Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is chief administrative officer and managing partner at Fiera CapitalOne day, the question of whether inflation-ridden economies experience a hard or soft landing will be settled. Inflation will moderate, probably in the ballpark of between 2 and 2.5 per cent. Free markets will price in the real cost of capital as opposed to negligible levels that the world has gorged on during the last cycle. We’ll also see a period of detoxication as central banks and governments adjust to a new economic paradigm.What then after this “Great Correction”? With inflation volatility under control, do we go right back to where we started? The journey to price stabilisation is being heralded as the end rather than the beginning of structural change. I couldn’t disagree more. All signs are pointing to the next decade or two being universally different from that which came before.   The return of normalised inflation that anyone over the age of 40 will remember will inevitably influence asset allocation as investors expect returns significantly above the risk-free rate. But it is the more persistent issues plaguing the developed world — more so than inflation — that will apply the greatest long-term drag on productivity and keep growth low. These include demography, climate change, rising healthcare costs, food security and the obsolescence of legacy infrastructure.The golden thread that unites these challenges is that solving them will require unprecedented capital expenditure.Russell Napier, the market strategist and economic historian, describes this as a “capex boom”. Others call it an incoming “productivity renaissance”. Whatever way it’s badged, the premise is that industries that enable us to tackle these mission-critical issues will ultimately attract seismic inflows of investment into physical assets.Estimates from McKinsey & Company suggest that capital spending on physical assets will amount to approximately $130tn through to 2027, led principally by the three “Ds”: digitalisation, decarbonisation and deglobalisation.But this figure does not account for more recent developments in energy-hungry and computational heavy fields such as AI and robotics, where demand for the capacity to store and exchange more data will overlap with capex requirements to upgrade global grid networks, harness renewable energy, extract resources to meet growing demand for batteries and modernise the west generally.  Forward-thinking investors with a longer-term outlook are already thinking about what this chapter will hold — not least because private capital will have a principal role to play in this age of formation that will dwarf previous smaller capex cycles that were broadly state-led.Exposure to traditional physical assets that are fast becoming “stranded” in the energy transition and the greening of material supply chains are some areas where investors are expecting enhanced returns. Others include logistics supporting “nearshoring” of production facilities, data centres, battery production, the retrofitting of carbon-intensive buildings and utilities upgrades.In some ways, this tilt to capex-ready industries is already bearing out in the breakdown in the traditional 60/40 portfolio split between bonds and equities. There is now a stronger emphasis placed on risk concentration. This means more interest in international smaller companies and overlooked emerging markets — but also private assets with a low correlation to stocks and bonds, such as agriculture and forestry, alternative real estate and renewable energy infrastructure.How capital is deployed is equally as important as where capital is deployed. Active asset management will make greater strides than passive investment in a capex boom — particularly as the goal is to selectively invest in physical assets necessary to power the new economy as opposed to seeking a broad “catch-all” exposure. The consequence is that, on public exchanges, broad indices may obscure the real winners of this supercycle while in private markets, there is a real bifurcation emerging between assets fit for the new economy and those that are being downgraded.It will still take time for institutional investors and intermediaries to get accustomed to this shift. But concerns over international supply chain dependency, the case for refreshing infrastructure, and capitalising advanced industries, are fast becoming policy priorities.When the inflation plane does eventually land, we’ll all open the hatch to a new and unfamiliar normal. And who will take priority? The investors with a head start, of course.                   More

When I started investing professionally in the early 1980s, I would constantly hear tales of the 1973-4 crash. It was one of those events seared on the corporate memory, just as the financial crisis of 2007-8 would be for subsequent generations.Fifty years on, there are still lessons to be learnt from that two-year bear market. For me, the enduring one is that companies often lay the tramlines for a successful future in the most difficult times.The past few years may not have been as calamitous for investors as that spectacular crash — the London stock market (the FT30, as it was then) lost three-quarters of its value in 1973-4 — but they have been seriously challenging. Covid, supply-side shocks, double-digit inflation, sharply rising interest rates and recession concerns have been a lot to overcome. A prolonged period of stress can be the opportunity for a reset.Rising pricesInflation is a major influence on asset prices and an important consideration in investment decisions. When UK inflation spiked last year it was a good time for companies to bury the bad news of their own price rises. Those that failed to pass on costs sufficiently will have seen margins squeezed. That reduced profitability may now be baked into their financial infrastructure, because customers become less tolerant of sharp price rises as inflation falls — and, despite the recent uptick, I believe inflation is falling.Technology was a big driver in containing inflation over the 20 years that preceded the recent spike. One product was particularly important — the smartphone. Though expensive, it replaced the need for a host of other things, such as a watch, a diary, a map, a camera and so on. It also gave us ever-ready access to pricing information that shaped the rest of our spending. Price comparison websites and search engines left no hiding place for uncompetitive businesses.Other online developments created excess supply. For instance, Airbnb meant there were many more “hotel rooms” in every town. As the textbooks teach us, a rapid increase in supply will lower prices if demand does not keep up.The next wave of technological advance is coming. Artificial intelligence will allow many companies to reduce the workforce while still enhancing services. The transition to a low-carbon world is lifting infrastructure spending and technology investment — which is initially inflationary, but change will come.I have previously expressed my enthusiasm for companies working to produce and store electricity from hydrogen — a sector that could benefit hugely from the drive to a low-carbon world. Nuclear power may hold opportunities too. Scientists have achieved ignition by a nuclear fusion reaction, which generated more energy than it consumed. An interesting business working in this area is First Light Fusion, in which quoted company IP Group has a stake. It aims to build a power plant producing 150 megawatts of electricity — enough to power 300,000 homes — and costing less than $1bn.The ingenuity of those working in this sector means energy will eventually be more abundant, cleaner and cheaper — bolstering economic growth and adding another deflationary force into the mix. But what about the more immediate future?The pricing-power testIt is worth looking at companies and whether they have been able to increase their prices. Be careful about top-line nominal revenue figures when checking shareholder updates — price rises can mask falls in sales and may still not be sufficient to cover raised costs.Remember, although we think of it as an aggregate figure, inflation is a composite of many elements. Some costs are rising faster than others. Take wage inflation. Annual wage growth in the UK from September to November 2023 was 6.6 per cent at a time when inflation generally was 3.9 per cent.That is a challenge for labour-intensive businesses like pub chain JD Wetherspoon, where labour constitutes over 30 per cent of costs. But it might be good for a company like the Gym Group, which has relatively low staff numbers and has successfully raised prices almost in line with inflation while its biggest cost — rent — has remained flat.Companies in cyclical businesses may recover some lost ground on pricing when the market picks up, as I believe it will when inflation stabilises at a lower level and interest rates fall. More immediately, though, they can offset price pressure by implementing difficult decisions to reduce costs.Building materials supplier Marshalls has exited its Belgian operation and streamlined manufacturing to save £9mn a year in costs, closing a plant near Glasgow. Last month, a trading update from brickmaker Ibstock showed it had cut jobs and closed a second factory, which will help save £20mn a year, while it continues work on a more efficient plant, based in the West Midlands, which will produce the UK’s lowest-carbon bricks when it opens soon.Another well-run company, ceramics specialist Morgan Advanced Materials, closed a lot of its facilities during Covid. The business was just coming out of the other side of that and was regaining momentum when a cyber attack dragged earnings down again. It has now got through this and its balance sheet is in a much better place. It has reinvested in R&D and is lean on costs. Its share price is weighed down by negative sentiment towards industrial companies, but that makes it cheap. And it is yielding around 4.5 per cent.Indirect winnersCrises can create indirect winners by taking out weak competition. At least three Italian budget airlines have folded since 201, as well as Flybe, which once provided more than half of UK domestic flights outside London. They have left companies such as Ryanair and easyJet with a clearer field.The rise in bond yields benefited many companies, sending their pension schemes into surplus. One of our holdings, logistics specialist Wincanton, is no longer pumping over £20mn a year into its pension fund to plug a deficit. This has freed money for vital investment and to repay shareholders, which is what may have persuaded a recent bidder to offer a premium of 50 per cent on the share price.During the Covid crisis, energy group Shell was one of many companies to reset dividends. It had been handing out too much cash to shareholders and, because of its reputation as a dividend darling, was loath to stop. Because of the pandemic, it was able to slash dividends and invest in projects like decarbonisation. At just over 4 per cent — from nearer 10 — its dividend looks more secure and is supplemented by a $3.5bn share buyback programme.The move by companies to reset dividends — at all levels — is one reason for optimism about the dividend prospects of the UK. The FTSE All-Share is yielding 4.8 per cent. And smaller companies are also generating handsome yields. Weakness in the smaller companies markets means there are many businesses in the UK with strong recovery and growth prospects paying well. Ibstock pays about 5 per cent now; Marshalls 3 per cent. We consider these both good companies that are well placed to thrive when housebuilding recovers, as it must.Falling interest rates will diminish returns on cash savings and make these dividends look increasingly attractive. That means the chance to secure this dividend income at such appealing prices will not last for ever. Just as the tramlines for success are laid for company managers in times of stress, so for investors. Markets bounced back strongly in 1975. UK shares may do the same this year. And if I am wrong? At least we are being well rewarded in dividends for our patience.James Henderson is co-manager of the Henderson Opportunities Trust; Law Debenture; and Lowland Investment Company More

Investors are piling into stocks of European luxury goods and other sectors with exposure to China, believing they offer a safer way to profit from a possible recovery in the world’s second-largest economy than investing directly in its ailing stock market. The Stoxx Luxury 10 index — whose constituents derive around 26 per cent of earnings from China, according to Barclays estimates — has risen 9.3 per cent this year, well ahead of the 0.8 per cent gain in the Stoxx Europe 600, a broad measure of the European stock market. Other equity sectors exposed to China, such as automakers and healthcare, have also outperformed.Strategists say there are early signs that the flagging Chinese economy, which last year grew at one of its slowest paces in decades, will recover. However, they believe a rout that wiped close to $2tn off the value of its stock market makes it a dangerous place to invest. European stocks offer “a safer way” of getting exposure to China, said Florian Ielpo, head of macro at Lombard Odier Investment Managers. “Most of Europe’s sectors could profit from an improvement in China and that improvement is not priced in yet.“If you don’t want to be exposed to the structural problems but do want to be exposed to the cyclical recovery then European equities are the way to go,” he added.Lombard Odier is overweight Europe in its portfolios. Ielpo said luxury stocks were the “obvious” place to invest, as well as healthcare, automakers and industrials.European luxury stocks have been lifted in recent weeks by earnings from heavyweights LVMH and Hermès, which beat analysts’ forecasts, convincing some traders that valuations had been excessively beaten down by gloom about China’s economy. LVMH shares are up 9.2 per cent this year, while Hermès has gained 11.8 per cent. Hermès CEO Axel Dumas brushed off concerns about a Chinese consumer slowdown last week. While he said he had noticed lower shopping mall traffic on his latest visit to the country, he added that this was not reflected in the company’s fourth-quarter figures. “In some cases the negativity on China is quite overdone,” said Emmanuel Cau, head of European equity strategy at Barclays, which has “started to add back in China exposure selectively”, particularly in sectors like luxury. Shares in carmakers Mercedes-Benz and Volkswagen — which both derive more than 30 per cent of profits from China, according to estimates by Barclays — have rallied 6.9 per cent and 14 per cent, respectively, since the beginning of the year.China’s economy grew 5.2 per cent last year, according to official figures from Beijing, slightly above target but still one of the slowest rates in decades. Some economists believe this figure may be an overestimate, as Beijing seeks to quell concerns while the country continues to battle a property crisis and deflationary risks.However, there are tentative early signs that economic activity may be picking up, say some strategists.Data showed China’s services and construction sectors ticking up in January, with the non-manufacturing purchasing managers’ index rising to its highest level since September. Manufacturing continued to contract, but at a slower pace than the previous month. Authorities have also recently ramped up efforts to boost market confidence, with the so-called “national team” of state-affiliated financial institutions pouring money into the market, and tightened restrictions on short selling.China’s CSI300 index has tumbled 43 per cent from its all-time high three years ago, but has recently began to pick up following interventions from Beijing. International investors, however, remain extremely cautious. BNP Paribas upgraded Europe’s luxury sector to overweight on Monday, a move that the bank’s head of equity strategy, Ankit Gheedia, said was “a better way to position for China” than either buying local equities or investing in European industrials. European sectors most exposed to China, including luxury goods and industrials, could also benefit from growth in other regions, particularly in the US, thereby protecting investors against steep losses if the Chinese economy deteriorated, say analysts.“A recovery in European equities is a more diversified bet” than direct investment in China, said Tomasz Wieladek, an economist at investor T Rowe Price. Indirect bets on a Chinese recovery might also help investors avoid being caught out by fraying diplomatic relations between Beijing and Washington — especially in an election year where Republican frontrunner Donald Trump has already proposed steep tariffs on Chinese exports.Even for those more pessimistic about China, some European stocks still offer a cheap option on a surprise recovery in the country’s economy. Gerry Fowler, head of European equity strategy at UBS, remains downbeat on China’s outlook but nevertheless favours Europe’s “very beaten down” mining sector, which is heavily exposed to China, in the bank’s 2024 outlook.This offered “cheap unloved exposure [to China] that would benefit from a recovery”, said Fowler. “We don’t expect it to go down but it could go up significantly,” he said. More

TOKYO (Reuters) – Japan’s benchmark Nikkei got off to a roaring start on Friday, opening the morning session at its highest since Japan’s economic bubble burst in the late 1980s.The Nikkei share average was last up 1.6% at 38,769.64, surpassing the post-economic bubble era high of 38188.74. So far it’s up 14.0% for the year. The broader Topix was up 1.1% at 2620.53. The Nikkei was within touching distance of the all-time record high of 38,957.44 hit in December 1989. The stock market was buoyed by a strong day on Wall Street overnight. U.S. stocks closed higher as retail sales data declined more than expected, feeding hopes the Federal Reserve will soon start cutting interest rates in coming months.The largest percentage gainers in the index were Advantest Corp up 4.91%, followed by Tokyo Electron Ltd gaining 4.74% and Resonac Holdings Corp up by 4.32%. More

NEW YORK (Reuters) -Federal Reserve Bank of Atlanta President Raphael Bostic said on Thursday that while the U.S. central bank has made a lot of progress lowering inflation pressures, ongoing risks mean that he’s not yet ready to call for interest rate cuts. “We have made substantial and gratifying progress in slowing the pace of inflation,” Bostic said in a speech before a gathering held by the Money Marketeers of New York University Inc.“My expectation is that the rate of inflation will continue to decline, but more slowly than the pace implied by where the markets signal monetary policy should be,” he said.Bostic said it is too soon to declare victory over high inflation, and that “leaves me not yet comfortable that inflation is inexorably declining to our 2% objective.”As a result, it could take a while before the Fed has sufficient confidence that the economy is on a path that will allow a cut in interest rates. “We will likely soon contemplate the appropriate time for monetary policy to become less restrictive,” Bostic said. “Right now, a strong labor market and macroeconomy offer the chance to execute these policy decisions without oppressive urgency,” he added. Markets have been actively debating the timing of a central bank cut in what is now an interest rate target of between 5.25% and 5.5%. Markets had been eyeing a spring easing in light of rapidly cooling price pressures, but a range of Fed officials have signaled that it will take longer to gain the needed confidence to support lower rates. In addition, stronger-than-expected data on January consumer prices has raised fears that inflation will not retreat as swiftly as thought, pushing back investor expectations of a rate cut. Bostic said that relative to his colleagues’ collective expectation that the Fed can cut rates three times this year, he had penciled in two cuts for 2024 because he was expecting an uneven retreat in price pressures. The Fed will update those forecasts at its policy meeting next month. In his speech, Bostic said the economy’s strength in the face of rapid Fed rate hikes and the ability of inflation to fall despite a very strong job market confounds what many had been expecting. It is also possible, he said, that the economy has grown less responsive to changes in monetary policy. The economy may even have “pent-up exuberance” that could drive up demand again, which represents an upside risk to inflation, he said. Bostic also said he did not see a reason for the Fed to slow or stop its ongoing balance sheet drawdown, which has seen around $1.4 trillion come off the central bank’s balance sheet. He said market liquidity still looked solid and he is watching for signs it may be getting tighter. More

“I’m comfortable to continue this,” Bostic said of the balance sheet drawdown commonly referred to as quantitative tightening. Bostic said he doesn’t see a shortage of liquidity that would cause the Fed to shift gears on the balance sheet cuts, in comments to a gathering held by Money Marketeers of New York University Inc. More

(Reuters) -Australia’s QBE Insurance Group’s full-year profit more than doubled on Friday, helped by higher income from premiums, but missed analysts’ expectations, sending its shares on track for their worst session in three months. The group, which operates in 27 countries including the U.S., said adjusted net cash profit after income tax was $1.36 billion for the full year ended Dec. 31, compared with $664 million a year earlier.It, however, missed an LSEG estimate of $1.40 billion and a Citi forecast of $1.46 billion. Shares of QBE were trading about 3.3% lower at 2330 GMT, after falling as much as 4.8% to A$15.61 earlier, their biggest intraday loss since Nov. 15. Analysts at Citi said the results are “certainly a disappointment” relative to its forecasts. However, they still think QBE should be performing better given that the insurance cycle has been at its strongest in 20 years. The country’s biggest insurer by market value said it expected premium rates to remain supportive, targeting a mid-single digit growth in fiscal 2024 on a constant currency basis. QBE’s gross written premiums on a headline basis rose 9% to $21.75 billion in 2023, supported by higher premium rates as well as targeted new business growth.However, its net cost of catastrophe claims increased marginally to $1.10 billion due to extreme weather conditions in its areas of operation. Strong returns on fixed income assets amid higher interest rates boosted net investment income to $1.37 billion, compared with an investment loss of $773 million in the prior year. QBE reported combined operating ratio of 95.2%, compared with 95.9% a year earlier, and said it was targeting a COR of about 93.5%. A ratio below 100% means the insurer earned more in premiums than it paid out in claims.It also declared a final dividend of 48 Australian cents apiece, up from 30 cents a year ago. More

TOKYO (Reuters) – Japanese Finance Minister Shunichi Suzuki said on Friday that monetary policy including whether and when the central bank may end its negative interest rate policy was up to the Bank of Japan to decide.”I am aware there are various opinions in the market,” Suzuki told reporters when asked if weak gross domestic product data may affect the timing of an end to negative rates, which many investors expect to happen in March or April. More