Inflation Smoke and Mirrors
September saw another step taken by both the Bank of England (BoE) and Federal Reserve (Fed) into entering the upside-down world of negative interest rates. At the BoE’s latest monetary policy committee meeting, rates were left unchanged at 0.1% but the committee was briefed on how a negative interest rate could be implemented. Across the pond, Fed chair Jerome Powell forecast rates will remain at record lows until at least 2023.
Two central banks that are already deep into the negative interest rate experiment are the European Central Bank and Bank of Japan, who took the plunge in 2014 and 2016 respectively. One aim of negative interest rate policy is to stimulate inflation but, at least by official measurements, this has been lacking, with the Euro Area and Japan achieving 0.7% and 0.5% annualised inflation rates since their moves to negative rates.
If the BoE and Fed fare poorly in stoking inflation with ultra-low interest rates, will negative rates be the next step? The market suggests “yes” for the UK, with overnight index swaps implying negative rates by 2021. Whilst negative rates are yet to be priced into US derivatives markets, it appears the Fed has another trick up its sleeve. Fed ownership of the US Treasury Inflation-Protected Securities (TIPS) market has doubled in 2020 to close to 20%, by outstanding market value. By driving down yields on TIPS at a faster rate than the yield compression across conventional Treasuries, the Fed in turn has pushed up the breakeven inflation rate. This leaves us questioning whether the breakeven rate is based on a market forecast of expected inflation or just a Fed policy designed to build higher inflation expectations into the market psyche, hoping for a self-fulfilling prophecy to appear in order to meet their average inflation target of 2%.
Online business models are having a year to remember. Whilst much of the virtual water cooler chatter focuses on US tech behemoths like Amazon, Facebook and Microsoft, September belonged to a UK tech success story in The Hut Group (THG). Founded in 2004, the business is a digital consumer brands group, selling own brands such as Myprotein, the largest online direct to consumer sports nutrition brand globally. The jewel in the crown however is its proprietary technology platform, THG Ingenuity, that has not only shown demonstrable success via the growth in own brands such as Myprotein, but is now being used by blue chip third party clients such as Coca-Cola, Nestle and Johnson & Johnson. During the month, the company completed a successful initial public offering which saw its valuation reach £6bn.
The success of THG is an endorsement of the strategy employed by portfolio holding Merian Chrysalis, which is set to benefit substantially from a valuation uplift of its equity position in THG. The aim of the trust is to provide late-stage private businesses with supportive capital to help them make the transition to a publicly listed company. With other portfolio holdings such as Klarna and Transferwise also benefitting from the shift to online consumer activity, Merian Chrysalis has been a strong performer, up over 17% this year compared to the FTSE All Share’s -20% return.
Source for all information: Bloomberg Finance L.P. For professional investors only.
Past performance should not be seen as a guide to future performance. The outlook expressed in this communication represents the views of Tom Delic at the time of preparation and are not necessarily those of Seneca Investment Managers Limited. His views may be subject to change and should not be interpreted as investment advice. Whilst Seneca Investment Managers has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content. This document is provided for the purpose of information only. Seneca Investment Managers Limited is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP20 233