instruments with a higher correlation to equities.
  • Maintained a short duration position in bonds.
  • Reduced currency risk.

We are comfortable with current risk levels in our portfolios and we are prepared, as much as we can be, to meet any potential liquidity and tail risks. Importantly, though, our active decision to gradually raise cash in recent months places our portfolios in a strong position to capture potential investment opportunities should we see a significant sell-off in markets.

Investing

Investment Roundtable: Live with Jim Bianco

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With Q4’s macro picture still looking grim amid the return of exponential coronavirus waves in Europe and the U.S. and Europe, we speak with veteran macroanalysis strategist Jim Bianco, CMT for a data-driven deep-dive into the global economy and financial markets on Sept. 7th at 12pm EDT.

Sign up for this exclusive webinar now

Key themes:

  • Learn from Jim’s unique combination of quantitative and qualitative analytics which provide an objective view on Rates, Currencies and Commodities to make smart investment decisions
  • Identify important intermarket relationships he is watching with respect to Global Equities
  • Roadmap a global outlook for 2021 in view of socio-political backdrop giving viewers key takeaways and intermarket perspectives on global investing.

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Jim’s robust technical analysis includes a broad look at trends and themes in the markets, market internals, positioning such as the Commitment of Traders (COT), sentiment, and fund flows. Don’t miss out on this exclusive session from one of the investment world’s most insightful thought leaders.

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Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election

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Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election 1

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets had another choppy week, falling for most of it before recovering some of their losses on Friday and posting further gains this morning.

At their low point last week, global equities were down some 7% from their high in early September. US equities were down close to 10%, hurt by the large weighting to the tech giants which at least initially led the market decline.

The market correction is nothing out of the ordinary with 5-10% declines surprisingly common. Indeed, a set-back was arguably overdue given the size and speed of the market rebound from the low in March.  As to the cause for the latest weakness, it is all too obvious – namely the second wave of infections being seen across the UK and much of Europe and the local lockdowns being imposed as a result.

These will inevitably take their toll on the economic recovery which was always set to slow significantly following an initial strong bounce. Indeed, business confidence fell back in September both here and in Europe with the declines led by the consumer-facing service sector. A further drop looks inevitable in October – fuelled no doubt in the UK by the prospect that the latest restrictions could be in place for as long as six months.

The job support package announced by Rishi Sunak did little to boost confidence. Its aim is to limit the surge in unemployment triggered by the end of the furlough scheme in October. However, the scheme is much less generous than the one it replaces as the government doesn’t want to continue subsidising jobs which are no longer viable longer term.  A rise in the unemployment rate to 8% or so later this year still looks quite likely.

Aside from Covid, for the UK at least, there is of course another major source of uncertainty – namely Brexit. Another round of trade talks start this week and we are rapidly reaching crunch time with a deal needing to be largely finalised by the end of October.

Whether we end up with one or not is still far from clear. That said, the prospects for a deal maybe look rather better than they did a couple of weeks ago when the Government was busy tearing up parts of the Withdrawal Agreement. With significant Covid restrictions quite probably still in place in the new year and the Government already under attack for incompetence, it may not wish to take the flack for inflicting yet more chaos onto the economy.

Markets remain unimpressed. UK equities underperformed their global counterparts by a further 2.7% last week, bringing the cumulative underperformance to an impressive 24% so far this year. The UK weighting in the global equity index has now shrunk to all of 4.0%.

It is not only the UK which faces a few weeks of uncertainty. The US elections are on 3 November. We also have the first of three Presidential debates this Tuesday. Joe Biden’s lead looks far from unassailable, a close result could be contentious and control of Congress is also up for grabs.

All said and done, equity markets look set for a choppy few weeks. Further out, however, we remain more positive – not least because the focus should hopefully switch from the roll-out of new lockdowns to the roll-out of a vaccine.

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What Investors are Looking for in the Next Fintech

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What Investors are Looking for in the Next Fintech 2

By Shaun Puckrin, Chief Product Officer, Global Processing Services

Are investors getting pickier when it comes to fintech? It’s hard to say for sure, but there are recent developments that point towards a shift in investor interests.

Firstly, research from Innovate Finance shows that investment in UK fintech dropped by 39% in the first half of 2020, compared to the same period in 2019. In H1 2020, $1.8bn of venture capital was invested in 167 startups compared to H1 2019, when $3bn was invested in 263 startups.

However, it’s worth mentioning that the $1.8bn UK fintech investment earlier this year was still a 22% increase over the second half of 2019, when funding totalled $1.5bn. Therefore, all signs suggest that investors will make significant increases in capital investments during the rest of the year.

Secondly, it appears that the current investor appetite is for more mature, later-stage fintechs: more than half of the $1.8bn went to just five companies: Revolut, Checkout.com, Starling Bank, Onfido and Thought Machine. Perhaps it is the ongoing economic uncertainty surrounding the COVID-19 crisis that is prompting inventors towards perceived “safer bets”, but what we do know for a fact is that early-stage fintechs raised just 8% of the total investments.

Is there a silver lining? The coronavirus crisis has rapidly accelerated the digitisation of financial services, with lockdown restrictions encouraging those previously resistant to engage with digital financial services. The stage is set for fintechs to thrive and deliver offerings that meet shifting consumer demands. To be in with a shot of wooing investors, fintechs will need to demonstrate certain qualities that set them apart from other companies.

So, what are the four things investors are looking for in the next big fintech?

  1. A strong, differentiated proposition

The fintech marketplace is crowded and filled with mature innovators setting a high standard for everyone else. Against this backdrop, “challenging the incumbents” is, unfortunately, no longer a USP.

To really catch the attention of investors, you must be addressing a clear, pressing market need that no one else is tackling. Not just that, your proposition must be easily articulated and backed to the hilt with market research that proves the opportunity is worth pursuing.

Ultimately, investors are going to ask the question: why you? What are you doing that’s unique? What do you have that means you – and only you – can do this? They will also want to know how defendable that proposition is once you’ve built it.  What is your moat? Getting this right means a foot in the door with investors.

  1. A path to profitability or exit

This is an extremely pertinent point, especially given recent news surrounding the financial results for many of the big challenger banks, and how they show the route to profitability for challengers isn’t necessarily straightforward or easy.

In the current environment, an attractive fintech must be able to demonstrate a concrete, long-term plan for the financial viability of the business. There are different paths for investors to make their returns, be it a trade sale or IPO, but the fundamentals of securing a successful outcome are usually the same. By being able to demonstrate how you can plot a course to attract and serve your customers for less than you can monetise them will be at the route of any subsequent valuation, no matter how its outcome is achieved.

Whatever the goal, you need a plan to support your ambitions. You need to demonstrate an understanding that building a scalable and sustainable fintech is likely to require significant capital – you must invest in the right people, partners and technology to make money. Developing competitive services, attracting customers and, crucially, monetising your offerings, requires hard work and the ability to adapt to your customer’s needs.

  1. Strong leadership and core team

Ultimately, securing investment is about building relationships and what often tips the scales is having the right people in the room. This is why a great team is crucial.

A great team means many things: Strong leadership with the vision to build something revolutionary. The skills and expertise to turn that vision into reality. The experience to traverse the pitfalls and opportunities you’ll face. And finally, the ambition and determination to make the business successful no matter what.

Building the right team with the right qualities is often what convinces investors that they’re putting their money in the right place.

  1. The right partnerships

Partnering with the right organisations can give you strategic access to the solutions that will help build and scale your offering. Their expertise and experience are often invaluable; many partners have been in the game for years and may have already solved problems you might be encountering for the first time.

From an investor’s perspective, seeing that you’re working with credible partners and proven tech helps build confidence. It shows that you’re a less risky investment, and that you respect their investment and are going to be using their money to build real value.

Fintech investment is not dead

After this recent blip, we expect the amount of investment into fintech to continue to be significant, at least in relation to other industries. But there’s no avoiding the fact that investors will be looking to stress test potential investments much more than before.

By creating a differentiated proposition, planning a clear route to profitability, building a strong team, and finding the right partners, fintechs will be in with a shot of securing the funding they need to make their grand vision a reality.

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