Investment Comment
25th November 2022
Optimistic markets facing hard reality
Investors have been taking a more upbeat view of the outlook over the past couple of weeks. The $15 per barrel fall in oil prices has contributed to a decline in inflation expectations. Together with the better-than-expected inflation data in the US, investors appear to be willing (wanting) to believe in a peak of inflation. The minutes from the November Federal Reserve policy meeting, released on Wednesday, indicated that Federal Reserve officials supported slowing the pace of interest rate increases, from 0.75% per move to 0.5%. Whilst such a slowing of tightening would be welcome, the Federal Reserve observe that inflation remains too high and so interest rates may peak at a level ‘somewhat higher’ than previously expected.
China
Recent weeks have seen investors grow more optimistic about the Chinese authorities’ approach to Covid. The stringent zero-Covid policy has resulted in widespread shutdowns to suppress the virus, with subsequent economic damage. To assess the level of restrictions in different countries, Oxford University constructed the Covid Stringency Index. The nine metrics used to calculate the Stringency Index include school closures; workplace closures; stay-at-home requirements and international travel controls. A higher score indicates a stricter response (i.e. 100 = strictest response).
The data shown below certainly suggest a relatively high degree of economic stringency has been maintained by China in recent months, at least relative to the US and UK.
Oxford’s Covid Stringency Index: China remains prone to tighter Covid controls than the UK and US
Source: Artorius, Bloomberg
Recent statements from Chinese policymakers suggested a relaxation of the policy. However, the recent surge in cases have resulted in lockdowns despite statements from the Government to make their responses more targeted and less disruptive. Only 40% of the over 80s in China have received 3 shots of the vaccine, the dosage required to gain high levels of protection against the Omicron variant. When Hong Kong had an outbreak early this year, its hospitals and morgues ran out of space.
How China evolves its strategy against Covid when a significant proportion of the population remain unvaccinated is likely to be key for the Chinese economy in coming months. A lot of pent-up demand could be unleashed into China’s economy – and its service sector in particular – were lighter policies to be enacted. This could inject growth into the global economy, but in turn delay lower inflation. Every silver cloud has a dark lining.
Tax and football
With a nod to the World Cup and the recent UK Budget, Tax Policy Associates generated the chart below. It shows a loose correlation between a country’s corporate tax rate and their FIFA (football’s world governing body) ranking. Maybe with the corporate tax rate increasing in the UK from 19% to 25% there is hope for the England and Wales football teams in Qatar.
Taxes continue to rise as a share of the economy over the next few years
Source: Artorius, Tax Policy Associates
Gerard Lane Chief Investment Officer
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FP20221125001 EXP06/01/2022