Regulatory disclaimer: This newsletter is provided solely to enable clients to make their own investment decisions. The information within this newsletter does not constitute advice or a personal recommendation, or take into account the particular investment objectives, financial situations, or needs of individual clients. It may therefore not be suitable for all recipients. If you have any doubts as to the suitability of this service, you should seek advice from your investment adviser. The past is not necessarily a guide to future performance. The value of investments and the income from them can fall as well as rise and investors may get back less than they originally invested. Certain Investment Trusts will permit using gearing as an investment strategy. Gearing is a strategy which involves borrowing money to increase holdings of investments or investing in warrants or derivatives. Such a strategy is likely to result in movements in the price of the relevant security being amplified significantly and may be subject to sudden and large falls in value and investors may get back nothing at all. Any tax rates and reliefs are those currently applying, are dependent on individual circumstances, and could be subject to change. All estimates and prospective figures quoted in this newsletter are forecasts and are not guaranteed. Within our advisory service we offer advice on a wide range of investments including shares, corporate bonds, gilts and managed funds. Within the RDR our advisory service is recognised by the FCA as a ‘restricted’ service as we do not offer advice on the whole of the financial planning market which includes products such as life policies and personal pension schemes. Barratt and Cooke is the trading name of Barratt & Cooke Limited. Registered in England No. 5378036. Barratt & Cooke Limited is authorised and regulated by the Financial Conduct Authority, who are based at 12 Endeavour Square, London, E20 1JN.
Much has happened since Sir Keir Starmer became Prime Minister on 5 July 2024. Indeed, Donald Trump has survived not one but two assassination attempts, Spain beat England in the final of Euro 2024, the Olympic torch arrived in Paris and Oasis are once again ‘mad for it’ with several concerts scheduled for next summer.
Sadly, the so called ‘mandate for change’ promised in the General Election has, thus far, been anything but change at a political level. After 14 years in opposition, most of which spent criticising and exposing Tory sleaze, we have simply had more of the same, just with a different name on the tin. Having demanded that the Conservative Government rule out scrapping winter fuel payments, Rachel Reeves is now pressing ahead with it and offering contradictory arguments to defend the indefensible.
Constant bickering, expenses scandals including lavish party trips to Ibiza. What has changed apart from the name of the Governing party? Boris lost his job over a piece of cake and a glass of wine! Anyone waiting to see Labour’s plan for the future has been left disappointed.
The Autumn Statement
We will know a lot more on 30 October 2024 in one of the most widely anticipated Budgets in living memory. Moreover, I cannot remember one where there has been such trepidation about what may be announced.
Having pledged not to tamper with income tax (though perhaps the ‘rate bands’ could be tweaked?), national insurance or VAT, the taxes and reliefs which could potentially be ‘at risk’ include:
• Inheritance tax reliefs
• Lifetime gift exemptions (the 7 year rule)
• Capital gains tax rates
• Capital gain uplift to probate value for deceased estates
• Main residence relief for capital gains tax
• Pensions contribution income tax relief
• 25% tax free pension capital lump sum
• Inheritance tax relief on pension funds
There is wide speculation within the professional services industry as to which of these are more likely than others, but the fact they are all ‘on the table’ is concerning. None of these tax reforms are particularly palatable but the lack of clarity, particularly in relation to the timing of any alterations (31 October, 5 April or heaven forbid retrospective) exacerbates the issue.
On top of this there is the imposition of VAT on private school fees, effective January 2025, including those with special educational needs and on EHCPs (Educational Health and Care Plans).
The net result of such fiscal speculation is that even the most wealthy of individuals are feeling more anxious about their finances and family succession plans. But there is a wider issue too, as we believe that even higher taxes (the current tax burden is the highest in the UK since the end of the Second World War) will adversely impact those most in need of support in society, since there will likely be a significant reduction in charitable and philanthropic giving.
At a recent Norfolk Community Foundation event I was staggered to learn that 85% of charitable giving goes to just 4% of charities, the big national charities. With the wealthy potentially reigning in their generosity, I expect the small, local volunteer led groups which are so vital in supporting communities across the country to be deprived of vital funding. Is this really the outcome anyone wants?
Ahead of the Budget announcement it is sensible, in certain circumstances, to consider making exceptional one-off capital gains in order to ‘future proof’ investment portfolios.
Ahead of the Budget announcement it is sensible, in certain circumstances, to consider making exceptional one-off capital gains in order to ‘future proof’ investment portfolios. The financial press has hung, drawn and quartered the Chancellor before the Budget has even been announced, so it is important to remember this is all speculation and perhaps the Budget will not be as bad as feared. In any event, at some stage in the future there will be another change in Government and with it no doubt fiscal policy. So balanced, rational decisions remain key.
Geopolitical tensions and the economy
Sadly the conflict in the Middle East is spreading, with Israel fighting on at least four fronts: Hamas in Gaza, Hezbollah in Lebanon, the Houthis in Yemen and now Iran too. 05/10/22
As a result of escalation in this key producing region, the oil price has spiked by around 10% in recent days. With the stimulus injected into their own economy the Chinese authorities are also supporting the oil price. However, as can be seen on the chart, the price of oil has been gradually declining over the last couple of years.
With global central banks having increased interest rates rapidly, we are starting to see the handbrake effect this has had on the global economy. Indeed, UK economic data has been uninspiring, with official GDP reported figures showing no month-on-month growth in the economy in three of the last four reports. Inflation is seemingly under control, with UK August CPI of 2.2% in line with forecasts and it would have been below forecast if not for the impact of a big swing in airfares, which we would suggest is a temporary factor. Goods prices are seeing deflation, with August showing a 0.9% decline year on year. The Bank of England therefore reduced the base rate by 0.25% in August as the first step in seeking to support the economy.
In the US, on 18 September 2024 the FOMC (Federal Open Market Committee) surprised market analysts with a larger than forecast 0.5% cut to the Federal Funds target range to 4.75-5%. At the previous meeting Chair Jerome Powell had said that a 0.5% cut to rates was not something the committee was thinking about. It also guided markets that this was not a ‘one and done’ cut with every member of the committee seeing rates falling further over the course of the next year.
With global central banks having increased interest rates rapidly, we are starting to see the handbrake effect this has had on the global economy.
There are clear signs that the domestic economy is starting to slow down.
Our clients have very limited exposure to companies which are reliant on domestic growth, but in recent months ISG, the sixth largest construction firm in the UK by turnover with more than £1bn of Government contracts, has fallen into administration with 2,200 workers being made redundant.
Rightmove reports that it is taking longer, on average, for a seller to find a buyer, whilst economically sensitive retailers such as Topps Tiles and Carpetright have reported declining activity and store closures. A recent survey from KMPG suggested that four in ten consumers have cut back on non-essential spending. Eating out (67%), clothing (59%) and takeaway food (56%) are the three most common cost-cutting targets for those reducing non-essential spend with a quarter cutting back on TV or music streaming services.
I cannot help but think that Labour’s continual pessimism about the UK economy, the ‘black hole’, the looming spectre of ‘hard decisions’ and fears of tax reforms in the upcoming Budget are part of the problem. What is the old saying about talking up a recession?!
Given the deteriorating economic landscape, we expect cuts to UK interest rates will be ‘front-end’ loaded, with a reduction at the November Bank of England meeting and further cuts in the first half of 2025, swiftly removing a degree of restriction on the economy. In the US the situation is more nuanced, with the surprisingly strong jobs data released on 4 October 2024 and the inflationary impact of the oil price spike suggesting the pace and timing of further monetary easing will be guided by key economic data points. Nonetheless, we expect UK base rates to fall to 4% by the summer, and the US a little lower (given the UK economy structurally generates greater inflation than the US). We shall see.
Simultaneously, the Bank of China has reduced the Reserve Requirement Ratio for banks from 12.5% to 11% over the past year (the equivalent figure for UK banks is currently 12.75%). This is an attempt to stimulate their domestic property market, which has been in crisis following a slump in consumer spending.
A recent survey from KMPG suggested that four in ten consumers have cut back on non-essential spending.
Smoke and mirrors
In August the fragility of the global financial system was laid bare. The US$/Yen carry trade is by far the largest worldwide, valued at about US$4 trillion (roughly the size of the German economy!)
Essentially, institutions had hitherto borrowed Japanese Yen at 0% (Japanese rates were at zero) and converted it into US Dollars yielding over 4.5% in the money market.
But greed always overcomes sense, so these institutions leveraged their positions by up to 10 times, and also invested into US stocks (mostly the Magnificent Seven about which we have written extensively in recent communications). This buying pressure pushed up equities, causing more buying pressure from index trackers, creating a virtuous cycle. Not content with that, the Yen was bound to depreciate against the Dollar due to the disparity in money market returns (zero compared to 4.5%) so you also get a currency profit when converting back to Yen and repaying the loan. What’s not to like?
This all seemed too good to be true. And it was. In August the Bank of Japan increased interest rates from 0% to 0.25% whilst simultaneously the FOMC started floating the concept of US interest rates being reduced. Suddenly hedge funds were forced to pay higher borrowing costs on their Japanese Yen, whilst the Yen appreciated (as opposed to the expected depreciation) against the Dollar, creating huge foreign currency losses.
This caused many hedge funds to aggressively unwind their positions, with huge selling pressure causing carnage in global speculative risk markets such as Japanese equities, Bitcoin and the Nasdaq. In early August the index value of Nasdaq fell by over 10% whilst the Bitcoin price fell by over 20%.
The US Dollar assets they were holding had become insufficient to meet the Yen denominated liability.
Portfolio positioning
Though mentioned earlier, I feel it important to reiterate that we have very limited direct exposure to businesses which are reliant on the domestic UK economy, or are particularly exposed to changes in domestic legislation, regulation or taxation.
Our portfolios are truly international in their composition, and we expect this will remain the case for some considerable time.
With interest rates seemingly having peaked we have sought to lock in reasonable returns from lower risk assets such as Government Gilts, ensuring portfolios are invested sensibly with good liquidity, dependant of course on client risk profiles.
For clients where exposure to fixed income investments is relevant we have been proactive in building out a ‘gilt ladder’, with redemption dates all the way out to 2030. This has locked in attractive returns and protects against the reinvestment risk of too many redemptions being received in any one year.
Within our equity positioning, we remain steadfast in our commitment to long-term investment in quality companies.
We have written in detail about our ‘quality criteria’ previously, but it is no coincidence that much of our equity positioning is across sectors such as:
• Fast moving consumer goods (particularly hygiene and food essentials)
• Business services (including Artificial Intelligence)
• Data and digitalisation (mission critical)
• Healthcare (often essential or breakthrough drugs & equipment)
These all benefit from long-term structural tailwinds and the sort of companies we are attracted to typically enjoy strong and defendable competitive advantages. This not only allows them to regularly increase pricing, and therefore margins, but also reduces their reliance on wider macroeconomic conditions.
It is during periods of uncertainty when consumer staples stocks have historically come into their own, providing portfolios with defensiveness and reassurance when times get tough. Of course, company performance must remain robust and fortunately most of our core holdings, specifically Unilever, Colgate Palmolive and Procter & Gamble, have all been performing at least in line with expectations during 2024. Over the last six months all three have outperformed the FTSE 100.
There are others in the sector which have had idiosyncratic issues to deal with and have not performed quite as well; there will always be one or two facing challenges, but we are encouraged by the sector’s recent performance. Falling interest rates and an uncertain economic outlook is a backdrop in which the sector tends to perform well, hence we continue to hold relatively large weightings across portfolios.
In football we often hear of the ‘managerial merry go-round’, when several managers are removed from their jobs as teams seek to improve their fortunes by a change of leadership, often in order to avoid relegation.
Something similar has taken place in the consumer goods sector, where we have seen new CEOs appointed at; Diageo, Unilever, Reckitt Benckiser, Nestle and Nike, all within the last two years. Estee Lauder has also announced the departure of long-term CEO Fabrizio Freda and a search for his successor is underway.
We typically afford a new CEO a reasonable amount of time to implement a new corporate strategy and we are encouraged to report that we have been particularly impressed by Hein Schumacher and Kris Licht, who have taken the helm at Unilever and Reckitt Benckiser respectively. The others are either yet to make a real impact or are relatively early into their tenures, though a couple of companies remain dangerously close to the portfolio relegation zone, so we shall continue to monitor progress closely.
Away from consumer staples, the artificial intelligence (AI) ‘boom’ gathered significant momentum when ChatGPT was released to the public at the end of 2022. Ever since, companies across an array of industries have announced new products and investments focused on this technology, which promises to revolutionise business operations and models. Consequently, we have seen the market ascribe winners and losers of AI.
Winners
Those seen as benefiting from operational efficiencies and/or greater demand for products and services, have seen their share prices rally, in many instances due to a higher valuation rather than an acceleration in profits in the short term.
Losers
Those seen as facing significant challenges as AI threatens to derail their business models over the medium/long term, have seen their share prices rapidly decline.
Microsoft released its first significant AI based software, Copilot, to enterprises last November. The company has advertised Copilot as “your everyday AI companion”. The software generates text such as emails, creates images based on text prompts, and can take meeting notes. Management confirmed in their most recent set of results that take-up has been very strong, with almost 80,000 organisations adopting Copilot so far. It is also worth noting that Microsoft is also the largest corporate investor in OpenAI, the creator of ChatGPT, which was recently valued at almost US$160 billion.
In response to ChatGPT and Copilot, Alphabet (parent company of Google) launched its own AI platform, Gemini, which can respond to prompts and questions with AI generated responses in text, audio, image and video. Whilst Gemini was originally launched as a direct competitor to ChatGPT, it is now also enhancing Google’s capabilities in search, digital media platforms and advertising.
The mega cap technology companies continue to invest billions of pounds into product development based on AI and are deemed major beneficiaries of this new technology.
Simultaneously Microsoft and Alphabet, as two of the top three providers of cloud computing infrastructure, are benefiting from accelerating demand for server space, storage and speed. Indeed, for technology and other companies to take advantage of AI and develop new products based on AI, there is an increasing need for data storage and high-speed computing. Hence Google Cloud and Microsoft Azure are experiencing exceptionally strong demand which shows no signs of abating.
Whilst still in an infant stage, Microsoft and Alphabet have demonstrated the impact AI could have on businesses and people’s lives. As demand to keep up with this next stage of technology accelerates, these companies are ideally positioned to benefit and we therefore expect sustained growth in revenues, profits and cash generation for many years to come.
We have always sought to ensure portfolios are exposed to exciting growth sectors, whilst also retaining sensible diversification since market sentiment, generally or indeed to a specific stock/ sector, can turn rapidly. Our clients more defensive holdings have been a little lacklustre during the tech bull market, but always remember that old friends treat you well over the longer term.
Giving back
by Shaira Bale
Charity has long played an important role at Barratt & Cooke
Giving
The firm continues to donate funds to local charities and community groups, giving back to important causes (more details below)..
Sponsorship
Alongside charitable donations, the firm is proud to sponsor various charitable events (including the Norfolk Superhero), helping to cover running costs, ensuring that monies raised have the greatest possible impact.
For fear of self-promotion, it would of course be challenging for William Barratt to write about the firm’s charitable giving! As a member of the wider team, and one who is both involved with, and proud of, what Barratt & Cooke does in this respect, I wanted to share some details with our clients and professional network.
Specifically, each year, the Directors kindly allocate monies for charitable causes, with a staff-led Charitable Giving Committee empowered with overseeing the company’s donations to local charities and community groups. The wider Barratt & Cooke staff are encouraged to identify charities to support, and the committee meets regularly to agree worthy causes, to coordinate grants for the chosen charities and to consider ways to further develop the firm’s charitable impact.
Since forming in 2022, the committee has made charitable contributions to over 20 local charities and groups, operating in East Anglia, with the aim of promoting social welfare, education, relief of sickness and poverty, cultural enrichment, and other charitable activities. Examples include Little Lifts which provide handpicked care packages for people undergoing breast cancer treatment and Norwich Door to Door, a local, friendly, and reliable door to door community transport service available to residents of Norwich and its districts.
Pro Bono
Our staff continue to give up time, such as hosting events which help to raise funds for, and the awareness of, charitable initiatives (most recently on behalf of Sir Norman Lamb’s Mental Health and Wellbeing Fund).
Professional
Whilst a commercial venture, we are proud to act for a significant and growing charity client base, partnering with trustees as responsible stewards of charitable funds, helping to grow their income and capital and, with it, their charitable impact.
We also champion a ‘Charity of the Year’, with staff encouraged to undertake fundraising activities, for which matched funding is available. Previously selected charities include Nelson’s Journey, a childhood bereavement charity supporting under 18s in Norfolk who have experienced the death of a significant person, and Brave Futures, a support service for under 18s in Suffolk and Norfolk who have experienced sexual abuse. This year, we are raising funds for the Alzheimer’s Society, a charity that helps those living with dementia today and provides hope for the future by providing Dementia support services and funding Dementia research. Looking ahead to the second half of 2024, eight of our staff (and counting) are participating in the Larking Gowen Norwich Half Marathon, helping to raise funds for the Alzheimer’s Society.
Barratt & Cooke have a long history of giving back to the community. Our history, culture, and people are rooted in Norfolk, and we aim to celebrate this local connection by supporting charitable causes and organisations that promote the welfare of local people.
Barratt & Cooke
Conclusion
I was
trained many years ago by
Charles Barratt and shall never forget that: ‘in this game you should always be cautiously optimistic – things are never as good as you think, but they are never as bad either’. This Labour Government is really testing me!
Sir Keir Starmer, who let us not forget described Joe Biden as ‘on top form and sharp’ in July, has been handed one of the largest parliamentary majorities in history, yet has presided over a tumultuous first 100 days in office; from rewarding strikers whilst penalising pensioners, to questionable foreign affairs policy and releasing violent criminals from prison early.
Alongside this, war rages in the Middle East, the Chinese authorities have stepped in to support their stagnating economy and ahead of their forthcoming Presidential Election the US Federal Reserve has delivered a 0.5% cut to interest rates, the first cut of this magnitude since September 2007.
Following the recent US jobs report market strategists remain optimistic that a so called economic ‘no landing’ (modest economic growth, stickier inflation and stable interest rates) can be achieved and are forecasting new highs for global equities. But history would suggest this is not so straightforward and we fear a few googlies will be delivered along the way.
As Sir Garfield Sobers once said:
“A true champion adapts to every pitch and condition”
Global markets have produced pleasing returns since the Covid induced volatility, but now is a time to read the conditions and play accordingly. Balance and diversification is crucial, somewhere between ‘Bazball’ and Boycott seems the order of the day. This is what we are seeking to achieve with our portfolio construction, and we have every confidence that many stocks we hold on your behalf are well set for a long stint at the crease, irrespective of how the wicket plays.
William Mellor Investment Director October 2024
Global markets have produced pleasing returns since the Covid induced volatility, but now is a time to read the conditions and play accordingly.
October 2024 equity suggestions
* Equivalent Gross Redemption Yield for Index Linked Gilts assuming RPI
** Price adjusted for inflation (please note the
FTSE 100 – 1 year
FTSE 100 – 5 year
Source: Iress Barratt & Cooke
Barratt & Cooke is:
• The trading name of Barratt & Cooke Ltd., a wholly owned subsidiary of Barratt & Cooke Holdings Ltd.
• Authorised and regulated by the Financial Conduct Authority (registered number: 428789), whose address is 12 Endeavour Square, London, E20 1JN.
• Registered in England and Wales (registered number: 05378036) and is a member of the London Stock Exchange.
