Follow the money

Wednesday 24th May 2023

Sustainable investment

Many of you will have heard us use the mantra "follow the money" when describing one of the reasons we think investing in Sustainable funds is a key part of future returns. Trillions of pounds have been and will be invested by governments and private companies to develop the expertise and tools to tackle climate change. Approximately 50% of the funds we manage are in the Sustainable category, so investing in Companies that will benefit from this initiative over time. Phoebe Stone of LGT WM has produced a short video explaining the basics of Sustainable funds and their assessment of Companies they invest in, that you may find of interest. Please click here to view it.

Hitting the ceiling

The United States leads the way in market news this week as like most countries they must borrow to pay the bills. They have a 'debt ceiling' which is the maximum amount the Government is allowed to borrow at any given time. This is currently at $31.4 Trillion and needs to be raised for the country to continue borrowing to meet its debts. The Democrats and Republicans must agree to increase that ceiling, and President Biden and Republican Speaker McCarthy met on Monday continuing negotiations. The Republicans want the Democrats to cut spending in return for their cooperation, and it seems if agreement isn't reached the money to keep the government going will effectively run out by 5th June. Today the brinkmanship has increased and stock markets have fallen as the talks have stumbled. Despite the fact there is still no final deal, there is optimism that the US political leadership will find a compromise arrangement to avoid defaulting on their obligations. We have been here a few times before and agreement was always reached, as the consequences of not doing so are pretty dire.

Ever decreasing circles

So, governments are borrowing more and increasing interest rates also means they have to repay more. According to the Office for National Statistics the UK National Debt at the end of March 2023 was £2.536 Trillion, being 99.2% of our Gross Domestic Product (GDP). GDP is the value of the country's goods and services. The pre-Covid level was £1.891 Trillion and 85.4% of GDP, so you can see the impact Covid has had on the country's finances. That increase alone is roughly the same as the national debt in 2008 before the Financial Crisis. Every month the UK Government borrows yet more money and it was £25 Billion alone in April 2023. Of that amount, £9.8 Billion was simply to pay the interest which was £3.1 Billion more than in April 2022. Ever increasing borrowing at an ever increasing cost to repay is not a great situation.

We have been used to a long period of low cost borrowing and the point of the figures we give is that interest rate rises impact both the public and our purse, which is partly why there is such a watch over the inflation and corresponding interest rate impact. The worry currently is that inflation is proving more "sticky" and not coming down as much as expected. Today's UK inflation figures coming down to 8.7%, from double digits, seem good news, but the Bank of England predicted 8.4% and the market expected 8.2% with food inflation in particular hardly falling. This week will also see the release of the inflation data in the US and will be a major consideration when the Federal Reserve meets to determine the US interest rate in June. It could mean that interest rates instead of having peaked may creep up more yet, although much more will become unaffordable for the public and governments as the costs of borrowing become too much. The dilemma is that the increase in interest rates by the central banks takes at least 12 months to have any effect and, with roughly 85% of mortgages being fixed rates probably longer, so any increase will have be judged very carefully against this backdrop.

United Kingdom

There's been some good news for the UK from the International Monetary Fund who yesterday forecast the UK will no longer enter recession this year. Ironically this links to our comments about government debt above, as they believe any surplus achieved by doing better than expected, should be used to pay down debt rather than by giving tax cuts. Seeing energy company SSE's excellent results today and listening to their chairman explaining how much they are investing in renewable energy reminded us of Royal London's Mike Fox latest Sustainable Funds update about optimism. He comments that from a portfolio management view, as the world become more global with technology support, that portfolios have become more global rather than the UK bias and yet there are some excellent UK Companies:

" . . . lets show optimism rather than pessimism about UK investing. Which is the leading cancer drug developer in the world? AstraZeneca. Which company is building the most offshore wind generation in the world? SSE. Which company has bought a major US company, consolidating its world leading position in pest control? Rentokil. Which company provided critical chemistry expertise to allow Pfizer to deliver its Covid vaccine to hundreds of millions of people? Croda. One of the largest providers of data to the global financial sector? London Stock Exchange. We could go on, but it doesn't change the underlying point; these are all UK businesses winning in a global context. Of course, there are always things which could be improved."

If you would like to read Mike's full commentary please let us know.

Charity Support: Centrepoint

This year we have chosen to support Centrepoint, which provides homeless young people with accommodation, health support and life skills in order to get them back into education, training and employment. They are campaigning to end youth homelessness by 2037. We have launched our 1,500 Mile Challenge, where the team at Bailey Cook will walk or run a total of 1,500 miles in May and June with the target of raising £1,000 for Centrepoint. If you would like to donate and help support this worthy cause, you can do so by visiting our JustGiving page. Thank you in advance for your generosity.