The Importance of Financial Planning

2024 Investment Performance Review

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Macroeconomic Backdrop

U.S. Economic Resilience and AI-Driven Growth

The U.S. economy remained the standout performer in 2024, with GDP expanding at an annualized rate of 2.6%. This growth was driven by a strong labour market  with unemployment which averaged 3.8%, robust consumer spending, and continued capital investment in AI and automation.

Core PCE inflation, the Federal Reserve’s preferred gauge, remained above target at 3.2%, leading policymakers to delay aggressive rate cuts. The yield curve inversion, while persistent, narrowed slightly toward year-end as recession concerns receded.

 

European Economic Weakness and Policy Constraints

Europe underperformed as weak manufacturing data signalled a deepening industrial slowdown. Germany, the region’s largest economy, contracted by 0.4%, with the ZEW economic sentiment index (Germany’s leading indicator of economic activity) remaining in negative territory for much of the year. High energy costs, a rigid labour market, and regulatory headwinds appear to have constrained corporate investment.

Meanwhile, political instability in both France and Germany led to bond spread widening, with the French OAT spreads over German Bunds rising by 30bps – marking the first time since the Global Financial Crisis that French yields exceeded Spanish equivalents, inferring a greater risk.

 

China’s Late-Stage Policy Shift and Market Impact

China’s economic struggles continued for most of 2024, characterized by weak consumer confidence, declining property prices, and deflationary pressures. CPI remained below 1% for most of the year, reflecting subdued demand. The People’s Bank of China (PBOC) responded with targeted stimulus, including Reserved Ratio Requirement cuts and increased liquidity injections into the financial system. September’s more cohesive fiscal and monetary stimulus package, equivalent to 2.1% of GDP, ultimately sparked a market rebound, leading to a stunning 19.8% gain in Chinese equities in Q4.

 

 

Performance of Bond Markets (Local and Global)

Interest Rate Expectations and Yield Curve Dynamics

Global investment-grade bonds posted a -1.7% return, reflecting a higher-for-longer interest rate environment. The U.S. 10-year Treasury yield peaked at 4.9% in October before settling around 4.2% by year-end as inflation expectations moderated. For reference, the US 10 year treasury is currently trading at 4.52% yield. The MOVE index, a key gauge of bond market volatility, remained elevated, reflecting uncertainty around the Fed’s policy trajectory.

 

Credit Spreads and Sector Performance

Investment-grade corporate bonds underperformed, with spreads widening slightly to 120bps over Treasuries, reflecting moderate risk repricing. High-yield credit, however, outperformed, returning 8.2%, supported by strong fundamentals and limited default risk. The U.S. high-yield default rate remained below historical averages at 2.7%, aided by stable earnings and refinancing activity.

The following chart illustrates bond market returns across key segments over the past five years.

 

2024 Performance of Bond Markets

 

Performance of Equities (Local and Global)

Sector Leadership and Market Breadth

Developed market equities returned 19.2%, in local currency terms driven by a continued rally in U.S. equities (+25.0%). The rally, initially concentrated in mega-cap technology stocks (with the “Magnificent Seven” contributing nearly 50% of the S&P 500’s total return), and broadened in the second half of 2024, as cyclical sectors caught up. Financials benefited from expectations of deregulation, while industrials rallied on the back of AI-driven automation demand and forecast policy change.

Japan’s Nikkei 225 rose 19.2%, supported by structural corporate reforms, rising foreign ownership, and the Bank of Japan’s exit from yield curve control.

European equities trailed at 8.1%, weighed down by a lack of AI-driven growth narratives and sluggish economic fundamentals as outlined previously but the German Dax did outperform providing a return of 18.8%.

Emerging markets saw mixed performance. The MSCI EM Index returned 8.1%, with India and Taiwan posting strong gains, while China’s volatile trajectory limited broader index performance.

The following chart captures five-year trends in equity market performance across major regions.

 

2024 Performance of Equities

 

Oil Price Changes and Market Impact

Supply and Demand Dynamics

Brent crude prices rose by 5.4% in 2024, a more muted increase than previous years as OPEC+ production cut production by 2.2 million barrels per day which helped stabilize prices on the one hand, while weaker-than-expected demand from China and increased U.S. shale production capped any intended gains.

Energy equities in general, lagged broader market returns with some exceptions, reflecting tighter profit margins. The XLE Energy ETF underperformed the S&P 500, returning just 4.1%. Refining margins remained compressed as weak Chinese demand impacted global diesel and gasoline consumption.

 

Geopolitical Factors and Strategic Reserves

The geopolitical landscape influenced oil markets, with conflicts in the Middle East briefly driving WTI crude above $90 per barrel in Q3. However, the release of 30 million barrels from U.S. Strategic Petroleum Reserves helped contain price spikes.

The following chart illustrates annual changes in Brent crude oil prices over the past five years.

 

2024 Oil Price Changes

 

Foreign Exchange Performance

Dollar Strength and Global Implications

Finally, the U.S. dollar appreciated against most major currencies in 2024, with the DXY Index rising 4.6%. This was driven by the Fed’s hawkish stance relative to other central banks, as well as persistent economic outperformance. The dollar’s strength put pressure on emerging market economies, leading to capital outflows from higher-risk regions.

 

Euro and Pound Weakness

The Euro depreciated against the dollar, closing the year at $1.07, down from $1.12 (4.4%) at the start of 2024. This decline reflected Europe’s weaker growth outlook and a shift in investor capital toward U.S. assets. The British pound followed a similar trajectory, weighed down by weak consumer sentiment and higher borrowing costs.

 

Yen Depreciation and Policy Shifts

The Japanese yen declined further, reaching ¥155 per USD at its weakest point, reflecting the Bank of Japan’s cautious approach to policy normalization. While the BoJ ended negative interest rates and yield curve control, the yen’s continued depreciation suggested limited confidence in Japan’s economic acceleration.

 

Overall Assessment of Market Performance

2024 was another strong year for risk assets, but underlying risks remain.

  • Equities: The AI-driven bull market broadened beyond technology, but U.S. stock valuations remain elevated, with the S&P 500’s forward P/E at 21.2x—above its 10-year average of 18.5x.
  • Fixed Income: Bond market volatility underscores the need for duration management, as shifting rate expectations due to economic uncertainty and stubborn inflation, continue to drive repricing.
  • Oil Prices: Supply-side constraints and geopolitical risks remain, but demand concerns limit upside potential.
  • Foreign Exchange: A strong dollar could create additional pressure on emerging markets, particularly those with dollar-denominated debt.

So, as we head into 2025, asset allocators of portfolios must balance opportunity with caution driven by the geopolitics, interest rates and credit availability.  

It is not yet clear one way or the other, what economic impact to the global economy will result after the inauguration of President Trump. He  & his Bro-tocracy, is creating uncertainty and volatility across the capital markets. A reset in mind & thinking is absolutely required and I suspect, that the bond market will have some  curtailing influence on the more extreme ideas to emerge from the Bro’s around the Presidents table.

As always, but now more than ever, diversification across & within asset classes and geographies remains critical in navigating a fast evolving macroeconomic landscape.

 

Asset Class Returns

 

 

The Importance of Financial Planning

Urgent Notification for Business Owners

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The Finance Bill 2024 was published yesterday & it contained provision which materially impacts your retirement funding from 01/01/2025.

Since Finance Act 2023, business owners were provided the opportunity to make significant contributions to their Personal Retirement Savings Accounts (PRSA) which for many, afforded them the opportunity to back fund for contributions which perhaps couldn’t be made in the early years of setting up the business.

PRACTICALLY, that meant that business owners with significant funds in the bank, and with one eye on retirement, could make significant contributions to fund their PRSA’s and if they were Company Directors, would receive Corporation Tax relief.

YESTERDAY, Minister Chambers published the Finance Bill 2024, which disappointingly, contained a provision to limit the employer contribution amount to 100% of total emoluments, which is usually defined as salary. This is a huge departure from the previous flexibility of being able to fund up to the Standard Fund Threshold of €2M.

WHAT HAS CHANGED is that contributions to a PRSA greater than their total remuneration will now NOT receive the Tax relief previously afforded and will be treated as a Benefit in Kind as it was prior to the original amendment in Finance Act 2023. In essence, this is a huge step back for the backbone of this economy; the Irish SME’s, family business owners & Company Directors.

ACTION is now required by business owners to swiftly re-assess their current retirement funding strategy and to re-align if necessary, with the current impending change in the legislation BEFORE 31/12/2024.

If you would like to discuss this further, please contact me on 085 866 9813 or michael@lifetimefinancial.ie  

The Importance of Financial Planning

Monthly Investment Note: August 2024

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Global Markets have taken an abrupt turn in recent days accelerating a change in the redistribution of capital from risk assets coupled with significant moves into short term bonds & re-inverting the yield curve. Changes in market sentiment throughout the year are common and drive volatility which is represented in the Volatility index (VIX = 38.7) where anything approaching or above 20 indicates volatility.

Indeed, for some time now, we have observed some rotation from growth to value based risk assets indicating a greater reluctance to overpay for the promise of higher returns from certain sectors (i.e. technology) at their current high valuations. With this in mind, it seems that a confluence of other factors have led to this recent Global market selloff & I will attempt to summarise our understanding as follows;

  1. High valuations in the Global Technology sector coupled with disappointing 2nd quarter earnings reports from many providers and consumer based businesses plus lower than expected future forecasts have led some investors to sell, take profits & reduce their risk exposure to this sector.
  2. High US market valuations coupled with lower jobs data than expected prompted an increase in the fear of an impending recession in the US edging many (undecided) investors to sell risk assets & take shelter in short term government bonds causing yields to drop at the short range of the curve by ca. 1%; a huge change in the bonds market.
  3. Combined with the above, the signals from the FED that a rate cut is not on the cards until September and may indeed be less than the forecast 0.5%, leads some investors to think that the FED is behind the curve in trying to achieve a so-called soft landing for the US economy compared to its peers in Europe.
  4. A recent notification to the SEC that Berkshire Hathaway has made significant sales of its holdings in Bank of America & Apple Inc bolstering its cash position to $276.5 Bn, which many retail investors fear is a prelude to a US recession from the Oracle of Omaha; Warren Buffett. This is the highest it has been since 2005 and US recession signals have been on the cards for ca. 18 months since the 2 and 10 year yield curves inverted. This so-called yield curve inversion is often a signal of recession over the coming 36 months.
  5. Finally, with the recent announcements by the Japanese Central Bank to increase interest rates, there has been a significant strengthening of the Japanese Yen v’s the USD (¥161.7 to ¥144.9 v’s USD). This has led to an unwinding of carry trades1& required the (fire)sale of assets to fund margin calls for those traders resulting in a huge pullback in the Japanese market (-16.1%).

As investors, it is important to note that the major markets often correct (sometimes abruptly) throughout the year and many markets which are currently trading with high side valuations compared to their long-term averages will provide the most abrupt adjustments. The table below outlines the impact (in Euro Term) of those recent corrections from the recent highs and to provide perspective, compares the 12 month returns for those same markets.

 

VIX Euro US500 NASDAQ Japan Global US2 Yield US10 Yield
Correction fromRecent High 2 +112% -6.9% -8.2% -13.4% -16.1% -8.2% -12.58% -9.56%
12 MonthsReturns3 NA 9.16% +17.3% +18.8% -0.4% +13.3% NA NA

 

As always, we take the long view on Investments. In today’s (relatively) normal interest rate environment, we continue to see less fair value across global equities with (fPE’s at 19.1) in comparison with early 2023, where valuations averaged 16.6 times earnings. While the markets have roared and now corrected this year, I would suggest that as the Central bank’s Monetary policies continue to unfurl throughout the course of the year, we can expect to see further volatility in those capital markets and the reason is fear of not achieving an economic soft landing.

During these times, it is important to firmly remind ourselves of our investment objective which as always, guides our asset allocation. For regular long-term investors, our view is there may be opportunity to buy into the markets at lower valuations, while ensuring diversification across sector, jurisdiction, and currency. For lump sum investors, while the conservative portion of portfolios can be bought quickly, a multi-stage approach to the purchase of the equities portion, may be an alternative option.

Our view, on global bonds has also remained as per recent communications, but with the US 2 year treasury now yielding 3.89%, though it is still attractive when compared to the average dividend yield of 2.0% for risk assets, it is slightly less attractive than some money market funds which are paying the 3.77% yield with the advantage of higher liquidity. Therefore, with bond yields at current levels, and interest rates plateaued but probably set to change, bonds continue to look like an attractive investment. Nonetheless, our cautious view on lower volatility portfolios continues to be implemented through the use of money market funds, and a small allocation to hedge fund positions to exploit market inefficiencies; all in all, providing some degree of protection in the current volatile climate.

 

Sources: Central Banks: Federal Reserve, ECB, CBOI, Treasuries; Sharepad®. Euro Inflation is measured by the Harmonised Indices of Consumer Prices (HICP). Periodic Market updates & reading materials from Vanguard, Bloomberg, Ruffer, Davy Select & others depending on subject matter. All views and details contained are for information purposes only, are subject to change & should not be construed as advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

1 A Carry trade borrows capital at a low rate of interest & invests in an asset which provides a higher rate of return often across currencies

2 Data from 11/07/2024 in Euro’s

3 Data from 04/07/2023 in Euros

The Importance of Financial Planning

Monthly Investment Note: May 2024

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We’ve seen a change in sentiment on the markets over the past few weeks, driven largely by the change in tone regarding interest rates reduction and the increasing tensions in the middle East.

Markets performed strongly in March, where the energy sector provided the best returns (9.28%) driven largely by higher crude oil prices and a less bleak economic outlook, equities markets have since course corrected slightly.

Indeed, with the first quarter earnings well underway, we saw pullback in the US market which is down about 3% (in Euro Terms) since its high in early April likely attributed to the high valuations, forecasts and some profit taking. This too, is reflected in the Global markets.

Our valuation models continue to observe high side valuations with most well above their historical norms. Some of the headline data which we track is shown in the table below and I have added in the January data for comparison.

 

Month EU Inflation US Inflation ECB Rate Fed Rate Brent Crude US 10 Year Equities YTD Equities fPE
Jan 2.8% 3.1% 4.5% 5.5% $81.41 4.15% 6.4% 17.83
Mar & April 2.4% 3.5% 4.5% 5.5% $89.50 4.70% 8.1% 19.10

 

As the table shows, EU inflation in March continued on a downward trajectory to record 2.4% in March which is a far cry from the 10.6% recorded in October 2022. The relentless impact of current EU interest rate policy is grinding inflation lower successfully, but it is slow progress and the chatter has now turned to whether the EU will actually move to cut rates before the US this year, something which is unusual. Incidentally, Irish inflation data in March recorded a rate of 1.7%, down a full percentage point since January this year.

In contrast, US inflation actually increased slightly in the month of March to 3.5%, which is creating a conundrum for the Federal Reserve….and another headache for President Biden in an election year! Recent commentary on when interest rates will be cut, has abated and the general consensus now is that a US rate cut will occur (if at all) much later in the year.

As mentioned above, energy sector stocks performed well in March & April (up ca. 14.2% YTD) due in large part to the price of Oil which has moved from $81 to $89 a jump of 9.9% from January. Indeed, the price per barrel actually topped $91 pb in early April and with tensions rising daily in the Middle East, the $100 per barrel predictors are back on the scene.

On the fixed Income side, with the US debt to GDP ratio firmly set at 122% and credit rating for US treasuries having been reduced in 2023, there is market sensitivity to interest rate commentary, and one could be forgiven for thinking there would be nervousness to the issuance of new debt. Indeed, in March & April, we saw a sell off of treasuries and the 2 year yield moved from 4.67% to 4.96% with the 10 year yield going from 4.26% to 4.7%. These are big moves in the bond markets but something which we are becoming accustomed to now.

So, while in Europe the current ECB interest rate policy continues to have the desired effect on the rate of inflation, in the US, it does not. With the 2% sweet spot in sight in Europe, it is now time for the ECB policy makers to start thinking seriously about reducing those higher rates to avoid the EU tipping into full recession. Indeed, recent positive data suggests that the Eurozone expanded at its fastest rate in over a year with the preliminary estimate of the HCOB Eurozone composite PMI increased to 51.4, from 50.3 the previous month and well above consensus expectations of a 50.8 figure. The balance faced by the ECB here is too much rate reduction, too quickly and one can imagine a steady round of low interest rate cuts over a long period to control this. In the US however, the message must be to continue interest rate policy for longer than expected until inflation is much closer to the 2% mark than, something which President Biden (and the markets) are not happy about.

As I mentioned in my last update, the challenge to achieve that “soft” landing where inflation peels back to 2% without the economy tipping into recession is a bit like steering an oil tanker, in reverse, into a parking spot at your local supermarket.

Setting macroeconomics aside, what does all this mean for investors?

On the global markets, we continue to see positive returns. In March, this was 11.25% which reduced to 8.1% in April with the afore mentioned correction. This global trend was reflected in all major developed markets with reductions in the US of 2.6%, in Europe of 1.43% and 5.3% in Japan which was the big performer early in the year. It should be noted here that the Japanese Yen is the weakest it has been since the 1990’s trading at about and above the ¥150 mark (¥156.68 / $1 at time of writing) since the Bank of Japan moved from a negative interest rate environment.

Global Valuations as measured by fPE ratios continue upwards moving from 17.83 to 19.1 times forward earnings and indeed in the latest earnings reports, we see that while many companies have delivered beyond the analysts’ expectations, almost all are sounding cautious notes for the remainder of the year…..another contributing factor to recent pullbacks! Year to date returns for the tech bellwether so-called, “Mag-7” stocks are shown in the table below.

 

Returns AMZN GOOGL AAPL NVDA Meta MSFT TSLA US 500
YTD 18.6% 19.1% -9.4% 76.7% 21.8% 6.6% -22.3 9.40%
April -4.95% +7.1% +2.98% -3.1% -13.79% - 5.88% +10.3% -1.36%
fPE 43.5 x 22.1 x 26.4 x 35.1 x 21.7 x 34.1 x 74.7 x 21.74 x

 

While five out of the seven have outperformed the broader market for the year so far, Apple & Tesla are the laggards which is being attributed to their lack of product innovation & cost of goods while consumer discretionary spend globally, is reduced. Notably, Alphabet and Meta are trading with fPE’s in line with the broader market while the others are in excess.

However frothy I deem the US markets to be, the fear gauge as measured by the volatility index still continues to bound around the 13 to 15 range; well below the standard of 20 points which indicates volatile markets, last seen in October 2023.

The long-term (10 year) forecast for growth in global stocks has increased slightly to 11% with another slight reduction in the average yield of 2.0% from 2.1% in January. This increases the equity risk premium (the excess return to compensate investors for taking the risk of investing their money in equities as opposed to the risk-free rate) to ca. 5.9%. However, conditions continue to still drive fund flows into the money markets which are currently yielding ca. 3.93% and remain a valuable component of many portfolios.

As always, we take the long view on Investments and are happy with globally diversified portfolios. In today’s (relatively) normal interest rate environment, we see less fair value across global equities with (fPE’s at 19.1) in comparison with early 2023, where valuations averaged 16.6 times earnings. While the markets have roared so far this year, I would suggest again that as the Central bank’s Monetary policies unfurl throughout the course of the year, we can expect to see increased volatility in those capital markets. During these times, it is important to remind ourselves of our investment objective which as always, guides our asset allocation.

For regular long-term investors, our view is to continue to buy into the markets ensuring diversification across sector, jurisdiction, and currency. For lump sum investors, while the conservative portion of portfolios can be bought quickly, a multi-stage approach to the purchase of the equities portion, may be an alternative option.

Our view, on global bonds has also remained as per last month. With, the US 2 year treasury now yielding 4.96%, which is attractive when compared to the average dividend yield of 2.0% for risk assets and slightly more attractive than some money market funds which are paying the 3.93% yield but with the advantage of higher liquidity. Therefore, with bond yields at current levels, and interest rates probably plateaued but set to change, this asset class continues to look a more attractive investment, than in recent years.

Our cautious view on lower volatility portfolios continues to be implemented through the use of money market funds, currently yielding ca. 3.93% and a small allocation to hedge fund positions to exploit market inefficiencies; all in all, providing some degree of protection in the current volatile climate.

 

Sources: Central Banks: Federal Reserve, ECB, CBOI, Treasuries; Sharepad®. Euro Inflation is measured by the Harmonised Indices of Consumer Prices (HICP). Periodic Market updates & reading materials from Vanguard, Bloomberg, Ruffer, Davy Select & others depending on subject matter. All views and details contained are for information purposes only, are subject to change & should not be construed as advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

The Importance of Financial Planning

The Power of Partnering with a Certified Financial Planner

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The Power of Partnering with a Certified Financial Planner

Financial planning is at the cornerstone of personal empowerment, and for women, it holds particular significance. In a world where gender disparities persist in various areas of life, from earnings to career progression, financial planning is a crucial tool for women to navigate these challenges and secure their future independence.

At Lifetime Financial Planning, we strongly advocate for long term planning for the future, today to provide a sense of financial wellness regarding your future financial self. For women, financial wellness has a particular importance considering that on average, women live longer than men (84.4 years for females vs 80.8 years for males in Ireland in 2020: CSO Measuring Ireland’s Progress 2021) and as a result will require more financial resources if they wish to maintain a comfortable quality of life as they age.
Recent findings from the FPSB Value of Financial Planning Research 2023, undertaken for FPSB Ireland and conducted amongst 1,000+ consumers* in Ireland shed light on the significant impact of financial planning on the financial well-being and confidence of women in Ireland. Here are the key takeaways from the survey:
*52% of respondents were female and of these, 240 are advised and the balance, 296, unadvised.

Women who have sought financial planning advice have elevated levels of financial confidence.

The survey reveals a promising level of financial confidence among advised females, with 92 out of 240 expressing belief in having enough funds for retirement. A substantial majority of 196 out of 240 respondents consider themselves knowledgeable about finance, indicating a solid foundation for making informed financial decisions. Impressively, 199 out of 240 advised females successfully adhere to their financial strategies, highlighting disciplined financial management practices.
The more intimately you know your finances the better; this is particularly important where you share finances with someone. It is important that you can be financially independent just in case something goes wrong – such as divorce, or untimely death, etc.

Women who have a written financial plan are more likely to feel confident about achieving their life goals.

The survey identifies various triggers prompting females to seek financial advice, including specific financial goals and objectives, recommendations from trusted sources such as family, friends, or colleagues, referrals from professional advisers, health-related concerns, and windfalls like inheritances. Before doing anything about your finances, it’s important to set yourself financial goals for the future. The goals should be specific and realistic.
Women often have unique financial challenges, such as longer life expectancy and career interruptions due to caregiving responsibilities. It’s essential to address these factors in long-term financial planning. Understanding your current financial situation, including income and expenditure, assets and liabilities, risk attitude, tolerance, can help women build a solid financial foundation for the future.
Once you have set your objectives and goals, and understand your current financial position, make sure you create a plan of action. Those with a written, comprehensive plan are more likely to feel strongly confident about achieving their life goals. Financial planning is a dynamic ongoing process that requires continuous monitoring. The actions recommended and the goals should be reviewed regularly to take account of a change in income, asset values or family circumstances.

Women who work with a professional financial planner express considerable or complete trust in them.

Building a strong support network is crucial for women’s financial success. Financial planning professionals provide connections with other professionals, such as accountants, solicitors and mentors, to provide holistic guidance. Collaborating with trusted advisers, in particular a CERTIFIED FINANCIAL PLANNER™ professional, who will hold you accountable for your plan and help you make necessary adjustments when, or if, it goes off track will ensure that women receive comprehensive support tailored to their unique needs and goals.
A significant majority of advised females, with 197 out of 240 respondents, express considerable or complete trust in their financial planners. This trust reflects the strong relationships built on transparency, expertise, and personalised guidance, highlighting the importance of trust in the client-adviser relationship.

Engagement with CFP® Professional.

A notable portion of advised females, 104 out of 240 respondents, demonstrate an awareness of the internationally recognised CERTIFIED FINANCIAL PLANNER designation. Welcome news is that 73 out of 240 advised females are fortunate to receive guidance from a CFP® professional, highlighting the value placed on expertise and accreditation in financial planning.

The survey findings highlight key benefits in working with a professional financial planner, including simplifying and explaining financial matters, boosting financial decision-making confidence, saving time and effort in financial decision-making, improving financial well-being and peace of mind, and establishing and achieving financial goals.
Beyond mere budgeting, financial planning encompasses a strategic approach to managing resources, investing wisely, and building long-term financial stability. The survey findings reaffirm the invaluable role of financial planning in empowering female consumers to achieve their financial goals, enhance their financial confidence, and secure their financial futures. Recognising the unique socioeconomic landscape women often face, proactive financial planning not only fosters individual prosperity but also serves as a catalyst for broader economic empowerment and gender equality.

The Importance of Financial Planning

Monthly Investment Note: February 2024

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A Frothy Cappucino…

 

frothy-cappucino

As we close the door on February, things are certainly feeling a little frothy in a number of markets just now.  US equity markets continue to drive higher, led by the phenomenal returns from the technology sector in the all-encompassing Artificial Intelligence space, the US 500 has hit multiple new highs in February and there seems like no end is in sight……watch out for phrases such as it’s different today!!.

With our feet firmly on the ground though, we see many valuation models continue to notch up and most are well above historical norms (>1 SD). With the latest earnings season now behind us, the star performers (you know the ones) with the exception of TSLA, continued to post huge profits, none more so than Nvidia which added a further $277 Bn (yes, you heard right, that’s two hundred & seventy seven with nine zero’s behind it) to its market capitalisation on the back of the statement that it expects revenue streams to continue to grow. Seriously, in February 2020 the shareprice for Nvidia was a respectable $67.94 per share, while today it is trading at $797.82 per share, that’s a compounded annual growth of ca. 85% per year over the last four years. …nose bleed alert!!

In contrast, participants on the fixed income side are indeed having a rougher time of it. Treasury yields swung from 4% in December, to 3.94% in January to a whopping 4.26% today driven by the disconnect between the markets and the message from the FED. J Powell stated explicitly that the FED would be data driven and the markets simply ignored his message, and proceeded to price in a seven point rate cut in 2024. This has now been re-calibrated at break-neck speed, to three rate cuts in 2024. In previous notes, I mentioned to expect rates to commence being reduced in the second half of 2024 and indeed, this now appears more plausible.

As ever, the best advice for long term investors, is just to hold on for the ride. Despite nosebleed valuations, missing out on rallies like we’ve seen in the last 6 weeks is the opportunity cost that can destroy long term returns remembering that the greatest returns throughout the year occur over a handful of days only and are best availed of when investors stay in the market. Trying to time a dip or a peak is a gamble & inevitably leads to missing out on the best days for returns. Statistically, this behaviour has significant negative impacts on portfolios.

On the macroeconomics side of the equation, we see that EU annual inflation[1] dropped slightly from 2.9% to 2.8% in February which was mirrored in Ireland with a decrease from 3.2% to 2.7%. Underneath this drop, we see that In Ireland, the biggest contributors to the rates included price increases for food, utilities, recreation and hotels. Italy showed the lowest inflation at 0.9% while Estonia the highest at 5.0% for the same period.

Some of the headline data which we track is shown in the table below.

EU Inflation US Inflation ECB Rate Fed Rate Brent Crude US 10 Year Equities YTD Equities fPE
2.8% 3.1% 4.5% 5.5% $81.41 4.26% 7.5% 17.83

Reinforcing the message last month; the current US & ECB  interest rate policies continue to have the desired effect on the rate of inflation.  With the 2% sweet spot in sight, it is now time to start thinking about reducing those higher rates to avoid either economy tipping into full recession. The balance faced by the Central bankers here is too much rate reduction, too quickly, and they will be cognisant of the eighties when just such a move tipped the US into prolonged recession. The challenge then is to achieve that “soft” landing where inflation peels back to 2% without the economy tipping into recession…..a bit like steering an oil tanker into a parking spot at your local supermarket.

Sticking with inflation, Europe should be content, and the US irked by the slow pace of its reduction. I would suggest that Europe is experiencing the greater rate reduction as several economies are close to or in technical recession, despite the bloc having registered a 0.1% increase in Q4 2023.  Germany, the EU’s largest economy saw its GDP shrink by 0.3% in the final quarter of 2023 which for the industrial powerhouse of Europe is somewhat worrying.

Like European Central Bank rates, US rates have remained unchanged, and I would suggest this will be the case for a few months more yet. Core inflation is stubborn to get down and a cool hand by Central bankers is required to steer the trading blocs gently towards that all important soft landing where inflation reaches its target of 2% while high employment remains.

So, while great for investment portfolio’s yearly performance, the market froth is a sign of pent-up energy amongst investors to continue to re-allocate their capital, something which must be viewed with a note of caution. So, with the transformative change in the risk-free rate now firmly planted at stage two, we continue to see Short dated bonds paying a higher yield than the average dividend yields for stocks, (4.67% versus 1.5% in the US and 2.06% globally) and that being the case, any future yield drops in bonds, should produce a capital return for short dated bond portfolios.  These two features highlight the comeback of the 60/40 portfolio where now both equities & bonds will deliver reasonable returns for the foreseeable future.

Turning to oil now, we see the price jump from $78 to $81 per barrel bringing us back to the average price per barrel of €82 through 2023. The global threats including the war in Ukraine, Israel’s invasion into the Gaza strip, trouble in the Red sea shipping lanes and all that that brings, still remain. We continue to see US and UK navy tactical bombardments of Houthi rebel positions to protect those valuable shipping lanes, but we move into the warmer season in the northern hemisphere, consumption should be lower and it might give time to resolve issues in that region of the world.

Setting macroeconomics aside, what does all this mean for investors?

Well, year to date, we see a rally in global markets which have delivered about 7.5% increases but with valuations of fPE ratios notching up to 17.83. The biggest contributor is the top ten companies contributing to the US500 with 9% driven in no small part by the technology sector, followed closely by the Japanese rally of 8.7% (I’ll get to this in a moment) and then Euro equities 4.1%. However frothy I deem the US markets, the fear gauge as measured by the volatility index continues to bound around the 13 to 15 range; well below the standard of 20 points which is attributed to volatile markets (last seen in October 2023).

Returning to the Japanese equities story, for the past two years they have been trading at well below (>1-2 SD) their long term average and have now broken free in 2024 delivering a whopping 8.7%  year to date. So, what’s driving this?…well since 2020, both the Euro and Dollar both strengthened against the Japanese Yen, by 36% in Euro terms and 28% in US Dollar terms. Weaker Yen means cheaper exports and that, coupled with significant corporate board room changes at Japan’s biggest companies has led to a resurgence in interest in Japanese companies which are already amongst the best in the world.

In addition, Japan is now making moves to slowly increase its interest rate (Currently -0.1%) to combat rising inflation. That being the case, the Yen will strengthen, so those who bought Japanese assets for relatively cheap Yen, will now also benefit if indeed interest rates do in fact increase. Hence the flood of global capital eastwards.  Don’t forget that Japan is the thirds largest economy in the world, something to be admired of the Samuri warriors…

Looking forward, we are seeing forward price / earnings ratios (one of our measures of value) for global equities continue to increase from long term averages with global equities now trading at 17.83 times (increased from January), European equities at 13 times, with Japanese equities trading at 14.92 (increased from 13.8 in January) and US equities now trading at 20.4 times their forecast earnings.

The long-term forecast for growth in global stocks has reduced slightly to 10.3% with another slight reduction in the average yield of 2.06% from 2.1% in January. This reduces the equity risk premium which is the Forecast growth – the risk-free rate, to ca. 5.7%. However, conditions continue to still drive fund flows into the money markets which are currently yielding ca. 3.98% and remain a valuable component of many portfolios.

As always, we take the long view on Investments and are happy with globally diversified portfolios. In today’s (relatively) normal interest rate environment, we see slightly less fair value across global equities with (fPE’s at 17.8) in comparison with early 2023, where valuations averaged 16.6 times earnings. While the markets have roared so far this year, I would suggest again that as the Central bank’s Monetary policies unfold throughout the course of the year, we can expect to see increased volatility in those capital markets. During these times, it is important to remind ourselves of our investment objective which as always, guides our asset allocation.

For regular long term investors, our view is to continue to buy into the market and for lump sum investors, while the conservative portion of portfolios can be bought quickly, a multi-stage approach to the purchase of the equities portion, might be a prudent option.

Our view, on global bonds has also remained as per last month. With, the US 2 year treasury now yielding 4.67%, which is attractive when compared to the average dividend yield of 2.06% for risk assets and slightly more attractive than some money market funds which are paying the 3.98% yield but with the advantage of higher liquidity. Therefore, with bond yields at current levels, and interest rates probably plateaued but set to change, this asset class continues to look a more attractive investment, than in recent years.

Our cautious view on lower volatility portfolios continues to be implemented through the use of money market funds, currently yielding ca. 3.98% and a small allocation to hedge fund positions to exploit market inefficiencies; all in all, providing some degree of protection in the current volatile climate.

My favoured image this month comes from Vanguard,  courtesy of  Standard Life & depicts the progress in market returns despite the global trauma experienced…Enjoy!

 

time-in-the-markets

[1] Measured by the Harmonised index of Consumer Prices,

 

Sources: Central Banks: Federal Reserve, ECB, CBOI, Sharepad®. Euro Inflation is measured by the Harmonised Indices of Consumer Prices (HICP).  Periodic Market updates & reading materials  from Vanguard, Bloomberg, Ruffer, Davy Select & others depending on subject matter. All views and details contained are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use. 

 

 

The Importance of Financial Planning

Monthly Investment Note: January 2024

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A new year, a new perspective…

Happy New Year from Lifetime Financial PlanningWe start the new year with gusto, but with a stark reality check, casting our sights on World affairs and outlining the global risks clearly evident. The war in the Ukraine trundles into its third year and with no sign of closure, remains a threat to the status quo of the European Union and indeed the NATO alliance. Any escalation could have dire consequences on the human and macroeconomic side. The attack on Israeli citizens by Hamas and the subsequent invasion by Israel of the Gaza strip razing it to the ground, has the potential to severely escalate conflict in the wider Middle East. The long admired decade of growth of the Chinese economy has halted and the current macroeconomic & property market correction in the World’s second biggest economy is currently disrupting global trade as Chinese citizens adapt to their new macroeconomic climate. Speaking of climate, the ever increasing threat of climate change culminating in 2023 being the hottest year on record globally, will continue to drive changes in food production, energy consumption and population movement and finally, we have the imminent US election with the very real possibility of Trump being the next US president with all “that” entails….. let’s see how it all plays out throughout the course of the year. Some of the headline data which we track is shown in the table below.

EU Inflation

 US Inflation ECB Rate Fed Rate Brent Crude US 10 Year Equities YTD Equities fPE
2.9% 3.4% 4.5% 5.5% $78.56 4.14% 1.7%

17.31

Looking back in December, we see that EU annual inflation ticked up slightly from 2.4% to 2.9% in December which was mirrored in Ireland with an increase from 2.5% to 3.2%. Underneath, we see that although energy prices did by in large decrease. The big increases were observed in the food & beverage(5.6%), recreation / culture (10.3%) as well as restaurants & hotels (6.6%) sectors. Once again Belgium showed the lowest inflation at 0.5% while Slovakia the highest at 6.6% for the same period. In Ireland, this jump was higher than the European average from 2.5% to 3.2%; the biggest contributors being the higher rates of price increases for food, transport, recreation and hotels.

It’s fair to say that while the current interest rate policy is having an impact on inflation, it’s is also very fair to say that we are not done yet as evidenced by the slight uptick during the festive holidays. Core inflation is notoriously difficult and stubborn to get back under control & Christine Lagarde’s team is cognisant that any changes in the reduction of the interest rate from 4.5% at this stage may only serve to rekindle the inflationary ambers forcing us all to re-tighten the preverbal belts once again for another 18 months. More time is needed…they don’t want history repeating.

Across the pond in the US, we also saw inflation increase, though at a lower rate from 3.1% in November to 3.4% in December. Although not ideal, it should be encouraging to the Federal Reserve interest rate policy makers that their policy of 5.5% interest rates is actually working (bumps along the road aside). US inflation in December 2022 was 6.5% and so with almost a 50% reduction in 12 months, it’s fair to say that the slow grind to bring inflation under control and closer to the 2% target, will become exponentially more difficult and sensitive to the afore mentioned global threats, most notably in energy commodities.

Like European Central Bank rates, US rates have remained unchanged, however, I would suggest the markets did misinterpret (or ignored) FED president Jerome Powells comments at the very end of last year and in anticipation of rates falling, led to a rally in US equities (S&P 500) which allowed them to finish the year with a return of at 21.3% in Euro terms. Even more amazing was the performance of the tech heavy NASDAQ which finished up 56.2% in USD terms.

While great for investment portfolio’s yearly performance, it is a sign of pent-up energy within the market to re-allocate investment capital, something which must be viewed with a note of caution. In January, when the realisation occurred in the market that actually the battle for control of inflation was not yet over, interest rates were unlikely to be reduced as early as anticipated, we see a bond sell off.

While the US 2 year treasury has hovered at the 4.3% level, in January, the 5, 10 and 20 years treasury yields have increased to 4.04%, 4.14% and 4.48% respectively. This represents a sell-off in the treasury market which is likely to be an interpretation that markets are now re-assessing their original thesis of six rate reductions in 2024.

As I mentioned in the December note, both the ECB and Fed expressed their desire to hold interest rates higher for longer, as inflation approaches the 2% mark. While it is entirely plausible that we could indeed see rate cuts in 2024, it is not guaranteed, and a fair assessment would be not to expect those cuts to be implemented until later in the year when there is robust inflationary data signalling the desired trend is being achieved.

So, with the transformative change in the risk-free rate having now moved to stage two, we continue to see Short dated bonds paying a higher yield than the average dividend yields for stocks, (4.34% versus 1.5% in the US and 2.1% globally) and that being the case, any future yield drops in bonds, should produce a capital return for short dated bond portfolios.

Looking at oil prices now, we are hovering around $78 per barrel mark compared to an average price per barrel of €82 through 2023. Oil is a globally traded commodity and the afore mentioned global threats here include the war in Ukraine but also the Israel’s invasion into the Gaza strip and all that that brings. I mentioned last month that Iranian backed Somali Houthi Pirates now threaten the Red Sea causing the major shipping companies to halt transportation or re-route around the horn of Africa causing delays to already tight delivery timelines. Hence, the heavy US presence and making that presence felt. Not having access to the Suez Canal is a major headache for global shipment providers as costs will increase. While the oil price has not moved that much since the invasion, the lack of significant movement is likely attributed to the current inventories and the re-negotiation of alliances on the supply side.

Setting macroeconomics aside, what does all this mean for investors?
Well, 2023 delivered positive returns across most markets and all those we track and consolidated into global equities which returned 19.5% in Euro terms. We saw some outperformance in US equities which delivered 21.3% and significant outperformance in the technology sector which delivered a staggering 59.4% in USD. European and Japanese equities delivered positive but more modest returns of ca. 16% in Euro terms, not bad though considering the European power house (Germany) is on track to hit a possible two year recession.

Looking forward, we are seeing forward price / earnings ratios (one of our measures of value) continuing to move away from long term averages with global equities trading at 17.3 times (increased from December), European equities at 12.6 times, with Japanese equities bucking the trend trading at 13.8 (reduced from 14.4 in November) and US equities now trading at 19.4 times their forecast earnings. While US equities valuations fell from the first half highs of 2023, they are starting to rise again and a correction on the US market wouldn’t be surprising given the current macroeconomic data and interest rate policy stance.

The long-term forecast for growth in global stocks has stabilised at to 10.5% with a slight reduction in the average yield of 2.1% from 2.2% in December. This puts the equity risk premium which is the Forecast growth – the risk-free rate, at ca. 6.2%. However, current conditions still continue to also drive fund flows into the money markets which are currently yielding ca. 3.9% and which are now a component of many portfolio’s.

As always, we take the long view on Investments and are happy with globally diversified portfolios. In today’s (relatively) high or normal interest rate environment, we see slightly less fair value across global equities with (fPE’s at 17.3) in comparison with early 2023, where valuations averaged 16.6 times across the year. While the markets have started on a positive note so far this year, I would suggest that as the Central bank’s Monetary policies unfold throughout the course of the year, we can expect to see volatility in those capital markets and it is imperative in these times, that the investment objective guides the asset allocation.

Our view, on global bonds has also remained as per last month. As mentioned, the US 2 year treasury is yielding 4.34%, which is attractive when compared to the average dividend yield of 2.1% for risk assets and slightly more attractive than some money market funds which are also paying the 3.9% yield but with the advantage of higher liquidity. Therefore, with bond yields at current levels, and interest rates probably plateaued but set to change, this asset class continues to look a more attractive investment, than in recent years.

Our cautious view on lower volatility portfolios continues to be implemented through the use of money market funds, currently yielding ca. 3.9% and hedge fund positions to exploit market inefficiencies; all in all, providing some degree of protection in the current volatile climate.

 

Sources: Central Banks: Federal Reserve, ECB, CBOI, Sharepad®. Euro Inflation is measured by the Harmonised Indices of Consumer Prices (HICP). Periodic Market updates & reading materials from Vanguard, Bloomberg, Ruffer, Davy Select & others depending on subject matter. All views and details contained are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

The Importance of Financial Planning

Monthly Investment Note: December 2023

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merry-christmasWe would like to wish all our client’s a very happy Christmas & Happy new Year and I would like to thank you once again for
continuing to place your trust in our services. MERRY CHRISTMAS & Enjoy the final note of the year!!

With Dasher, Prancer, Comet, Rudolf, and the rest, including of course the big man himself, all preparing for the big present drop, we start to look at winding down for the Christmas holidays, reflect on the years happenings and cast an eye on the possibilities for 2024.

In November, EU Inflation as measured by the Harmonised Indices of Consumer Prices (HICP) continued its downward trajectory to an average of 2.4% across the bloc with a range of -0.8% in Belgium to 6.9% in Slovakia. Ireland followed suit with lower inflation (3.6% to 2.5%) in the same period.

It’s fair to say at the moment, that the inflation story is starting to subside somewhat, with the Irish economy currently undergoing macroeconomic adjustments, such as reductions in GDP (-1.9%), GNP (-1.1%) and unemployment slightly rising to 4.8% (v’s 6% in the EU), all being attributed to the current ECB interest rate policy. Doing nothing with the interest rates at this stage makes sense as rates unchanged at 4.5%, are effective in impeding inflationary growth and indeed, successfully rolling inflation back closer to the desired 2% rate; the goal of the ECB monetary policy. In her speech, Christine Lagarde, stated categorically that no discussion regarding the roll-back of the ECB rate had taken place, as a specific signal to the markets not to expect rate cuts in early 2024….really!.. though you can imagine that some of the class must have had the odd quiet chat in the corners.

Across the pond in the US, we saw a very small reduction in the rate of inflation from 3.2% to 3.1% which was less than expected and which we read as flat. Like Europe, the Fed funds rate remained unchanged at 5.25% to 5.5% for the month of December. However, the commentary which emerged from FED President Jerome Power did nothing to quell the appetite of the equities markets which interpreted his comments as being “done with rate hikes”. That being the case, a re-pricing of equities has occurred and has led to a rally in November / December leading to a return year to date, of 21%.

The movement in inflation from 3% to 2% is exponentially more difficult economically, due to the more stubborn core inflation as the competing forces of high employment and wage inflation continue to drive prices to higher levels on the demand side and cost of goods on the supply side, in truth, it’s difficult to strike the right balance but the so-called economic soft landing does look like it might actually be possible in the US.

Looking to 2024, though both the ECB and Fed expressed their desire to hold interest rates higher for longer, as inflation approaches the 2% mark, it is entirely plausible that we could indeed see rate cuts in 2024. And the pressure to do so builds, given the level of debt across governments. Remember last month’s note, I mentioned the level of interest payments on the US national Debt was similar to the whole National Defence budget (ca. €1Tn)…..seriously!!…

Turning to US Treasury yields, we continue to observe changes in the yield curve dynamics once again and are putting these down to trading. The 2 year and 20 year bonds are now yielding 4.37% and 4.21% respectively (both down from October) while the 5 year and 10 year bonds are yielding 3.9% and 3.92% respectively (also down since October). So, the transformative change in the risk-free rate has now moved to stage two. Short dated bonds continue to pay a higher yield than the average dividend yields for stocks, and that being the case, the yield drops have also resulted in positive capital gains for bonds in portfolios for the short period….Not bad for the so-called risk-free asset.

Next to oil prices, not quite hitting the predicted prices of $100 Plus per barrel this year, (there is always one!!) but having hit the lofty early $90’s per barrel earlier in the year, prices have for now settled back to $77pb (at time of writing) a swing in correction of ca. 10% over the past month. I mentioned last month that oil supply chains having been re-engineered since COVID, but remember the ship that got stuck in the Suez Canal and the implications of the delay to world trade, in getting it dislodged? Well, it looks like the shipping merchants are now being held hostage on this occasion, by the Iranian backed Somali Houthi Pirates in the Sea of Arden, so much so, that Maersk, MSC and Hapag-Lloyd who account for ca. 50% of global trade transportation, have decided to halt using the Red Sea for the time being until a suitable coalition naval protection force is put into place. I mention this because, BP, one of the worlds biggest oil producers has halted Oil transportation through the straits on the same grounds. So, taking into account COP28, the brutal razing of Gaza which is infuriating the Arab nations, , OPEC plus politics, and the war in Ukraine, there remains a substantial credible threat to global oil supply, driving prices and supply side inflation. Indeed, increased inflation pressures could also be seen where the biggest shipping companies decide to no longer use the Red

Sea trade routes…..there is much to be wary of!

 

Setting macroeconomics aside, what does all this mean for investors?

Well, year to date, returns from global equities markets are ca. 19.3% which is up from October, driven in large part by the aforementioned US Market expectation that interest rate cuts are on the cards in early 2024. European Equities have recovered their recent shock in September to deliver ca. 15.5% since January, while US equities delivered ca. 21.4% and Japanese equities 15.3%, all in Euro terms.

Looking forward, we are seeing forward price / earnings ratios (one of our measures of value) moving once again away from long term averages with global equities trading at 16.5 times (increased from October), European equities at 12.0 times, Japanese equities trading at 14.4 and US equities trading at 18.7 times their forecast earnings. One notable feature of the US market at the moment is the returns showing in the equal weighted factor funds. This suggests that marketeers are on the hunt for value stocks looking beyond the magnificent seven (AMZN, GOOGL, AAPL, MSFT, NVDA, META, and TSLA).

The long-term forecast for growth in global stocks has been elevated slightly up to 10.6% with an average yield of 2.3%. This puts the equity risk premium which is the Forecast growth – the risk-free rate, at ca. 6.3%, nonetheless, current conditions still continue to also drive fund flows into the money markets which are currently yielding ca. 3.9% and which are now a component of many portfolio’s.

As always, we take the long view on Investments and are happy with globally diversified portfolios. In today’s (relatively) high or normal interest rate environment, we continue to see fair value in across global equities (fPE’s at 16.5). We have seen a small resurgence in equities driven by the perceived ECB and US monetary halt in future interest rate rises, which may (or may not) come to fruition and the acceptance that rates will likely not fall to any great extent until late in 2024 at the earliest. Our view, on global bonds has also remained as per last month. As mentioned, the US 10 year treasury  is now yielding a reduced yield of 3.92%, which is still attractive when compared to the average dividend yield of 2.3% for risk assets but not as attractive as some money market funds which are also paying the 3.9% yield and higher liquidity. Therefore, with bond yields at current levels, and interest rates probably plateaued, this asset class continues to look more attractive, than in recent years. Our cautious view on lower volatility portfolios continues to be implemented through the use of money market funds, currently yielding ca. 3.9% and hedge fund positions to exploit market inefficiencies; all in all, providing some degree of protection in the current volatile climate.

 
Sources: Central Banks: Federal Reserve, ECB, CBOI, Sharepad®. Euro Inflation is measured by the Harmonised Indices of Consumer Prices (HICP). Periodic Market updates & reading materials from Vanguard, Bloomberg, Ruffer, Davy Select & others depending on subject matter. All views and details contained are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

The Importance of Financial Planning

Monthly Investment Note: November 2023

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The House View Summary:

With our Celtic Samhain festival over for the year, the real horrors of the world are laid bare, flashing on our screens as we enter November. Coming towards the year end, we have one eye on the investment journey of the past 10 months and one eye on where we may end up at the end of the year.

In October, EU Inflation as measured by the Harmonised Indices of Consumer Prices (HICP) continued its downward trajectory from an average of 4.3% to 2.9% with a range of -1.7% in Belgium to 7.8% in Slovakia. Ireland followed suit with lower inflation (5.0% to 3.6%) in the same period. All this points to ECB interest rate policy, with interest rates unchanged at 4.5%, being effective in impeding inflationary growth and indeed, successfully rolling inflation back towards the desired 2% rate which is the goal of the ECB monetary policy.

This is a far cry from the start of year when we experienced an inflation rate of 9.2% in the EU and 8.2% in Ireland.  Noting, of course, that like coastal erosion, inflation erodes “permanently” the value of money over time; our €100 today will no longer buy us the same basket of goods as this time last year.

Jumping across the pond to the US, we note a smaller reduction in the rate of inflation from 3.7% to 3.2% and like Europe, the Fed funds rate remained unchanged at 5.5% for the November meeting, a portent  that perhaps, progress was slowly being made towards the 2% acceptable rate. However, some commentary emerged from a few Federal State Central Bankers, around a further increase in the FED rate by another 25 bps, something which will be addressed as the data emerges. Raising the FED rate further will depend on how core inflation will behave to the sustained higher interest rate environment. This is anything but trivial and given the US is at near “full” employment, will be more difficult to gauge in the coming months.

Looking forward to next year, both the ECB and Fed have expressed a desire to hold interest rates higher for longer, something which will no doubt hamper earnings growth on the equities side. I came across a very interesting chart recently which was published by Research Affiliates, regarding US interest rates. The chart shows the Federal Govt interest payments (in blue) versus the National Defence, Consumption & Investment are now almost aligned, in other words, the US government is now paying interest at the same level as is allocated to the huge defence budget, (ca. €1Tn per year).

fed-interest-payment Turning to US Treasury yields, we are now starting to see changes in the yield curve dynamics. The 2 year and 20 year bonds are now yielding 4.83% and 4.82% respectively and the 5 year and 10 year bonds are yielding 4.43% and 4.45% respectively. These yields are all down since September indicating that the bond sell-off in US debt is probably close to being over.

Finally, we are seeing that Oil prices, having hit the lofty early $90’s per barrel earlier in the year have for now returned back to $81 per barrel (at time of writing) a swing in correction of ca. 11%. No doubt, Middle East dynamics, OPEC plus and the war in Ukraine, could still threaten supply, but supply chains to the developed economies for both crude Oil and natural gas have been re-engineered over the past 12 months and stocks have been replenished ready for the coming winter months.

So, economics aside, what does all this mean for investors? Year to date, returns from global equities markets are ca. 13.7% which is down by ca. 9% from the July high of 15.1%. European Equities have recovered their recent shock in September to deliver ca. 9.4% since January, while US equities have delivered ca. 16.3% and Japanese equities have delivered 11.2%, all in Euro terms. These are increases from the September numbers and show a return of confidence in risk assets.

Looking forward, we are seeing forward price / earnings ratios continuing their reversion to long term averages with global equities trading at 15.4 times, European equities at 11.3, Japanese equities trading at 14.1 and US equities trading at 17.3 times their earnings. These are all lower than their seven month averages indicating that (apart from the magnificent seven) equities globally, are trading at good to fair value in the current interest rate environment.

The long-term forecast for growth in global stocks has remained largely unchanged at 10.4% with an average yield of 2.3%. This puts the equity risk premium at ca. 5.6%, nonetheless, current conditions still continue to drive fund flows to the money markets which are currently yielding ca. 3.8% and which are a component of many portfolio’s.

As always, we take the long view on Investments and are happy with globally diversified portfolios. In today’s (relatively) high or normal interest rate environment, we continue to see fair value in across global equities (fPE’s falling to 15.4). We have seen a small resurgence in equities driven by the perceived ECB and US monetary halt in future interest rate rises, which may (or may not) come to fruition and the acceptance that rates will likely not fall to any great extent until late in 2024 at the earliest.

Our view, on global bonds has also remained as per last month. As mentioned, the US 10 year treasury is now yielding 4.45%, which is attractive when compared to the average dividend yield of 2.3% for risk assets. Therefore, with bond yields at current levels, and interest rates almost at their forecast apex, this asset class continues to look more attractive, than in recent years. Our cautious view on lower volatility portfolios continues to be implemented through the use of money market funds, currently yielding ca. 3.8% and hedge fund positions to exploit market inefficiencies; all in all, providing some degree of protection in the current volatile climate.

Sources: Central Banks: Federal Reserve, ECB, CBOI, Sharepad®. Euro Inflation is measured by the Harmonised Indices of Consumer Prices (HICP).  Periodic Market updates & reading materials  from Vanguard, Bloomberg, Ruffer, Davy Select & others depending on subject matter. All views and details contained are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use. 

The Importance of Financial Planning

Monthly Investment Note: October 2023

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The House View Summary

1

As the leaves turn a different shade of green & we start to light the fires indoors, heading into the final quarter of the year, we are starting to see a change in sentiment in Markets.

In September, EU inflation (HICP) across the bloc, reduced by 0.9% to 4.3% (from 5.2% in August), US inflation remained flat at 3.7% and Irish inflation actually rose slightly to 5% (from 4.9%). The conclusion from these data as articulated by the respective central bank presidents is that the “job is not yet done”; the “job” being restoring economies back closer to the normalised inflation rate of 2%.

How this is achieved creates a conundrum for central bankers, where on the one hand, they have a remit to bring inflation under control and on the other, they don’t wish to send their economies into a tailspin of recession. The so-called soft-landing option is their desirable outcome and in the US (at least) this might seem plausible, while in the EU, this might pose more challenging given that some economies (Germany) are already in recession. The big question on everyone lips at the moment is whether both the ECB and the FED will hike another 0.25% in interest rates or hold the current rate level for longer.

2

Technically, there are plausible arguments for both cases, but I want to drill down to the case of hiking rates. As a business, with the increased rate hikes, the cost of credit increases. This places pressures on margins, leading to lower earnings which inevitably leads to a price correction of publicly quoted companies, seen in September across most developed markets. All is not rosy on the Sovereign side too, as higher interest rates lead to higher yields (the US 10 years Yield is 4.91%; its highest since 2007), which means higher debt servicing costs and less liquidity for national investments.

Extending this further and incorporating the stubborn high (core) inflation we are still seeing, both industry and governments are now being hit on both sides at the same time. With the costs of raw materials and labour increased significantly over the past two years, margins and returns on capital are again lowered. Finally, with inflation still high but relatively stabilised, we are now seeing a potential shortfall in oil production. Should the tragic events of the middle East not be resolved, this will exacerbate. Oil has already pushed passed the $90 per barrel range, a psychological trigger for alert with investors.

3

So, what does all this mean for investors? Year to date, the returns on global equities markets have dropped from 15% (in July) to ca. 11% at time or writing which is a downward reprice of the markets by ca. 26% from the high in July this year. Notably however, trading volumes are low suggesting that many participants are holding safe-haven assets. Indeed, with US inflation at 3.7% and US 10 year bond yields at 4.9%, who can blame them. Similarly, we are seeing money market funds providing 3 to 4% in yields, so the parking of new capital in risk-off assets seems to be a prevalent feature of current market conditions.

As always, we take the long view on globally diversified investments. In today’s (relatively) high or normal interest rate environment, we continue to see fair value in across global equities (fPE’s falling to 15.8), a return towards fair value for US equities (fPE = 17.3) and as noted when we compare the stock market capitalisation with US GDP. Just to highlight one important point, when we strip out the capitalisation of the magnificent 7 (AAPL, MSFT, AMZN, GOOG, TSLA, NFLX and Meta), and apply equal weight to all US500 stocks, we see and negative -0.8% return of the combined businesses, YTD. Something to ponder. No surprise then when we see the price correction due to prolonged, higher, interest rates but this highlights the importance of maintaining our outlook on global equities.

4Our view, on global bonds has also changed. As mentioned, the US 10 year treasury is now yielding 4.9%, its highest since 2007, which is attractive when compared to the average dividend yield of 2.3% for risk assets. Therefore, with bond yields at current levels, and interest rates almost at their forecast apex, this asset class now looks more attractive than in recent years. Our cautious view on lower volatility portfolios is augmented by money market funds, currently yielding ca. 3.85% and hedge fund positions; all in all, providing some degree of protection in the current volatile climate.

Sources: Central Banks: Federal Reserve, ECB, CBOI, Monthly Market updates from Vanguard, Zurich New Ireland & Bloomberg & Davy Select. All views and details contained are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

 

The Importance of Financial Planning

Monthly Investment Note: September 2023

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The House View Summary:
Dusting off the málaí scoile, September is back to school time and the adjustment back to routine and familiarity, the family taxi service and preparing for another academic year. Hopefully everyone has managed has had some time to rejuvenate the spirits for the final push to the end of the year. We had a plethora of global macroeconomic data during the break period often providing contradictory signals and coalescing to produce a muddy picture of the global economy which I have tried to breakdown as follows;

  • US resilience
  • EU & China laggards
  • Earnings beat expectations
  • The glorious Seven
  • Inflation Combat
  • Bond Market adjustments

In the US, Consumer confidence, labour market and industrial production throughout the summer months remained robust and despite eleven interest rate hikes, economically, the US economy did not slow as quickly as commentators anticipated. US inflation data actually increased to 3.2% in July from a previous of 3% which bucked the year to date trends of reduction from 6.4% in January. It was always known that reducing inflation by the last percent to achieve the 2% Fed target would be fraught with difficulty. Bearing in mind that often, monetary policy takes time to shake through the system, it could just be a matter of time before, we this in the key economic performance indicators. The bottom line is that with the current growth projections, the US is unlikely to tip into recession in 2023 though projections for 2024 do not yet rule this out.

In Europe, Inflation showed a very minor reduction to 5.3% (from 5.4%) and the recent drop in the PMI (purchasing managers indices) suggests likely recession in the coming months. The bottom line is that Europe is struggling economically and the ECB must decide in September, on whether to act hard or soft on future interest rate hikes in the coming months, to steer the economic cycle back to a growth phase. Broadly speaking, while central banks continue to analyse the data, we can continue to expect pro-longed higher interest rates until reversion of inflation rates back to the long-term desired level of 2%. This must be achieved with interest rate adjustment but as mentioned on the last note, our biggest flag for concern continues to be the ability to repay credit in a highly indebted corporate world with the case in point being some of the biggest property developers in the world’s second biggest economy.

Speaking of which, the long-heralded reopening of China has indeed fallen short of expectations with lower exports, foreign direct investment and land sales all declining. So, while the economy will likely still reach its targeted growth of 5% in 2023, in reality, this is far short of expectations from an economy emerging from the throes of COVID.

Turning to Q2 earnings, with the delivery season now almost completed, we saw contraction of US earnings by ca. 3% overall and in Europe by ca, 5% confirming an earnings recession. While it would be expected that the US would likely emerge from this period of earnings recession earlier, (within the next 6 months), European companies are likely to take longer to adjust back to growth; probably down to the faster implementation of the monetary policy by the FED. Guidance on the return of European companies back to earnings growth again is Q2 2024.

Continuing the theme of earnings, the glorious seven (Microsoft, Apple, Tesla, Google, Amazon, Nvidia and Meta) once again outshone their US 500 peers with the all encompassing “AI” narrative and really helped to drive US equities growth so far this year. The markets recognise that Artificial Intelligence is indeed transformational changing technology which will drive future innovation across business sectors. But, despite these heady factors, the fundamentals cannot be ignored. The parody of inflation & economic growth has stumped commentators thus far but with inflation having decidedly dropped in both the US & EU, it is now at the stubborn end 3.2% (US) and 5.4% (EU) where the Central banks must decide whether it is better to continue or hold off on further interest rate hikes in order to achieve their stated goal of 2%. What is not in doubt is that Central Banks are near the end of interest rate hikes cycle and this requires us to consider our options on the credit markets.

Speaking of which, we saw bond markets corrected over the last coupe of months as the continued strength in the US economic data prompted a sell off in US treasuries raising the all important US 10 year yield to 4.34%. It should be noted that the US two year yield remains significantly higher (4.89%) at writing, maintaining the inverted yield curve, an economic feature which very often predicates a recession within 18 months. Fundamentally, this means that the bond market has corrected for higher interest rates for longer, making yields which are available, more competitive and valuable as a part of a diversified portfolio. When Central banks make it clear they are finished raising rates, credit quality should add value to portfolios containing bonds.
Against this economic backdrop, we note that a globally diversified portfolio of equities continues to deliver good value. For portfolio’s not requiring full on risk assets and, with the terminal interest rates starting to appear, our view on long duration bonds has changed from a HOLD to BUY while still acknowledging the utility of the counter correlated hedge funds. Money market funds are now providing higher yields and thus also an attractive option to holding cash on deposit. We also acknowledge the aforementioned liquidity risk as being a significant risk to credit providers and continue to add the counter correlated hedge funds as a risk hedge to diversified portfolios at the lower risk end.

Sources: Central Banks: Federal Reserve, ECB, CBOI, Monthly Market updates from Vanguard, Zurich New Ireland & Bloomberg & Davy Select. All views and details contained are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.

The Importance of Financial Planning

Monthly Investment Note: July 2023

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One of the golden rules of investing advises investors to avoid timing the markets as anticipation can be a costly venture and is probably appropriate here. With the recent June inflation data from the US starting to show a sustained reduction marked to 3%, from the recent year to date high of 8.1% in Feb, commentators are starting to discuss whether further rate hikes remain necessary to continue the FED’s journey of inflation steerage back to their heralded utopia of 2%. This is turn has stimulated the bond markets to re-price sovereign bonds which, as a consequence, has led to enthusiastic rallies on global markets. On a cautionary note, Euro investors are not necessarily seeing the benefits from this as along with these re-pricing mechanics, we are also seeing a significant weakening of the USD currency versus the Euro. So, while the markets “givith” with one hand, they take with the other.

Broadly, we expect interest rates to continue to rise but at a slower pace and with consideration to evaluate their effect on national CPI data. With this in mind, our biggest flag for concern continues to be corporate liquidity & the ability to repay credit in a highly indebted corporate world. Although behavioural research shows investors have less appetite for risk when interest rates are high, interestingly, most investors’ portfolios are still shaped for a zero interest rate world – but ……….the world has changed!

Against this backdrop, we note that a globally diversified portfolio of equities continues to deliver good value. For portfolio’s not requiring risk assets and, with the terminal interest rates starting to appear, our view on long duration bonds remains from a HOLD to BUY while still requiring the utility of the counter correlated hedge funds. Money market funds are now providing higher yields and thus also an attractive option to holding cash on deposit.

Commentary:
With the first half of the year done & dusted, we saw inflation reductions across the EU and US from the early year highs in the EU (HICP) of 8.6% to 5.4% and the US of 6.4% to 3%, noting of course that the US commenced their rate hikes earlier in the tightening cycle. In Ireland, the pace of reduction was slightly behind that of the European average with a reduction from 8.5% in Feb to 6.1%. EU interest rates were raised to 4% but a hike was skipped in June in the US with the headline FED rate fixed at 5.25%. FED commentary had suggested a further 0.5% increase by the end of the year and bond / equities markets had priced these in at the early part of the year though current sentiment regarding this approach is faltering somewhat with arguments now being made for a continued pause.

During the first half of 2023, we also saw a reduction in Oil prices from $85.91 to $72.3 and settling finally at $79.93 pb, still sub $80 pb despite production reductions driven to no small extent by the economic slow-down in the Chinese economic recovery after the COVID 19 pandemic.

With the recent inflation data from the US, we have seen a re-pricing of sovereign assets in July. US 2 & 10 year bond yields are now 4.668% and 3.791% respectively which represents a 5.5% increase on the short part of the yield curve and a reduction of 2.2% on the 10 year yield since the beginning of the year.

The first half of the year also saw Developed market Equities rally since the lows of 2022 with the US leading the charge delivering ca. 12.7% returns, the Euro stocks providing 11.2% and Japanese stocks providing 10.3% (all hedged to Euros) while the emerging markets was more muted at 3.4%. This was against the backdrop of the dollar v’s the euro which fell 4.9% since the beginning of the year making US exports more attractive.

Whether these market returns are sustainable remains to be seen but a flag of worry remains about the Chinese market post pandemic recovery. As reported last month, May exports plunged 7.5% year on year and further to 12.4% year on year in June. Sino commentators continue to push the line of blaming a “a weak global economic recovery, slowing global trade and investment, and rising unilateralism, protectionism and geopolitics”. Time will reveal how this plays out on the global markets in the coming months.

I would suggest there are other issues at play here too. Rising interest rates, tightening credit lines and reductions in corporate liquidity all provide ingredients of the recipe for a perfect storm. We see monetary inflows to the Japanese Yen currently, why?…….Japanese interest rates are currently -0.1% and bond yields are -0.041 on the short end of the curve and 0.475% on the 10-year bond. If a liquidity crisis does indeed unfold over the coming months, those stocks with low exposure to interest rate sensitive credit tightening policies will likely fare better.

Not to be the harbourer of doom & gloom, enthusiastic investment sentiment has illuminated the star performers in the US markets which once again have been participants in the technology sector driven by the meteoric rise of the potential for Artificial Intelligence applications. The NASDAQ index which contains 100 stocks has first half returns of an eye watering 43.6% in USD but with a fPE ratio of 27.25 for those stocks in comparison to the broader US500 market which is trading with a fPE of 18.8 and compared (again) with global stocks which are trading at fair value of 16.65 times earnings. Noteworthy as well, is the good to fair value of Japanese, European and Emerging Stocks which now trade at fPE’s of 14.21, 12.4 and 12.33 times respectively and higher yields.

We continue to be positive but cautious on a globally diversified portfolio of equities and bonds and with money market funds also now looking attractive providing yields of 3% plus, we are starting to make switches from cash positions into these funds as an alternative. We also acknowledge the aforementioned liquidity risk as significant and continue to add the counter correlated hedge funds as a risk hedge to diversified portfolios.

All views and details contained are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.