Debanking

The closure of the bank accounts of ‘politically exposed persons’ (PEPs) has made news headlines recently after several public figures, including Nigel Farage, complained their accounts had been shut without warning. City Minister Andrew Griffith is believed to have summoned nineteen bank chiefs to a meeting to discuss how customers can be protected from being ‘de-banked.’

However, it is not just some public figures that are experiencing problems with their bank accounts. In yet another example of the ‘law of unintended consequences,’ it appears as if smaller UK defence businesses have been refused accounts, or informed existing accounts will be closed and their balance re-funded. This stems from the growth of environmental, social and governance (ESG) policies which encourages businesses to invest ethically. While banks have come under increasing pressure from investors in recent years to stop funding the development of fossil fuel projects such as coal and oil, the ESG rules has also impacted financing available for defence contractors. The Minister for Defence Procurement James Cartlidge said ‘defence businesses large and small have told me that ESG rules have undermined them, from facing more expensive finance to being denied basic banking facilities.’

James Cartlidge has held talks with the ADS, the UK trade association that represents some 1,200 UK firms in the aerospace, defence and space sectors which employ some 417,000 people. The ADS has asked the government to address the ESG restrictions on accessing finance for many small and medium-sized defence contractors.

This news comes in the wake of the latest NATO meeting in Lithuania, where PM Rishi Sunak observed that in 2022, less than half of the alliance members met the 2% of GDP defence spending target. However, all allies are now committed to hitting the 2% target. War is terrible, but defence spending is critical to protect democracy. We doubt America, China, or Russia would let ESG rules hamstring their military capability.

‘If you want peace, prepare for war’ –Roman general Vegetius, 5^th Century AD

What have we been watching?

Despite continuing disappointing Chinese economic data, the US S&P 500 share index touched a 15-month high. Investors appear to be hopeful of a possible ‘Goldilocks scenario’ where inflation continues to fall and while growth is low, that the US economy avoids recession as interest rates peak and then look to fall. UK equities also enjoyed another good week as UK inflation came in below expectations suggesting that peak interest rates might be a bit lower than originally expected. Sterling dipped back below $1.30 which helped the large overseas earners and exporters.    

Russia has ended the Black Sea grain deal, terminating an agreement that had allowed Ukraine to resume exports. The White House has also warned that Russia has laid additional sea mines in the approaches to Ukrainian ports. Wheat prices rose sharply on the risk to cargo ships.

---

 

UK inflation showed an unexpected cooling in June, with a fairly broad-based moderation across the basket. Headline CPI dropped to 7.9% while core inflation edged slightly lower from 7.1% to 6.9%. There was a clear skew towards weaker goods inflation, consistent with the trend seen globally. The bigger concern has been services inflation, which is driven more by domestic factors. Intense wage pressures are likely to limit the extent of future slowing in services inflation, leaving the Bank of England (BoE) with a smaller but still significant inflation issue. However, the latest inflation data removes some of the immediate pressure on the BoE and the market is now expecting a smaller 0.25% interest rate hike in August. Furthermore, market expectations have seen peak UK interest rates shift from 6.25% to 5.8%. The 2-year gilt yield dropped to 4.84% compared with the recent peak of 5.47%.          

---

 

The European Central Bank is expected to deliver on former guidance with a 0.25% interest rate hike later this week which would bring the deposit rate to 3.75%.

---

 

US industrial and manufacturing output were weaker than expected in June driven by a contraction in demand for consumable durables such as appliances, furniture, and carpeting. Following the recent US inflation data there has been a shift in market expectations for the Federal Reserve (Fed) interest rate policy. Market consensus is for a 0.25% hike at the next meeting to 5.25%-5.5%, later this month. Beyond that, there is only a 14% probability of a further 0.25% hike in September, with November still seen as the peak, with a 30% probability (up from 1%) of no change. Meanwhile, the Fed’s preferred inflation measure, the PCE deflator, dropped to 3.8% in June.

---

 

The Governor of the Bank of Japan pushed back against building speculation that the central bank might unwind its yield curve control programme amid rising inflation.

---

 

Troubled Chinese property business Evergrande revealed losses of $82bn and that it is carrying liabilities of $300bn and is working on an offshore debt restructuring plan. Chinese officials have been emphasising their desire to roll out a policy to support consumption, a move away from the traditional debt-financed splurge on infrastructure projects.

---

 

Brent oil was steady at $80 following last week’s disappointing Chinese economic data.

---

Finally, while the UK currently appears out of fashion with some global investors, a reminder that the UK is an innovative nation. In 2022, the UK was fourth in the global innovation rankings ahead of the likes of Japan and Singapore. In 2021, UK businesses are estimated to have invested almost £47bn in R&D and there were 18,855 patent applications. Not bad for what Napoleon once called ‘a nation of shopkeepers.’

Read Last Week’s Alpha Bites – A Smoking Gun

 

Further information about Alpha Portfolio Management, our products and services, please visit www.alpha-pm.co.uk or email info@alpha-pm.co.uk. Alternatively, you can call us on 0117 203 3460.

This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the FCA.
Registered Office: 1 The Square, Temple Quay, Bristol, BS1 6DG. Registered in England No. 2489639
Copyright © 2021 Alpha Portfolio Management, All rights reserved

Trading name text

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