UK Fiscal Rules: The Need For Stronger Oversight

Economic

Summary:

In the run-up to the 30 October Budget, there has been a great deal of discussion in the media about the prospect of changes to the government’s fiscal rules.

In the run-up to the 30 October Budget, there has been a great deal of discussion in the media about the prospect of changes to the government’s fiscal rules. The new Labour government has already signalled that it will not keep exactly to the same fiscal rules as its Conservative predecessor. In its manifesto, Labour proposed two “non-negotiable” rules which would guide its decisions on government spending, taxation and borrowing:

The current budget must move into balance, so that day-to-day costs are met by revenue; andDebt must be falling as a share of the economy by the fifth year of the forecast.

The first of these rules is a version of the “Golden Rule” followed by Gordon Brown and Alistair Darling as Chancellors from 1997 until 2009, when the Global Financial Crisis caused it to be changed. However, Brown and Darling talked about balancing the current budget “over the cycle” in their version of the rule. The second rule relating to public sector debt proposed in the Labour manifesto is the same (in principle) as that used by the previous Conservative government – though there has been a lot of media discussion about using a different measure of public sector debt under the current government.

Lessons from monetary policy

It is instructive to contrast the fiscal framework with the monetary policy framework. Gordon Brown took the radical step in 1997 of giving the Bank of England operational control of UK monetary policy, under the supervision of a nine-member group of Bank officials and independent experts – the Monetary Policy Committee (MPC). While there has been some modest tinkering with the MPC mandate over the past 27 years, there has only been one major change, when Gordon Brown changed the inflation target for the MPC from 2.5 per cent for RPIX to 2 per cent for CPI.

By contrast, there has not been a stable or credible accountability framework for fiscal rules in recent years. The normal response of governments to their inability to meet their fiscal targets has been to change the rules. This has been possible because the Chancellor has been able to set his or her own fiscal rules, with the role of the Office for Budget Responsibility (OBR) being then to assess whether the tax and spending plans meet the rules set by the government.

One of the reasons why governments have been able to get away with varying and changing the fiscal rules is that there is no solid basis in economic theory and practice behind many of the UK fiscal rules introduced since 1997. The deficit rules have generally had a stronger economic justification than the debt rules. Whereas Gordon Brown was aiming to stabilise the public debt/GDP ratio below 40 per cent in the early 2000s, the current government now finds itself trying to reduce the debt/GDP ratio from a level of 90-100 per cent. That requires a totally different approach to public finances than in the Blair/Brown era.

By contrast, it is generally recognised that the goal of monetary policy should be to keep inflation low and stable – close to stable prices. The targets of 2.5 per cent for RPIX and 2 per cent for CPI (which were in the 1990s hardly distinct) have been a practical expression of this objective, and both were widely supported by the economic and political establishments.

This suggests that any move by the Chancellor to change her fiscal rules needs to meet two criteria. First, it must be accompanied by changes which will strengthen the oversight by the OBR, or some other body supervising fiscal policy. Second, the new rules must be durable and not likely to be subject to the chopping and changing we have seen since the Global Financial Crisis.

Changing the fiscal rules

The two fiscal rules which the Chancellor has set herself have varying degrees of economic strength and pedigree behind them. Her first rule – based on the “golden rule” for public finances – requires her to meet day-to-day spending with regular government receipts. Borrowing is for investment only, which is generally interpreted as net capital investment, capital spending less depreciation. However, the Chancellor has not set a time horizon over which this rule will need to be met. Instead, the Labour manifesto commitment is only to “move towards” this balanced current budget.

The latest OBR projections show the current budget deficit gradually moving towards balance which is expected to be achieved in 2007/28. Last year, the current budget deficit was 1.9 per cent of GDP and the Spring Budget forecast was for it to fall to 0.7 per cent. But the Chancellor has additional spending commitments and tax rises – promised in the General Election campaign – to factor into her public finances forecast. Also, better economic growth news could help close the gap between spending and receipts more quickly than the current OBR projections suggest. But with careful management of public finances, this “golden rule” should be met in a few years, and the Chancellor would do well to stick with it.

The second fiscal rule set out in the Labour manifesto is more problematic. This is the requirement to have debt falling in the fifth year of the forecast. There are several reasons, however, why this is a “bad” rule. It relies heavily on a forecast of public finances over five years – which is highly uncertain. It takes no account of the debt profile in the short-term, which is likely to be rising. And the debt measure used by the previous government is one of many alternatives which could be used.

In my opinion, the Chancellor should find a supplementary rule based on the government deficit. The deficit can be easily measured in the short-term and can be forecast and projected with more certainty than debt-related measures. A good supplementary deficit rule would be for the public sector deficit to be 3 per cent of GDP, with a margin of 1 per cent either way, similar to the inflation target. If the “golden rule” was also met, this would allow governments to invest 2-4 per cent of GDP, which is generally higher than governments have achieved since 1979 – or indeed since 1997.

Strengthening the fiscal framework

If these changes were implemented, it would leave us with two fiscal rules, the same number as proposed in the Labour manifesto. The first would be identical to the manifesto commitment – covering current expenditure with government receipts, and therefore running a current balanced budget or surplus. The second would be a target overall deficit of 3 per cent of GDP, but with the requirement for the Chancellor to write an explanatory letter to the OBR (or some other fiscal regulatory authority) if the deficit was scheduled to rise above 4 per cent or fall below 2 per cent in any year of the Budget forecast.

Why should the deficit target be 3 per cent of GDP? In normal circumstances, this should generate a falling debt/GDP ratio – starting from where we are now. A 2-3 per cent of GDP public deficit has historically been a safety zone for UK public finances. A 3 per cent target keeps us within that range. Over time, as confidence grew operating within this framework, the deficit target could be nudged down to 2.5 per cent of GDP, with a target borrowing range of 1.5-3.5 per cent of GDP. But this is fine-tuning. A 3 per cent target for the total deficit is a sensible starting point and was used by the previous government – though not adhered to.

How should these rules be enforced, however? Here, there are two directions in which the new government could go. The first is to establish a supervisory fiscal committee or council which oversees the implementation of fiscal policy. The alternative would be to beef up the OBR so it can act as a much stronger fiscal policy regulator. Both would be in line with previous NIESR work on designing a new fiscal framework.

A Fiscal Policy Council or Committee could contain a group of leading economists with experience in assessing fiscal policy, as well as the head of the OBR. As such, it would be well-placed to give views not just on the implementation of fiscal policy, but on the policy framework itself.

An alternative approach would be to expand the OBR Board to a group of seven-nine members, akin to the MPC, to fulfil the same function as a Fiscal Policy Committee or Council, modelled on the MPC.

Whichever route is taken, the benefits would be:

A larger board, which brings a greater diversity of views.;OBR members or Fiscal Policy Council members would be more publicly accountable, like MPC members;Members of the OBR Board/Fiscal Policy Council could contribute to public debate on fiscal policy;A stronger focus on fiscal policy in public discourse, just as the establishment of the MPC led to a much richer debate on UK monetary policy.

Conclusion

It is very clear that the Chancellor and her Treasury team need to set out a new set of fiscal rules. In particular, she should ditch the debt rule looking five years ahead – which she inherited from Jeremy Hunt – and focus on designing a good deficit rule to replace it.

But to make this credible, and avoid accusations that the new Labour government is changing the fiscal rules to make life easier and expand the deficit, the framework of oversight of UK fiscal policy by independent bodies needs strengthening. This can be done by establishing a new Fiscal Policy Council or Committee to oversee the OBR, or reforming the OBR Board – broadening its membership, and bringing it more into line with the Monetary Policy Committee in terms of its membership, accountability and procedures.

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SAXO

Economic

Bond

Political

The "Trump trade" environment—characterized by rising yields, inflation concerns, and fiscal stimulus—poses risks for bondholders (for more on the Trump trade click here). Expectations of slower Fed rate cuts are fueling volatility, diminishing the appeal of U.S. Treasuries as a safe haven, especially as the U.S. election draws closer. Here's how these dynamics might affect your bond portfolio and potential strategies to mitigate the risks.

Implications of the "Trump Trade" for Bondholders:

Inflation Risk:

Trump-style policies, such as tax cuts and infrastructure spending, are inflationary. Increased government spending and wage growth could push inflation higher, which erodes bond returns. Inflation-linked bonds, like Treasury Inflation-Protected Securities (TIPS), help hedge against this risk, as their principal value adjusts with inflation.

Cautious Monetary Policy:

Economic growth fueled by tax cuts and deregulation can increase inflation pressure, limiting the Federal Reserve's ability to cut rates aggressively. If the Fed is too accommodative, markets may react by selling bonds, pushing yields higher and bond prices lower. Since the September FOMC meeting, market expectations for rate cuts have shifted, with the Fed now projected to lower rates to 3.45% by 2025, compared to the earlier forecast of 2.8% before the September FOMC meeting. However the recent Treasury selloff was characterized by a bear-steepening yield curve, with long-term yields rising faster, suggests markets are pricing in higher growth and inflation—possibly in anticipation of a Trump victory.

Improving Credit Fundamentals:

Pro-growth policies could benefit corporate bonds, especially in sectors like energy and finance that thrive under deregulation and tax cuts. Stronger economic growth could boost corporate earnings and improve credit quality. However, if growth falls short or corporate debt rises unsustainably, high-yield bonds may face increased default risk.

U.S. Dollar Strength:

Stronger economic growth or inflation could also lead to a stronger U.S. dollar. For those holding foreign bonds, this introduces currency risk, as a stronger dollar could reduce returns when foreign currencies depreciate relative to the U.S. dollar.

Smart Strategies to Safeguard Your Bond Portfolio

Given the current environment of rising yields and falling bond prices, consider these strategies to safeguard your portfolio:

Diversification:

Spread your investments across different bond types, including short-term bonds, which are less sensitive to rising rates, and corporate bonds, which may benefit from pro-growth policies.

ETFs example: iShares Core Global Aggregate Bond UCITS ETF (AGGH). This ETF provides diversified exposure to global bonds, including government and corporate bonds across different maturities, offering broad diversification.

Inflation-Protected Bonds (TIPS):

Adding TIPS can help protect your portfolio from inflation, as their value adjusts with inflation rates, helping to maintain purchasing power.

ETFs example: iShares $ TIPS UCITS ETF (IDTP).This ETFs provides exposure to U.S. Treasury Inflation-Protected Securities (TIPS), which are government bonds designed to help protect against inflation.

Floating-Rate Bonds:

These bonds adjust their interest payments with prevailing rates, offering protection against rising yields in volatile environments.

ETF Example: WisdomTree USD Floating Rate TBond UCITS ETF (TFRN). This ETF offers exposure to U.S. Treasury bonds with floating interest rates. These bonds adjust their interest payments based on short-term interest rate changes, providing protection against rising rates while maintaining the security of U.S. government bonds.

Reduce Duration:

Long-duration bonds are most vulnerable to rising yields. Focusing on short- and medium-term bonds can reduce the impact of interest rate changes on your portfolio.

ETF Example: iShares Treasury Bond 1-3yr UCITS ETF (IBTA). This provides exposure to short-term U.S. Treasury bonds with maturities between 1 and 3 years.

Active Management:

Actively managed bond funds can quickly adjust to market changes, allowing professional managers to respond to inflation, interest rate shifts, and market volatility, helping protect your portfolio. What the "Trump Trade" Means for Your Bond Portfolio – And How to Protect It_1

What the "Trump Trade" Means for Your Bond Portfolio – And How to Protect It_1

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Risk Warnings and Disclaimers

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Justin

Economic

“Small is beautiful”, proclaimed the classic 1973 book by British economist Ernst Schumacher, challenging the century’s mania for gigantic projects. He opposed nuclear power, among the largest industrial endeavours of his time, multibillion-dollar assemblages of concrete, steel, wires and uranium. But the emerging nuclear power renaissance, driven by data centres, combines the small and the large.

On last Wednesday, e-commerce and web services giant Amazon said it would be an anchor investor in a $500 million fund-raising by X-energy, a new developer of small modular nuclear reactors (SMRs). Amazon also said it would support SMR projects in its home state, Washington, as well as in the data centre hotspot of Virginia.

Amazon and X-energy intend to have more than 5 gigawatts of SMRs operational by 2039. This is approximately equal to the 5.6 gigawatts of conventional large nuclear reactors at the UAE’s Barakah plant.

Last week, tech rival Google also ordered six to seven SMRs from Kairos Power, while last month, Oracle said it would use three SMRs to power a more than 1 gigawatt centre and meet “crazy” needs for power. Microsoft had announced it would buy electricity from the infamous Three Mile Island nuclear power plant, site of a 1979 accident, if its owner restarts it.

These are welcome steps forward for nuclear power. Outside a few countries such as China and the UAE, nuclear capacity has been going backwards for years, as ageing reactors were closed down and not replaced, new plants took decades to build and run heavily over-budget, and countries such as Germany phased-out operational sites.

The improvement in renewable energy such as wind and solar, sharp falls in costs for battery storage and, in the US, a glut of cheap shale gas, made nuclear power economically uncompetitive. Environmentalists, often adhering to 1970s-era orthodoxies and fears of nuclear accidents such as Chernobyl in 1986, campaigned heavily against new nuclear investment, and overregulation and legal challenges drove up construction times and costs.

But three factors may create a more radiant future.

First, climate. At the Cop28 talks in Dubai last year, a group of more than 20 countries, including the UAE, US and UK, affirmed a goal of tripling nuclear capacity by 2050 as a source of reliable low-carbon electricity.

Second, energy security. The Russian invasion of Ukraine and the cut-off of much of Europe’s gas made the continent, and other isolated energy markets such as Japan, South Korea and Taiwan, aware again of the value of power generation which is not affected by weather and whose fuel can be stockpiled for years. But Western countries and allies want to steer clear of Chinese or Russian reactors and fuel, so they need to rebuild decades of atrophied domestic capability.

Third, electricity demand is rising again in developed countries, after decades when it barely grew. Demand for electric heating, air-conditioning and battery cars is one component.

The explosive rise of data centres is another, driven by the artificial intelligence boom. Even if the overall electrical needs of data centres are not huge, they are very significant in specific areas, far-exceeding local capacity in areas such as Virginia. Meeting this need with renewables is difficult as the best solar and wind sites are distant and constructing new transmission cables across state borders is a regulatory thornbush.

But to answer these needs, new nuclear plants need to be much quicker and cheaper to build. The International Energy Agency estimates that nuclear electricity in China costs 6.5 US cents per kilowatt-hour, which is cheaper than gas, and reasonably competitive with large-scale solar or wind power. China builds numerous plants in sequence and has managed to standardise them and train up its workforce.

But the cost in the US is 10.5 cents, and in Europe, 14 cents. New reactors are rarely built, face endless public and legal challenges, excessive and often capricious regulation, and lack of expertise from developers whose last serious construction programmes were in the 1970s or 1980s.

SMRs promise the needed improvement. A conventional nuclear reactor may typically be about 1,000-1,400 megawatts. SMR designs, by contrast, range from a few megawatts, designed for remote communities, isolated industries or military sites, or ships, to Rolls-Royce’s 470MW unit, really a medium-sized reactor. X-energy’s system features 80-megawatt reactors which can be bundled into a “four-pack”.

SMRs cover a wide range of designs, from variants of traditional models, to radical new concepts. They are often intended to be inherently safer than conventional reactors, not requiring external cooling, the problem that hit Japan’s Fukushima plant in 2011 when its backup diesel generators were swamped by a tsunami.

Their biggest selling point is that they should be quicker and, eventually, cheaper to build than large conventional reactors. Many of their components will be fabricated in assembly-line fashion, gaining manufacturing experience and lowering costs by standardisation. On-site construction and changes of plan, the bane of many new nuclear sites, will be minimised. Financial exposure will be less, lowering the risk and cost of capital.

Unlocking the promise of SMRs needs deep-pocketed, long-term and risk-tolerant investors. After several false turns and doors barred firmly by engineering, finance or regulation, the industry may finally have found its key in cash-rich Amazon, Google and Microsoft.

Some Middle East countries are also awake to the promise of SMRs, as their net-zero carbon and data centre ambitions grow. In December, the Emirates Nuclear Energy Corporation signed co-operation agreements with X-energy and three other SMR developers. Saudi Arabia’s King Fahd University of Petroleum and Minerals is working on its own SMR design, and the kingdom is co-operating with South Korea on its Smart reactor.

SMRs are still a tough sell in the Gulf, even with its booming electricity needs, given the abundance of land for cheap solar power backed up with batteries. Yet the tech giants’ commitments demonstrate confidence as well as urgency to meet vast energy projections. Artificial intelligence may be the parent to beautiful small reactors.

Source: THENATIONALNEWS

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PIIE

Economic

The new British prime minister, Sir Keir Starmer, led the Labour Party to an impressive victory in July, capitalizing on Britain’s economic problems and mounting backlash over its troubled exit from the European Union. In his campaign, Starmer vowed to “reset the relationship” with Europe, and he recently travelled to Brussels for talks with EU leaders, but nothing much concrete came out of these discussions.

Future historians may classify Brexit as one of the United Kingdom’s biggest mistakes in its postwar history. It has certainly had a great impact on Britain and to a lesser degree on the EU. European leaders are still in transition mode, waiting for the new European Commission to be installed, and appear to be in no mood for ambitious negotiations to reconcile with the UK. But with some effort and political will there are quite a few things that could be done, notably when it comes to mobility, security, and migration.

While Prime Minister Starmer promised to try to reset relations with the EU and turn the corner on Brexit, he has been eager not to upset Brexiters in his own party, making clear that a new referendum and rejoining the EU are not in the cards.

Starmer has spoken about improving cooperation on security and trade, as well as the need to facilitate travel for individual groups, such as touring musicians. Beginning next year, the EU will impose visa requirements on citizens from the UK, and the UK will put in place an electronic travel authorization system next spring. This will further complicate travelling across the English Channel.

The EU has been reluctant to reopen the Trade and Cooperation agreement that took five years of negotiations and two British prime ministers to reach. Brussels is also of the view that London has not yet done enough to implement the existing agreement. The European Commission has, however, offered to discuss free travel in both countries for persons 18 to 30 years old. This offer has been rejected by London.

The prime minister has also been travelling to Paris, Rome, and Berlin to repair relations. In Brussels he met with European Commission president Ursula von der Leyen and other EU leaders. Not much came out of these meetings, though; the press release from the meeting with the Commission president was vague, stating the unique relationship between the UK and the EU, the aim to work together on the situation in the Middle East, and their joint support for Ukraine. On the idea of “resetting” the relationship, not much was said, apart from a commitment to have regular joint summits at leaders´ level and to take the agenda forward in areas “where strengthened cooperation would be of mutual benefit.”

The proponents of leaving the EU in the 2016 referendum argued that the British economy would prosper and the UK would conclude a lot of trade agreements with the rest of the world. Neither has happened.

A report from the mayor of London earlier this year claims that London´s economy alone has shrunk by more than £30 billion and that the cost of Brexit to the British economy is £140 billion. Other estimates point to a 5 percent drop in growth because of Brexit. Trade has diminished, but the EU is still the most important market for the UK, and the UK is the EU's second biggest trading partner.

A clear majority of Brits consider the decision to leave the EU a mistake. A You Gov poll from August this year shows 51 percent saying that the negatives of Brexit have outweighed the benefits; only 17 percent think the opposite.

THE WAY FORWARD

Despite the obstacles, it is in everybody´s interest to deepen relations. Improving economic, political, and security cooperation would benefit both sides. The UK and the countries of the EU are neighbors and allies. In gloomy and uncertain times, you need all the friends you can get. The possibility of a second Trump administration in Washington is likely to put pressure on transatlantic relations and increases the need to work closely with other partners. So what can realistically be done?

The UK will not be joining the internal market, and it cannot freely cherry-pick specific sectors to join. The EU is negotiating future enlargement with nine countries and putting hard demands on them on aligning with EU law, so the UK cannot expect VIP treatment for its own interests.

For the time being it also seems that there is no clear, consistent agenda for what the British government wants. Brussels is skeptical about negotiating something that is not clearly defined. It would be wise for London to come up with a consolidated agenda of what it wants and what it would be ready to give that is broadly agreed in the British parliament and among key stakeholders.

The future relationship will therefore have to be based on a new model, and the EU must be a bit more flexible when it comes to alignment of standards and conformity assessments—for instance, in the agricultural sector. Progress would be possible if the UK agrees to follow the European Court of Justice in agriculture disputes. The checks on UK exports of agricultural products to Europe are cumbersome and expensive, and the UK farming sector has suffered hard. A solution for agriculture issues would be a clear victory with immediate benefits to show for the prime minister.

Areas outside the internal market should be easier to negotiate, for instance on Ukraine and security. Support and coordination on Ukraine have worked very well so far and could be furthered deepened in coordination for the future reconstruction of the country. A stronger defense and security pact could be developed with increased interoperability in this sector. Migration is an area where cooperation is already ongoing, especially with France. As the EU implements its own internal migration pact, there is scope for further collaboration.

On carbon pricing, the UK has a model very similar to the one the EU developed (CBAM, the carbon border adjustment mechanism). But the British one is a little bit more flexible vis-à-vis third countries. This is something the EU could learn from.

Mobility should in theory be easy to solve if both sides make an effort. If London is prepared to allow young people from Europe to work and study in Britain, facilitating the same rights for British youth in the EU, the European Commission should give in on the touring visas for musicians. Furthermore, the UK should rejoin the student exchange program known as Erasmus, adding recognition of qualifications in several professions. In a global quest for skills, such a step would be mutually beneficial.

The UK has just joined the Comprehensive and Progressive Agreement for Transpacific Partnership (CPTPP), a trade agreement covering 12 countries. It would be in the EU´s interest to join this agreement as well and work together with the UK to strengthen cooperation. Within the CPTPP, countries are actively working on trade liberalization and rules and standard setting, acknowledging that neither China nor the US is a member.

Clearly, deepening cooperation is of mutual benefit for the UK and the EU. But compromise and bold thinking will be needed from both sides. With upcoming EU enlargements to include Ukraine, Moldova, and the Balkans, the EU will have to try to find a unique model of cooperation with its former member state without jeopardizing the credibility of the accession process. There are areas that could clearly benefit from deeper cooperation and alignment. But so far, their reconciliation efforts have been more talk than action.

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Justin

Economic

The global landscape of business and investment is undergoing a transformative shift, driven by heightened awareness of climate change, social inequality and corporate governance. Over the past two decades, the ESG (environmental, social and governance) framework has not only emerged but thrived as a pivotal instrument, illuminating the remarkable capacity to assess and enhance the sustainability, ethical standards and long-term viability of companies worldwide.

However, as we face the complexities of today’s world, it is essential to not only adapt but also improve this framework to meet evolving challenges. Thus, it is time to expand the ESG framework to include resilience, ushering in the era of ESGR (environmental, social, governance and resilience).

Introducing resilience: The fourth dimension

Recent global events have highlighted the struggles of companies lacking resilience. The Covid-19 pandemic brought unprecedented challenges, from supply chain disruptions to sudden shifts in consumer behaviour. Geopolitical tensions, such as the conflict in Ukraine, have further destabilised markets, particularly impacting industries dependent on the region for raw materials. These crises underscore the need for resilience in the corporate world.

While the traditional ESG framework provides a solid foundation for evaluating corporate responsibility, it falls short in addressing the rapid changes and uncertainties of our modern world.

Environmental criteria assess a company’s role as a custodian of nature; social criteria examine its relationships with stakeholders; and governance criteria scrutinise its leadership and operational transparency. However, this framework lacks a dedicated focus on resilience — a vital component for navigating the volatile, uncertain, complex and ambiguous (VUCA) world we inhabit. Resilience, defined as the capacity to adapt, recover and thrive in the face of adversity, represents the missing link in the ESG framework.

By incorporating resilience as the fourth pillar, we acknowledge the imperative of not merely withstanding shocks but also evolving and emerging stronger. This addition is particularly pertinent in an era defined by unprecedented challenges such as climate change, pandemics and technological disruptions.

Key components of resilience

Resilience in the corporate world hinges on three fundamental components, each serving as pillars upon which enduring success is built.

Compliance with legal changes: The rapid changes in legal requirements across environmental, social and governance domains necessitate that companies develop adaptive strategies to remain compliant and resilient. For instance, China’s aggressive carbon reduction policies forced unprepared factories to shut down or relocate, whereas resilient companies promptly adopted renewable energy practices and reduced carbon emissions. The EU’s GDPR in 2018 required drastic data protection overhauls. While proactive companies successfully navigated the shift, many like Meta and Amazon are facing fines.

Ensuring economic stability: Businesses must maintain strong financial health by diversifying their income streams and being prepared for economic downturns to ensure resilience. Companies unprepared for economic crises often face severe consequences, such as layoffs or closures. During the 2008 global financial crisis, Lehman Brothers collapsed due to its overreliance on high-risk investments, leading to significant job losses and market instability. Similarly, the Covid-19 pandemic forced JCPenney into bankruptcy due to declining sales and debt. In contrast, resilient companies like Amazon, which diversified its business and enhanced its digital infrastructure, thrived.

Maintaining operational continuity: Companies need to establish resilient supply chains and business operations capable of withstanding disruptions from natural disasters, geopolitical tensions or other crises. For instance, during the Covid-19 pandemic, Procter & Gamble’s proactive supply chain management and diversified manufacturing locations enabled it to maintain product availability despite global disruptions. On the other hand, Peloton encountered challenges with its supply chain, resulting in delays in product deliveries and impacting customer satisfaction.

Building resilient foundations with RIC

Risk assessment, innovation and competency (RIC) form the bedrock of resilience, representing the essential elements upon which an organisation’s ability to adapt and thrive in dynamic environments rests.

A study by PwC found that organisations that embrace strategic risk management are five times more likely to deliver stakeholder confidence and two times more likely to expect faster revenue growth. This highlights the critical role of risk assessment in enhancing resilience to the modern world’s challenges. Effective risk assessment involves identifying, analysing and mitigating potential risks that could jeopardise business operations. This process includes not only ensuring daily operations comply with regulations but also anticipating and addressing potential risks that could cause business disruptions. Through comprehensive risk assessment processes, organisations can anticipate potential disruptions, minimise vulnerabilities and enhance their capacity to withstand adverse conditions.

Innovation serves as a catalyst for resilience by driving the development of new solutions and approaches to address evolving market dynamics. Fostering a culture of innovation encourages creativity, adaptability and forward-thinking, enabling companies to stay ahead of the curve and respond effectively to changing business landscapes. A McKinsey study found that companies with a high commitment to innovation are 2.4 times more likely to experience revenue growth. However, only 23% of companies prioritise innovation as one of their top two concerns. Innovation does not always mean creating new inventions. It can also involve adopting emerging technologies such as artificial intelligence, blockchain and renewable energy solutions.

Embracing a spectrum of competencies within the boardroom is imperative for guiding companies towards resilience and sustainable expansion. Yet, according to a recent study conducted by Deloitte, merely 36% of board members worldwide possess expertise in technology, underscoring a notable deficiency in diversified skill sets. This disparity underscores the importance of fostering a board environment rich in varied proficiencies. Such diversity not only fosters a holistic evaluation of opportunities and threats but also fosters well-informed strategic decision-making, ultimately fortifying the organisation’s capacity to adeptly navigate multifaceted challenges.

Creating a forward-thinking standard with ESGR

I urge global stakeholders to recognise the pivotal role of resilience in sustainability. By transitioning from ESG to ESGR, we can create a robust, forward-thinking standard that addresses the multifaceted challenges of our time, safeguarding businesses and investments while fostering a more sustainable and resilient global economy. Integrating resilience into the ESG framework is essential for survival and growth in an increasingly volatile world, and this evolution offers an opportunity to shape a future characterised by sustainability, resilience and prosperity.

Source: The edge markets

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ACY

Political

Economic

The U.S. dollar has been on a notable upward trend in the lead-up to the November 5th presidential election, registering its third consecutive week of gains. The Dollar Index, which measures the greenback’s strength against a basket of major currencies, has achieved its longest winning streak since the 1970s, climbing for fourteen consecutive trading days. This strong performance highlights the dollar’s resilience in the face of political and economic uncertainty. Over the past few weeks, the dollar has appreciated by 3.5%, showing particularly pronounced strength against currencies like the New Zealand Dollar (NZD) and the Japanese Yen (JPY), which have fallen 4.3% and 4.2% against the dollar, respectively.

USD Rises as Trump’s Re-election Prospects Gain Momentum Ahead of U.S. Election_1

Trump’s Re-election Momentum Fuels Dollar Rally

A significant factor driving the dollar’s surge is the growing market perception that Donald Trump may secure a second term in office. This sentiment has been bolstered by recent betting market data from platforms like PolyMarket, where Trump’s re-election odds have climbed past 60%. This shift in market expectations stems from his improving performance in key battleground states and the narrowing gap in opinion polls between Trump and his opponent, Kamala Harris. Despite Harris still leading in national polls, the electoral college dynamics indicate a tightening race, creating uncertainty that is reflected in currency markets.

USD Rises as Trump’s Re-election Prospects Gain Momentum Ahead of U.S. Election_2

The USD’s rise reflects a "Trump risk premium" as investors begin to factor in the potential impact of a second Trump presidency. Historically, Trump’s policies on trade, deregulation, and economic nationalism have introduced volatility into global markets. Under his administration, policies such as tariffs on Chinese goods and a renegotiation of NAFTA (replaced by the USMCA) disrupted global supply chains and currency flows. This risk premium suggests that markets anticipate renewed volatility in global trade relations, should Trump win re-election. I’ve made a video discussing a bit more in-depth about trump winning and what could happen on the market if he actually wins, you can find this video here:

The USD/MXN pair, a barometer of U.S.-Mexico trade relations, has already climbed to the 20.00-level. The Mexican Peso’s sensitivity to U.S. political shifts reflects concerns about potential changes in trade policies or tariffs that could emerge under another Trump administration. The dollar’s strength in this context may be seen as a hedge against policy uncertainty, which could otherwise weaken emerging market currencies like the MXN.

USD Rises as Trump’s Re-election Prospects Gain Momentum Ahead of U.S. Election_3

Diverging Monetary Policies Support the Dollar’s Ascent

In addition to election-related factors, the U.S. dollar’s strength can also be attributed to a growing divergence in monetary policy between the Federal Reserve and other major central banks. While the Fed has signalled a potential slowdown in the pace of its interest rate cuts, delivering a modest 25 basis points (bps) reduction at its next meeting (07/11/2024), other central banks have pursued more aggressive easing measures.

USD Rises as Trump’s Re-election Prospects Gain Momentum Ahead of U.S. Election_4

For instance, the Reserve Bank of New Zealand (RBNZ) recently implemented a significant 50bps cut and is expected to make further cuts as inflation in New Zealand has slowed faster than anticipated. Similarly, the Bank of Canada (BoC) is widely expected to follow with additional rate cuts, reflecting concerns about weakened economic growth. In contrast, resilient inflation and stronger-than-expected economic data in the U.S. have limited the Fed’s ability to continue aggressive rate cuts, which has further boosted the dollar. You can find out more about RBNZ on this blog I’ve posted: https://acy.com.au/en/market-news/market-analysis/analysis-of-the-new-zealand-dollars-after-a-50bp-from-rbnz-l-s-132614/

Should Trump win the election, market participants anticipate that the Fed might even pause its rate-cutting cycle altogether. Trump’s administration has consistently pressured the Fed for lower rates, but a Trump victory might strengthen the market’s belief in the U.S. economy's relative strength, supporting the dollar.

Global Inflation Dynamics and Impact on Central Banks

Inflation trends across major economies have also contributed to the divergence in monetary policy. In economies like New Zealand, the UK, and Canada, inflation has decelerated more rapidly than expected. This has given their respective central banks the flexibility to lower interest rates without stoking fears of overheating their economies. However, the U.S. has experienced more persistent inflation, which limits the Fed’s capacity for rate cuts. If inflation remains relatively strong, the Fed might hold off on further easing, providing additional support to the dollar.

As the November election approaches, the dollar’s trajectory will be closely tied to political developments and shifts in market sentiment regarding the election outcome. Traders and investors will be watching polling data, particularly in swing states, to assess the likelihood of a Trump victory. Additionally, any further signs of economic strength in the U.S. could reinforce the dollar’s upward momentum. However, should Trump’s opponent Kamala Harris regain her lead in the polls, the market may adjust its expectations, potentially reducing the Trump risk premium and dampening the dollar’s rally.

Central bank actions will also play a crucial role in the dollar’s future. Any unexpected rate cuts by the Fed or more aggressive easing from other central banks could alter the dollar’s current path. Inflation dynamics, trade tensions, and geopolitical risks will continue to be key drivers in the months ahead.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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JanusHenderson

Economic

Bond

The growth of actively managed exchange traded funds (ETFs) across the world is well documented. Janus Henderson recently expanded its own footprint, acquiring an ETF business in Europe.

But what does this mean for investors? What do you need to know when considering investing in active ETFs versus more traditional mutual fund vehicles?

In this guide, we look at some of these considerations and provide practical insights on how active ETFs can be used in an investor’s portfolio.

Common misconceptions

First and foremost, it’s important to clarify one of the biggest misconceptions on ETFs – that they are passive strategies i.e. managed to an index. It is true that historically, most ETFs in the market place have been passive strategies but that is no longer the case.

ETFs are as they suggest – exchanged traded funds. That is, funds that can be bought and sold through a stock exchange much like a stock or a bond. Those funds can be active or passive. The key difference is simply how investors buy or sell the strategy. As figure 1 shows ETFs bring together the benefits of both.

Maximising Your Outcomes: Adding Active ETFs To Your Portfolio_1

Portfolio construction considerations

The answer to whether an active ETF or mutual fund is preferable when building a portfolio largely depends on the nature of the portfolio and how it will be managed. There is no right or wrong answer but there are important considerations when looking at the alternatives.

When an active ETF could be preferred

Highly active portfolio management: While we strongly advocate for time in the market rather than timing the market, active ETFs can be an excellent way to gain exposure to active strategies while also allowing for intraday transactions. This can become particularly important when material market events are likely to have an ongoing impact (positive or negative) on returns.

Small accounts: For smaller accounts or for satellite holdings, active ETFs could fill the void where the minimum account sizes of mutual funds are prohibitive. Where a mutual fund will typically have higher minimums and trading sizes, an ETF can be bought or sold for as small an amount as one “share” – which could be as low as £1.

Rebalancing: Intraday trading and small minimum trade sizes mean that investors are able to rebalance portfolios more accurately and more frequently – providing the benefits of the rebalance outweigh the trading costs. An active ETF allows investors to redeem (or add to) the holding at any time throughout the day at intraday pricing.

Blending: The greater level of transparency afforded by active ETFs permits more exact portfolio blending with other holdings. In contrast, mutual funds typically disclose only their top 10 holdings on a monthly basis, while active ETFs can disclose their full holdings daily.

Efficiency: The mechanics behind active ETFs are simple, standardised and highly efficient. This helps to keep trading costs down and means they are also operationally convenient for investors.

Contrary or “short” positions: It is possible to short some ETFs thus taking the other side of the trade.

Leverage: Some prime brokers / banks will allow margin lending to be run against ETF positions should investors wish to do so.

Pricing: Active ETFs are unable pay sales commission to advisers (in Europe) and hence do not have these commissions built into the ongoing charges figure. This allows a non-advised client to access strategies free of such charges.

When a mutual fund could be preferred

Of course, there remains many reasons why mutual funds remain a preferred approach for many investors.

Long-term time horizon: A major benefit of active ETFs is accessibility and ease of transaction. For many components of a portfolio, investors should be taking a long-term time horizon with their investment. As such, the ability to trade intraday shouldn’t be a necessary feature. Even during times of significant market volatility, rarely does trying to time the market result in better financial outcomes.

Valuation certainty: An active ETF has two valuations: 1. Net Asset Value (NAV) and 2. share price. Generally, these two should track each other closely and ETF issuers have techniques to ensure that occurs. However, there can be some deviation between the two. A mutual fund just has the NAV and, therefore, the price offered per share aligns to the value of the fund’s assets. Further, if an adviser is buying (or selling) on behalf of underlying clients then all clients will buy (or sell) at one price – this is impossible to achieve for ETF purchases.

Range of options: Currently, the majority of active strategies are offered via mutual funds. Therefore, it may not be feasible at this moment in time to build an entire active portfolio out of ETFs.

Availability: Many platforms have yet to fully engage with active ETFs. As a result, investors may find that the mutual fund approach remains the most effective approach, at least in the near term.

Selecting an active ETF – key considerations

For an investor considering an active ETF, there are several questions that should be asked:

How closely does the active ETF strategy reflect the manager’s existing strategy i.e. is this a genuine strategy or an adapted version?What are the trading costs to buy and sell the holding?Does the ETF trade at a material discount (or premium) to the NAV?How is liquidity guaranteed?Can a suitable collection of active ETFs be accessed with the platform/provider used?

We believe that active ETFs have a very promising future as evidenced by their increasing popularity among investors. But as with any investment, it’s crucial to carefully examine the construction, management, and listing details of the ETF.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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