News & Reports Archives

What is the forecast for China in 2024?

Written by IntaCapital Swiss on January 8, 2024. Posted in Blog Article, News & Reports. Leave a Comment

China, the world’s second largest economy, kicks off 2024 with a much weaker economy, raising doubts about the underlying foundations on which its decades of amazing growth is built. Once China’s draconian Covid-19 pandemic laws were revoked, their leaders expected it would be business as usual for their economy. However, instead of consumers returning to malls, increases in land auctions and home sales, and factories tooling up for increases in demand, foreign firms have pulled money out, factories are facing waning demand, consumers are saving not spending, two of the largest properties companies along others have defaulted on their loans and local government finances are in a complete mess.

Reforms have always been particularly difficult in China, but the leaders are now presented with some tough choices if things are to improve in 2024. However, it has been an inauspicious start as Hong Kong’s flagship, the Hang Seng Index, started 1.5% down on 2^nd January 2024. Mainland China’s CSI 300, which measures the top 300 stocks listed in Shenzhen and Shanghai, also dropped 1.3% and in excess of 43% since its peak in 2021. Both indexes were two of the worst performers in 2023 with a slowdown in production activity, lukewarm consumption, a prolonged property slump and concerns over Beijing’s crackdown on the tech sector.

However it is not all doom and gloom for the Chinese stock markets. Experts say that the trends in the Hang Seng Index are closely related to the number of IPO’s (Initial Public Offerings), and the same experts are predicting that HK$100 Billion (Circa £10 Billion and $7.8 Billion) will be raised in Hong Kong in 2024, just over double of that raised in 2023. A number of analysts have gone on to say that today the risk premium of Chinese stocks has reached a level that, in the past, has led to returns nothing short of spectacular. Indeed, the yield gap between stocks and bonds has now reached circa 5.5% and has rarely been this big, in fact the dividend yield of the stock benchmark has risen above the dividend yield of the long term bond benchmark for the first time since 2005. Adding to this optimism for Chinese stocks in 2024, a well-known emerging markets equity fund in the United States boosted its equity holdings of China and Hong Kong stocks in one of their funds to 33% of its portfolio. This confirmed that, in their view, the relentless selling is just about over and 2024 will be a good year.

On economic growth, top Chinese officials have pledged to put this at the forefront of their economic plans. However, the hole in this plan is the lack of measures to boost consumer spending, which may end up making it hard to deliver on this statement. The tone for economic development for the following year is usually set at the CEWC (Central Economic Work Conference) which finished on the 9th of December 2023. This closely watched conference announced that policy would focus on “the central task of economic development and the primary task of high quality development”. Analysts have suggested that this conference was more pro-growth than in previous conferences, however they went on to say that potential growth levels of circa 5% would be hard to achieve without stimulus measures directly targeting consumer spending. Indeed, there was a complete silence on increasing household income and consumption support policies, and many analysts agree that weak consumption is a major drag on the economy.

On the deflation front, China has been fighting this for most of 2023 due to weak spending and the property slump, and finally policymakers have indicated that they will address this problem, which up to now, has been studiously ignored. Deflation is not good for the economy as falling prices are a major concern, and companies and consumers may put off investments and purchases anticipating a further fall in prices, which in turn can further slow the economy. Acknowledging this problem a quote from the 2023 CEWC said “Total social financing and money supply should be in line with economic growth and the price target”, which basically refers to the amount of financing needed for the real economy. Analysts noted that this was the first time the Price Target had been alluded to, indicating a more accommodating monetary policy. This suggests there will be interest rate cuts in 2024 acting as a stimulus to the economy. It should be noted that the CPI (Consumer Price Index) fell 0.5% in November 2023, the biggest since the Covid-19 Pandemic, marking an acceleration in the rate of deflation.

The property market has been a major headache for Chinese policy makers and the economy, with experts advising that property market stabilisation should be very near the top of economic priorities. This is because there are signs that the crisis within the property market is spilling over into the broader economy, including consumer confidence and financial markets. The CEWC confirmed that Chinese policymakers will meet this problem head-on by announcing the importance of resolving risks in “real estate, local government debt, and small and medium sized financial institutions”. They went on to say that the government, with regard to three major areas, will accelerate construction in public infrastructure facilities, affordable housing and urban village redevelopment. The property industry accounts for circa 30% of Chinese Gross Domestic Product (GDP), and the real estate slump has accounted for many of China’s current economic problems. House sales have gone south dramatically with developers’ debt problems spilling over into the shadow banking system*.

*China’s Shadow Banking System – This refers to financing outside of the formal Chinese Banking System and is conservatively estimated by experts to be in the region of USD3 Trillion. Such financing is made by banks through off-balance sheet activities or by non-bank financial institutions such as Chinese Trust firms. These trust companies sell investment products to qualified investors and the funds are used to invest in a wide range of financial assets, plus they are used to lend to property developers and their project companies and to local government financing vehicles who in turn lend to property companies.

Politically, experts suggest that China’s leaders will look to thaw relations with the United States and Europe, if only for economic purposes. Indeed, President Xi Jinping met with President Joe Biden in San Francisco back in November 2023 and recently met with EU Commission officials in Beijing in an effort to keep the European Union close for trade purposes and to get access to technology. However, any perceived thaw will be down to economic expediency and nothing more. In fact, for the first time President Xi Jinping announced in his New Year speech that the economy is facing troubles in such areas as employment, with many finding it difficult to fund basic needs and enterprises having a tough time. He went on to say that we will consolidate and strengthen the momentum of economic recovery.

Outside influences may have a direct impact on the Chinese economy in 2024. President Xi’s desire to control or unify Taiwan could put China in direct conflict with the United States. The looming presidential election in Taiwan has three candidates, the Beijing sceptic William Lei (Democratic Progressive Party), the Beijing friendly Hou You-Yi (Kuomintang) and the third candidate Ko Wen-je who will follow the outgoing president’s approach. Beijing will look at this election as a litmus test for a non-violent unification. The possibility of a second Donald Trump term could end up being a real wild card for China/ United States relations, and could well impact some of China’s geopolitical goals. The preferred candidate for China, according to experts, would be anyone showing weakness towards NATO, Ukraine and Taiwan.

The rhetoric coming out of Beijing is setting the tone for 2024 with their ambition for progress, development and global cooperation (with the United States? We will have to wait and see) focusing on growth, sustainability and innovation, paying particular attention to the property sector. The policymakers are looking to promote long-term prosperity and stability in Hong Kong as a vibrant financial sector, as this is also essential in the rehabilitation of China’s economy. However, the property sector could really make or break China’s economy in 2024. There are many failed real estate projects in China and the crisis has also enveloped the once untouchable real estate developer Country Garden, considered by many to be a safe investment. The real worry for Beijing is a dip in housing prices, as roughly 70% of all Chinese household assets are invested in property. The government has continually fiddled with economic data, which they will have to stop in order to get more outside investment, but whilst official figures show housing prices remaining static, it is estimated that house prices have fallen by 15% in many cities and by circa 30% in Beijing.

If indeed the authorities start releasing proper economic data, and can show a credible effort at solving the property sector crisis, then according to many experts FDI (Foreign Direct Investment) will pick up as will the economy. There are many doom mongers who are saying it will be the same old China, all talk and dodgy economic data, but if those who predict a rise in the stock markets are to be believed, in 2024 China will not only talk the talk but walk the walk as well.

2023 Closes with Global Equities Charting Big Gains

Written by IntaCapital Swiss on January 4, 2024. Posted in Blog Article, News & Reports. Leave a Comment

As the financial curtain came down, marking the end of 2023, a heart-stopping rally in the last two months of the year showed global stock markets with strong annual gains due to investors betting on the fact that major central banks have finally stopped their monetary tightening policies and will indeed cut interest rates 2024. The MSCI World Index* has, since late October 2023, surged by 16%, and, with a flurry of late trading on the 29^th of December, showed an annual gain of 22% . This was reflected in recent data showing that in western economies inflation is falling faster than expected, which, as mentioned above, dramatically changed the perception of interest rate changes. Indeed, Jerome Powell, Chairman of the Federal Reserve, fanned the flames of an equity rally in December by announcing that borrowing cost may have peaked.

*MSCI World Index – This is a stock index maintained by Morgan Stanley International (MSCI) and is designed to track broad global equity-market performance. This index is composed of stocks belonging to circa 3.000 companies from 23 developed countries and 25 emerging markets.

The rise in global equities as reflected in the MSCI World Index is the best run on an annual basis since 2019, when a similar run reflected a 25% gain. The S&P 500 finished the year up by circa 24% which was mainly due to a massive rally in megacap tech stocks. European markets, after a lacklustre 2022, posted positive gains in 2023 with Italy’s FTSE MIB charting gains of circa 30% and Germany’s DAX coming in with an impressive 20% increase. The overall increase for European equities was reflected on the STOXX 600* charting a gain of 12.6%. Elsewhere all three indexes in Japan posted hefty gains in 2023 with the Nikkei Stock average finishing the year up 28%, this being the best rally since 2013 which reflected a rise of 57%.

*STOXX 600 Index – This index tracks 600 of the largest stock exchange listed companies from 17 countries in Europe. The countries represented are Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

The big omission from the global rally in stock markets is China, where the world’s second largest economy has suffered from problems in their property sector. As a result, the expected recovery has faltered. Indeed, China’s CSI 300, which measures the largest companies listed in Shenzhen and Shanghai, fell by 11.38%. Their flagship financial centre, Hong Kong, has suffered over the years and in 2023 stocks were particularly hard hit, with experts advising the Hang Seng index is the worst performer of 2023.

Sadly, in the United Kingdom the FTSE lagged behind their counterparts in the United States and Europe by posting a gain of 4% in 2023. Experts suggest that this is down to a stubborn inflation rate, energy companies that are oil-price exposed, and a preponderance of mining companies that are overexposed to and rely on a slowing Chinese economy.

Many expert strategists seem to be sitting on the fence when calling the outlook for 2024. This year will determine the fate of the political leadership for half the global economy, the final battle against inflation and the fate of the current business cycle. The IMF (International Monetary Fund) has issued figures for world growth in 2024 as 2.9% with investors being excited as the IMF issued growth figures for the Asia Pacific region as 4.2%. Specifically in Singapore, Vietnam and Taiwan, analysts suggest these countries could outperform in 2024 due to the potential upswing in global tech, as they have a high concentration of manufacturing and R&D facilities. All in all many experts are suggesting a wait and see policy, as we see how the US/China relationship unfolds, the on-going ramifications of the Russia/Ukraine war, where interest rates stand in June this year, and whether or not the USA economy enjoys a soft landing.

Final Call for Interest Rates Going into the New Year

Written by IntaCapital Swiss on January 3, 2024. Posted in Blog Article, News & Reports. Leave a Comment

On Thursday 14^th December 2023 at the final MPC (Monetary Policy Committee) of the year, after a vote of six to three, the Bank of England maintained the status quo and left interest rates unchanged holding steady at a 15 year high of 5.25%. However, the rhetoric remains unchanged as the Governor Mr Andrew Bailey advised “There is still a long way to go in the fight to control inflation”.

The governor further acknowledged that despite financial markets expectations, he pushed back against an expected rate cut in May 2024, as the MPC warned they may tighten monetary policy if price pressures persist. The MPC were quick to point out that the two key indicators of price pressure which are service and pay inflation remain elevated, and the United Kingdom remains the only major economy where food price increases remain in double digits, with the UK’s inflation figure of 4.7% being the highest of the G7 countries.

Across the Atlantic Ocean in the United States, on Wednesday 13^th December 2023 the Federal reserve once again left interest rates unchanged. However, the Chairman Jerome Powell confirmed that the FOMC (Federal Open Market Committee) is still prepared to resume monetary tightening policies and increase interest rates should price pressures return.

At the same time, in a more dovish stance, the Federal Reserve leaned towards reversing their interest rate hike policies, by issuing forecasts that showed a number of rate cuts would be likely in 2024. However market experts pointed out that in November, increases in service-sector costs and in particular housing has kept inflation stubborn enough to counter any Federal Reserve interest rate cuts in the near future.

In Europe, the ECB (European Central Bank), along with their counterparts in the United Kingdom and the United States, kept interest rates on hold for the second meeting in succession. The deposit rate remains at a record high of 4%, even though inflation is heading south. The ECB confirmed that keeping interest rates high will make a substantial contribution to returning consumer price growth to the goal of 2% and they further advised that they will increase the speed of its exit from the pandemic era of stimulus which cost them Euros1.7 Trillion.

The ECB will also increase the speed at which they are ending reinvestments under PEPP bond buying programme*, putting monetary policy tools into a tightening mode. Financial markets are expecting an interest rate cut in March 2024 despite Christine Lagardem, the ECB’s governors’, comments that policy rates will remain at sufficiently restrictive levels for as long as necessary. Markets noted with interest the wording “inflation is expected to remain high for too long” had disappeared from central bank rhetoric and was replaced with “inflation will gradually decline over the course of the next year”.

*PEPP Bond-Buying Programme – Otherwise known as the Pandemic Emergency Purchase Programme was an ECB instigated response to the Covid-19 crisis. Initiated on the 20th March 2020, it is a temporary asset purchase programme of public and private sector securities. These purchases cover sovereign debt, covered bonds (an investment debt comprising of loans that are backed by a separate group of assets), asset-backed securities and commercial paper.

Elsewhere and outside of the major central banks, Norway increased interest rates for what is expected to be the final time with Russia also raising their cost of borrowing. Meanwhile, Mexico, Pakistan, the Philippines, Switzerland and Taiwan all maintained the status quo by keeping interest rates unchanged whilst Brazil, Peru and Ukraine all cut their borrowing rates.

At the end of 2023, whilst the Federal Reserve, the Bank of England and the ECB all kept interest rates unchanged, it appears that the Bank of England will have a different policy to the other two central banks going forward in 2024. Whilst the ECB remains hawkish with an exit from the pandemic stimulus, there is still an anticipation of an interest rate cut in March of next year. The Federal Reserve has been more forthcoming issuing forecasts of interest rate cuts in 2024, with the most hawkish of them all being the Bank of England who are sticking by their statement that interest rates will remain high for as long as deemed necessary. However, recent data showing the UK GDP results being worse than expected may push the Bank of England into reassessing their monetary policy for 2024 forcing them into a small interest rate cut.

A Happy New Year to Farsley Celtic FC

Written by IntaCapital Swiss on January 3, 2024. Posted in News & Reports. Leave a Comment

All of us at IntaCapital Swiss SA would like to wish the players, the management, the backroom staff and all those connected with Farsley Celtic a Very Happy and Successful New Year. Whilst 2023 has brought mixed results there have been some memorable wins, and though only 15^th in the table, the Celts are only nine points off 4^th place, which shows that the National League North is a highly competitive division. We are confident we shall see the Celts climb the table in 2024 and to this end wish the players and management the best of luck.

The Global Housing Market Crisis of 2023

Written by Barclay Butler on December 7, 2023. Posted in News & Reports. Leave a Comment

Sadly, for many people throughout the world, higher interest rates besetting global property markets are diminishing the prospects of home ownership. In 2022 central banks started employing quantitative tightening monetary policy and raising interest rates in their fight against inflation, the resultant shock that rippled through global housing markets gave way to the reality that the real estate boom was at an end, marking a finish to the millions made by people across the globe.

It would appear that higher interest rates are here to stay for a while longer, keeping borrowing costs high, this together with a shortage of homes are keeping prices elevated. This has resulted in those homeowners who have had to reset their loans facing increased financial hardship, whilst in many areas housing is now less affordable. For instance, in the United States the home market is dominated by the 30-year mortgage and today it is effectively frozen, as buyers are being squeezed because those with lower interest rate mortgages are reluctant to sell.

In each country across there are differing scenarios, but in the end they are all dragging down global economies, as whether they rent or buy, people are using more of their net income for housing. Take for example Canada and New Zealand, where those who bought at the top are now struggling with higher repayments on their loans. Across the world landlords are suffering from distress and in many areas higher interest rates have negatively impacted on the building of homes.

Experts suggest that the “Golden Age” of single family homes is ancient history with the cost of home loans doubling in some parts of the world. If potential home buyers bought just after the global financial crisis then in most parts of the world owners would now have built up a substantial amount of equity. They predict that the next ten years will be an uphill battle for many new home buyers or even for those looking to trade up. For example, in the United States the current 30-year mortgage is circa 7.4% and over the next decade is expected to be around the 5.5% mark, whereas in the comparable low early part of 2021 it was 2.65%. In 2011 the average 30-year mortgage was circa 3.9% and slowly reduced over the next decade, making it the optimal time to buy.

Interestingly, back in the 1980’s, John Quigley, an economist at the University of California, Berkeley, identified what was to be known as the lock-in effect. Between 1978 and 1981 mortgage rates had doubled from 9% to a staggering 18%, which left millions of households paying well below the market rate for mortgages . Therefore, to purchase a new home meant adding possibly unsustainable costs to the monthly household bills, which was a powerful reason to not to move, hence the lock-in effect.

Economic incentives quite often make people forget lessons learnt in the past, as Quigley’s “lock-in effect” was quietly forgotten as interest rates fell back. However, this all changed when the Covid-19 Pandemic hit. In 2020 the US housing market briefly shut down, then a housing boom exploded (not seen in decades) due to a combination of plummeting borrowing costs and stimulus payments. For the first time in fourteen years existing home sales hit six million annually. The market was seeing house hunters purchasing homes far from the coast (the most popular areas before the pandemic), mainly due to the new remote working policies. Today, the quantitative tightening policies of the Federal Reserve has reduced demand and reduced supply even more due to Quigley’s “Lock-in Effect”

Unfortunately for home buyers, even as inflation begins to recede and central banks reverse their strict monetary policy of interest rate hikes, they have to face the reality that borrowing costs on their mortgages may never return to the lows during the fifteen years seen since the global financial crisis. In the past, if interest rates shot up, consumers were confident that rates would return to what was perceived as normal. They would be able to struggle through the higher rate or take on mortgages with a view to refinancing at a later date when interest rates once again fell. Today, these options will not be available because as previously stated, higher interest rates and costs look like dragging on for quite a number of years.

Experts in the United States are referring to the housing market as the start of the glacial period due to the collision of the highest mortgage rates in a generation (timeline 20 – 30 years ), a low inventory and rising prices. As a result, recently released data shows sales of previously owned homes having dropped to their lowest level since 2010, with contract closings in October falling by the most in the last twelve months and dropping by 4.1% from September of this year. Further data released from ICE (Intercontinental Exchange Inc) show that the housing market in the United states is the least affordable in forty years. The data further confirmed that circa 40% of average household income is now required to purchase your average home.

Expert analysts predict that in 2024 the housing market will feel the most severe effects of higher interest rates and sustained higher mortgage rates as they estimate transactions in this market will fall to their lowest levels since the 1990’s. The glacial period that is being deferred on the United States housing market will have many knock-on effects. For instance, families may be forced to live together, and as the elderly age without moving, homes will be kept off the market which could have been made available for purchase by younger buyers. Furthermore, there are a vast number of homeowners who are unaffected by the increase in interest rates (as 30-year mortgages were negotiated when interest rates were low), and they are also sitting on a near-record amount of equity. In other circumstances, there may have been forced sales or foreclosures which would have opened up purchasing opportunities for potential buyers.

Away from the United States things are just as bad in many housing markets with New Zealand being an extreme case. New Zealand enjoyed possibly one of the largest pandemic booms as in 2021 property prices rose by an incredible 30%, and according to data released by the Reserve Bank, circa 25% of the then current stock of mortgage lending was taken out in 2021 and a fifth were first time buyers. However, mortgages are only fixed for three years or less, and interest rate hikes of 5 ¼% since October 2021 have sent mortgage repayments through the roof. The Reserve Bank has estimated that household disposable income that is used to finance mortgage repayments will be circa 20% by June 2024 up from a low in 2021 of 9%, more than double of what they were paying. However, thanks to strong wage growth many households are just about managing.

In China the property slump is not driven by interest rate hikes, but two years ago a government led clampdown on developers borrowing was the forerunner to a growing crisis. Today, China’s property market, which once accounted for 30% of the economy, is struggling with unresolved debts and slow sales leading to an economic decline. Potential buyers have been reluctant to invest in homes yet to be finished, due to a legal system that is not prepared to restructure debt and spreading defaults by home builders. However, the government has advised that it will target selected developers for financial aid, but insist the funding is to finish housing projects, not to repay debt.

In Canada many citizens profited from the housing boom of the last decade, and by 2020 had come to own more than two homes which, in British Columbia and Ontario, accounted for just under 33% of housing stock. However, data shows the introduction of higher interest rates meant that in a city such as Toronto owning a condo was now yielding only circa 3.5% after mortgage repayments and costs whilst Canadian Government Bonds were paying 5%. The high rates of interest have certainly put a damper on interest in new housing purchases, whilst some with investment properties are facing negative cash flows, forcing owners to sell, if indeed they can find buyers.

Elsewhere, Europe is facing a housing crisis, as a collapse in home building threatens an increase in shortages over the next five years. Those countries that are hardest hit are among the wealthiest with building permits in France down by over 25% in seven months through to July 2023, and in Germany building permits were down 27% in the first half of 2023. In fact, when Olaf Scholz’s coalition took power in Germany in 2021, the Chancellor’s pledge of adding 400,000 new homes per year was sadly way behind schedule. In fact experts suggest that Germany won’t reach this figure until 2026 at the very earliest.

There is a massive construction crash in Europe with governments reluctant to spend any more funds than are absolutely necessary as they continue the battle against inflation in the post-covid era. Recent data shows that in Sweden in the first ten months of 2023, 1,145 companies within the construction industry filed for bankruptcy, an increase of 32% from 2022.

Many politicians are advocating more spending on housing, even the Labour party in the United Kingdom (polls suggest a shoo-in at the next general election) are promising to overhaul the planning system and build 1,500,000 over the next term of parliament. However, as in many countries a manifesto promise and reality are often many miles apart. The German government has offered to boost public investment and simplify licensing procedures, but what analysts describe as a tepid response is not expected to make any significant impact.

Without government investment and private sector investment many citizens across the world will be unable to buy their own homes destroying the dreams of home ownership. The only winners appear to be those buyers in the United States locked into the 30-year mortgage when interest rates were at their lowest. The rest of the world can only hope that the property market returns to relative normality, but how long that will take is anybody’s guess.

Gold Hits Record High December 2023

Written by Barclay Butler on December 7, 2023. Posted in Industry, News & Reports. Leave a Comment

This week, gold touched an all-time high of $2,135.39 as the metal continued on a rally which started in early October of this year and has seen the metal gain 16%. Gold last reached a record high back in August 2020, when the Covid-19 pandemic sparked a rush into gold as a safe haven. As the world becomes more volatile, the old adage of gold being a safe haven tends to make it increase in value.

This of course can be seen in the continuing war between Russia and Ukraine, as well as the continued conflict between Israel and Palestine, providing a geopolitical risk as a reason to invest in gold. Furthermore, the dovish stance being taken on interest rates by the Federal Reserve in the United States has given the gold price some staggering momentum.

When the Federal Reserve first started hiking interest rates, assets such as bonds became more lucrative for investors due to the higher yields on offer. Consequently, the demand for gold lessened due to the fact the metal carries no interest rate thus diminishing investor appeal. Conversely, when interest rates come down the appetite for gold increases, and the prospect of easing money supply and reducing interest rates appears to have been confirmed by recent comments coming out of the Federal Reserve.

Analysts are advising that gold’s surge towards a record high was aided by Federal Reserve Governor Christopher Weller, who indicated that interest rates will not have to be increased to get inflation to return to 2%. Further dovish remarks followed from the Chairman himself, Jerome Powell, who said the central bank’s policy rate was now well into restrictive territory, which suggests that rate increases have now concluded.

This potential end to rate hikes will prove beneficial to gold, as the metal tends to struggle under higher rates whilst benefiting from lower rates. Therefore, as mentioned above, gold is not only rising from geopolitical risks, (also 41% of the world’s population will go to the polls next year,) but from traders aggressively pricing in rate cuts from March 2024. Indeed, experts advise that the swaps markets are now predicting a better than even chance of a rate reduction in March 2024, and are pricing in a cut in May of the same year. The recent decline in the value of the dollar has also spurred investor interest in gold as the metal is usually valued against the greenback.

Experts suggest that gold may well go higher as there are many investors still on the side-lines, which increases the possibilities of further spikes/rallies in gold. Previous gold bull markets have been driven by investors using exchange-traded funds or ETFs*, but analysts advise that investors in the mechanism have seen sellers for much of 2023 down 20% from the high of 2020.

*Gold ETFs – This is a very popular way for investors to buy gold as they do not have to go through the process of owning the metal. Gold ETFs enjoy good liquidity and investors can buy and sell shares of the ETF on the stock exchange. When a purchase of shares is made the fund manager must buy the equivalent amount in physical gold. This not only will increase the price of gold but can act as a signal to the broader market that demand is increasing thereby impacting investor sentiment.

Furthermore, experts advise that the current price of gold (down at the time of writing form the high of USD2,135.39 to USD2019.17) may well be underpinned by the continuing support of purchases by governments and central banks. For example, Poland has bought circa 300 tonnes of gold in the past few years falling in line with the Eurozone average of gold to GDP ratio. This is a covert requirement* and as such analysts suggest Poland will buy an additional 130 tonnes of gold.

*Covert Requirement – is referred to because some central banks within the Eurozone (e.g., Belgium) refuse to be transparent with regard to the gold reserve alignment on the grounds of professional secrecy.

Market sentiment appears to favour a bull run in 2024 as experts predict that the Federal Reserve will cut US Dollar interest rates four times in 2024. However, if inflation figures do not match market sentiment and rates are put on hold or even hiked once more, traders and investors will not hesitate to cut their positions and gold will fall back to weaker levels.

Is it Time for the USD25 Trillion Global Cargo Trade to go Digital?

Written by Barclay Butler on November 16, 2023. Posted in Industry, News & Reports. Leave a Comment

Paper documents still rule the world in global cargo trade. Indeed within this USD25 Trillion business, there is, at any one time, four billion paper documents in circulation. Importers, exporters, banks, brokers, financiers et al all rely on paper documents, which finance and move global resources around the world. It is a system that has seen little change since the 19th century and yet paper documents are frequently subject to fraud (i.e., fake or altered), get lost, and can with any particular journey add huge amounts of time.

With regards to time, data released by experts within this area suggest that the time to process a single bill of lading (paper document along with others) required for the transportation of goods, from issuance to customs clearance which for example includes preparation, issuance, shipper to bank, shipper bank to buyer bank, buyer bank to buyer, submission for customs clearance is circa 16.4 hours. Digitisation will dramatically reduce the time spent on processing.

Company lawyers are still today flying many miles to get a bill of exchange signed off at the last minute. This happened in Singapore in the late 2000’s where a lawyer flew to Hong Kong from Singapore and back in one day, (circa 5,000 miles) in order to have a bill of lading signed off by a client. Typically, this process does not happen every day but digitisation would reduce this process to minutes.

Below are examples of the main type of paper documents usually required under a documentary letter of credit that underpin global trade.

· Bill of Exchange or Draft

· Airway Bill (if air freight)

· Road Transportation Document (if road freight)

· Bill of lading

· Pro Forma or Commercial Invoice

· Insurance Policy and Certificate

· Certificate of Origin

· Inspection Certificate

· Packing List

· Warehouse Receipt – when kept in safe custody after goods arrive.

Based in Paris the ICC (International Chamber of Commerce) currently estimates that circa 1% of transactions within the global trade financing market are fraudulent equating to roughly USD50 Billion per annum. The principals involved, such as traders, banks, other financiers and parties, have, according to recently released data, lost USD9 Billion in falsified documentation over the last ten years. Experts are saying that sending duplicate documents to banks involved in a transaction or falsifying documents are the easiest types of fraud to commit.

Examples of fraud can be seen in the metals market which, going back in history and up to today, has been beset by fraudulent scandals. Some of the latest incidents have encompassed some of the world’s leading trading companies and houses including warehouses connected to the London Metal Exchange (the world’s benchmark futures market for base metals) which were proven to have shortcomings. In the world of metals, the commodity or collateral is usually underpinned by the likes of shipping documents (e.g., quantity ownership, location of goods and quality) and warehouse receipts. Such documents are open to fraudulent misrepresentation, such as being fake whereby the material maybe fictitious, or a single cargo may be pledged for multiple loans which is referred to as over-pledging.

In February of this year a well-known company within the metals industry was left facing a loss of circa USD500,000 as the nickel they had purchased did not contain the nickel as specified in documents. Their modus operandi with nickel was to purchase a cargo of nickel aboard ships then on sell that cargo when the ship reached its destination port. However, on one occasion when investigators in Rotterdam checked the contents of a container containing nickel, they found the contents to be of much lower value materials.

In 2020 a well-known energy group purchased copper from a Turkish supplier, but despite documents confirming the cargo was copper, when the containers were opened, they were full of painted rocks. The list of frauds perpetrated within the metals market is very long indeed, and of course fraud is not just found within metals but anywhere that has paper documentation. It would appear therefore that in order to reduce fraud across the industry, digitisation is the only way forward.

Many advocates of digitisation suggest now is the time to go digital, and make use of blockchain technology. In fact, they go on to say that such technology exists today, resulting in a massive decrease in fraudulent transactions. Furthermore, experts advise that that digitisation will be a boost for the sector, as digitised or electronic bills of lading would increase global trade volume by circa USD40 Billion due to a reduction in trade friction (the reduction in time and paperwork) especially in emerging markets. A very important point as muted by experts suggest from an ecological standpoint that by reducing friction in the container trade (e.g., paper documents), 28,000 tress per year could be saved.

An example of less friction has recently been seen between BHP Group in Australia who shipped nickel in containers to Chinese buyer Jinchuan. The transaction was financed by banks domiciled in each country, and using the ICE Digital Trade Platform the full documentation process amazingly took under 48 hours. Interestingly, 65,000 companies (including leading commodity producers) use the ICE Digital Trade Platform, which provides paperless global management solutions, which include digitisation, automation, and accelerates trade and post-trade operations, finance, logistics, compliance and visibility. Whilst 65,000 companies may sound a lot, remember there are still over four billion bits of paper underpinning global trade in circulation at this very moment.

Detractors say that online hacking is an obstacle to digitisation, but the plain fact is that hacking is a lot more difficult than altering a piece of paper. Indeed, expert opinion advises that that circa USD6 Billion could be saved in direct costs by the major shipping lines if they decided on full adoption of digital bills of lading. Furthermore, it is suggested that financiers such as banks would be more willing to finance those counterparts who are considered to be smaller and riskier if the sector went digital.

Currently, the industry is only transacting 2% of global trade via digitisation. However, change is in the air as ten of the world’s top container shipping lines (nine of which are responsible for in excess of 70% of global container freight), have by 2030, committed to digitalising 100% of their bills of lading, (50% by 2028). Happily, some of the worlds largest and most renowned mining companies have given their vocal support to digitisation, these include Anglo America PLC, Vale SA, Rio Tinto Group and BHP Group Ltd, who are all looking to digitise the bulk shipping industry.

So why is that with all the support for digitisation within the industry, only 2% of global trade has been digitised. The answer is a simple one, as the greatest stumbling block to digitisation is Legal. Whilst shipping companies, insurers, traders, banks and other financiers have all got the wherewithal to go digital, at present the only document recognised by English Law that gives the holder title and ownership to a particular cargo is a paper bill of lading. As a result, any deal or transaction which is not legally secured will not receive funding from a bank or cover from an insurance company, and without either of these two participants there will be no transactions.

As a result of this impasse, on the 20th of July 2023 the Electronic Trade Documents Act 2023, having received royal assent, came into effect on the 30th of September 2023*. This act gives the same legal powers to digital documents as paper ones. This represents a massive step forward, as English Law has legally controlled this industry sector for centuries and underpins circa 90% of global commodities and other trade contracts. France is expected to enact similar legislation towards the end of 2023 whilst Singapore (also a centre for maritime law), passed a similar Act or legal framework in 2021 and in 2022 conducted its first electronic bill of lading transaction.

This act is also based on a Model Law** as adopted by the United Nations, as being a transnational body, it is important that they pass statutes that are acceptable to all countries throughout the world. It has been welcomed by many companies throughout the industry and the Trafigura Group has gone on record by saying “We believe this is one of the solutions which would help in reducing documentary fraud”.

*Electronic Trade Documents Act 2023 – The UK Law Commission published their draft bill in March 2022, which this act is largely based on, and it set out the basis of how, under English law trade, documents can 1. Be dealt with and 2. Exist in electronic form, such that an electronic trade document can have the same effect as a paper trade document. The Act goes on to state that a person may possess, indorse and part with possession of an electronic trade document, and anything done in relation to an electronic trade document has the same effect in relation to the document as it would have in relation to an equivalent paper document. This Act amends the Carriage of Goods by Sea Act 1992 and the Bills of Exchange Act 1882.

**Model Law – UNCITRAL (The United Nations Commission on International Trade law) Model Law on Electronic Transferable Records 2017, aims to enable the legal use of electronic transferable records both domestically and across borders. It applies to electronic transferable records that are functionally equivalent to transferrable documents or instruments. Transferable documents or instruments are paper-based documents or instruments that entitle the holder to claim the performance of the obligation indicated therein and allows the transfer of the claim to that performance by transferring possession of the document or instrument. Transferable documents or instruments typically include bills of lading, promissory notes, warehouse receipts and bills of exchange.

The challenge facing the industry is change. People and companies get stuck in their ways and sometimes it is hard to adopt new processes when the current ones have been in existence for hundreds of years. There are many faults with paper, but it is something that everyone across the ecosystem understands, and whilst there is a global approval of digitisation, few are ready or even keen to be the first to dip their toes in the new waters. Experts have rightly expounded on the fact that if digitisation is to work, then everyone across the supply chain must adopt the same data standards, so that communication can move in the most effective way ensuring verification in a truly interoperable manner.

Southport 1 – 1 Farsley Celtic

Written by Barclay Butler on November 16, 2023. Posted in Industry, News & Reports. Leave a Comment

For the first time since August of this year Farsley Celtic have gone on a three-match unbeaten run, when at the final whistle on Tuesday evening the spoils were even between themselves and Southport. Sadly, the Celts player/manager Clayton Donaldson was forced off near the end of the game which, together with the earlier injury to Darren Stephenson, meant the Celts were forced to play to the final whistle with only ten men. We wish both players a speedy recovery and hope they will be fit for the visit this Saturday to the Citadel of Radcliffe FC in the second round of the FA Trophy. The run of two wins and a draw now see the Celts mid-table and their current form will surely see them rise even higher.

Is the US Government’s Interest on Debt Spiralling out of Control?

Written by Barclay Butler on November 15, 2023. Posted in Industry, News & Reports. Leave a Comment

In the United States the annual debt interest they pay on Treasury Bills (US Treasuries) has doubled in the last 9 months, and recent figures released shows that debt interest has passed the USD1 Trillion mark as of the end of October 2023. This figure is representative of 15.9% of the entire United States Federal budget for the 2022 fiscal year, which totalled out as USD6.272 Trillion.

The heavy borrowing coming from Washington DC has driven up bond yields amid worsening metrics, and such borrowing was responsible for the credit agency Fitch to downgrade government debt back in August of this year. The upward shift in interest rates has put the United States government in a position of having to pay more on interest payments in the coming years than was originally calculated.

Before the Covid-19 Pandemic no one anticipated that interest rates would go so high, and unless interest rates return to their pre-pandemic levels, interest rate debt will spiral out of control. In fact, experts predict that by 2026 the government’s net interest expense may well be 3.3% of Gross Domestic Product (GDP), which will be a new record being the highest ever recorded.

As an example of how interest rate debt is spiralling out of control, in October 2023, data released showed that circa USD207 Billion in Treasury notes matured, these notes were issued in 2013, 2016, 2018, 2020, and 2021. Calculations carried out by respected analysts show that the weighted average interest rate* was 1.2%. These notes will be replaced by newly issued debt at an average rate of 5%, and the same will happen every month, (though the amounts will differ) for many months to come.

*Weighted Average Interest Rate – This represents the aggregate rate of interest paid on all debt in a measurement period. The formula for calculating the weighted average interest rate is,

Aggregate Interest Payments ÷ Aggregate Debt Outstanding

= Weighted Average Interest Rate

However, things may be looking up for the US government as along with the European Central Bank and the Bank of England, the Federal Reserve announced on 2nd November 2003 that it would keep Overnight Federal Funds steady, which is the second consecutive meeting where rates have remained unchanged. Many operators in the financial markets believe that rates will come down in the new year, which will lighten the load on debt interest payments. However, the Chairman of the Federal Reserve warned that if inflation stops declining he reserves the right to increase rates again, thereby increasing the burden on debt interest repayments.

Are Bull Markets Coming To An End and Will This Affect Asset Managers?

Written by Barclay Butler on November 15, 2023. Posted in Industry, News & Reports. Leave a Comment

Money managers, who across globe control circa USD100 trillion, have seen an unprecedented outflow of investor funds. One global asset manager based in the United States has seen an exodus of funds amounting to USD127 Billion in the last 24 months. Indeed, within this industry money managers have over the past 10 years faced a massive shift in investor sentiment who have moved to more passive and cheaper investment strategies.

Sadly, these money managers are now facing what may be the end of a mammoth bull run, which has not only masked deep vulnerabilities within the industry but have kept their investments afloat. According to data released from a well know consulting company, in the last 17 years circa 90% of additional revenue received by these money managers has not been from their ability to attract new clients but simply from rising markets. Experts suggest that if there is one more bear market, many of these companies will turn from a slow decline to an impending crash.

Industry experts point out that many of these companies have been literally coasting for years. The coasting is now coming to a stop and if they do not change the consequences will be extremely dire. The salient facts are that amount of client cash that has headed out through the doors of companies such as Invesco Ltd, Janus Henderson Plc, Abrdn (formerly Standard Life Aberdeen Plc, the largest active asset manager in the UK), Franklin and T.Rowe has been in excess of USD600 Billion. Taking these companies as a benchmark for the huge middle of the industry and as proof the world is no longer buying what they are selling, just look at the amount of client funds that have haemorrhaged over the past 10 years.

Experts advise the above five firms represent the pick of the bunch for the middle tier of this industry and as of June 30th, 2023, recently released data confirms that between them they oversaw USD 5 Trillion in assets under management (AuM). However, to show which way the wind is blowing within these companies, whilst the S&P 500 has increased in value by 60% since 2018, with the exception of T.Rowe Price, the other companies have lost circa 33% of their value.

Added to these current problems the industry is still reeling from higher interest rates becoming the norm and the geopolitical tensions between the West and Russia and China. Even Blackrock one of the industry’s leaders has not been immune from the exit of funds as in July, August and September of this year clients pulled a net USD13 Billion from their long-term investment funds. Larry Fink, the CEO of Blackrock was quoted as saying, “Structural and secular changes in business models, technology and most of all, monetary and fiscal policy, have made the last two years extremely challenging for traditional asset management”.

Currently the downward trajectory looks like it will not be changing course anytime soon, and regardless of whether markets are going up or down, passive products* seem to be the favoured by many investors, so they are gaining a lot of traction. Interestingly, as of 30th June 2023, passive investments in mutual funds and ETFs in the United States accounted for 50% of all assets, up from 44% in 2021 and 47% in 2022, whilst 10 years ago it accounted for circa 27%. Essentially investors are ditching those mutual funds with active investments and are joining those with passive strategies which are largely managed by the big companies being Vanguard Group Inc, State Street Corp and Blackrock Inc. Furthermore, there is one more problem money managers have to contend with, and that is cash, and with interest rates remaining high many investors wish to keep money in cash deposits and other similar money market products.

*Passive Products – Passive investing basically refers to a buy and hold strategy for long-term investments, coupled with minimum trading in the market. The most common form of passive investing is Index Investing**, whereby investors seek to replicate and hold a broad market index or indices. Passive investment seeks to avoid fees, is less complex, involves limited trading and therefore is cheaper than Active Products***. The underlying assumption of a passive investment strategy is that over a period of time the market will return positive results.

**Index Investing – This can be an index mutual fund or ETF (exchange traded fund), that tracks a specific market benchmark such stocks and shares in the FTSE 100, the S&P 500, Dow Jones Industrial Average, Nasdaq Composite and the Russell 2000. Other indexes outside the stock market that funds follow are commodity benchmarks such as S&P GSCI Index, the Bloomberg Commodity Index, and the DBIQ Optimum Yield Diversified Commodity Index. These are just three examples pf many commodity indexes that are available to investors. These market indexes make it easy to understand whether the market as a whole, be it stocks or commodities, is gaining or losing ground.

FTSE 100

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index the FTSE 100 or informally known as “the Footsie” is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalisation.

S&P 500

The Standard and Poor’s 500 or known as the S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in America.

Nasdaq Composite

This is a stock market index that includes almost all the stocks listed on the Nasdaq Stock Exchange. Along with the S&P 500 and the Dow Jones Industrial Average it is one of the three most-followed stock market indices in America.

Dow Jones Industrial Average

Simply known as the Dow Jones or the Dow, this is a stock market index of 30 prominent companies listed on stock exchanges in America.

S&P GSCI Index

This index serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradeable index that is readily available to market participants of the Chicago Mercantile Exchange

The Bloomberg Commodity Index

This index is a broadly diversified commodity price index and distributed by Bloomberg Index Services Ltd.

DBIQ Optimum Yield Diversified Commodity Index

DBIQ stands for the Deutsche Bank Index Quant and this index is the Excess Return Index which is a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world.

***Active Products – Active investing is an investment strategy where traders, money managers and their ilk trade on a frequent basis which requires a constant hands-on approach. Active investing requires the knowledge and expertise to buy into or sell out of a particular asset, bond or share. There are usually a team of analysts who look at quantitative and qualitative factors who use established criteria and metrics to help decide whether to buy or sell. All of these factors add up to active investment being more costly than passive investment. Active investing is particularly attractive during times of market upheaval, and unlike passive investing where the goals are to match the market, active investment’s aim is to outperform the market.

Looking back to the beginning of 2023 data released shows that the active funds did not perform as usual during an upheaval in the market. Indeed, in Q1 the extreme volatility that occurred due to a banking crisis, enhanced geopolitical problems and rate hikes should have produced rich pickings for the active side of asset management. However, according to data released by a US Bank, two thirds of actively managed US large cap funds underperformed their benchmark, the worst quarterly figures since Q4 of 2020.

Experts are even suggesting that many asset managers in representing the middle of the industry may not survive a bear market. A well-known internationally recognised accounting company recently suggested 16% of existing asset and wealth management (AWM) companies and organisations will have been swallowed up or disappeared by 2027, which is twice the historical turnover. In 2022 asset managers had a very tough year with funds or assets under management (AuM) falling by just under 10% from a high in 2021 of USD 127.5 Trillion to USD115.1 Trillion which represented the greatest decline for 10 years. Experts suggest that the during the next two years two of the biggest problems for asset managers and investors will be market volatility and inflation. However, it is estimated that a rebound may well occur in 2027 with assets under management reaching a base case of USD147.3 Trillion being an Annual Compound Growth Rate (CAGR) of 5%.

It has been 14 years since the Global Financial Crisis of 2007 – 2009 and since 2011 the world has enjoyed over a decade of low interest rates and financial stability. Today the world is a different place with high interest rates* and an uncertain economic environment, such trends are somewhat alien to many working in the asset management industry and who are therefore light on experience. Furthermore, as mentioned above, this environment may well be prolonged by the current geopolitical instability plus labour shortages. The problem is that money mangers whilst coping with these problems will have to focus on new investment decisions needed to bring growth and long-term viability which currently, they are failing to do.

*High Interest Rates – Athens Thursday October 26th, 2003, the European Central Bank (ECB) governing council in a unanimous decision held the benchmark rate unchanged at 4%, bringing to an end its unprecedented streak of 10 consecutive rate increases that started in July 2022. However, this rate is still 4.5% higher than the all-time low of minus 0.5% and the decision comes a week ahead of Bank of England and the US Federal Reserve decisions where interest rates are expected to remain steady.

With regards to the markets, the bulls are confident of another run, however despite some bullish signs many investors are saying that the math is not adding up to an on-going rally, especially as there are prospects of a recession on the horizon. Furthermore the 2-year and 10-year Treasury yields remain inverted. An inverted Treasury yield occurs when short-term interest rates exceed long-term interest rates. Under normal circumstances, the yield curve is not inverted since debt with longer maturities typically carry interest rates that are higher than shorter term maturities.

But why are inverted yield curves considered prescient, it is because historically they have been a precursor (not always) to a recession. If indeed there is a recession, (Germany for example is already experiencing a recession), then some of the middle tier money managers had better watch out, as a recession inevitably means a bear market and as explained above a number of middle tier companies could disappear completely.