Posts tagged: KNG International Advisors

Monday 4th of November 2024

We’re now a couple of weeks into earnings season for the third quarter of 2024 and we have enough information to start thinking about what these latest data tell us about the state of the economy and market outlook.

First, the bad news, although it’s not really new news. The Chinese consumer remains in poor shape. Any consumer focussed company we follow, from high end luxury down to consumer basics, who has major exposure to the Chinese market is reporting business performance there which is below expectations. China macro weakness is not a new story, but many had been hoping for the worst to be behind us and a possible inflection to come soon. It looks like investors will have to be more patient, the Chinese economy and consumer remain weak based on the data we’ve seen from corporate results so far.

The good news for investors is that China consumer weakness is the only negative story we’ve seen so far this earnings season, in terms of read across for the economy. At time of writing, two of the big three cloud hyperscalers (Microsoft and Alphabet) have reported results and both reported numbers ahead of expectations with strong rates of growth in cloud computing.

The wave of cloud computing and migration of existing IT stacks to the cloud continues to be a source of sustained growth, a major theme in the global economy with a long road of growth ahead. What’s more, generative artificial intelligence (AI) is a major contributor to the ongoing success of these cloud businesses, driving further growth in revenues and profits. AI is not a ‘maybe’ story, it’s a real technology cycle driving real-world businesses today.

In online advertising we’ve seen good results from Meta (owner of WhatsApp, Instagram and Facebook) and Alphabet (owner of Google and YouTube). The primary driver of these businesses is online advertising spending, and both companies reported results above expectations for the third quarter of 2024. In both cases, the application of AI is further supporting business success, as AI is improving the return on investment for businesses using these platforms to advertise their products. These two companies look set to dominate the future of online advertising.

En Europa, hay evidencias de que el consumidor está en una mejor situación de lo que muchos temían. Los sólidos resultados de Garmin y Booking fueron impulsados por la fortaleza en Europa. Los productos vestibles de Garmin son populares entre los entusiastas de los deportes al aire libre y aquellos que practican hobbies relacionados con actividades al aire libre, y esta división reportó resultados muy por encima de las expectativas, impulsados por el gasto de los consumidores en Europa. El negocio de Booking, centrado en viajes, tiene una fuerte presencia en Europa, y también reportaron cifras sólidas para el trimestre.

The important take away so far is that in the major global themes in which we invest, we continue to see strength driven by new technology adoption, exceptional corporate performance, and continued cultural trends towards greater spending on travel and experiential services. These trends are not going away and continue to power growth in revenues and profits of the companies we invest in.

There are still many companies globally who are yet to report their results, so we will wait until we have more information before making an updated call on the state of the economy and outlook in the short-term, but at this stage, it’s a case of so far so good!

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Tuesday 22nd of October 2024

When inflation started to surge globally in 2021, many economists and policymakers debated whether it was “transitory” or likely to be a prolonged issue.

The word “transitory” was commonly used to describe price pressures that would resolve themselves once the supply shocks and economic imbalances from the pandemic eased. But as inflation persisted longer than anticipated, many were quick to dismiss the transitory narrative, likening the situation to the sustained inflation of the 1970s.

In hindsight, however, there is a growing argument that inflation over the past few years bears more resemblance to the inflationary period following World War II in the late 1940s than the infamous stagflationary spiral of the 1970s. This shift in perspective suggests that policymakers may have been overly concerned with avoiding the mistakes of the 1970s, when in fact this inflationary episode had much more in common with the post-war period.

The inflation of the 1970s was driven by a combination of factors, including demand-pull inflation, cost-push pressures from oil price shocks, and wage-price spirals. It was a period of stagflation; high inflation coupled with slow economic growth and high unemployment. In response, central banks, particularly the Federal Reserve under Paul Volcker, took aggressive measures, pushing interest rates sky-high to rein in inflation. Volcker’s draconian monetary tightening is often credited with ending the inflationary spiral, though it also led to a severe recession in the early 1980s. Policymakers ever since have taken this episode as a cautionary tale, believing that sustained inflation can only be tamed through aggressive tightening, and that failure to act early can result in entrenched inflation expectations.

This 1970s legacy loomed large in 2021 when inflation began to rise. There was an overwhelming fear among policymakers and market participants that allowing inflation to run even slightly hot could result in a similar spiral, where inflation expectations become unanchored, leading to wage demands and price-setting behaviour that could entrench inflation for years. This is one reason why central banks, led by the US Federal Reserve, raised interest rates at a historically aggressive pace from 2022 onwards.

However, a growing body of evidence now suggests that this bout of inflation may have more in common with the late 1940s, when inflation also surged as a result of a massive, temporary dislocation of the global economy due to World War II. In that period, inflation spiked due to a combination of pent-up demand, supply shortages, and the unwinding of price controls. Inflation in 1946 and 1947 was intense, with prices rising at double-digit rates, much like they did in 2021 and 2022. However, the inflationary pressures were largely transitory, resolving themselves as the economy adjusted to peacetime production, supply chains normalised, and the temporary mismatch between demand and supply abated.

In both cases, the late 1940s and the early 2020s, the inflation was primarily driven by supply-side disruptions rather than excessive demand. In the 2020s, the COVID-19 pandemic caused widespread supply chain disruptions, labour shortages, and shifts in consumer demand patterns.

One of the key factors that distinguishes the inflation of the 2020s from that of the 1970s is the supply-side nature of the price pressures. The 2020s inflation was largely driven by supply chain disruptions, semiconductor shortages, labour market tightness, and energy price volatility exacerbated by Russia’s invasion of Ukraine. These are predominantly supply-side issues, and once resolved, the inflationary pressures would naturally subside. In contrast, the inflation of the 1970s was more demand-driven, with oil price shocks compounding pre-existing inflationary pressures from over-expansionary fiscal and monetary policies.

By late 2023, many of the factors that had driven inflation higher were showing signs of easing. Global supply chains had begun to normalise, energy prices had come down from their post-Ukraine invasion peaks, and labour markets were starting to cool. Even where inflation remained somewhat sticky, such as in the services sector, it was increasingly clear that the worst of the inflationary pressures had passed. This easing of supply-side constraints mirrors the pattern seen in the 1940s, when inflation cooled once the supply-demand imbalances caused by the war were resolved.

In hindsight, the inflationary pressures of the early 2020s appear to have been driven largely by temporary, supply-side disruptions, much like the inflation experienced in the aftermath of World War II. While inflation persisted longer than many had initially anticipated, it has increasingly shown signs of cooling as supply chain issues have been resolved and global economic imbalances have normalised. Policymakers’ bias toward avoiding a repeat of the 1970s may have led to overly aggressive tightening. As inflation continues to moderate, this period may ultimately be remembered as a bout of transitory inflation driven by unique, temporary factors, rather than the beginning of a new era of sustained inflationary pressure. And that is good for the outlook for risk assets!

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 14th of October 2024

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Why UK Equities Could Offer Long-Term Upside?

In recent years, UK equity markets have struggled to keep pace with global competitors. With sluggish economic growth and persistent underperformance in UK stocks, it’s easy for investors to overlook the potential long-term opportunities the UK economy may offer. However, beneath the surface of these short-term challenges, there is a growing case for optimism. The UK, while lagging in certain areas, has a wealth of untapped potential, particularly in sectors like infrastructure, housing, and capital investments, which could drive significant economic growth in the future.

It’s no secret that UK equities have been trading at a discount compared to their international peers. Factors such as political uncertainty following Brexit, lacklustre economic growth, and sluggish productivity have all contributed to this. Moreover, markets have been hesitant to price in any optimism for the UK’s economic outlook, which has further driven down the value of UK equities relative to other developed markets.

For example, the FTSE 100, a benchmark index of the largest publicly listed companies in the UK, has lagged other major indices like the S&P 500 in the US or the Euro Stoxx 50 in Europe. This underperformance is partly because the UK economy has grown at a slower pace, and investors have seen more attractive opportunities elsewhere. As a result, many UK stocks are priced more cheaply than their global counterparts.

But while this current landscape may seem discouraging, it is also where the opportunity lies. Markets are often forward-looking, and today’s depressed prices in UK equities reflect the challenges the economy has faced. However, for long-term investors, this presents an entry point into an economy that may be on the cusp of a transformation.

One of the main reasons the UK has underperformed economically over the past few decades is a chronic lack of investment in key areas like infrastructure, capital assets, and housing. These are the building blocks of any thriving economy, and the UK has been lagging for a long time. Addressing these shortcomings could be the key to unlocking the country’s economic potential.

The UK’s infrastructure, from transport networks to broadband, has long been in need of significant upgrades. Roads, railways, and other essential services are often outdated, leading to inefficiencies that hamper economic growth. The underinvestment in infrastructure is not just a recent problem but has accumulated over decades, limiting productivity and the country’s competitiveness on the global stage.

This lack of investment, however, offers an opportunity. As governments around the world look to infrastructure spending to stimulate economies post-pandemic, the UK has the potential to follow suit. A renewed focus on upgrading the country’s infrastructure could not only boost short-term growth but also lay the foundation for sustained long-term productivity gains. Investors should keep an eye on companies involved in construction, transport, and related sectors, as they could benefit from a surge in government spending.

Another area where the UK has fallen behind is in the investment in capital assets, such as machinery, technology, and automation. For years, UK companies have been hesitant to invest in new capital, preferring to cut costs rather than increase spending. This has led to stagnant productivity growth and has made UK businesses less competitive on a global scale.

However, this may be changing. As technological advancements accelerate, companies are starting to recognize the importance of investing in capital to stay competitive. Automation, artificial intelligence, and green energy technologies are just a few areas where increased investment could lead to significant gains in productivity. This could, in turn, boost the profitability of UK companies and the broader economy, making UK equities more attractive over the long term.

One of the most pressing issues facing the UK economy is the chronic shortage of housing. For decades, the UK has failed to build enough homes to meet demand, leading to skyrocketing house prices and affordability issues, particularly for young people. The country’s restrictive planning laws and green belt policies have been major contributors to this problem. While intended to protect the countryside, these regulations have often made it difficult to build new homes, especially in areas where they are needed most.

However, there are signs that this could change. A growing awareness of the housing crisis, combined with pressure from younger generations, is leading to calls for reform. If the new Labour government can tackle the labyrinthine planning process and rethink outdated green belt policies, it could unlock a wave of new housing developments. This would not only help address the affordability issue but also boost the construction industry and the wider economy.

For investors willing to take a long-term view, the current discount on UK stocks may offer an attractive entry point into an economy poised for transformation. The key is patience! Those who recognise the latent potential of the UK economy and its equities today may be rewarded in the future as the country begins to realise its full potential.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Tuesday 8th of October 2024

Lessons from the 1990s

The stock market is often complicated and unpredictable, but sometimes, the conditions align in such a way that stock prices rise rapidly in what is known as a “melt-up.”

This is when investors start pouring money into the market, driving prices higher in a relatively short period of time, often fuelled by a combination of optimism, new technologies, and economic policies.

Today, there are signals suggesting that we might be on the verge of another melt-up, similar to one that happened in the 1990s.

To understand how a melt-up works, the 1990s in the United States provides a perfect case study. Several factors came together in that decade to push the stock market into a rapid rise. Let’s break down those factors and why they created an environment for a melt-up.

One of the key drivers of the stock market’s rise in the 1990s was innovation in technology. The internet was starting to revolutionise industries. Companies like Microsoft, Intel, and Cisco Systems were at the forefront of this new technological wave, developing products and services that were reshaping how businesses operated and how people communicated.

Investors saw the potential for these companies to grow, and their stock prices soared. It wasn’t just the big names, either. Startups and smaller companies that were part of the tech boom also experienced sharp increases in their stock prices, as everyone wanted a piece of what was believed to be the future of the economy.

The 1990s were also marked by a strong US economy. The country was experiencing a period of sustained growth, with low unemployment and rising wages. This created an environment of confidence, as consumers and businesses were spending more, leading to higher corporate profits.

A strong economy generally supports higher stock prices because when companies generate higher profits, their stock becomes more valuable. In the 1990s, the combination of a strong economy and new technology made investors optimistic about the future.

Another crucial factor that fuelled the stock market’s rise in the 1990s was the Federal Reserve’s monetary policy. The Federal Reserve (or “the Fed”) is the central bank of the United States, and one of its main tools for influencing the economy is adjusting interest rates. When interest rates are high, it’s more expensive for businesses and consumers to borrow money. When rates are low, borrowing becomes cheaper, and this can encourage spending and investment.

In the 1990s, the Fed cut interest rates to support the economy, especially after a brief recession in the early part of the decade. These rate cuts made it easier for companies to invest in growth and for consumers to spend, which in turn helped fuel the strong economy and rising stock prices.

By the mid- to late-1990s, these factors; innovation, a strong economy, and lower interest rates, combined to create a boom in the stock market. From 1995 to 2000, the S&P 500, one of the main stock market indexes, tripled in value. This was an extraordinary rise, and many investors saw their wealth grow rapidly.

Now, let’s compare the conditions in the 1990s to what we’re seeing today. There are some striking similarities that suggest we could be on the verge of another major melt-up in stock prices.

Just as the 1990s were driven by the rise of the internet, today we are seeing major technological advancements that could reshape the economy. Artificial intelligence (AI), automation, renewable energy, and biotechnology are all areas experiencing rapid innovation. Companies involved in these sectors have already seen their stock prices rise, but we may only be at the beginning of a much larger wave of growth.

Much like the 1990s, investors are excited about the potential of these new technologies to transform industries, and as these innovations become more integrated into daily life, the companies leading the way could see significant gains in their stock prices.

While the global economy has faced challenges in recent years, including the COVID-19 pandemic, there are signs of recovery and strength. In the US, unemployment has been low, and there has been significant government spending aimed at boosting economic growth. While inflation has been a concern, it appears to be stabilising, and consumer spending remains strong.

A strong economy supports corporate profits, and as businesses continue to grow, their stock prices are likely to follow suit, just as they did in the 1990s.

Perhaps the most important factor to watch is the Federal Reserve’s monetary policy. After a period of raising interest rates to combat inflation, the Fed is now in a rate cutting cycle. If inflation continues to come down and the economy remains strong, rate cuts could create a favourable environment for stock prices to rise.

When we combine these factors; innovation, a strong economy, and the potential for lower interest rates, it’s easy to see why some analysts believe we could be on the verge of another melt-up in the stock market. Just like in the 1990s, the conditions are aligning in a way that could lead to a rapid rise in stock prices, especially if investors become increasingly optimistic about the future.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 30th of September 2024

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Many people think the Federal Reserve (the Fed) plays a huge role in controlling the economy by setting interest rates. But some experts argue that the Fed’s power might be more of an illusion. Let’s break down what this means and why it’s a big deal for everyone, not just those who follow finance.

The Fed is like the US government’s bank. One of its main jobs is to set a short-term interest rate called the “federal funds rate.” This is the interest rate banks charge each other for short-term loans. The Fed changes this rate to influence other interest rates in the economy, like those for mortgages, car loans, and credit cards. The idea is that by raising or lowering this rate, the Fed can help control things like inflation or stimulate the economy during tough times.

Recently, there’s been a debate about whether the Fed’s actions are really effective or if it’s just been lucky in controlling inflation through raised interest rates.

Some economists argue that while the Fed sets one rate, it doesn’t actually have much control over the important rates that affect everyday people. For instance, when the Fed raises its rate, you might expect mortgage rates to rise too, but that doesn’t always happen. Sometimes they move in opposite directions, or not at all.

New York University professor Aswath Damodaran is one of the experts who believes that the Fed’s power might be overrated. He argues that the Fed’s rate is just one of many factors that influence interest rates on things like mortgages and business loans. Sometimes, these real-world rates don’t change in line with the Fed’s rate changes at all. For example, between 2004 and 2006, the Fed raised its rate by more than 4%, but other rates, like those for certain corporate bonds, barely moved. This suggests that markets often ignore what the Fed does.

Damodaran and others say that real-world interest rates, like those on your mortgage or credit card, are mainly driven by two factors: how the economy is growing and expectations about inflation. Neither of these is controlled by the Fed. For example, interest rates were low before the pandemic not because the Fed kept them low, but because the economy was weak and inflation wasn’t a concern.

On Wall Street, the consensus idea is that the Fed is in control and its rate decisions affect the economy. If the Fed doesn’t have the power people think it does, then a lot of what investors and analysts focus on might be wrong. It would be like following rituals for a god that doesn’t exist.

This view has support. Financial Times writer Martin Sandbu has argued that the recent spikes in inflation were mostly due to supply chain issues and other disruptions, not because of anything the Fed did or didn’t do. If that’s true, then the Fed’s efforts to control inflation might not have had much effect.

Some say the Fed’s actions might matter during major crises, but even then, their impact is limited. For instance, in 2007, the Fed tried to prevent a recession by cutting rates, which initially boosted stock prices. But as the economy continued to weaken, those rate cuts weren’t enough to stop a downturn.

The Wall Street Journal’s Spencer Jakab recently compared the Fed’s chairman, Jay Powell, to the Wizard of Oz, powerful in appearance but not as effective as people think. He noted that during past crises, what really drove markets wasn’t the Fed’s rate cuts but broader economic trends, like whether the economy was growing or shrinking.

If the Fed is more of a follower than a leader, what should you do as an investor?

For one, you might not need to worry so much about the Fed making mistakes, like raising rates too high and causing a recession. Instead, paying attention to the overall health of the economy and how companies are performing might be a better strategy.

In 2022, many investors were nervous about the Fed’s actions and avoided risks, only to miss out on the gains of 2023. If they had focused on the economy itself rather than the Fed, they might have made different, and potentially better, decisions.

In the end, it’s important to remember that while the Fed plays a role, it’s not the all-powerful force many believe it to be. Understanding the bigger picture can help everyone make smarter financial choices.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 23rd of September 2024

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In many countries, the housing market plays a crucial role in driving economic growth. The US economy has long relied on multiple sectors, such as technology, manufacturing, and retail, to fuel its growth engine. But with rising government debt, stretched spending, and uncertainty in other areas, attention is shifting to housing, which has been a drag on growth in the US since the pandemic.

Housing is more than just homes, it touches everything from construction and real estate services to banking and consumer goods. When the housing market is booming, demand for materials like lumber, cement, and steel skyrockets. Contractors, architects, and real estate agents also benefit, and homebuyers typically spend on new furniture, appliances, and renovations. All of this creates jobs and boosts GDP.

The UK offers an interesting case study in how housing could be a major economic driver. With its strained public finances and limited ability to ramp up government spending, the new Labour government in the UK is now looking to housing as a way to stimulate growth.

The UK, like the US, is facing a significant housing shortage. A lack of affordable homes has driven up prices, leaving many people priced out of the market. This pent-up demand for homes represents an opportunity to build more and stimulate the broader economy.

Housing doesn’t just benefit homebuyers and sellers; it has what economists call a ‘multiplier effect’. For every home built, there is a ripple of activity across different industries. This makes it an attractive option for policymakers aiming to boost economic activity without increasing government spending.

The UK’s new government has recognised that building more homes and making the housing market more accessible could drive growth. Their focus on housing policy includes streamlining planning laws, incentivising developers, and ensuring that infrastructure projects complement new housing initiatives.

Could the U.S. follow a similar path?

The signs are there.

Kamala Harris has recently been discussing the potential for housing to play a bigger role in the US economy. The US housing market is massive, and just like in the UK, there’s a significant shortage of affordable homes. According to Freddie Mac, the US is short by 3.8 million housing units. This imbalance between supply and demand presents a similar opportunity to what the UK is now trying to address.

In the ongoing US presidential race, Kamala Harris has mentioned housing as a way to generate sustainable, long-term growth without relying on increased government spending. This is especially appealing at a time when the US national debt is over $33 trillion. In this context, the housing market could be seen as a vital lever to pull.

So, what does this mean for investors? If housing does become a key growth engine, then related stocks and sectors could see significant gains.

Companies that specialise in building residential homes are the most direct beneficiaries of a housing boom. If housing policies are enacted to stimulate more construction, these companies will be at the forefront.

A housing boom means increased demand for building materials too. Companies that produce lumber, cement, steel, and other key components are likely to see increased revenues.

This opportunity is compelling for investors. If housing does become the new growth engine of the US economy in 2025 and beyond, stocks related to homebuilding, construction materials, real estate services, and consumer goods could all benefit. Keeping a close eye on policy announcements and market trends could help you stay ahead of the curve and capitalise on this potential shift.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 16th of September 2024

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Ukraine’s recent military actions have caused concern and consternation, not only by crossing into Russian territory but also by challenging the boundaries set by the United States. Since the beginning of Russia’s full-scale invasion of Ukraine, the US has been clear about its intentions: to help Ukraine defend itself and remain a sovereign nation. However, the idea of taking the fight into Russia has always been considered a risky move, one that could lead to dangerous consequences.

After Ukraine’s recent incursion into the Kursk region of Russia, Ukrainian President Volodymyr Zelenskyy expressed frustration with the restrictions placed on Ukraine’s military actions by its allies, particularly the US. He criticized what he called the “naive, illusory concept of so-called red lines regarding Russia” that some of Ukraine’s partners had insisted on. According to Zelenskyy, these red lines are no longer relevant.

But is that really the case? The differing approaches of the US and Ukraine reflect not just different views on how much pressure can be applied to Russian President Vladimir Putin, but also different goals. From the outset, US President Joe Biden has had two main objectives: supporting Ukraine and avoiding a broader conflict that could escalate into a world war. If it ever came down to a choice, the US would prioritize avoiding a global conflict.

Ukraine, however, is fighting for its survival. For Ukraine, direct involvement by the US in the war would be welcome, even if it risks a larger conflict. In fact, according to a recent book by David Sanger, Biden has suggested that Zelenskyy might even be trying to pull the US into a larger war. This difference in goals naturally leads to a different appetite for risk. The US has been very cautious about the types of weapons it provides to Ukraine and how they are used. For instance, when the US supplied long-range missiles to Ukraine, it placed strict limits on how far they could be fired. Only recently did Washington allow US-supplied weapons to be used against targets just inside Russia, and even then, certain restrictions remain.

This cautious approach isn’t just limited to the US. Within Europe, there is also a range of opinions. Countries like Estonia and Poland, which feel directly threatened by Russia due to their proximity, have been advocating for giving Ukraine more advanced weapons and fewer restrictions on their use. Meanwhile, Germany has been much slower and more reluctant to take such steps.

Ukraine has long complained that the caution of its most powerful allies is forcing it to fight with one hand tied behind its back. While Russia is free to strike deep into Ukrainian territory, Ukraine has faced limitations on how it can respond. Both Ukraine and the US have stated that the Biden administration was not informed about the Kursk offensive before it happened. This seems to be true, as the US has a strong interest in distancing itself from any direct involvement in attacks on Russian soil.

Ukraine’s decision to launch the Kursk offensive without prior approval from Washington is reminiscent of Israel’s approach to military action. Israel has a history of taking military actions independently, sometimes without US approval, under the assumption that if the action is successful, it will eventually be accepted. If it fails, the US is expected to help manage the fallout. For now, there is cautious optimism in Washington about the Kursk offensive. However, there are still concerns about whether Ukrainian forces can hold onto the territory they have taken and withstand Russian counterattacks in eastern Ukraine.

For everyday investors, it’s important to be aware of these escalating risks, but there’s no need to panic. Global investment portfolios generally have limited direct exposure to these conflicts, and while the situation is serious, it is being managed carefully by the US and its allies. The goal is to continue supporting Ukraine while avoiding a broader conflict that could have more significant global repercussions. Investors should stay informed but maintain a balanced perspective on how these developments might affect their investments.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Tuesday 10th of September 2024

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This past summer, stock markets went on a wild ride, leaving many investors confused about what was happening. In simple terms, some weak economic data from the US triggered a wave of selling, making things look worse than they really were. But within a few days, the markets bounced back to nearly where they started. It was a typical case of summer market fluctuations, where lower trading activity can lead to bigger swings.

One positive takeaway from this situation is that the financial “safety net” worked as it should. When stocks dropped, bond prices went up, which helped cushion the impact for investors. This balance between stocks and bonds is a classic strategy, known as the 60/40 portfolio: 60% stocks and 40% bonds. It’s designed to protect investments during tough times.

This strategy took a hit in 2022 when inflation soared, causing both stocks and bonds to lose value at the same time. That left investors with nowhere to hide. But now, with inflation somewhat under control, the concern has shifted to the possibility of economic slowdown, which is where bonds typically shine.

Bonds are currently offering some of the highest yields (returns) we’ve seen in years. Not long ago, bonds were yielding almost nothing, and in some cases, investors were even losing money just by holding them. That strange period is over, and now, the benchmark 10-year US government bond yields around 3.8%, which is quite decent compared to recent years.

Experts like Simon Dangoor from Goldman Sachs suggest that bonds could once again provide protection against stock market declines, especially if interest rates start to drop. But there’s a catch. This isn’t the first time we’ve heard that “bonds are back,” and it hasn’t always turned out well, especially when inflation proves hard to control.

While some analysts are cautious about getting too excited over bonds, saying they aren’t the “free ride” they used to be, the fact that the financial system’s safety net held up during this summer’s market turmoil is reassuring. It shows that having a balanced investment strategy with both stocks and bonds can still help navigate through uncertain times.

While the recent market craziness might have been unsettling, there’s no need to panic. The safety mechanisms in place worked well, and for now, investors can take comfort in knowing that their diversified portfolios are designed to withstand such shocks.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 2nd of September 2024

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Over the past decade, many emerging economies have struggled, while developed countries like the United States experienced solid economic growth. However, a major shift is now underway. Emerging economies are starting to outpace developed nations in terms of growth. In fact, the percentage of emerging economies where per capita GDP (a measure of economic output per person) is expected to grow faster than in the US is set to rise dramatically. Over the next five years, this proportion is projected to reach 88%, a level not seen since the 2000s boom in emerging markets.

This new wave of growth in emerging markets is different from the last one in several important ways. Back in the 2000s, much of the growth in these countries was driven by China’s rapid economic expansion, a sharp rise in commodity prices, and easy access to money provided by Western central banks. Many believed that as long as China continued to grow, other emerging economies would follow suit. But this assumption proved overly optimistic. By 2012, it became clear that the previous decade’s growth was unsustainable, and many emerging markets struggled to maintain their momentum.

Fast forward to today, and many emerging economies are in a much stronger financial position than before. In contrast, the United States, which has been relying heavily on large deficits to fuel its growth, is on a less stable path. Emerging economies, on the other hand, have much lower budget deficits and current account deficits, giving them more room to invest in future growth. Even countries that were previously known for poor financial management, like Turkey and Argentina, have returned to more responsible economic policies.

Another key difference in the current revival of emerging markets is that their success is no longer so dependent on China. China is facing several challenges, including a shrinking population and high levels of debt, which have made it less of a driving force for global growth. Moreover, China’s increasingly nationalistic policies and tense relationships with Western countries have led many global investors to move their investments elsewhere.

This shift has benefited other emerging economies. Many of these countries are expected to see strong export growth in areas like green technologies and the raw materials needed to produce them, such as copper and lithium. These resources are primarily found in emerging markets. Additionally, the growing demand for AI-related technologies is boosting exports from countries like Korea and Taiwan, which produce chips used in AI, and from Malaysia and the Philippines, which manufacture electronics. Investment is also flowing into emerging markets that offer unique strengths, such as India’s large domestic market, Malaysia’s favourable environment for data centres, and Mexico’s proximity to the US.

As economic growth accelerates in these countries, corporate profits tend to follow. Excluding China, corporate earnings in emerging markets are currently growing at an annual rate of +19%, compared to +10% in the US. For the first time since 2009, companies in emerging markets (excluding China) have exceeded earnings expectations by a wider margin than their US counterparts. Additionally, profit margins in emerging markets have been improving.

Despite these positive trends, global stock market investors have been slow to respond. Many are still focused on large American tech companies, and as a result, trading volumes in emerging stock markets have declined significantly, reaching 20-year lows in some cases. However, there are some exceptions, such as India and Saudi Arabia, where strong and growing domestic investor bases have led to competitive gains in their stock markets.

After years of being overshadowed by the US, emerging markets are now looking like an attractive investment opportunity. Even though these countries are seeing faster earnings growth, their stock valuations are still at record lows compared to the US. For the past 15 years, the US has been delivering superior earnings growth, largely driven by big tech companies. But this trend is now shifting.

While emerging markets have faced challenges in the past decade, they are now potentially on the verge of a major resurgence. With stronger financial positions, reduced dependence on China, and growing opportunities in key industries, these economies are poised for significant growth. Investors who recognize this shift early may find themselves well-positioned to benefit from the next big wave of economic expansion in the emerging world.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 24th of Aug 2024

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As earnings season draws to a close, Walmart, one of the last US retail giants to report its quarterly results, will provide a final feel of the pulse of the American consumer. By analysing the earnings reports of major US consumer focussed companies, several key trends appear to emerge this quarter, shedding light on how the consumer landscape is evolving.

In the food industry, the demand landscape is highly nuanced, with significant variations depending on where a product falls on the price and quality spectrum. Interestingly, this doesn’t imply that the cheapest option always wins. Instead, consumers are making more discerning choices about value, even if it means spending more.

Chipotle, for example, the mid-tier fast food chain, has been thriving, despite being pricier than fast-food giant McDonald’s. This suggests that for higher-income consumers, Chipotle represents a ‘trade-down’ from even more expensive dining options, rather than a trade-up from cheaper alternatives. This highlights a crucial distinction in consumer behaviour: people are not merely looking for the lowest price but are seeking the best value within their perceived quality threshold.

Mondelez, the snack manufacturer (owner of Oreo, Cadbury and Philadelphia), emphasised this point in its earnings release by noting a shift in consumer purchasing patterns. Two to three years ago, consumers gravitated towards larger, family-sized packages, which were seen as offering better value. Now, particularly among lower-income shoppers, there’s a move towards smaller basket sizes that fit tighter budgets. The key takeaway here is that if a product can meet the consumer’s price expectations within these constraints, it will sell; if not, it will be left on the shelf.

Pepsi echoes a similar sentiment, noting that a segment of US consumers is becoming more value conscious. This shift is forcing companies to adapt, offering more value-oriented products to retain brand loyalty.

The travel and leisure sector, meanwhile, continues to see robust demand. During the immediate post-pandemic years, there was a rush to book vacations well in advance, driven by pent-up demand and fears of rising prices. However, this behaviour has now shifted, with companies like Booking.com and Airbnb reporting that consumers are now booking trips with much shorter lead times.

Despite this change in booking behaviour, the US consumer is still prioritising vacation spending. Booking.com notes stability in the types of accommodations and the length of stays, with only a slight indication of consumers trading down in the US.

Cruise lines, such as Royal Caribbean and Norwegian Cruise, have had particularly strong quarters, with expectations to maintain pricing power, indicating that for certain experiences, consumers are still willing to spend.

Big consumer product brands are holding their ground remarkably well too, despite concerns about a weakening consumer. Procter & Gamble’s CEO remarked that, contrary to expectations, they have not seen a significant shift towards private label products, which typically gain market share during times of economic stress. Instead, brand loyalty remains strong, with consumers continuing to purchase established brands even as they face economic pressures.

Colgate experienced a positive response when it cut some prices in the US, seeing a notable improvement in volume and household penetration. This suggests that while consumers are price-sensitive, they are not abandoning trusted brands; rather, they are waiting for the right price point to make their purchases.

Similarly, Kenvue, the maker of Band-Aid and Tylenol, observed that consumers are still willing to pay a premium for brands that are perceived as science-backed, indicating that trust and perceived efficacy play crucial roles in consumer decisions, even in a tighter economic environment.

The overarching theme from this earnings season is that the American consumer is still spending, but with a more discerning approach. Impulse buys are out, and value is being redefined, with consumers carefully considering each purchase. This behaviour is likely driven by a combination of low unemployment, the depletion of excess savings accumulated during the pandemic, and the lingering effects of a significant rise in price levels, even as inflation cools.

For investors, this means that consumer spending patterns may be shifting somewhat, but they are not declining rapidly. The consumer remains in good health overall, and this is good for the economy and a positive signal for equity markets.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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