08 Mar 2024
Events at the Post Office have challenged the dictum that there is no such thing as bad publicity.
The Horizon scandal is better commented upon by people with more knowledge than me. And the less said about the internecine squabbling at the recent Select Committee, the better. International Distribution Services (Royal Mail as was) must be relieved not to have ownership anymore, so it can focus on its own challenges. To stem losses, it was announced last week that the cost of a first class stamp was rising to £1.35. Out of interest I looked up the cost of a stamp in 1970 – before realising that was pre-decimalisation. Anyway, in new money terms, a first class stamp cost 3p. Over that period prices have risen by 20 times. So, if the stamp had kept pace with inflation the cost would be around 60p. Trying to keep to past practices looks an increasingly forlorn hope and putting the price up again (fourth time in two years) will further reduce demand for services. It looks like radical steps are needed.
Government bond markets have not started the year well. After two months, we have seen the gains made at the end of last year eroded. This has been particularly noticeable in the UK, where 10-year yields touched 3.5% in late December and are now trading around 4.1%. This reflects the change in interest rate expectations. Looking at market pricing, UK base rates are projected to be around 4.5% at year end. In contrast, at the end of last year the 12-month outlook was for rates below 4%. This may seem strange, given that weak growth picture in the UK. But what we are seeing is a global trend, with bond yields in the US and core euro area retracing about half of their late 2023 gains. The reset is due to a combination of factors: growth being better than expected, disinflationary trends being tested by tight labour markets, and over exuberance in the run up to Christmas. In the US, where investors first bought the bullish rate outlook, expectations have moved significantly. Just two months ago, six rates cuts of 25bps were priced in for 2024. Today, instead of pricing a Fed Funds rate around 3.75% we are looking at nearer 4.5%. Yields on 10-year US treasuries finished at 4.2%, down 8bps on the week, but still 40bps above the late December low of 3.8%.
Credit markets were on the back foot last week. The downwards trend in investment grade spreads seen since late October went into reverse, as higher global supply and push back against the speed of tightening took a toll. The move was not big, in the case of sterling we saw a 5bps change, but the tone was definitely weaker globally, not helped by a further slump in the equity price of New York Community Bancorp. That said, demand for new issues remained robust. High yield spreads also retreated but still remain tighter than their 2024 starting level.
Speculation about the UK budget filled the economic and business sections of the weekend press. The common theme is the apparent desire for a National Insurance tax cut, financed through various offsetting policies around air travel taxes, changes to non-domiciled status and an extension of windfall taxes. In short, a hotchpotch of tax raising policies lacking any coherent theme – bar a potential desire to steal the opposition’s policies.
There has been speculation around a British Individual Savings Account (ISA), a proposal that was backed by various finance leaders in a letter to the Times newspaper. In essence, the favourable tax treatment for ISA investments would be restricted to UK companies. This is not a sensible proposal, if the idea is to address the low valuation of domestic companies. Again, we see governments addressing symptoms and not causes. It also fails to recognise the global nature of most of large companies, let alone the problems of defining what constitutes a British company. There was also an interesting suggestion that pension funds would need to disclose the size of their exposure to British companies and that underperforming funds would be banned from pitching for business. For politicians’ sake, they must be hoping that such a proposal does not gain wider traction and is applied to themselves.
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.