The UK Budget was a considerable disappointment. There seemed to be an emphasis on doling out more money, taxing those of us who work (and retirees) to pay for it, and nothing to stimulate much needed growth.
Supply-side reforms would have been welcome news. Such as reducing paperwork and regulation (e.g. for hiring or planning permission), tax incentives, infrastructure spending to make it easier to do business, improving capital availability.
The Budget increased some public investment, added to planning reforms, and introduced localised “growth zones”. A new 40% first year allowance for qualifying plant and machinery is helpful. But these and other adjustments are simply not going to move the needle, not in scale. Even by the governments own estimates, after 10 years these might lift total GDP by just 0.6%. This is not good enough, and it will have no bearing on the hit to business confidence in recent months directly attributable to Budget uncertainty.
The reaction of UK financial markets was understandably muted, no more no less. It will be interesting to see if there is any relative strength, or weakness, versus global markets in the days ahead.
In the next 6-12 months there is a huge test for the government, to see if it grasps the nettle on supply-side reform, and starts to unlock productivity and boost business confidence. The UK’s challenge is not a lack of potential, but a messy political environment that makes execution difficult.
Looking beyond the UK, as soon as I said “US still heading lower” last week, it turned around and up. It now appears more likely that it will lunge upwards to another all-time high, the FOMO crowd being enthused by expectations of rate cuts. I’m not expecting the S&P to go a lot higher, not in the weeks just ahead. But equally I won’t be surprised to be wrong, as I’m fighting the tendency to a Christmas rally as well as excitement over rate cuts and the lingering mania.
That gold turned around and up in parallel tends to support the idea that across the Summer gold also got caught up in the more broadly-based US-centred investment mania, which does rotate around its fringes – crypto out, gold in, is the latest fad. One result is that the correction in gold and the other metals might already be over, against my expectation of something more prolonged – that will become clearer in the days just ahead.
Always a great read, this week the latest note from commodity specialists Goehring and Rozencwajg crash-landed into my inbox – it is never much less than 50 pages crammed with analysis. These are their key points:
· Every 40 years or so the monetary world changes, with a bang…
· …that is when the next commodity cycle begins in earnest…
· …when policymakers can no longer be relied upon to cushion the markets from catastrophic losses.
· The most likely trigger for that bang is resurgent inflation.
· Gold will enjoy a profitable long term position in portfolios…
· …but the bigger opportunity is now moving to oil.
· Despite a strong YTD performance from uranium, the nuclear energy play, interest is subdued at best…
· …there is a clear swell in long term demand, and a “quiet erosion of expected supply”.
· It is similar with platinum and palladium, but there is a deficit of supply in 2025/6…
· …which will eventually be met by “sharply higher prices”…
· …“recent weakness…an attractive new entry point” for investors.
Oil is the one which most of you would not have expected to see featured. Yet that is exactly what happens at big turning points – total lack of interest, even the view that it is uninvestable. It is fashionable to be negative about oil. Yet inventories are falling relative to seasonal requirements, while demand continues to trend higher.
In a turnaround, the International Energy Agency says demand for oil will keep rising until at least 2050. This while the US shale supply, which has been dominant in recent years, is rolling over. Another case of falling supply, rising demand, and complete lack of investor interest.
In coming weeks I will broaden out this discussion, as it would be useful to consider how much space these opportunities should take up in your portfolios.
What’s Hot What’s Not? illustrates that gold funds enjoyed a decent recovery, particularly in the second half of the month. They were joined by US small and mid cap funds exposed to rising hopes of lower interest rates, aided and abetted, sadly, by the ridicule and bullying of the Federal Reserve by Donald Trump. The dog funds were dominated by tech funds or those Growth funds heavily invested in tech. Doubts are growing about the ability of AI to deliver the huge profits (or any profits!) needed to justify bubble valuations in the big tech companies, the same companies which have single handedly driven the US stock market in recent years.
The sector analysis is headed up by US smaller companies, buoyed by hopes of rate cuts, sooner and deeper. Sadly, expected rate cuts did not prevent UK smaller companies from featuring amongst the dogs, alongside two Asia sectors, weighed down by lacklustre China and Japan. The tech sector was the worst offender, down over 7%.
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Please note that there will probably not be a note next Friday, unless there are some big moves which merit comment.