The US economy continues to be in good health, by virtue of a growing GDP and buoyant consumer demand even after recent interest rate increases. The debate of when and how quickly the Federal Reserve will cut them continues.
Its tricky dual mandate of maintaining inflation at circa two percent and full employment provides sufficient challenges for policymakers and a variety of split opinions from market pundits. With a recent report stating ‘consumer pricing and core inflation exceeding’ expectations and that US inflation had risen to 3.5% suggest no swift end to this story certainly before the summer (FT, Jones et al, 2024).
All-time highs
Regardless of political issues and presidential elections prospects. The New York based stock markets have risen to all-time highs, especially stocks in the technology ladened NASDAQ Index. How long this can continue is also another speculative game played by market pundits. Investment banks, such as Citi Group and Goldman Sachs, have recorded ‘blockbuster M&A deals’ which have more than doubled in the first quarter of 2024 (FT, Levingston, 2024).
Is there anything further other than speculation over the direction of US interest rates or concerns about the size of the National Debt (which effect government spending plans) that could knock the confidence of US investors, or could they do it to themselves?
The issue of large US asset managers, like Fidelity, wanting investors to pay ‘$100 per trade’ when buying exchange traded funds or asking ‘ETF sponsors to pay 15% of the total fund revenue’ to avoid any such charges (FT, Schmitt, 2024). Exchange traded products providers created funds for asset classes including equities, bonds, currencies, and commodities. They have seen massive growth in recent years, with the US ETF market alone estimated at $8.9 trillion, so there is a huge number of trades to charge fees for.
The market will no doubt decide how to deal with large ETF brokers’ charging plans in time. Meanwhile, it is upsetting markets participants such as Regents Park, a Californian based ETF provider, who made the comment that ‘this is just another hammering’ and threatening to raise its own ETF fees to justify its own rising costs, which is a very understandable reaction.
Fidelity Brokers has explained that the latest ‘fee schedule’ covers support services such as ‘analytical tools’ and ‘general investment research and education materials’ for exchange traded funds on its brokerage platform to justify the increased charges (FT, Schmitt, 2024).
Comment from Vetta Fi, a New York consultancy, noted ‘if this becomes prevalent, we could see a slow down in product development’ which could stifle innovation in the fast-growing active EFT market (FT, Schmitt, 2024). With a high demand for these type of products from large US institutions and retail investors alike, this may be a dampener for cheaper access to the world’s largest financial markets through broker platforms. Trouble ahead? Perhaps but self-imposed most certainly.
City of London
Meanwhile, in the City of London there’s signs of decline and dejection from bankers over the state of capital markets, especially in equities and initial public offerings. The CEO of Peel Hunt, a leading London based investment bank, for one has voiced concerns that equity markets ‘have been dramatically hollowed out over the last 5-10 years’, buoyant mergers and acquisitions activity has exacerbated the ‘de-equitisation’ trend (FT, Levingston, 2024).
Along with the dearth of company floatation’s on London’s stock markets the relisting of former FTSE100 constituent and UK technology star ARM Holdings on NEW York’s NASDAQ is a particularly hard blow for prestige. Building materials group CRH is also moving its primary market listing to New York.
The FT (Hickey, 2024) has also highlighted that hedge funds are ‘pouncing’ on unloved investment trusts as the premium between their listed share price and the underlying nett asset value of their holdings has become significantly wider circa. 9-10% on average. Time to do your own research and join them?
However, it is a sad indictment on the state of the British market that this is even happening.
Fallen out of favour
Finally, Paul Killik of Killik & Co. makes a worthwhile point in his recent column in the FT’s Weekend Money section (2024) asking why has buying shares directly in companies fallen out of favour in recent years?
An important part of Killik’s explanation was the introduction of tax-sheltering individual savings accounts (in the UK). These government approved savings schemes have capital gains tax benefits with annual investment limits to encourage people to switch from holding shares directly in to holding them through their broker’s nominee accounts. This meant that individual shareholder’s names no longer appeared on shareholder registers.
These appeared along with ‘government legislation on the right of nominee holders’ from the introduction of the CREST system in 1996. However, consequently, it has ‘disenfranchised’ most retail investors through the loss of pre-emption rights for new shares, voting rights at meetings, and notification of major events or in receiving the annual accounts. The lesson learnt is that benefits can have a cost.
The only advantage of being a ‘beneficial’ shareholder is the ability to buy or sell the share into the public market via a broker. Perhaps allowing shareholders’ their full rights as risk-taking equity investors is one way of winning back a degree of investor interest in the moribund UK equity markets.
LDC April 2024
References.
Financial Times, (2024, ‘Markets Slash Rate Cut Bets After US Inflation Rises to 3.5%’, by C. Jones and K. Duguid, The Financial Times Ltd 2024, London UK. Available Online at: Markets slash rate cut bets after US inflation rises to 3.5%
Financial Times, (2024), ‘Why is Buying Company Shares Out of fashion’ by P. Killik, Financial Times Ltd 2024, London UK. Available Online at: Why buying company shares has gone out of fashion (ft.com)
Financial Times, (2024), ‘Blockbuster M&A Deals More Than Double in the First Quarter’ by I. Levingston, Financial Times Ltd 2024, London UK. Available Online at: Blockbuster M&A deals more than double in first quarter (ft.com)
Financial Times, (2024), ‘Banker to British Mid-Caps Warns Off Bleak Outlook for London Market’ by I. Levingston, Financial Times Ltd 2024, London UK. Available Online at: Banker to British mid-caps warns of bleak outlook for London market (ft.com)
Financial Times, (2024), ‘Fidelity Clawback of ‘Free’ Trading Costs to Hit Investors’ by W. Scmitt, Financial Times Ltd 2024, London UK. Available Online at: Fidelity clawback of free ETF trading costs to hit investors
Financial Times, (2024) ,’Hedge Funds Circle Struggling UK Investment Trust Industry’ by S. Hickey and C. Mourselas, Financial Times Ltd 024, London UK. Available Online at: Hedge funds circle struggling UK investment trusts (ft.com)