Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The International Energy Agency has warned of volatile gas prices this year, with conflict in the Middle East and Ukraine creating “an unusually wide range of uncertainty” in its forecasts.The west’s energy watchdog said in its quarterly report on Friday that geopolitical issues such as the war in Ukraine and heightened tensions in the Middle East, shipping disruptions and potential start-up delays at new liquefied natural gas plants “all represent downward risks to the current outlook, which could fuel price volatility through 2024”.The warning comes as the gas market enjoys a period of relative calm at the start of this year.Despite occasional cold snaps and disruptions to liquefied natural gas shipping caused by the Houthi attacks on vessels in the Red Sea, ample levels of gas in the EU’s storage facilities have helped push benchmark European prices to their lowest in six months this week. Storage across the EU is 73 per cent full, well above the previous five-year average.But “the escalation of regional conflict, which began with the war between Israel and Hamas in October 2023, could significantly affect LNG flows in the Middle East”, the IEA said. Qatar, which accounts for one-fifth of global LNG supplies, and the United Arab Emirates transport their LNG through the Strait of Hormuz, and “consequently, any disruption to this route could have major implications for global LNG markets”, the watchdog said.All such deliveries from Qatar to Europe then normally travel through the Red Sea and the Suez Canal, but it has recently diverted four cargoes that were bound for Europe to travel via the longer Cape of Good Hope route, according to shipping data provider Kpler.The rerouting adds about 10 days of extra voyage for Qatari cargoes to Europe. No LNG carriers have come through the Suez Canal since January 16, according to the firm. However, the IEA also said that “high inventory levels together with an improving supply outlook are providing gas markets with some reassurance for 2024”, with global gas demand expected to grow 2.5 per cent, or 100bn cubic metres. That is higher than the 0.5 per cent growth in 2023.The watchdog also noted that gas demand in OECD European countries fell 7 per cent last year to its lowest level since 1995. The power sector accounted for 75 per cent of the demand reduction, as lower electricity consumption, continued expansion of renewables and improving nuclear power availability reduced the need for gas-fired power generation.Demand in Europe is set to grow 3 per cent this year, but will still be 20 per cent below its pre-energy crisis levels in 2021, the IEA added. More

Looking back over my five and a half decades exploring investment and finance, I have to ask the inevitable question: what have I learned from it all?The period has been marked by a welter of financial innovation, regulatory change, booms and busts, banking crises, geopolitical tension and much else besides. From this protracted drama it is hard to extract a set of simple coherent lessons for investors. Yet I believe that there are some eternal verities in investment and finance. They are often counterintuitive and not always aligned with conventional economic wisdom.My early education in investment started in the great bull market of the late 1960s, in which a heady pace was set by the so-called Nifty Fifty growth stocks on the New York Stock Exchange. In the brief period I spent in the City of London, becoming a chartered accountant, I had the good fortune to be sent on the audit of the Imperial Tobacco pension fund. This was run by one of the great investment gurus of the postwar period, the actuary George Ross Goobey.When Ross Goobey went to the Imperial fund in 1947, pension funds were mainly invested in gilt-edged securities, which were regarded as safer than equities. In his view this was a nonsense. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Against the consensusHis thinking, he told me, was not based on sophisticated economics or actuarial legerdemain. He merely thought that the Labour chancellor Hugh Dalton’s 2.5 per cent fixed interest gilts were a swindle when inflation was running at more than 4 per cent. They could not, he thought, deliver the requisite returns to meet Imperial’s pension obligations. Equities, by contrast, looked to him absurdly cheap. Ross Goobey managed the remarkable feat of persuading the fund’s trustees to let him invest in equities and dump the fund’s gilts.In the bull market conditions of the late 1960s the Imperial fund’s portfolio struck me as bafflingly cumbersome. It contained nearly 900 holdings in mainly small and medium-sized — far from nifty — quoted UK companies. The fund was stuck with them regardless of their performance because Ross Goobey insisted his managers should never trade, only buy and hold.Particularly unfathomable to me was his injunction to his managers to buy nothing that yielded less than 6 per cent. In a raging bull market this ensured exposure to some of the shakiest companies on the London Stock Exchange.A few went bust in the subsequent recession. Yet, thanks to the policy of extreme diversification, the portfolio damage was marginal. In addition the high-yield injunction protected the fund from exposure to the most overvalued (and thus low-yielding) companies in the boom.Here was an object lesson in the workings of diversification, though not quite as envisaged by economists such as Harry Markowitz, for whom the “free lunch” of diversification came primarily from spreading bets across different asset classes. Ross Goobey instead took a very risky bet on a single asset class while diversifying within it. The risk of capital loss was mitigated by the yield discipline he imposed.So great were the returns that Imperial enjoyed pension contribution holidays for years. Other institutional investors followed suit by dropping gilts in favour of ordinary shares. Ross Goobey was credited with founding what came to be known as “the cult of the equity”.Among the enduring lessons: diversification is an invaluable risk management tool. High yield, though often an indicator of dividend cuts to come, can be a good defence in an overheated market; equating risk with volatility, as so many economists do, may be less helpful, especially for private investors, than focusing on avoiding loss of capital. Meanwhile, reducing transaction costs by minimising share trading bolsters investment performance. That logic has turbocharged the rise of passive investing.  A decade of financial turbulenceThe 1970s provided me with an induction course, first on the Investors Chronicle and The Times, then as financial editor of The Economist, in the dynamics of booms and busts. The unintended consequences of deregulation — a recurring theme in financial markets — helped shape what proved in economic and financial terms to be an exceptionally violent decade.Exhibit A in the saga was US President Nixon’s cancellation in 1971 of the convertibility of the dollar into gold. The resulting deregulation of exchange rates unleashed volatile cross-border capital flows that caused wild swings in global asset prices. Exhibit B was the shift in the banking system from being a home for low-risk, highly regulated quasi-utilities — a product of the troubled 1930s — to an adventure playground in which bankers’ insatiable risk appetite was substantially liberated.A radical and still instructive deregulatory experiment took place in the UK in 1971. The Bank of England scrapped quantitative ceilings on bank lending in favour of indirect controls, such as balance sheet ratios. This unleashed a wild acceleration of the money supply and credit. Excess liquidity poured into an overheating property market. Then came the 1973 oil crisis, soaring inflation, recession and financial crisis. Property, gilts and equities all plunged.In equities, the dramatic share price collapse was driven by financial institutions’ selling. Their fear was not ill-founded. In confronting inflation, the Conservative government of prime minister Edward Heath removed key props of the capitalist system by adopting price, dividend and commercial rent controls. At the same time companies faced not only spiralling wage bills but penal tax liabilities. This was because corporation tax was charged on paper profits from stock appreciation, the difference between the original cost of inventory and the inflated cost of replacing it. Result: British industry was going bust.When Labour replaced the Tories in early 1974 chancellor Denis Healey intensified the corporate fiscal clamp. Yet by the autumn he had grasped that the corporate sector was being terminally throttled. He introduced tax relief for stock appreciation along with other breaks.Timing the marketPolicy U-turns often signal market turnarounds. Healey’s move to put British capitalism back on its feet should have ended the bear market. Yet in the fourth quarter of 1974, fearful insurance companies, pension funds, investment trusts and unit trusts together sold more shares than they bought for the first and last time during the decade.     Then on January 6 1975, after a peak-to-trough fall on the FTSE All-Share index of 72.9 per cent, the market inexplicably turned and rose vertically. It was impossible for the institutions to get back into the market without causing prices to move spectacularly against themselves.That is a reminder of the futility, for most investors, of trying to time the market and of the difficulty of contrarianism, the art of investing against the consensus. Note, though, that Ross Goobey, hitherto an equity ideologue, once again defied convention. When undated gilt yields reached 17 per cent in the mid-1970s the Imperial fund took a big bet on these government IOUs. Ross Goobey’s thinking was that if inflation came down this was an unbelievable bargain. But if the economy was going to hell in a handcart all bets were off anyway. Of course, all bets are never off in financial markets, not least because when that becomes the common perception, gold comes into its own. There lies the case for the yellow metal as a hedge against catastrophe.Why should this episode resonate with us today? While economists have explained exhaustively that we are not now reliving the 1970s the similarities remain more striking than the differences. Both periods saw supply side energy and commodity shocks, together with surging money supply. Governments turned on the fiscal tap in response.Central bankers in both periods initially declared they could do nothing to curb an inflation induced by supply shortages. They were slow to see the demand side of the equation and the risk of second round effects in labour markets. And 21st century central banks’ economic models provided useless forecasts when confronted with supply shocks. So they fell back on a shaky, data-dependent (in other words, backward-looking) monetary policy.One lesson is that investors, as well as central bankers, ignore money supply signals at their peril. Another is that in such inflationary periods government bonds cease to provide a diversifying hedge against supposedly riskier assets.   Dotcom deliriumFast forward, now, to the second half of the 1990s, by which time I had been writing for the FT for a decade and a half. The dotcom boom was turning into a bubble, once again making a nonsense of mainstream economists’ belief that markets are “efficient” or reflect fair market values. An important psychological factor in the tech euphoria was “Fomo” (fear of missing out) which goes back in history at least as far as the South Sea Bubble of the early 18th century. Fomo adds to investors’ myopia over the risk of capital loss.For professional investors fear of missing out is more a matter of business and career risk. They are usually benchmarked against an index or peer group. So if they stand against a bubble and underperform the index, clients defect and they may be fired.This was the fate of Tony Dye, the former chief investment officer of Phillips & Drew Fund Management, during the tech bubble. By shunning overvalued tech and going heavily into cash he seriously underperformed PDFM’s peer group, leading to his ousting just two weeks before the bubble burst. Small wonder fund managers tend to hug their benchmarks. A typical trading room, the modern face of the City. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Bond investors are warming to a host of countries locked out of international markets for the past two years, raising hopes that a debt crisis in the developing world may be starting to ease.A global bond rally over the past two months, in anticipation of interest rate cuts in the US and other big economies, has swept up riskier debt as investors seek higher returns.The resulting fall in borrowing costs has helped to pull countries out of debt distress, commonly defined as a dollar-borrowing cost more than 10 percentage points higher than that of US Treasuries, which in effect bars a government from issuing new debt.Ten nations — Angola, Egypt, El Salvador, Gabon, Iraq, Kenya, Mongolia, Mozambique, Nigeria and Tajikistan — have now seen their borrowing spreads fall below this threshold since 2022.That raises the prospect that more developing countries will be able to refinance their debt with fresh borrowing rather than joining the raft of economies that defaulted in the wake of the Covid-19 pandemic.“It is looking better overall, and what has improved is access to financing,” said Simon Waever, global head of emerging markets sovereign credit strategy at Morgan Stanley. “I do think there is a chance that some who have been excluded from markets will have access now.”Ivory Coast further buoyed optimists this week by becoming the first sub-Saharan African country to issue an international bond in nearly two years as it raised $2.6bn on the market. Investors now expect other issuers with “junk” level credit ratings to follow.“Ivory Coast has definitely benefited from the improving mood and falling yields,” said Paul Greer, an emerging markets debt portfolio manager at Fidelity International. Greer added he expects “the disinflation momentum will continue, letting some others come to market this year”.While a fall in bond yields in the US and other developed markets — which makes emerging market assets more attractive to investors — has been the biggest driver of the rally, economists also point to falling oil and wheat prices that have eased pressure on some emerging economies.“If we look back to 2022, debt-distress concerns were at their height, pushing many of these economies into unsafe territories,” said William Jackson, chief emerging markets economist at Capital Economics. “The Federal Reserve was about to raise interest rates and US bond yields were rising quickly. Commodity prices were rising from the war in Ukraine. But all of those have started to reverse.”There are still questions over appetite to lend money to these countries, however, as some investors continue to be burnt by post-Covid defaults that have yet to be resolved. Zambia, Sri Lanka and other defaulters have been falling behind on restructuring debts because of disputes among creditors.Despite relatively few defaults since 2022, flows of money back into hard currency emerging market debt have been scant, one fund manager said. “A lot of it has to do with the experience on the restructuring side.”There is also hesitancy on whether the falling spreads are a sufficient indicator that countries can access the markets and not default on new credit.“These rates are not indicative, and are largely driven by expectations for US bonds,” said Emre Tiftik, director of sustainability research at the International Institute for Finance. “There are remaining tensions in domestic debt and government expenses that suggest that some of these countries will not be able to access capital markets.”And while the yield gap relative to US Treasuries has shrunk, many riskier emerging economies would still probably face daunting double-digit borrowing costs.Some countries may prefer to avoid fresh borrowing on the bond market and instead seek cheaper financing such as more loans from the IMF and other official lenders — at the cost of conditions on policy.“For countries that do not default, they will stretch out the pain by using multilateral capital to continue paying off rising debts and by further squeezing government expenditures,” said Bright Simons, vice-president of research at Ghanaian think-tank Imani.Most governments close to debt distress already rely on support from multilateral lenders such as the IMF and World Bank to help them defray debt costs and avoid default. The International Development Association, the part of the World Bank that provides low-interest loans to the poorest countries, dispersed a record $27 billion in 2023. Last year, debt-distressed Egypt released two yen-denominated Samurai bonds with the Africa Finance Corporation as a guarantor. Kenya, meanwhile, is exploring debt for climate swaps, in which a portion of debt is cancelled in return for commitments to address climate change, following the lead of other debt-distressed countries such as Ecuador. But analysts warn that such schemes might not be enough to stop more emerging economies from reneging on their borrowing, as Ethiopia did in December.“There is a better global outlook for the next few quarters, especially in [formerly distressed] countries,” said Sergi Lanau, director of global emerging markets strategy at Oxford Economics. “But we should still expect some sovereign defaults.”Additional reporting by Joseph Cotterill More

(Reuters) -Visa’s tepid forecast for current-quarter revenue growth on Thursday eclipsed a market-beating earnings report that was powered by customers swiping their cards for big purchases during the holiday shopping period and robust travel.Even so, executives at Visa (NYSE:V) struck an optimistic tone over the outlook for spending across the year. Severe winter storms that hit the U.S. have weighed on volumes at the start of the year, CFO Chris Suh said in an interview with Reuters, but added that the company is not worried about any broader impact and expects it to get smoothed out over the quarter. “As it turns out, no one goes out in negative 10 degree weather … Conversely, in cities where the weather has been good, there’s been no change in volume,” Suh said. Shares of Visa, the world’s largest payments processor, were down 3% in extended trading after the company forecast an increase of “upper mid- to high single-digit” in second-quarter net revenue. The outlook compares with an 11% growth in the corresponding period in 2023. The outlook for payments firms has been marred by worries that a slowing economy and high-interest rates will continue to pressure the wallets of consumers, particularly those in the lower-income bracket. Edward Jones analyst Logan Purk said the results show that consumer spending remains robust, but also reveal that it is starting to slow down. “We believe the mixed guidance and slowing transactions will likely weigh on the stock,” Purk added. In a bright spot, U.S. consumers shrugged off macroeconomic worries to ring in a solid holiday season. Adjusted profit of $2.41 per share sailed past analysts’ expectations of $2.34. Suh added that travel in key markets continued to improve, including China, where it is yet to return to pre-pandemic levels, but is seeing steady sequential recovery. Payments volume increased 8% in the first quarter on a constant-dollar basis while cross-border volume excluding intra-Europe, a gauge of international travel demand, surged 16%. More

TOKYO (Reuters) – The U.S. dollar held firm on Friday after rising overnight, as traders weighed how domestic GDP data that surprised to the upside would impact the Federal Reserve’s rate path and awaited key inflation data later in the day. The euro, meanwhile, was on the backfoot following the European Central Bank’s (ECB) latest monetary policy meeting on Thursday which held interest rates at a record-high 4%.In the United States, official data on advance GDP estimate showed gross domestic product in the last quarter increased at a 3.3% annualized rate, overshooting the consensus forecast of 2% growth rate. It also showed inflation pressures subsiding further.”US GDP data re-affirmed soft landing hopes for the US economy, but the bond market focused more on the disinflation component of the report which pushed yields lower. The dollar, however, held up,” said Charu Chanana, head of currency strategy at Saxo in Singapore.The dollar index, which measures the greenback against a basket of major currencies, hovered around 103.52 after climbing about 0.2% overnight. It’s gained about 2% so far this year.U.S. Treasury yields slid, with the benchmark 10-year yield down at 4.11% in the Asian morning. [US/]Markets are betting there’s a 50% chance of a rate cut in March, according to the CME FedWatch tool, down from 75.6% a month ago. “Pressure on yields and dollar could increase if December PCE comes in softer than expectations today,” Chanana added.The euro was last $1.0841, after slipping to a six-week low of $1.08215 on Thursday.The ECB stood pat at its policy meeting on Thursday as expected, although traders piled on bets that the bank will cut interest rates from April as they interpreted policymakers are growing more comfortable with the inflation outlook.The ECB’s pushback against market bets of an April rate cut was “less direct and positive direction was noted on wages,” which pushed up expectations and “emphasises a bearish outlook for the euro,” said Chanana. Sterling consolidated around $1.2703. The Bank of England will announce its latest decision on interest rates next Thursday.Elsewhere, the was stuck around 147.56 per dollar, after it inched further down overnight from recent lows hit earlier this week after the Bank of Japan took a more hawkish tone. Data on Friday revealed core inflation in Japan’s capital slowed to 1.6% in January from a year earlier, below the central bank’s 2% target. “The plunge in inflation to well below 2% in Tokyo last month was broad-based, casting doubt on the Bank of Japan’s willingness to end negative interest rates,” Capital Market’s Head of Asia-Pacific Marcel Thieliant wrote in a note.The focus in coming months will be on whether wages will rise enough to underpin consumption and help Japan sustainably achieve the Bank of Japan’s 2% inflation.In cryptocurrencies, bitcoin last fell 0.1% to $39,858.20. More

TOKYO (Reuters) – Bank of Japan policymakers agreed to further debate the timing of an exit from its ultra-loose monetary policy, and the appropriate pace of interest rate hikes thereafter, minutes of their December meeting showed on Friday.In a sign they were already brainstorming ideas, some in the board said the BOJ could maintain its bond yield control as a loose framework even after pulling short-term interest rates out of negative territory, the minutes showed.”A few members said the BOJ will likely maintain massive monetary easing for some time, even after ending negative interest rates and yield curve control,” the minutes showed.The minutes add to recent growing signs the BOJ is gearing up for a near-term end to its negative interest rate policy and yield curve control (YCC).The BOJ maintained its ultra-loose monetary policy at the December meeting. It kept policy steady at a subsequent meeting on Tuesday but signalled its growing conviction that conditions for phasing out its huge stimulus were falling into place, suggesting that an end to negative interest rates was nearing. More

ORLANDO, Florida (Reuters) -A gradual financial disentangling of China and the United States after decades of symbiosis may reduce fears of ‘mutually assured financial destruction’ but also harden divisions in an increasingly polar global economy.Whether one or the other suffers more from that separation is under the microscope right now. But the mutual threat – especially China’s U.S. bond holdings – looks far less potent than once assumed. Since China’s return to the global economic stage in 2000, the wave of U.S. corporate and banking investment in the country was seemingly matched by China banking windfall savings from the resulting export and growth boom back into U.S. Treasury bonds.Channeling the old Cold War thesis of a stable nuclear arms rivalry, some saw ‘MAFD’ and the resulting inter-dependence as binding the two together and preventing any sudden fracture in the economic relationship. The circular thinking was that any political standoff that disturbed those investment flows would be so devastating to both in the highly integrated world economy that they would always step back from the brink.But that’s not quite how it has panned out.Following the trade wars of late 2010s, the pandemic shock and geopolitical rifts surrounding Ukraine and Taiwan, both sides have substantially reduced their respective financial footprints in the other. “Derisking,” in Washington parlance.While its debatable to what extent China’s current deep market disturbance is related to the rapid retreat of U.S. corporate and banking investment over the past two years, China’s hold on the U.S. bond market has loosened too.The latest figures show China held $782 billion of Treasuries in November – a large amount, but also around its smallest in 15 years and down significantly from the peaks of $1.3 trillion in 2011 and 2013.More importantly, China’s footprint in the U.S. bond market is a fraction of what it once was. China owns less than 3% of all outstanding Treasuries, the smallest share in 22 years, and again substantially down from the record 14% in 2011.Granted, China also likely holds Treasuries via other countries like Belgium. And an estimated 60% of China’s $3.24 trillion foreign reserves is in other dollar-denominated assets like agency bonds, shorter-term bills, and bank deposits. But Beijing’s influence over the U.S. bond market has waned.”China’s holdings are large enough that selling could in theory be very disruptive, although its hold over the market is not what it was relative to the past,” notes Alan Ruskin, macro strategist at Deutsche Bank.”But China has not shown any desire to be a disruptive force in this regard.” DECOUPLINGChina is not alone. The rise in overseas holdings of Treasuries to all-time highs of around $6.8 trillion is down to the private sector – global official holdings have fallen to a 12-year low around $3.4 trillion.The Treasury market is now a $26 trillion beast, twice as large as it was eight years ago and five times its size before Lehman Brothers collapsed in 2008. But China has steadily lagged its central bank peers, and Beijing’s share of all Treasuries owned by the official sector is now 21%. That’s the lowest since 2005, and well below the peak of 37.5% in 2011.There are signs that outright selling as well as valuation adjustments is shrinking China’s Treasuries portfolio.Deutsche Bank’s Ruskin estimates that China sold $15 billion in November, taking net selling over the last 12 months to $65 billion, flows that will support the notion that China is “decoupling from a key financial linkage with the US.” GO WITH THE FLOWIt is difficult to accurately track bilateral U.S.-China capital flows. Chinese companies list on non-Chinese exchanges, U.S. investors funnel funds into China via offshore financial centers, and there is the huge difference in liquidity and accessibility of Chinese ‘A’ shares and ‘H’ shares.But broad measures suggest the decoupling is going both ways. In the first nine months of last year U.S. investors sold a net $1.76 billion of Chinese financial assets, according to official U.S. quarterly balance of payments data. That was largely driven by equity selling. In calendar year 2022 they sold a net $9.5 billion of Chinese assets and the year before that they sold a whopping $67 billion. Both were driven by powerful equity outflows.U.S. companies have been pulling money out of China too.Official U.S. balance of payments data show that a net $5.6 billion of direct investment flowed back to the United States in the first nine months of last year, and in calendar year 2022 that flow totaled $12 billion.This tallies with China recording an $11.8 billion deficit in foreign direct investment in the third quarter last year, its first ever FDI deficit with the rest of the world. That was a marker.The United States and China start 2024 on very different financial and economic footings – the S&P 500 is at a record high; U.S. market outperformance over Chinese stocks is yawning; nominal U.S. GDP growth last year was probably higher than China’s; global money is flooding out of China and into America.As their financial co-dependence diminishes, China appears to be the more vulnerable of the two. Not what everyone would have predicted 20 years ago.(The opinions expressed here are those of the author, a columnist for Reuters.)(By Jamie McGeever; Editing by Andrea Ricci) More

LONDON (Reuters) – British consumers are their most confident since January 2022 as lower inflation helped them to feel better about their finances, a survey showed on Friday, welcome news for Prime Minister Rishi Sunak before a national election expected this year. The GfK consumer confidence index rose to -19 in January from -22 in December. A Reuters poll of economists had forecast a slightly smaller improvement to -21.”Despite the cost-of-living crisis still impacting many households across the UK, consumers appear to be encouraged by the positive news about falling inflation,” Joe Staton, client strategy director at GfK said. Sunak, who has suggested he will hold a national election in the second half of 2024, has promised to voters that he will get the economy growing again. While British inflation unexpectedly rose to 4% in December, denting investors’ hopes of quick interest rate cuts by the Bank of England, it is well below its peak of 11.1% in October 2022. The BoE is expected to hold its main Bank Rate at a nearly 16-year high of 5.25% next week after 14 consecutive increases between December 2021 and August 2023 but analysts are expecting a signal that the time for rate cuts might be approaching. GfK said all five of its confidence gauges rose in January with the outlook for personal finances in the next 12 months out of negative territory for the first time in two years with a reading of zero. “This significant change is the best single indicator for how the nation’s households feel about their income and expenditure,” Staton said. A measure of how consumers view the economy over the next 12 months increased by four points to -21.Friday’s survey contrasted with official data published last week, which showed the biggest fall in retail sales for nearly three years in December, raising the risk that the economy slipped into recession in late 2023. More