Financial Update from Brewin Dolphin - 1 December 2023

December 2023

The Weekly Round-up

Friday 1 December 2023

In his latest weekly round-up, Guy Foster, our Chief Strategist, reflects on November’s stock market rally, a decline in energy prices, and a leaked memo at one of China’s largest investment banks.

This has been a relatively quiet week in terms of economic news, but still a momentous one in many ways.

The sad news about this week is that it included the passing of Charlie Munger just 34 days short of his 100th birthday. Munger served as Berkshire Hathaway’s vice chairman but is not a household name in the same way as his business partner Warren Buffett. Students of the investment world, however, recognise that it was Munger who persuaded Buffett that he should shift his focus from “cigar butts” (uninspiring companies which could be acquired cheaply) to companies with superior profitability and earnings potential that could be realised over the long term.

Stock market rally

The loss of an investing giant was very sad, but the good news this week was that November provided the best monthly equity returns in three years. The 9% return is the best that investors have enjoyed since November 2020 (12%). As we have discussed previously, one of the bigger headwinds for risk assets this year was high current interest rates and so a sharp change in expectations for those interest rates has triggered a rally in invested assets.

The fall in expected interest rates provided some relief to real estate stocks, which have had a torrid couple of years as interest rates threaten to squeeze profitability. In fact, the global real estate sector outperformed broad global stocks during November’s rebound.

The other leading sector was technology, reflecting the traditional inverse relationship that the sector has with bond yields, which serve as the discount rate for the long-term earnings growth these companies are assumed to offer. It was, however, reassuring that tech stocks did still enjoy their negative bond correlation.

This correlation had been temporarily suspended earlier in the year when yields were surging and many tech stocks were also performing well due to excitement about the profits they will reap from increased adoption of artificial intelligence.

Energy sector

The rally in energy prices that had been prompted by the Israel-Hamas war softened, leading to speculation that the Organization of Petroleum Exporting Countries (OPEC) and Russia would coordinate to restrict energy supply and thus support prices.

OPEC typically works on the basis that members will benefit by selling their oil at higher prices if they do not compete to maximise sales (as this would drive the price lower for all). In recent years, Saudi Arabia has had to shoulder the burden of cutting its production as smaller members dispute or refuse to honour the production quota they are allotted. The cartel announced a cut of 900,000 more barrels of production, which should be seen as supportive for the oil price except that the cut was described as voluntary. OPEC member Angola rejected its revised quota. A slide in the oil price provided a disappointing end to an underwhelming month for energy shares while other equity sectors were performing strongly.

Most commodities were weak during November because of concerns over demand. The exception was precious metals, with gold and silver making gains. Falling bond yields would traditionally be associated with a rally in precious metals but, like technology stocks, the relationship broke down earlier in the year in gold’s favour.

Despite the strong recent run, which ought to curb investors’ enthusiasm somewhat, the attraction of silver, in particular, stands out for a couple of reasons. Unlike stocks and bonds, which are valued based upon the yield they offer to shareholders, the value of precious metals is derived from the low ratio of new production relative to the existing pool of commodities in circulation.

China

A leaked internal memo at China International Capital Corporation showed that bankers at the firm were told not to publish negative views on the economy, nor comment on issues that are not in line with government policy. They were also asked not to wear luxury brands or disclose their compensation. This is the latest example of censorship from the Chinese Communist Party, which would seem to undermine the duty that a company would normally owe to its clients.

Chinese economic activity remains weak but was a little better than expected, according to the purchasing managers’ indices. Beijing continues to lean into the housing downturn with selective measures. Last week, the authorities essentially said that the Chinese banking system was earning excessive profits and could therefore stand to transfer some of those to the real economy. One idea that was proposed was to pressure banks to make unsecured loans to property developers, rather than more standard secured loans.

This kind of behaviour from firms, and the expectation of it from central government, is part of the reason why similar firms operating in the US and China have ultimately seen very different investment outcomes. The clear regulatory environment in the US (and most developed democracies) facilitates commercial relationships among the private sector, whereas companies and their clients in China do not know whose interests those companies are serving from one month to the next.

The Chinese market has significantly underperformed during the last week and over the last month, falling when developed markets have been making strong gains.

The value of investments can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance.