I got 89 problems

Investment managers must assess their client’s attitude to risk, but in turn, must also consider market volatility and global macroeconomic risks.

While markets act as a barometer of investor confidence and like to think they are pricing in the ‘known-knowns’ such as the path of interest rates, there can be sudden unexpected challenges such as the Covid-19 pandemic, war in Ukraine and global energy crisis.

How helpful for us therefore, that the UK government has just updated its latest list of 89 major threats facing life in Britain in 2023. Welcome to the updated National Risk Register. This covers a range of potential threats from heatwaves and flooding, through to terrorism and cyber-attacks.

The UK’s Deputy National Security Advisor Matt Collins said: “A comprehensive understanding of the risks we face is critical to keeping the UK safe.”

Amongst the most probable events with more than a 25% likelihood are a terrorist attack in a crowded public space and an attack on a NATO member country requiring the intervention of the UK’s armed forces. Amongst those with a 5%-25% likelihood is another global pandemic, an ash-rich volcanic eruption disrupting air travel and solar flares damaging satellite communications. Given the war in Ukraine, the risk to UK infrastructure from Russia is on the list but despite the fighting around the Zaporizhzhia nuclear plant, the risk from an accidental radiation release form overseas is just 0.2%. Even AI makes it onto the list as it might risk causing an increase in harmful mis-information.

The publication of the list comes as the UK is reported to be seeing an increase in Covid-19 cases with the spread of the latest Eris variant EG.5.1. Thankfully, due to vaccination and natural immunisation we appear to be coping with Covid-19. Meanwhile, Porton Down, the UK Health Security Agency is reported to be working on a vaccine for H5N1 avian influenza as well as one to protect against a new pandemic caused by an unknown ‘Disease X.’

Hopefully, we are better prepared in case of an emergency as a result of this risk assessment. Long-term investing involves surprises, sometimes pleasant, sometimes unpleasant but, generally risk can be factored into valuations.

What markets hate is uncertainty, or ‘Black Swan’ events that have not been anticipated. Inflation and interest rates continue to be key for global market sentiment with the war in Ukraine, China/Taiwan, US/China relations providing food for thought.  Given this, next year’s US presidential election will be even more significant.

With apologies to JAY-Z.

 

What have we been watching?

 

Markets were overshadowed by more disappointing Chinese economic data and escalating fears of a liquidity crisis at a major Chinese property developer. In Europe, a surprise windfall tax on Italian banks unnerved investors, although the Italian government ended up back-tracking somewhat. Energy prices spiked due to the war in Ukraine and potential industrial action in Australia. Trade tensions between the US and China were also back in the spotlight as US President Joe Biden unveiled a ban on US investment in Chinese tech sectors to restrict American capital for companies linked to China’s military. Inflation and interest rates remained in focus with further US inflation data, while UK GDP data raised concerns that UK interest rates may stay higher for longer.     

While summer weather continues to disappoint -thanks Jetstream! – let us hope this winter is mild. European gas prices were volatile, with a one day move of 30%, on concerns about lower Australian LNG exports due to industrial action. This coincided with stronger oil prices on developments in Ukraine.

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In the UK, retail sales growth slowed in July to 1.8% with the wet weather hitting the clothing sector. Meanwhile, the Bank of England’s chief economist warned that food prices may never fall back from their painfully high levels. While substantial declines on global food markets will eventually feed through to shoppers, it may only slow the pace of increases rather than lead to an outright drop. There was some relief however for home buyers as the UK’s largest mortgage lender Halifax announced it was lowering the cost of a 5-year fixed deal from 6.1% to 5.39%. A surge in manufacturing output in June came as a significant upside surprise and left GDP up 0.5% over the month.   

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In Europe, Italy’s Deputy Prime Minister announced a 40% windfall tax on Italian banks excess profits derived from higher interest rates. The one-off tax is estimated to equate to about 19% of the bank sector’s net profits this year. However, following a sharp sell-off, the government changed tack by announcing that Italian banks would pay no more than 0.1% of their assets.

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US inflation was broadly in line with expectations. CPI edged up to 3.2% in July but core inflation dipped from 4.8% in June to 4.7%. Meanwhile, US producer price inflation edged up 0.1% over the month coming in at +0.3%.

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The Chinese economy continues to falter. Chinese exports dropped by 14.5% in July. This was the biggest fall in exports since July 2020. Imports were also weaker than expected falling by 12.4%.  Concerns also remain about China’s heavily indebted property sector.

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Brent oil moved up to a nine-month high of $88 as Ukraine threatened to target Russian transit and ports in the Black Sea before edging back to $85 on sluggish Chinese economic data.

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Finally, following ‘Alpha Bites Debanking’ and the impact of ESG on the defence sector. According to data from the London Stock Exchange, UK based fund managers have reduced their holdings in UK defence contractors since the start of 2022 whereas EU investors have increased their exposure. The UK’s largest quoted defence contractor, BAE Systems,  has significantly out-performed the FTSE100 over the last twelve months. This should not come as a surprise given the war in Ukraine, the increase in global defence spending and heightened US/China tension over Taiwan.

Read Last Week’s Alpha Bites – You only had one job

 

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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.