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Investing in the US in the Trump Era

 4 min read / 

In the wake of the election of President Trump, the US is seeing an unprecedented upsurge. Primarily, this is due to market players’ interpretation of Trump’s rhetoric, promising an ‘America First’ policy. The policy is meant to focus on boosting growth along with the prospect of a deregulatory agenda. As equity strategist with Bank of America Merrill Lynch, Savita Subramanian, stated:

 “Improving investor sentiment, accelerating global growth and hopes for stimulus […] is driving the market to new highs”.

Indeed, the S&P 500, a benchmark stock index which tracks 500 stocks – seen as a leading indicator of US Equities – has hit multiple record highs recently, last week hitting 2400 as investor confidence in US growth surged.

The bond market, however, has remained stagnant, fixed income investors maintain pessimism in the face of the equity upsurge, reflecting some structural challenges facing the US, including the current global savings glut. However, assuming growth will occur, what does this mean for investors?

Inflation

Certainly, inflation is key when assessing investment strategy under growth. Inflation can occur through a ‘demand pull’. If demand for goods and services rises or experiences a shock through a rise in consumer confidence (which may be happening within the US with rising hopes for fiscal stimulus) for example, then producers charge higher prices in order to maximise profit in the current competitive climate.

It can also occur through a ‘cost push’, in which the cost of important raw materials, such as oil, increases, therefore increasing production costs and has a knock-on effect on the prices consumers face.

The so-called positive inflation caused by the ‘demand pull’ is associated with growth, and expectations of such inflation are increasing within the US, something that may hurt fixed income investors. Inflation is a bonds’ worst enemy, eroding the purchasing power of future cash flows.

This is easily visualised using a simple 1-year bond which pays a fixed interest rate at maturity and does not pay coupons. If such a bond were bought for £100, at 5% interest rate, then at maturity, an investor would receive £105. However, if inflation occurs, then the profit received from the bond is effectively reduced as the purchasing power is eroded by the increase in prices: it will not buy as much.

If inflation is 2%, the actual return would be 3% (using the Fischer equation, in which real interest rate = nominal interest rate – inflation). Therefore, as inflation in the US is likely to occur in the coming years, investors may move away from fixed income towards equities.

Another solution for investors are Treasury Inflation Protected Securities. Promising lower yields, their prices hike when inflation expectations experience an upsurge.

Monetary Policy

The Federal Reserve and its response to the threat of inflation are also pivotal. If the Fed increases the base rate, then interest rates faced by firms and consumers follow suit, dampening aggregate demand through a decrease in investment and consumption, as asset prices decrease and agents feel less wealthy.

This, in turn, stagnates the inflation caused by the initial demand shock. Indeed, such an interest rate hike seems to be on the horizon, with markets seeing a near 100% chance of an interest rate increase. With all eyes on the March 14/15 meeting, an increase in interest rates can affect investors’ decisions through multiple channels.

Bond prices move inversely to interest rates. This is because a bond paying a fixed interest rate previously issued is less desirable than newly issued bonds with a higher interest rate, thus decreasing demand for the bond and necessitating a decrease in price to compensate for the decrease in demand. As seen, the monetary policy sensitive US two-year yield, which moves in an opposite direction to prices, hit a seven-year intraday high last Friday.

Conclusion

Though uncertainty is prevalent within the US regarding future growth and therefore investment decision making, if growth occurs one should expect to see investors shifting from high yield to equities, or even to TIPS (inflation-linked bonds).

Though the market could go either way, with Trump’s ambiguity regarding stimulus along with the increased chances of an interest rate hike possibly dampening hopes of growth, many market players remain optimistic. An interest rate rise suggests the Federal Reserve is confident in the future economic outlook of the US, and investors may follow suit.

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Markets

Black Friday Leads to Low UK Retail Sales

 1 min read / 

black friday sales

Quarterly findings published today by the Office for National Statistics (ONS) found post-Black Friday sales in the UK were at their lowest in 18 months.

The long-suffering British retail market saw growth of just 0.4% in the quarter, half what was gained in the previous three months. In the same quarter last year, sales grew by 1%. Analysts have attributed inflation and a fall in consumer confidence.

The Black Friday event, imported from the US in 2010 has led to a decline in sales. Purchases that traditionally happened in the pre-Christmas shopping frenzy are now taking place in November where strong competition to keep prices down mean smaller profit margins for retailers.

However the volume of goods sold in shops and online also fell by 1.5% in November. Growth in 2017 as a whole was just 1.9%, the smallest in four years.

(Photo: Stan Honda)

 

Keep reading |  1 min read

Markets

The Future of International Wire Transfers

 3 min read / 

International wire transfers

After years of stagnancy in the traditional banking sector, major changes are rapidly taking place. As the world heads into an increasingly digital future, new financial technology is being created and new products are changing the way society does banking.

Banks and FinTech companies are already modernising their services and digitizing their operations. However, the real innovation will begin once they shift their focus from improving old systems to implementing entirely new technologies.

One of the most important financial services for businesses is the ability to send fast, secure, and cost-effective international wire transfers. Today, companies mainly use the SWIFT system to send and receive funds overseas. While it has its advantages, there are new technologies that are beginning to challenge this traditional transfer system.

The SWIFT Transfer System:

The SWIFT system is the most commonly used method for transferring funds internationally. Used by over 11,000 financial institutions globally, it’s one of the most popular and trusted ways to wire money. This member-owned cooperative has many advantages, although many disadvantages too.

Main Advantages of SWIFT:

  1. Provides the ability to transfer funds to anywhere in the world.
  2. Known and trusted system with high standards and minimal risk.
  3. Safe and secure transactions and top security defence.

Main Disadvantages of SWIFT:

  1. Transaction processing tends to be slow and can take up to 5 business days.
  2. Several banks can be involved in a single transaction leading to higher fees.
  3. Extra fees added to total amount due to currency exchange.

New technology in banking is beginning to challenge the gaps in the SWIFT system. Trends like blockchain and electric money technology are becoming more and more relevant as efficient ways of transferring money internationally.

How Can Blockchain Technology Affect International Wire Transfers?

Blockchain technology is a peer-to-peer network that is making its way into the banking industry. Its decentralized structure cuts out the need for a ‘middle-man’, leading to faster and less costly transactions. In addition, it is also much more secure than the SWIFT system.

Using Blockchain technology for international money transfers benefits both the bank and its customers. Banks can save precious time and resources while the consumer can transfer funds for a much lower fee, instantly. This will be extremely beneficial for smaller companies with limited resources who need an alternative to expensive wire transfers.

This technology has not been fully implemented, but banks have begun investing and testing blockchain based systems. Plus, with new blockchain startups on the rise, one can expect some major innovations that include this technology in the near future.

With this new technology being added, one can also expect banks to redesign and improve their user interface (UI) leading to a more enhanced overall customer experience.

Electronic Money Technology and International Wire Transfers

Another challenge that banks are facing is the increase of electronic money institutions (EMI). These FinTech companies offer cost-efficient and convenient financial services that are very attractive to customers.

Companies like PayPal offer an alternative to the SWIFT system for customers that need wire transfer services. Since EMIs issue electronic money as opposed to real money, they incur lower fees and faster transaction times than bank transfers.

With the increase in financial technology and innovation, society will see a major impact on the way international wire transfers are conducted . We can expect to see more EMIs offering wire services, better products, lower fees, advanced mobile capabilities, and a better overall banking experience.

Keep reading |  3 min read

Cryptocurrencies

Cryptos Rally Slightly

crypto prices

Following one of the worst crypto crashes since 2015, cryptocurrencies posted moderate recoveries.

Editor’s Remarks: Bitcoin dipped into four-figure territory at the nadir of the short-lived crash that many touted as the “end of cryptocurrencies”. However, most major currencies were up yesterday as they commenced a recovery. Ripple, which fell as low as $0.90, was up to $1.40 by midday, while NEO resumed its upward trend. Bitcoin’s recovery has been notably weaker than its smaller cousins, some of whom are up 60% in the last 24 hours against bitcoin. Ethereum gained back some of the ground it lost too and is settling in once more above the $1,000 mark.

Read more on Cryptocurrencies:

Keep reading |  1 min read

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