Market Update from Rathbones

By FMB on 

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We regularly receive market updates from fund managers and investment houses, here is an interesting one from Rathbones Investment Management...

"At Rathbones, we frequently use stock market options and structured products to build protection into our portfolio. Options are tradable contracts with investment banks that give us the right to ‘buy’ (calls) or ‘sell’ (puts) a certain value of an index which has the effect of limiting our exposure to market fluctuations. Structured products work in a similar way, except they are more like contracts that pay out gains in set situations and lose money in others. When stock market volatility is high, the value of these sorts of assets increases, making it more expensive to buy more of them. Typically, the value of a contract for future delivery of commodities is lower than the spot price because they tend to be bulky and costly to store. In the lingo, this default situation is called ‘contango’. However, due to the upheaval in commodity markets and supply shortages lots of buyers are using futures to lock in what they need further down the line, pushing up the price of futures relative to spot prices. This ‘backwardation’ difference today is higher than at any point since 2007 in all sorts of commodities from metals and energy through to livestock and grains; we believe it will return to its contango equilibrium in time.

Meanwhile, it’s holiday season so you may have noticed that the pound has been exceptionally weak recently. Against the dollar, sterling has slumped more than 10% year to date. Against the euro it’s fallen 3.5%. In recent years the pound has traded as a ‘risk-on’ currency — some, perhaps unfairly, characterise this as the UK is trading like an emerging market. This means that when investors are confident and willing to invest in riskier assets, the pound’s exchange rate rises. Yet, when everyone is scared and markets are falling, the pound falls too. This has myriad effects, but the main ones are that it makes UK-based costs, like labour, cheaper, and overseas costs, like oil, gas and imported food, more expensive. It also means that domestic UK earnings (in sterling) are less attractive and foreign exchange earnings from investments abroad more valuable.

The furore over sky-high energy bills — which are set to soar yet further in the autumn — led UK Chancellor Rishi Sunak to announce a £400 government support payment for every home in the UK. The poorest 8 million households will also get £650 to help with the cost-of-living crisis, split between July and October. The £15 billion programme will be partially paid for by a 25% windfall tax on the profits of UK-based oil and gas companies, which is expected to reap £5bn this year for the Exchequer. The tax will be removed once oil prices return to normal levels or by the end of 2025.

Put bluntly, this is ‘helicopter money’ — cash thrown out the window into the hands of the people below. That has pros and cons. It’s great because, unlike quantitative easing, more cash gets into the hands of the poorest who are most likely to need it and spend it, boosting the economy. The drawback is that it increases the amount of money being spent in a time of supply constraints. You may remember Milton Friedman, who pioneered the big glasses economist style before it was cool, talking about inflation being the effect of too much money chasing too few goods. This UK money-drop policy may exacerbate the UK’s inflation problem in the medium term even as it helps out struggling families."

- David Holloway, Rathbones Investment Management

The purpose of this blog is to provide technical and generic information and should not be interpreted as a personal recommendation or advice.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

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