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18 December 2023

Market Round-Up

Germany's bid to establish a strong foothold in the semiconductor industry faces significant hurdles. A recent setback, triggered by the budget crisis, has since cast doubt on these aspirations, unveiling a perfect storm for the economy with the constitutional court making the decision to block a government transfer of €60bn. The transfer was initially allotted to fund transformation projects aimed at modernising German industries and combating climate change, with the capital coming from the unused capacity of the pandemic budget.

Finance Minister Christian Lindner recently declared 2023 an emergency, suspending the debt rule for the fourth consecutive year in a bid to navigate this challenging financial terrain. It was hoped that subsidies worth billions of euros, further backed by government support, would help catalyse greater semiconductor production within Germany's borders, thus incentivising global chip manufacturers to set up shop. Among these, Intel, a prominent American tech company, was awarded a staggering €9.9bn grant to offset part of the €30bn expenses for constructing two new factories in eastern Germany.

However, these commitments have stirred apprehensions regarding state support. The subsidies promised to companies like Intel and Taiwan Semiconductor Manufacturing Company (TSMC) were originally set to be drawn from the climate fund. This shift in funding sources has raised concerns and sparked uncertainties about the viability of such pledges. Despite these challenges, Olaf Scholz, the Germany’s Chancellor, emphasised the paramount importance of the chip factories to the country’s economic landscape and remains hopeful that the plans will proceed as envisioned.

UK investors have shifted their investment strategy, favouring equities once again, following a robust trading outlook in November. Asset managers have remodelled their portfolios, marking this as the first instance in six months where a positive stance on inflation and interest rates has been seen. Notably, retail investors in the UK redirected a net £449m to equity funds in November according to global funds network Calastone, reversing a trend of half a year marked by net outflows.

For a retail investor, direct equities tend to be riskier than investment trusts or government-backed gilts as they are more volatile. Prices can change quickly in relation to company policies and the wider macroeconomic environment. Consequently, risk averse investors opt for a more conservative approach, holding investment trusts to provide them with coverage to many different areas, rather than concentrated holdings.

The new figures paint an interesting picture of the market, perhaps signalling a more optimistic macroeconomic landscape. Strong growth in the US and a relaxation in UK inflation has emboldened previously sceptical investors to part ways with their cash. The markets have seen a resurgence in confidence, with recent rallies in the Indian and US markets. Goldman Sachs analysts support this sentiment of a positive outlook for 2024, with investors actively seeking avenues to invest their available funds.

However, amidst this shift, investors have maintained a trend of selling UK specialist and environmental, social and governance (ESG) funds domiciled in the US and UK. Despite the evident confidence in the markets, concerns persist regarding UK investment flows, as some investors continue to park their money in short-term money market funds. Analysts are closely monitoring the market dynamics, anticipating a shift towards riskier assets in the near future.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance.
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