Finance

Jeremy Hunt warns of ‘difficult decisions’ ahead as public finances worsen

Published

12 months ago

October 13, 2023

Jeremy Hunt warns of ‘difficult decisions’ ahead as public finances worsen

The chancellor, Jeremy Hunt, has warned that the government will need to take “difficult decisions” in next month’s autumn statement after a sharp worsening of the public finances over the past six months.

Hunt said state borrowing was on course to be £20bn to £30bn higher than predicted at the time of the budget in March – wiping out what little room he had to cut taxes.

He has ruled out fresh tax rises in next month’s autumn statement and hopes to cut spending in a way that minimises the risks pushing an already flatlining UK economy into recession.

Hunt’s gloomy message from the annual meeting of the International Monetary Fund in Marrakech was accompanied by a warning from the governor of the Bank of England, Andrew Bailey, that interest rates were likely to stay high for some time.

The chancellor said: “The fiscal position has worsened since the spring and I will have to take difficult decisions in the autumn statement.

“The main reason things are more challenging is because interest rate projections for all economies have gone up. The UK is not immune to those changes. We are likely to see an increase in debt interest payments of £20bn-30bn and that’s a huge challenge.”

At the time of the budget, the Office for Budget Responsibility (OBR), said the chancellor had only a £6.5bn buffer to meet his fiscal rule of having debt as a share of national income falling at the end of five years. Higher borrowing in response to the Covid 19 pandemic has pushed the national debt above £2tn.

Hunt is braced for the OBR to cut its future growth forecasts for the UK economy – which would pile additional pressure on the public finances. “The OBR has been one of the most optimistic about the long-term growth rate among forecasters,” the chancellor said.

Hunt added that he was not prepared to borrow more to finance the tax cuts being demanded by some Conservative MPs and would instead seek to make savings to pave the way for a more generous budget next spring.

“I have to make sure the UK is resilient to shocks going forward,” Hunt said. “Increasing borrowing would be reckless and the wrong thing to do”.

Bailey said it would be a mistake to get too carried away with the fall in inflation – which is down from a peak of 11.1% to 6.7% – saying there was “an awful lot left to do”.

He added: “The last mile is going to be the hardest to get us back to target. Policy is acting in a restrictive manner, and it needs to do so. That does have an impact on the outlook for the economy, which is pretty subdued.”

Hunt made it clear tax rises to fill any black hole in the public finances were not being considered.

Taxes as a share of national income are already on course to rise to their highest in 70 years later this decade, and the chancellor said he was unwilling to add to the “burden”.

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“I will do everything I can to prevent tax rises and also show how I can reduce the tax burden over time. But I have to be honest – there are no short cuts. Borrowing to finance tax cuts is no tax cut at all. It just passes on the cost to a future generation.”

Hunt said his aim was to boost Britain’s long-term growth prospects, and the autumn statement will include measures to improve public sector productivity and increase business investment.

“All western economies have found themselves in a low-growth trap,” the chancellor said. “The autumn statement will show how we can get out of it.”

Hunt said there was a consensus among “many economists and the Labour party” that taxes would inevitably continue rising as a share of national income. “I don’t believe it does,” he added.

“The big picture is that we need to move from a paradigm where growth is 1-2% back to the 2-3% it used to be. That’s the long-term challenge.”

Bailey said the Bank’s decisions on interest rates would continue to be tight affairs, after the 5-4 split on its monetary policy committee to keep borrowing costs on hold at 5.25%.

Speaking at an Institute of International Finance meeting, the governor said it was now clear that the 14 interest rate increases since December 2021 were weighing down on growth. “If we don’t get back to (the 2% inflation) target sustainably the outlook will be worse.”

Finance

HSBC and Tradeshift Launch SemFi to Transform Embedded Business Finance

Published

7 hours ago

October 6, 2024

Press Room

HSBC and Tradeshift Launch SemFi to Transform Embedded Business Finance

“Semfi from HSBC (derived from seamless, embedded finance) will embed HSBC payment, trade and financing solutions across a range of e-commerce and marketplace venues, including Tradeshift’s own B2B Network.

“This marks a transformative step in Tradeshift’s ability to deliver vital, value-adding services to our network, tackling a key challenge for businesses: access to liquidity, cash flow management and seamless financial integration within supply chains.

“With Semfi now in the mix, we’re ready to rapidly scale to meet the demand for these services across a broad range of businesses.”

What’s next for SemFi?

Although SemFi will launch first in the UK, HSBC plans to expand the service globally over time. The venture is designed to operate as a technology company rather than a traditional bank.

Clients will be onboarded by HSBC, and the bank’s balance sheet will be used for financing, but the goal is to offer a tech-forward solution that meets the evolving demands of businesses worldwide.

With HSBC supporting 1.3 million businesses globally and facilitating more than US$800bn of trade each year, SemFi is set to become a key player in the world of embedded finance. For SMEs, the ability to access HSBC’s services seamlessly within their e-commerce workflows could represent a significant step forward in efficiency and growth.

Finance

Emerson Electric Co. (EMR): Strengthening Market Position with Financial Confidence

Published

14 hours ago

October 5, 2024

Press Room

Emerson Electric Co. (EMR): Strengthening Market Position with Financial Confidence

We recently published a list of 10 Wonderful Stocks to Buy Now at a Fair Price. In this article, we are going to take a look at where Emerson Electric Co. (NYSE:EMR) stands against other wonderful stocks to buy now at a fair price.

In H2 of the year so far, there are signs that the S&P 500 index has been broadening beyond technology leadership and the index is reverting to a more normalized state. This means that there are several high-quality stocks outside of the popular names and investors are required to be diversified. This diversification should not be limited to the style level, but also to the stock level. Market experts opine that the AI theme has largely fuelled the narrow market. This concentration, along with an increase in passive investments, resulted in a significant cycle of consensus positioning and stretched valuations. This led to the vulnerability in the market, which resulted in a sharp correction in July and early August.

As per Fidelity International, when it comes to passive investing in the S&P 500, it demonstrates nearly a third of holdings in only 7 stocks. Considering their dominance, a stumble in performance means the index will see a significant impact, and the investors have already seen some mega-cap technology names that are unable to deliver on strong expectations.

S&P 500 Index – Transition and Concentration

The US equities saw an outstanding performance in H1 2024, with the S&P 500 Index rising 15.3%, as per ClearBridge Investments (A Franklin Templeton Company). The investment firm believes that solid earnings results and fiscal stimulus mitigated the influence of higher interest rates. However, the headline performance numbers, aided by a ramp-up in mega-cap stocks and, more specifically, semiconductor leadership, eclipsed the recent signs of deterioration below the surface.

Since the Mag 7 stocks have disproportionately driven earnings growth over the previous 2 years, ClearBridge Investments expects a rebound in earnings among small-cap stocks in the upcoming 12– 18 months. The investment firm believes that small-cap companies have seen the impacts of higher rates. In 2023, profits for Russell 2000 companies declined ~12%. This year, they are up ~13.6%, and for 2025, the projections hover at around ~31%. If this happens, there might be a broadening of the market which should provide an opportunity for active managers.

Opportunities Apart from Magnificent Seven

Companies that are unable to meet hefty expectations might see a disproportionate sell-off, and the stocks riding the wave of AI might be significantly exposed considering the amount of capital deployed versus the uncertain future environment. Given such trends, Fidelity International believes it is unsurprising that so far in H2 2024, there have been signs that the S&P 500 is broadening beyond tech leadership, with some non-tech sectors surpassing the broader market.

There are abundant high-quality stocks apart from the popular names. This means that dozens of companies in the S&P 500 continue to offer a return on invested capital (ROIC) and earnings growth of more than 30%. This is true for several other quality metrics, reflecting an underappreciated depth of opportunity in the broader US equities.

While diversification remains critical, even looking beyond the Magnificent Seven might not necessarily offer the required diversification considering that the US market remains heavily weighted towards growth sectors like IT. As per Fidelity International, diversified portfolios need negative correlations between assets, but few styles provide consistent negative correlations to quality growth companies. That being said, cyclical value and defensive value remain 2 key exceptions.

To get a negative correlation, the investors are required to avoid an overlap at the stock level. As of now, the US market provides a range of attractive stock opportunities that offer this valuable diversification.

As per ClearBridge Investments, the top 5 stocks now constitute ~27% of the S&P 500 and the top 10 make up ~37%. As per the investment firm, this concentration might stagnate near current levels, with mega caps delivering solid, but slower, earnings growth in comparison to the recent past. The investment firm expects that diversified portfolios should outperform in the upcoming 12–18 months.

With this in mind, we will now have a look at 10 Wonderful Stocks to Buy Now at a Fair Price.

Our methodology

We first sifted through multiple online rankings and ETFs to identify quality stocks with wide moats. Next, we selected stocks that were trading at a forward P/E of less than ~23.65x (since the broader market trades at a forward multiple of ~23.65, as per WSJ). The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Engineers analyzing a complex network of process control software and systems.

Emerson Electric Co. (NYSE:EMR)

Expected Earnings Growth: 23.4%

Number of Hedge Fund Holders: 51

Forward P/E Multiple (As of September 30): 18.45x

Emerson Electric Co. (NYSE:EMR) is a technology and software company, which provides various solutions for customers in industrial, commercial, and consumer markets.

Emerson Electric Co. (NYSE:EMR) has a wide economic moat, which is mainly based on switching costs, and on brand intangible assets. Moreover, the company’s strong geographic presence and diversified customer base further solidify its moat. Emerson Electric Co. (NYSE:EMR) remains confident in its financial health and strategic initiatives. The company continues to focus on integrating National Instruments and potential share buybacks.

The company expects its backlog to increase YoY as it enters FY 2025. Emerson Electric Co. (NYSE:EMR) has been adjusting its strategy to focus on growth areas like innovation and renewable energy investments while, at the same time, managing softer segments. Therefore, Wall Street analysts are optimistic about the company’s future performance and its strategic positioning in the global automation market.

The company sold its remaining interest in the Copeland joint venture, hinting at the fact that Emerson Electric Co. (NYSE:EMR) is focusing on simplifying its portfolio. It highlighted that demand in process and hybrid markets, which is being led by a constructive capex cycle, has been meeting expectations. In Q3 2024, its operating leverage performance exhibited the benefits of its highly differentiated technology. For 2024, Emerson Electric Co. (NYSE:EMR) anticipates net sales growth of ~15% and operating cash flow of ~$3.2 billion.

Redburn Atlantic initiated coverage on 8^th July on the shares of the company. It gave a “Buy” rating and a $135.00 price target. Insider Monkey’s Q2 2024 data revealed that Emerson Electric Co. (NYSE:EMR) was part of 51 hedge funds.

Overall, EMR ranks 7th on our list of Wonderful Stocks to Buy Now at a Fair Price. While we acknowledge the potential of EMR as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than EMR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.