Market Watch 08.03.2021

Nicolas Sarkozy was sentenced to jail. The former French president, Nicolas Sarkozy has been sentenced to three years in prison after he has been found guilty of corruption and influence pending by the Paris court. During the whole trial, Sarkozy has declared that he is innocent and that nothing is real about the trial, however last week, he became the second French leader to be convicted after leaving the office. He has been accused of entering a corruption pact with his lawyer Thierry Herzog and former judge Gilbert Azibert. Both received the same sentence as Sarkozy. The police tapped his secret conversations with Herzog, in their communications using a fake name, called “Paul Bismuth”. In 2014, he promised to help Aziber get a job in Monaco in exchange for information for another case where Sarkozy has been accused of taking illegal funds from Liliane Bettencourt, the L’Oréal heiress, for his 2007 presidential election campaign. Even if Aziber did not get the job, the court decided that the proposal in exchange for confidential information was enough evidence of corruption. Jacqueline Laffont, Sarkozy’s lawyer, said: “There are dozens of clients found guilty in the first instance who are found not guilty on appeal, and Nicolas Sarkozy will be among them.” The former president has the support of the Les Républicains party, he continued to be part of the political stage, even after his retirement.

The nuclear agreement. In 2018, Donald Trump decided to pull the US out of the nuclear deal with the global powers, considering that it is in the US's interests. He imposed tough sanctions on the republic, wishing to secure a new deal that included Iran’s regional and military policies. With the new administration, the US is willing to return to the agreement ensured by Iran however, a specific time is not confirmed yet. Iran would be ready to begin discussions on the nuclear deal with the US and other western powers to condition the sanctions to be lifted within a year. They also implied that the US should return to the agreement unconditionally because it was the one that decided to leave. “They can announce and reassure us that all sanctions imposed after the JCPOA [the 2015 nuclear accord] would be lifted in less than one year and tell us to go and negotiate this process,” Mohsen Rezaei, who led the Revolutionary Guards. In the last weeks, all the involved sides have been taken steps to demonstrate their cooperation to find a way out. It is well-known that the US and European countries have tried to reach agreements to curb Iran’s missile programme and find a middle solution for the respective region. However, the parties involved had different opinions regarding the outcome. “Mr Biden may have some wishes,” but “they cannot be materialised in these fields”, Rezaei said. The sanctions that have been imposed on the country led to high inflation and recession, this time causing the government to focus more on its economy.

Crouching Sunak, hidden taxes. On Wednesday of the past week, Chancellor of the Exchequer, Rishi Sunak, unveiled his masterplan for returning the UK economy to its pre-pandemic levels. There was a caveat, however. Whilst forms of government spending, like the Furlough scheme, will be in place until September, the tax payer will thereafter have to begin to cover the balance of the government’s debt. Naturally, consumers despise tax rises. And whilst Sunak has vowed to spend millions on ensuring businesses can survive until the long-awaited reopening of the UK economy in June 2021, there were a few Easter eggs littered throughout the Chancellor’s budget that are pertinent for consumers and investors alike. The freezing of the income tax threshold has been widely talked about, mainly due to how it will eventually bring around 1.3 million new taxpayers into the tax net and subsequently compel another one million to pay higher taxes. This will especially hurt workers who incur wage increases that rise with inflation as this will manoeuvre them into a higher tax bracket through no fault of their own. Similarly, the Chancellor was able to fit some nuanced policies into the budget, especially through the lens of Corporation Tax. Whilst it is to rise from 19% to 25% in 2023, it is likely to affect wealthy families, alongside big companies. This is through a loophole that will mean “close-investment holding companies” will be charged corpor

ation tax at a higher rate than the current 19%. Naturally, the Chancellor is trying to claw back as much tax revenue as possible to ensure that the public debt is reduced. The rise in interest rates has clearly spooked the Chancellor into action.

The Oracle hath spoken. The “Oracle of Omaha” and CEO of Berkshire Hathaway, Warren Buffett, issued a bold statement in his latest annual letter to shareholders that “bonds are not the place to be these days”. He’s right. Due to rampant vaccine distribution across the West, sentiment about the economy has ticked up, and will continue to do so as summer draws closer. Bond holders have had a scare over the past month with regards to interest rates: still historically low, but reeling to creep up. In fact, the 10 Year US Treasury Yield is sat at 1.56%, which is below the 1.80 level that saw bonds at on the precipice of the pandemic. The Fed is not perturbed just yet. Chairman Jay Powell spoke on Thursday, stating that the rise in rates is not ringing alarm bells unless it culminates in a “persistent tightening in financial conditions”. The US equities market responded accordingly, leading the NASDAQ to sink - the usual suspects being highly overvalued tech stocks. The index closed down 1.18%. However, this small rise interest rates somewhat mimics the year 2009. Bond investors were startled by a meagre rise in interest rates, only for tepid economic growth led to a “cool-off” period, granted this was married with low inflation pressures. Time will only tell if history will repeat itself.

Buffett Vs. Wood: Out with the old, in with the new? Legendary investor Warren Buffett seldom needs an introduction. But is his investing philosophy stale? Cathie Wood, the founder of ARK Invest, has become increasingly popular within the investing game. Having achieved a monumental return of over 500% in her flagship Innovation ETF since it was formed in October 2014; many people wonder whether the Buffett/Graham approach to investing is relevant in today’s technology-heavy age. Buffett has always espoused the Value approach to investing, spearheaded through Ben Graham’s “The Intelligent Investor”, first published in 1949. Essentially, companies that have a high dividend yield, a low PE ratio and have a promising future and obviously a bullet proof business model are “buys” in Buffett’s eyes. Preferably, they are at a discount also, which is reminiscent of Berkshire’s large cash position of around $150 billion. Coca Cola, Apple and Bank of America are darlings within the Berkshire portfolio. Wood, on the other hand, has put all of her eggs in one basket, in my opinion. The Innovation ETF is based solely on tech: Tesla, Roku, Spotify and Square are notable companies. There is no doubt that these are highly profitable companies but are they overvalued. How the market performed last week should provide the answer. Shares of the ETF are down more than 10% this week and, off more than 25% from its all-time high. The fund has wiped out all of its 2021 gains this week. This provides a stark reminder of the early 2000s; whispers of an imminent crash have abounded since the start of 2021. So, who wins? Only time will tell: Buffett is famed for being able to deploy compound interest successfully. It is worth noting that few of the Ark Innovation ETF companies pay dividends so investors are mostly relying on the share price rising, not free cash flow to investors. The market will decide to triumphs.

Thank you to James Ballentine for his collaboration and in-depth analysis!

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