Economy

To investors, inflation is the monster under the bed which suddenly became real. For 30 years we have been able to ignore its menace. But now, with prices rising by more than 10 per cent a year and the best fixed-rate savings accounts delivering less than 5 per cent, your cash will halve in value in 14 years. We cannot close our eyes and pretend it is not there. This may change the way you view your investments, as well as your risk perceptions. Holding cash has suddenly become less safe. Equities are said to offer long-term protection against inflation, but it is worth understanding how.A chart of the S&P 500 from 1927 to today in logarithmic scale shows the performance of the world’s biggest market over nearly a century. The logarithmic scale allows you to spot more easily the market traumas — the Wall Street Crash, the 1974 oil crisis or the 2007-8 Great Financial Crisis. Over the long term the index rises — and you can see how since 2009 it has risen very nicely indeed. But there are long spells where the trend is essentially horizontal. Take January 1973 to July 1984. The S&P 500 staggered from 120 to 62.28 in October 1974 before gradually clawing its way back up again. What happens when you factor inflation into the numbers? The story is even bleaker. Adjust prices for double-digit inflation in the early part of this period and it was July 1987 before the S&P price recovered. The gloom you would expect in this period is reflected in price/earnings ratios, which experienced a similar slow-motion tumble and recovery — from 14x earnings to 7x and then to 20x. Yet the total return with dividends reinvested over those 14 years was nearly 400 per cent — about 11.6 per cent a year. Adjusted for Consumer Prices Index inflation, these returns look more modest — 86 per cent in total and 4.3 per cent a year in real terms — but still a lot better than the index charts alone might imply. And this is a real return. As we find ourselves in a new period of inflation and volatile markets, there is an important lesson in these numbers. Dividends count. They are likely to become a much bigger part of total shareholder returns if we are in for a long period of market stagnation.So far this year the S&P 500 is down 24.49 per cent in dollar terms. Many of the companies we hold have seen their share prices stumble. But, as an investment trust with a focus on income, we have been paid 4 per cent to 5 per cent in dividends, which has made a significant contribution towards total performance and should continue to do so. The dangers of doomsayingInvestors need to avoid dividend traps — companies that pay large yields but are flawed and heading for the rocks. Looking at today’s market, though, in my view, pockets of valuation anomaly are emerging. The relative price of “safety” appears to be rising. The valuations of many consumer staples, utilities and some elements of healthcare now look extended, particularly when plotted against those of lowly-valued sectors like banks, consumer finance and autos. Pepsi, a company we admire and whose shares we hold, recently reported pricing up 17 per cent. This is comforting for shareholders, but how sustainable is it? Pepsi shares trade on 24x consensus earnings for next year — in other words, at a 50 per cent premium to the market. If you are still buying staples and utilities, you probably need to be confident that we are going to endure a major recession. We put a lot of trust in the data and forecasts, but they are not always reliable. Norman Lamont was the last UK chancellor to handle high inflation and recession, in the early ’90s. As he ruefully reflected many years later: “I was led to believe we were enduring the worst economic crisis in our history. Later, as the figures were constantly revised and revised, it turned out that it was one of the shallowest!”Widely mocked at the time for identifying green shoots of recovery, he was probably right. It is easy to be too gloomy, and, as investors, we have to anticipate economic pivots.To that end, we have recently been eyeing up consumer discretionary stocks, like retailers, housebuilders and carmakers. Everyone says the auto sector performs badly in a recession. But it has been in a recession for two years already because of the crisis in the supply of semiconductors. Global inventories are close to the lowest they have been in 30 years. The number of vehicles sitting in US showrooms, distributors and factory lots is around a tenth of what it was in 2016. So this is not a sector that has been over-earning. We have owned VW shares for some time. The company recently listed a 12.5 per cent stake of non-voting stock in its most profitable brand, Porsche. Based on the price of those shares today, VW’s remaining holding in Porsche is valued at just over €61bn. VW itself is valued at €78bn. Essentially, you are getting VW, Audi, Škoda, SEAT, Lamborghini, Bentley and Ducati for around €17bn. The company is on a price/earnings ratio of 3.5, yields around 7 per cent and has cash reserves of €25bn. Stellantis, the multinational manufacturer created last year from the merger of companies like Fiat, Vauxhall, Citroen, Peugeot and Chrysler, is not a stock we own. It currently trades on less than three times earnings and yields 10.5 per cent. It has net cash on the balance sheet of €22bn. Yes, there is the worry about electric vehicles and whether these companies will manage the transition. Car manufacturers can trade on relatively low price/earnings ratios. But you do not have to make heroic assumptions to see how you might make above-market returns from companies in this and similar sectors.If you have a well-balanced portfolio, with some companies on sensible valuations paying an acceptable dividend and still growing quickly, a few lowly-valued companies paying a high income can be attractive — as long as you are confident of being paid.That is the crucial issue. Some of the consumer discretionary stocks I am looking at currently — in several areas — should be able to sustain high dividends almost irrespective of what goes on in the world. And if the economy takes a positive turn there is the possibility of equity growth, too. We are not abandoning our defensive positions, but in a world of incessant gloom some of these higher-yielding stocks could offer valuable dividend income — as well as growth. Think of it as insurance against good news. Investors are not defenceless in the battle against the monster of inflation.Stephen Anness is manager of the Invesco Select Trust plc Global Equity Income Share Portfolio More

All energy companies, including oil and gas producers, should pay into a multibillion pound fund to subsidise electricity and gas bills from April, when blanket UK government support ends, one of Britain’s biggest utilities has said.ScottishPower chief executive Keith Anderson proposed the fund to ensure millions of households’ energy bills continue to be discounted after the spring, when they are on average set to top £4,000 a year. New chancellor Jeremy Hunt on Monday announced the government would row back on outgoing prime minister Liz Truss’s pledge to limit typical yearly household bills to £2,500 for two years. Instead the government scheme — which caps the price per unit of electricity and gas that suppliers can charge and whose cost had been estimated at £150bn — will apply to all households only until April. Beyond that, Hunt said funding would be reviewed with the aim of targeting it at “the most vulnerable”. Anderson told the Financial Times the two-year protection for all households would have resulted in the Treasury writing an “open-ended blank cheque . . . that quite frankly the country can’t afford”.He added that an energy company-backed fund, which would be part-funded by public money, could replace other “rushed” policies. These include a windfall tax on oil and gas producers introduced in May and the revenue cap on low-carbon electricity generators, which was confirmed by the government last week. The tax has been widely attacked for enabling oil and gas companies to take advantage of a generous investment allowance and reduce their tax bills if they press ahead with new drilling projects.Anderson said the cap meanwhile did not apply to “half of the [electricity] generation sector”, such as gas-fired power stations, which have been boosted by the sharp rise in wholesale power prices since Russia invaded Ukraine.“There’s a need for all of us . . . oil and gas companies, upstream companies and every generator to sit in a room with the government and talk about how we contribute to [a] fund,” said Anderson. He added that the government should “pause, draw breath, stop running individual schemes” and consider how the energy sector “in its entirety” can help households.

He called for any fund to prioritise roughly 10mn of the most vulnerable Britons, and said energy groups and the Department for Work and Pensions would have to work together to identify people receiving universal credit and other benefits. But energy companies are also keen to help middle-income households, which will struggle to pay their bills next year without help. Previous suggestions of how to do this include restricting the number of subsidised units of energy customers receive, as wealthier households tend to use more.Greg Jackson, founder and head of Octopus Energy, told the Financial Times Energy Transition Summit on Wednesday that “we have to be very careful that we don’t end up assuming this is a problem just for the lowest income households”. “It’s colossal for them but it’s also a problem for middle income households who are also by the way facing 14 per cent food inflation and potentially huge rises in mortgages,” he added.ScottishPower has been credited as the architect of this winter’s energy bills support, after Anderson put forward a loan scheme in April to tackle the crisis.Additional reporting by Shotaro Tani in London

Video: American LNG exports surge with European demand | FT Energy Source More

Deng Xiaoping ushered capitalism into communist China with his famous aphorism: “Let some get wealthy first.” Four decades later, Xi Jinping is deciding “how rich is too rich”?China is preparing for an abrupt end to years of growth spurred by investment and exports. The slowdown is being exacerbated by the contentious zero-Covid policy, a snowballing property sector crisis and the choking of its access to vital technologies by the Biden administration. As growth slows there are rising expectations that Xi will sharpen focus on redistribution to improve the living standards for large swaths of the country’s 1.4bn people.In his opening address to the Chinese Communist party’s quinquennial congress on Sunday, Xi lambasted the party elite for “hedonism” and “extravagance” while promising oversight of “the means of accumulating wealth” and “excessive incomes”.The remarks reignited sensitive debates about the wisdom of Xi’s economic policies and the uneasy relationship between the ruling party and the businesses that underpin growth in the world’s second-largest economy. Xi Jinping is about to embark on an unprecedented third term as China’s leader © Mark Schiefelbein/APContentious questions include whether China should pursue a “people-oriented economy”, meaning a state-led, self-reliant and patriotic economy, but also Xi’s sweeping “common prosperity” vision aimed at reducing social inequality and cracking down on cultural vice as well as reining in big business and the excesses of China’s ultra wealthy.“Can the Chinese problem be solved by relying solely on theories brought in from the west? I’m afraid not. But can China’s problems be solved only by Chinese theories? This will be an even bigger mistake,” said Wang Xiaolu, vice-director at the National Economic Research Institute, a Beijing-based independent think-tank, in a recent interview with Chinese financial media.“People-oriented” and “people-first” are appearing more frequently in official statements, including by the People’s Bank of China and the ministry of finance. The phrasing, which has its roots among Chinese scholars and the party leadership in the early 1950s, describes a path of development distinct from western capitalist systems.In the weeks leading up to the party congress, Wen Tiejun, a 71-year-old agricultural economist at Renmin University, promoted the concept. Wen suggested that the Chinese economy was meant to serve sovereignty, develop independently and be pushed forward by state-led conglomerates.Transcripts of Wen’s statements circulated widely through WeChat messaging groups, China’s biggest social media platform, until censors removed the content days before the congress. The comments, however, have become a proxy for concern over the sidelining of market-oriented reforms as Xi embarks on an unprecedented third term as China’s leader. “Marketisation is an inescapable process of human development. We should cherish but not resist the technological wealth, ideological wealth and institutional wealth shared among mankind,” Wang said.Xiang Songzuo, head of the Shenzhen-based Greater Bay Area Financial Research Institute, said Wen’s promotion of the “people-oriented” theory was “not in line with the historical development of other countries, nor in line with the experience of China’s reform and opening up over the past 40 years”.“It’s really deceiving the people in the name of the people,” he said of Wen’s theory.Xi on Sunday reaffirmed that economic development was a priority for China. But he also targeted security and a “people-first” agenda. He reiterated that both state-owned and private businesses were vital, and that the party should show “unswerving” support for the latter, striking a more balanced tone than many analysts expected.Still, his use of “people-oriented” stirred anxiety among reformists as concerns mount over the vast economic challenges facing the president and his economic planners.

Xiang warned that the popularity of Wen’s statement reflected a “psychosocial imbalance” between different social camps, rooted in “the hatred of the rich”.“The nation has not yet formed respect for individual rights, especially private property rights . . . The more difficulties the Chinese economy is facing, the more we must use the greatest courage to promote ‘reform and opening’,” he said, referring to Deng’s hallmark policy that transformed China. Among the more important guidelines from the party congress are Xi’s plans to step up industrial policy with more fiscal support and subsidies, to achieve self-sufficiency, a greater focus on national security and the concentration of the state’s role in the economy, noted analysis by Natixis.“This implies that the role of private companies may become subdued,” said Alicia Garcia Herrero, chief Asia-Pacific economist at the French bank. She added that state companies might also need to do more and earn less to shoulder their social responsibilities.

Christopher Marquis, an expert on the Chinese economy at Cambridge Judge Business School, said the “mechanisms” of achieving wealth distribution had to be considered carefully to ensure that “the high-end productive and innovative part of the economy isn’t killed by the redistribution”.“The principle of trying to spread the economic success China had over the past 40 years to less developed cities and rural areas is in theory a good strategy,” added Marquis. “But as I’ve seen how it’s implemented, it’s very heavy-handed towards the rich.” Additional reporting by William Langley in Hong Kong More

Fitch said earlier on Thursday that a deterioration in political stability and government effectiveness had increased downside risks to the country’s ratings.It affirmed Peru’s long-term foreign currency issuer default rating at “BBB,” just one notch above junk. A downgrade to a junk rating could affect the Andean nation’s access to and costs of borrowing.Fitch said it expects the weakening of Peru’s political governance institutions will be difficult to reverse before the end of 2024, adding that “weaker governance poses greater downside risks to investment and economic growth” than the agency had expected earlier this year.”The negative outlook requires urgent measures and consensus building to avoid the deteriorarion of the country’s credit rating,” the finance ministry said in a statement. Peru’s weakened investment and economic prospects, if sustained over 2023-2024, could undermine its macro and fiscal trajectory in comparison to its “BBB” peers, Fitch added. The agency added that the country’s high Cabinet turnover and two failed impeachment attempts have sustained “political tumult.”Last week, Peru’s attorney general filed a constitutional complaint against President Pedro Castillo over “indications of a criminal organization” in his government.Castillo, who already faces five criminal investigations, called the complaint a “coup d’etat.” More

SYDNEY (Reuters) – Australia’s Labor government will launch its first budget next week with warnings about global recession and tough spending choices at home, while still meeting the modest promises made to win election earlier this year.Keen to avoid any echo of the mayhem caused by Britain’s recent mini-budget, Treasurer Jim Chalmers has put the accent on “responsible” for his effort, foreshadowing restraint on spending to support the Reserve Bank of Australia’s (RBA) struggle against runaway inflation.”My focus is on this inflation challenge, it’s about responsible cost-of-living relief, it’s about getting wages moving again,” Chalmers told the Australian Broadcasting Corporation.Investors seem reassured, so far, with no hint of the havoc that wrecked the UK gilt market.Chalmers also said the previous Liberal National government had “booby trapped” the budget with more than A$6 billion ($3.7 billion) in unfunded spending that would have to be covered in the deficit due to be announced on Oct. 25.Fortunately, that deficit will be much smaller than first feared thanks to high prices for many of Australia’s major commodity exports and a surprisingly strong labour market that has seen unemployment reach 48-year lows at 3.4%.As a result, the deficit for the year to June 2022 come in at A$32 billion, less than half the projection made back in March.Analysts are tipping the 2022/23 deficit will range from A$25 billion to A$45 billion, or around 1-1.5% of gross domestic product and relatively frugal by international standards.It is likely to widen a little from there as the government expects commodity prices to ease and spending pressures to mount, particularly on healthcare and childcare.TRIPLE ANatural disasters are also becoming a real headache, with flooding across the east coast this year costing billions in relief payments with more to come.Chalmers has also flagged steep downgrades to forecasts for global growth as central banks around the world hike interest rates. The RBA has lifted its rates by 250 basis points since May, boosting bond yields and the cost of government borrowing.Indeed, Chalmers has said the fastest growing area of spending would be borrowing costs “on the trillion dollars of debt that we’ve inherited”.Gross debt is expected to peak round A$1.1 trillion, though again that is moderate by international standards. On the IMF measure, Australia’s gross debt is around 57% of GDP, compared to 71% in Germany, 87% in Britain and 122% in the United States.This is a major reason Australia is one of only eight nations that can boast a triple-A credit rating.”For the years ahead, a budget deficit of 1.0%-1.5% of GDP will be an important part of fiscal policy working hand-in-hand with monetary policy to help the economy through the period of surging inflation and slower global economic growth,” said Stephen Halmarick, chief economist at CBA.”Small budget deficits will also help net debt decline as a share of GDP, adding comfort to Australia’s AAA credit rating.”($1 = 1.6031 Australian dollars) More

BEIJING (Reuters) – Xi Jinping, poised to clinch a third five-year term as China’s leader, will on Sunday preside over the most dramatic moment of the Communist Party’s twice-a-decade congress and reveal the members of its elite Politburo Standing Committee.Xi’s break with precedent to rule beyond a decade was set in motion when he abandoned presidential term limits in 2018. His norm-busting as China’s most powerful ruler since Mao Zedong has made it even harder to predict who will join him on the standing committee.The 69-year-old leader’s grip on power appears undiminished by a sharp economic slowdown, frustration over his zero-COVID policy, and China’s increasing estrangement from the West, exacerbated by his support for Russia’s Vladimir Putin. The new leadership will be unveiled when Xi, widely expected to be renewed in China’s top post as party general secretary, walks into a room of journalists at Beijing’s Great Hall of the People, followed by the other members of the Politburo Standing Committee (PSC) in descending order of rank. The lineup – who is in, who is not, and who is revealed to replace Premier Li Keqiang when he retires in March – will give party-watchers grist to speculate over just how much Xi has consolidated power by appointing loyalists.At the same time, some analysts and diplomats say, the makeup of the standing committee and the identity of the premier matter less than they once did because Xi has moved away from a tradition of collective leadership. “The new PSC line up will tell us whether Xi cares only about personal loyalty or whether he values some diversity of opinion at the top,” said Ben Hillman, director of the Australian Centre on China in the World at Australian National University.”It is possible that the new PSC will consist entirely of Xi loyalists, which will signify the consolidation of Xi’s power, but pose great risks for China. A group of ‘yes’ men at the top will limit the information available for decision-making.” IN OR OUT?At least two of the seven current Standing Committee members are expected to retire due to age norms. Reports this week in the Wall Street Journal and South China Morning Post suggest there could be as many as four openings, with Premier Li, 67, possibly among those stepping down.As for the next premier, although Wang Yang, 67, and Hu Chunhua, 59, a former and current vice premier, respectively, are both considered by analysts to be well-qualified by the traditional standards of a role charged with overseeing the economy, they lack long-term connections to Xi.Shanghai party boss Li Qiang, who has long-standing ties to Xi, is likely to join the PSC and is considered a leading contender to be premier, the Wall Street Journal reported, citing unnamed sources close to party leaders.Li’s elevation to premier would be a strong sign of the importance of loyalty to Xi following Shanghai’s punishing and unpopular two-month COVID-10 lockdown this year, for which Li drew heavy blame from residents.Another loyalist seen by party-watchers as a candidate for promotion is Ding Xuexiang, 60, who is Xi’s chief secretary and head of the Central Committee’s powerful General Office, which manages the administrative affairs of the top leadership. More

TOKYO (Reuters) -Japan’s core consumer inflation rate accelerated to a fresh eight-year high of 3.0% in September, exceeding the central bank’s 2% target for the sixth straight month as the yen’s slump to 32-year lows continue to push up import costs.The inflation data highlights the dilemma the Bank of Japan faces as it tries to underpin a weak economy by maintaining ultra-low interest rates, which in turn are fuelling an unwelcome slide in the yen that pushes up import costs.The increase in the nationwide core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, matched a median market forecast and followed a 2.8% rise in August. It was the fastest pace of gain since September 2014, data showed on Friday.The broadening price pressures in Japan and the yen’s tumble below the key psychological barrier of 150 to the dollar will likely keep alive market speculation of a tweak to the Bank of Japan’s dovish stance over coming months.”The current price rises are driven mostly by rising import costs rather than strong demand. Governor Kuroda may maintain policy for the rest of his term until April, though the key is whether the government will tolerate that,” said Takeshi Minami, chief economist at Norinchukin Research Institute.The data heightens the chance the BOJ will revise up its consumer inflation forecasts in new quarterly forecasts due at next week’s policy meeting, analysts say.An index stripping away both fresh food and energy costs, which the BOJ closely watches as a key gauge of the underlying strength of inflation, rose 1.8% in September from a year earlier, accelerating from a 1.6% gain in August.With Japan’s inflation still modest compared with price rises seen in other major economies, the BOJ has pledged to keep interest rates super-low, remaining an outlier in a global wave of monetary policy tightening. More

WASHINGTON (Reuters) – The U.S. government has significantly boosted purchases of electric and plug-in hybrid vehicles but faces supply chain hurdles, the White House said, as it looks to meet President Joe Biden’s aggressive zero-emission purchasing goals.Federal agencies quintupled purchases of EVs and PHEVs in the 12-months ending Sept. 30, moving from approximately 1% of vehicle acquisitions in the 2021 budget year to 12% of light-duty purchases in 2022, or 3,567 total, the White House said on Thursday.”But for the supply chain issues that impacted the auto industry’s ability to fulfill all of the Federal Government’s (zero emission vehicles) orders in FY2022, ZEVs would have achieved approximately 20% of acquisitions in 2022,” the White House said.The Government Accountability Office (GAO) said in a report Thursday that federal agencies had purchased 257 electric vehicles in the 2021 budget year and have just a fraction of EV charging ports agencies will eventually need. Biden in December issued an executive order directing the government to end purchases of gas-powered vehicles by 2035. Biden’s order also directs that 100% of light-duty federal acquisitions by 2027 be EV or PHEV purchases.Out of 33,000 light-duty vehicles acquired in the 2021 budget year, agencies bought 138 EVs and 119 plug-in hybrids, GAO said.Federal agencies as of March own and operate over 4,000 charging ports in about 1,050 charging locations in less than 500 cities, GAO said.The General Services Administration (GSA) estimates the federal government may need over 100,000 charging ports in part “because GSA expects agencies to need one charging port for every two electric vehicles acquired,” the report said.In 2020, the U.S. government operated 610,000 vehicles, traveling over 4 billion miles and consuming more than 360 million gallons of fuel.The U.S. government also owns 102,000 law enforcement vehicles that are covered by Biden’s order unless exempted by an agency head. GAO said they “may have additional performance requirements that may not be met by currently available zero-emission vehicle models.”Last month, the Homeland Security Department became the first federal agency to debut an EV for law enforcement functions, a Ford Mustang Mach-E.Biden’s order does not apply to the 200,000 vehicles owned by the U.S. Postal Service (USPS). Earlier this month, House Oversight Committee Chair Carolyn Maloney asked USPS to detail how it will spend $3 billion awarded by Congress in August for EVs and charging infrastructure. More