The Tip of the Spear

The British Army is the smallest it has been in 400 years. At a time when morale has been reported as being low and suffering a manpower crisis, it could be about to suffer further cuts in the next defence review due to be announced next week.

As recently as November, the government set out a £16.5bn increase in defence spending over the next four years but with defence spending already heavily overcommitted, manpower cuts are expected in order to balance the books.  The British Army has been preparing for a radical transformation which will include embracing new technologies from drones to artificial intelligence. Options being considered are cutting the number of battalions with 10,000 soldiers and cutting the current strength of 82,000, to help fund modernisation.

One defence sector observer pointed out that the majority of soldiers in a modern army are there to support and sustain a fighting force. The ‘tip of the spear’, the combat element is typically about one-third of an army’s total strength.  While technology will allow the Army to become leaner and more agile, if cut to 72,0000 would it have enough feet on the ground to sustain a long, enduring campaign such as in Helmand, Afghanistan? What will the UK’s closet military ally, the United States make of any cuts in personnel?

The Army appears to be embracing the government’s mantra of ‘global Britain’ and Brigadier John Clark, the Head of Army strategy predicts the Army will operate from a number of global hubs such as Kenya, Oman and Brunei. These would operate as forward-deployment launch pads where the British Army can be sent to train, develop and demonstrate. He describes the defence policy as ‘prevention rather than cure with smaller teams that can compete beneath the threshold of conflict’ in the so called ‘grey zone’ where forces operate discreetly in the blurred lines between war and peace.

NATO has realised that it must devote more time, political resources and action to the security challenges posed by China. NATO’s Secretary, General Jens Stoltenberg has urged countries in the region to stand up to China’s ‘bullying’.

Tobias Ellwood, a former defence minister who chairs the Commons defence committee, highlighted the political pressures: “Britain’s role on the world stage is at stake and our relationship with the US. Cutting our forces at the very moment president Biden is regrouping the Western resolve to counter growing threats will compromise our ability to step forward as a valued and trusted ally.”

What have we been watching?

Globally, US technology stocks suffered another wobble as the yield on 10-year US Treasury edged above1.55%, again on inflation concerns. OPEC+ surprise production news also added to inflation concerns about higher energy prices. Fixed interest investors appeared alarmed that the US Federal Reserve (Fed) risks losing control over the inflation outlook. This followed straightforwardly dovish comments by Fed Chair Jerome Powell who appears unconcerned by rising US Treasury yields.

While Covid-19 mutated strains need monitoring the vaccine news remained supportive of equity markets. For UK investors, with the major decisions pre-announced, there were no real surprises in the Budget although the jump in corporation tax in 2023 will not be welcome news for UK companies.

In America, the head of the US Centre for Disease Control and Prevention warned of a ‘potential fourth surge of cases’ in the country due to the risk from Covid-19 variants. The B.1.1.7 variant first discovered in the UK will become the dominant strain in the US this month. However, President Joe Biden will have enough vaccines for every adult by the end of May. This comes as some states such as Texas rescind most of the Covid-19 measures imposed, including the wearing of face masks.

There was better news from the UK with a study which showed that a single jab of the Astra-Zeneca/Oxford or Pfizer vaccine dramatically cuts the risk of hospitalisation for the over 80’s. The vaccination programme continues to make good progress with 22.2million now having had a first jab and over 1million a second jab. There are also unconfirmed reports that the Astra Zeneca/Oxford vaccine works against the Brazilian strain.

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In the UK, the Budget was pretty much as expected. Chancellor Rishi Sunak announced an additional £65bn of support covering furlough, universal credit and business rates. Having borrowed £355bn this year, the government expects to borrow a further £234bn in 2021/22.  To help pay for this support, corporation tax will rise from 19% to 25% in 2023. However, the Chancellor is aiming to promote business investment via a 130% ‘super deduction’ tax incentive. The Chancellor has been aided by a slightly more optimistic view on economic recovery helped by the vaccine roll-out and ending of lockdown. Economic growth is forecast to be 4% this year, followed by 7.2% in 2022. Faster economic growth will generate higher tax receipts but the pain comes later with the highest overall UK tax burden in some 50 years.

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In Europe, the PMI activity indicators for February suggests the region remains stuck in ‘double-dip’ territory although business confidence has improved to a three-year high.

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In the US, the ISM manufacturing activity reading for February recorded a ninth straight monthly expansion with good export orders. The Federal Reserve’s Beige Book survey of economic conditions suggested the US economy has expanded only modestly in recent weeks but companies are becoming more positive about growth prospects. The US Senate approved by 50 votes to 49, President Joe Biden’s $1.9trillion relief package, which now heads back to the Democratic-majority House of Representatives. Fed Chair Jerome Powell stressed patience saying ‘it will take substantial time’ to achieve the Fed’s employment and inflation objectives and policy stimulus will be maintained until the economy is ‘very far along the road to recovery’.

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China’s Caixin services PMI activity indicator dipped to a ten-month low in February although this covered the new year. However, Chinese exports surged 61% in February and imports by 22%. Exports were helped by demand for electronics (WFH) and textiles (PPE). Meanwhile, the annual People’s Congress has set a target of ‘above 6%’ for China’s economic growth in 2021 and a budget deficit of 3.2% of GDP.

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Brent oil spiked up to almost $70 as OPEC+ surprised traders by keeping a tight lid on oil production next month as Saudi Arabia urged members to ‘keep our powder dry’.  Saudi Arabia has also made the country’s additional 1million barrels a day production cut open ended.

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Finally, we all know how much life has changed during lockdown and that Zoom has become a way of life for some. This was reflected in Zoom’s recent results which revealed a 370% increase in revenue to $882m in the final quarter of 2020. Zoom’s CEO is forecasting a further 40% growth in annual sales in 2021 to $3.7bn.

 

Read Last Week’s Alpha Bites – Rare Earth Shootout

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.