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

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: 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.

The Importance of Financial Planning

Monthly Investment Note: June 2023

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As we roll into the end of the first half of 2023, we continue to see inflation dominate the macroeconomic system, though with the main central banks taking time to consider their next steps in terms of rate increases.

The Euro (HICP) Inflation rate for May is 6.1% (and for Ireland is 6.3%) down from the 7% in April. Across the pond, inflation in the US is 4.9%, (May inflation date is available on 13.06.23) but with core inflation remaining stubborn, the rate at which inflation drops closer to the FED stated 2% inflation target will be slower and more difficult to achieve.

So, interest rate policies across the globe continue to focus on the Central Bank’s goals of inflation reduction with the US considering halting rates at 5.25% for this cycle (but might go another 0.25%) and the European Central Bank with rates at 3.25%, continued to signal that more rate rises were likely. Despite Saudi Arabia deciding to cut oil production by 1M bpd, Oil (Brent Crude) continues to trade below $80 pb ($76 pb at time of writing).

After weeks of negotiations and speculation in Washington, we finally saw a deal between the Republican & Democrat parties to raise the debt ceiling which provided some relief to the US & Global markets, but did anybody really think that the US would default on its sovereign debt obligations? Out of interest, US national Debt is currently ca. $31.8 Tn with a debt to GDP ratio of 96%, much higher than Ireland’s debt to GDP ratio which is ca. 60%.

Stocks in the Asia Pacific region also benefitted from news of a US debt ceiling agreement however, weaker than expected Chinese Purchasing Managers Index and a slower than expected post covid recovery in the region has seen muted returns in 2023. Indeed, China’s exports in May plunged 7.5% year over year to $283.5 billion, where Economists were only expecting a 0.4% drop. May’s fall was so steep that export volumes were lower than those at the start of the year, after accounting for seasonality and changes in prices signalling a slow and difficult recovery to growth.

Time will reveal how this plays out on the global markets in the coming months.

Global equities have continued their rally with the index of global stocks up 10.9% since the beginning of the year. While US equities have risen 11.5%, Japanese equities risen 12.9%, (mostly in the last month), it is now the European equities which underperform the global market with a rise of 10.7% this year so far; (all Euro hedged). This is a lesson for timing the Markets, and it is well known within investment circles that the biggest gains for the year occur over the period of less than 10 days. Timing the markets cannot be done consistently and better to stay within the markets when there is downward volatility, than dip in and out.

The strong performances of the US & Japanese markets are driven by the meteoric rise of the potential for Artificial Intelligence applications into virtually (no pun intended!) every facet of life. It seems that any company which can play a part in the “AI” story has seen phenomenal growth in its share price and this is in turn reflected in the fPE ratios of the NASDAQ which remain high at 24.8 times earnings compared to the overall S&P500 at 18.9 times earnings.

While the performance in European stocks is also impressive, it is driven (in large part) by the good value on offer with a plethora of companies showing strong balance sheets & free cashflows and trading at good value (fPE = 13 x) in other words good quality companies trading at good value and suitable for this economic cycle. A similar situation is seen in Japan with markets trading at 13.6 times forecast earnings and the UK at 14.2 times.

The Importance of Financial Planning

Monthly Investment Note: May 2023

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While global GDP and inflation pressures continue to persist in the financial system, European & US economies are reporting lower inflation in the first quarter of 2023. However, in these economies inflation is still viewed as being stubborn and requiring a considered interest rate increase which is juxtaposed with balancing the cost of credit considerations. The key for Central banks is to find the optimal terminal interest rate; just high enough to continue reducing inflation but not to stifle growth too much and push their economies into recession.
 

At the end of March, US annual inflation was measured at 5% and European inflation at 6.9% (Ireland is estimated to be 7.7%) while UK inflation was estimated to be 8.9% and these headline figures continue to drive interest rate policies from Central Banks, currently. Notably also are the oil prices (as measured by Brent Crude) which have dropped by ca. 7.4% since early January and are currently trading at below $80 pb (ca. $79.60) at time of writing.
 

With the FED interest rate, adjusted in May to 5.25%, EU rates increased to 3.25% and UK rates at 4.25%, bond yields have also risen and have as a result, reduced valuations over the course of the interest rate hikes. While it was thought that the FED might start to ease the rate of interest rate increases early this year, it is now increasingly likely that further rate hikes or longer timeframes at current rates may yet be required. Therefore, it is likely that interest rates may indeed peak over the next 6 months and we continue to move cautiously on long term bond purchases until there is sight of the terminal interest rate, expected later in the year.
 

Global equities have continued their rally with the index of global stocks up 5.97% since the beginning of the year. While US equities have risen 5.35%, Japanese equities risen 3.02%, it is the European equities that continue to outperform with a rise of 11.4% this year so far; (all Euro hedged). This strong performance is driven (in large part) by the good value on offer with a plethora of companies showing strong balance sheets & free cashflows and trading at good value (12.7 x fPE) in other words good quality companies trading at good value and suitable for this economic cycle.  This is in contrast to US equities which are trading at ca. x 18.6 fPE.
 

We continue to favour taking positions in Globally diverse equity funds which are trading at good to fair value and are cautious on new positions in long / medium term bonds for the foreseeable future. These bond calls will be portfolio dependent. Conservatively, therefore, as per our previous notes, we still look to total return funds as potential alternative investments to bond funds.
 
As an aside, the link below (Courtesy of Visual Capitalist) shows an animation of the various business sectors contributing to the growth in the S&P500 in the first quarter 2023. Note the contributions from the mega cap companies which provided the greatest returns….Enjoy!
 
Click Here to See the Sectors Contributing to Growth in the S&P500 in Q1 2023
 

All views and details contained within this article 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

The Pace of Recent Interest Rate Hikes is Expected to Ease

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According to a Bloomberg survey, the European Central Bank (ECB) is expected to ease the pace of rate hikes to 0.25% from next week as the central bank weighs a pullback in bank lending against sticky inflation and a more resilient than expected economy.

It is anticipated that beyond next week’s hike, further 0.25% hikes in June and July will be delivered taking the peak rate to 3.75%. The results envisage that the first cut to borrowing rates will occur in October.

The Importance of Financial Planning

Monthly Investment Note: March 2023

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Global GDP and inflation pressures continue to persist in the financial system with the European & US
economies reporting higher than expected inflation and lower GDP for the final quarter of 2022. US inflation was measured at 6.3% and European inflation at 10% (Ireland is estimated to be 8%) in Feb, while the UK inflation was estimated to be 10.1% and these headline figures are driving interest rate policy currently.
 

It was thought that the FED might start to ease the rate of interest rate increases early this year but it is now increasingly likely this may be postponed until later in the year or until they have sight of the core inflation rate (4.7%) falling.
 

With the FED interest rate at 4.75%, EU rates at 3% and UK rates at 4%, bond yields have risen in line and have resulting in valuation reductions in the last 14 months. It is expected that interest rates will continue to rise over the next 6 months and therefore we have decided to halt long term bond purchased until there is sight of the terminal interest rate, expected later in the year.
 

Global equities have enjoyed a start of the year rally with the index of global stocks up 4.3% (in Euro term) since the beginning of the year. While US equities have risen 3.1%, Japanese equities risen 2.4%, it is the European equities who are the start performers following a rise of 7.9% this year so far. (all Euro hedged). This strong performance is driven (in large part) by the good value on offer with a plethora of companies showing strong balance sheets & free cashflows and trading at good value (12.5 x fPE) in other words good quality companies suitable for this economic cycle.  This is in contrast to US equities which are trading at ca. x 18.4 fPE.
 

We continue to favour taking positions in Globally diverse equity funds which are trading at good to fair value and avoiding the purchase of long / medium term bonds as we expect to see further interest rate rises in 2023. Conservatively, therefore, we are looking at total return funds as alternative investments to bond funds.
 

All views and details contained within this article 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: February 2023

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On the back of a dismal 2022, global markets have somewhat rallied during January 2023 on the back of a tapering of inflation expectations and sight of what the market perceives to be a landing area for the terminal interest rates.
 

US Stocks posted gains after the announcement of an above expectations, Gross Domestic Product (GDP) figure for Q4 of 2022. Showing that GDP in the US rose by 2.9% in the last quarter of 2022. Consensus among economists had been for a 2.6% increase. The higher-than-expected result was viewed by many as an indication of a more positive economic climate than had previously been forecast.
 

The gains seen in European stocks of late have resulted in positive sentiment from investors in the Eurozone, however the European Central Bank (ECB) has remained hawkish in its stance towards tackling inflation. ECB President Christine Lagarde has consistently left little room for doubt about the central bank’s commitment to raising rates and with the ECB set to announce an interest rate decision in the coming week, many investors are poised for a 0.5% rate increase.
 

Last week also saw the release of the Eurozone Purchasing Managers Index (PMI) for manufacturing and services activity. The figure came in at 50.2 in January, up from 49.3 in December and ahead of expectations of 49.8. This result represents moderate growth while the flash composite PMI for the UK dropped to 47.8 from 49.0 in December adding to investors doubts about recession risk. UK equities finished the week down -0.2% in euro terms. Indeed, coupled with the latest report from the IMF suggesting that the UK will be the only developed economy to enter recession in 2023,
 

Finally, equities in Japan had a stellar week returning 2.8% in euro terms. Much of the performance is seen as a result of the Japanese central bank’s commitment to maintain ultra-low rates. With inflation showing signs of tapering and economic indicators stronger than previously anticipated, there is a cautiously positive sentiment for equities markets currently and we continue to recommend a globally diversified portfolio of equities as part of any regular investment strategy.
 

Additionally, with rising interest rates driving the correction in bond prices and yields, in 2022, bonds now offer an attractive portfolio addition for investors for the foreseeable future.
 

All views and details contained within this article 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.