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The Month In Markets – October 2024

The Month In Markets - October 2024

After 16 weeks of anticipation, Chancellor Rachel Reeves delivered Labour’s first budget in nearly 15 years. This budget included significant tax increases amounting to £40bn, the largest hike since 1993. In addition to the tax rises, there were substantial increases to spending and borrowing, which are expected to provide a short-term boost to growth.

There have already been many column inches dedicated to covering the budget. As such, I will just touch on the market impact. In terms of government bonds, after an initial rally, UK government bonds sold off following the budget and continued to sell-off on the final day of October. This means UK borrowing costs are going up, not ideal given Labour’s need to increase borrowing to fund their spending plans. With the Office for Budget Responsibility (OBR) stating they expect inflation in the UK to be higher post-budget, the market has priced out some of the expected interest rate cuts. There has been a trend of developed market government bonds selling off in October, so the movement may not be fully attributable to the budget. Equity markets had a mixed response to the budget. The winner on the day was the UK AIM market, which rallied over 4%. This part of the market had sold off into the budget, with concerns around the removal of certain inheritance tax benefits. However, the changes announced were less punitive than expected, leading to an immediate relief rally. The mid-cap focused UK index marginally advanced on the budget day, while the large-cap index closed lower.   

Staying with the UK, earlier in the month there was positive inflation data. Headline inflation dropped to 1.7%, lower than expected, while services inflation fell from an annual rate of 5.6% to 4.9%. The positive shift in both headline and services inflation has opened the door to UK interest rate cuts in both the November and December Bank of England (BoE) meetings. The fly in the ointment now is whether the inflationary budget will cause the BoE to pause its rate-cutting journey.

Over in the US, the presidential election (5th November) dominated headlines. Despite the uncertainty surrounding the election outcome, US equities powered on, reaching a 47th all-time high during October. After a summer lull, the mega cap technology and artificial intelligence focused companies regained their poise to post a strong month. The star performer from the so called “Magnificent Seven” stocks was Tesla, which rallied over 20%, after a strong earnings report. Founder and largest individual shareholder, Elon Musk, saw his net wealth rise by over $30bn in two days because of the rally, taking his overall wealth to $277bn, cementing his place as the world’s richest person.

There was positive inflation data in the US, with headline inflation coming in at 2.4%, the lowest reading since February 2021. The continued decline in inflation helps make the case for further interest rate cuts from the US Federal Reserve. Two central banks that are further on in their rate cutting journey are the Bank of Canada (BoC) and European Central Bank (ECB). The BoC delivered a 0.5% cut in October, meaning they have already reduced interest rates by 1.25% over a matter of months. The ECB delivered their third cut of 2024, lowering rates by 0.25% for the second meeting in a row. The market is currently pricing in cuts from both the US Federal Reserve and the Bank of England in November.

After the excitement of September, emerging market and Asian equities were much more subdued. There have been concerns about the Chinese authorities’ abilities to deliver on their planned stimulus measures and even if they do, the market is unsure whether it is enough to turn round a flagging property market and struggling economy, hamstrung by poor demographics. As a result, Chinese equities fell during the second half of the month as investors pared back their bets on the world’s second-largest economy. We have seen companies that rely on China as an end market struggle of late. Within the luxury goods sector, companies such as Burberry have blamed Chinese weakness for poor results. UK-listed medical technology company Smith & Nephew also pointed to China as a reason for disappointing Q3 results.

Gold had another impressive month, making new all-time highs during October, with the price approaching $2,800 an ounce. The price of the precious metal has outperformed most equity and bond markets, rallying approximately 30% in 2024. Although not covered in the chart, silver has outperformed gold this year, and while the gold price is at all time-highs, silver is still close to 50% off its all-time high. Silver is often seen as more cyclical than gold, due to its more commercial use, and doesn’t offer the same diversification properties within a typical multi-asset portfolio.

At a currency level, we saw a resurgent US dollar after a few months of weakness against a basket of currencies. Against sterling, this meant it moved from around 1.34 to 1.30. Given the large fiscal deficit currently being run by the US, one could argue that the US dollar might weaken going forward. However, as the world’s reserve currency, and with no viable alternative, there is always likely to be demand for the greenback currency.

The end of October 2023 kickstarted a strong rally into the end of the year, with nearly all gains made during the year, occurring in the final two months. It was a reminder that patience is needed when investing, and that returns can be lumpy, but substantial at times. With events like the budget now over, and the US election soon to pass, some of the uncertainty looking over markets will be fully removed, which could support risk-taking once more.

Andy Triggs

Head of Investments, Raymond James, Barbican

 Appendix

5-year performance chart

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

The Month In Markets – September 2024

The Month In Markets - September 2024

After a steep rally at the end of the month, emerging markets and Asian equities were the standout performers for September, led by explosive performance from Chinese stocks.

China’s central bank surprised markets by announcing its most extensive stimulus package since Covid. The authorities deemed the intervention necessary in order to try and prevent an economic slump and persistent deflationary spiral taking hold in China. Recent economic data has been disappointing, and the property market slump has shown little signs of recovery. The hope is that the stimulus measures will boost economic activity, stabilise the property market and boost liquidity into the stock market. The impact in the stock market has been felt immediately, with an exceptionally strong five-day trading period which saw the headline Chinese index advance around 25%. On the final day of September, the market rallied over 8%, with a record amount of trading as investors aimed to get invested before the market closed for “Golden Week”. The excitement witnessed in the world’s second-largest economy spilt over into the Hong Kong market, which advanced nearly 12% over the final days of September. Hong Kong has close economic ties with China and many mainland Chinese companies are listed on the Hong Kong index and as such is often considered as a proxy for China.

China represents around 33% of the emerging markets index and Hong Kong is a little over 3%, so the stellar performance of these markets had a notable positive impact on emerging market (and Asia) indices.    

Aside from China, the other major news during September came from the US, where the US Fed cut interest rates for the first time in over four years. While it was widely telegraphed that an interest rate cut was coming during the September meeting, the magnitude of cut was unclear. The central bank was bold and delivered a 50bps (0.5%) reduction to the headline interest rate. Following the Jackson Hole speech by Fed Chair Jerome Powell it became clear that the US Fed were keen to support the labour market and the cut highlights this. There are also concerns of an economic slowdown and flagging consumer and as such it was deemed necessary to reduce interest rates. With US inflation falling to 2.5%, not too far from target, there was little deterrent for the central bank. Government bonds reacted favourably to the outsized drop in interest rates with the yield on the benchmark US 10-year government bond yield falling as low as 3.6% during September. The news also led to a weakening US Dollar. During the month sterling reached levels not seen since early 2022, touching 1.34 against the dollar. 

Despite the US cutting rates, the Bank of England (BoE) decided to pause, keeping rates at 5%, having reduced at the August meeting. UK headline inflation data came in at 2.2%, however the services component was 5.6%, a troubling number for the BoE. Services inflation is widely considered as more persistent than goods inflation because it is less dependent on global events and more influenced by domestic costs. With eight of the nine voting members deciding to keep rates at 5%, it’s clear that the BoE will want to see further progress on inflation before lowering rates once more.

Staying with the UK, the equity market disappointed during the month. It seems some of the euphoria around the change of government has soured, with investors waiting to see how bad the news will be from the well-publicised UK Budget at the end of October.

Gold once again made new all-time highs, approaching $2,700 an ounce, a 25% rise in 2024. It has been hypothesised that Chinese investors have been increasing exposure, diverting money from the property market to physical gold. It’s clear global central banks have also been accumulating more of the asset class, potentially at the expense of their US Treasury bond holdings. Physical gold has been a mainstay in portfolios for many years, with the holding being the biggest contributor over the last 12 months.

Oil, which is sometimes referred to as black gold, hasn’t enjoyed the same success as gold in recent months. During September US Crude oil fell to new one-year lows, touching $66 a barrel. Despite tensions in the Middle East, there are limited immediate supply issues and there is the prospect of Saudi Arabia increasing production later in 2024. At the same time we’ve seen a slowdown in the global economy, raising concerns about the demand outlook. Lower oil prices should help support the consumer and put downward pressure on inflation. Despite a weaker oil price many of the major oil companies continue to trade on very attractive free-cash flow yields and pay handsome dividends.

September could be a pivotal month where the largest economy in the world cut interest rates and the second largest economy in the world unleashed huge stimulus plans. This has the potential to support risk-assets going forward, especially if the interventions help stimulate real GDP growth. Outside of equities, government bonds continue to offer positive real yields, however, one needs to be mindful of the inflation outlook and manage duration (interest rate sensitivity) carefully.

Andy Triggs

Head of Investments, Raymond James, Barbican

 Appendix

5-year performance chart

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

The Month In Markets – August 2024

The Month In Markets - August 2024

If you don’t check markets daily, August could have seemed like a benign month, with only marginal movements from start to finish. However, intraday, there was significant volatility, with Japanese equities suffering its second worst day in history, falling over 12%.

The volatility in Japan seems to have been triggered by a rapid appreciation of their currency, which then prompted a huge unwind in positioning particularly from hedge funds, alongside heightened concerns around a slowdown in the US economy. The speed and severity of the movements led to the Japanese market falling nearly 20% in three trading days, culminating in 12% falls on 5 August. While this was extremely uncomfortable, the market very quickly rebounded, rising 10% on 6 August and by the end of the month had nearly regained all earlier losses. Given the drops were largely driven by technical reasons as opposed to a fundamental deterioration in outlook, we remained comfortable with our positioning and didn’t react to the volatility. Doing nothing is not always easy but is often the best course of action.

The turbulence in Japan did spread to global markets, with circa 5% drops in most global stock exchanges. Again, while this felt uncomfortable at the time, these levels of drawdowns in equities are common and part and parcel of investing in risky assets. Once again, global equities rebounded after the falls, with some investors using the pullback as an opportunity to increase exposure to markets.

One of the major concerns that surfaced during August was the increasing expectation of a US recession. While this is still low probability, the odds moved higher following weak non-farm payrolls (jobs) data on 2 August. We’ve witnessed US unemployment nudge higher to 4.3%, which is now up 0.9% from recent lows. While the jobs data was disappointing, other more real-time jobs data, such as weekly unemployment claims, repeatedly came in better than expected in August. This helped provide confidence that although the labour market is slowing there are currently no major cracks.

Inflation data coming from the UK and US provided further positive signals that inflation is more contained. It was expected that UK inflation would nudge higher to 2.3%, but it came in at 2.2%. US inflation fell to 2.9%, the first time it has been below 3% since 2021. The data helped solidify expectations that the US Fed will imminently begin cutting interest rates and increased the probability of another 0.25% cut from the Bank of England in September. Weaker jobs data and softer inflation led to government bond prices nudging higher during August. The mood music around inflation and government bonds has changed dramatically since last lastsummer. Only 12 months ago there were genuine concerns that UK interest rates could reach as high as 6-7% as inflation seemed out of control. As a result, there was a reluctance to hold assets such as government bonds. Fast forward 12 months and the Bank of England has now embarked on cutting interest rates, with UK inflation now below US inflation and close to target. Given the shift in inflation and interest rates, UK government bonds have performed strongly over the last 12 months, delivering high single-digit returns.

The Jackson Hole Symposium, an annual event, took place at the end of August. Over the course of three days central bank leaders from around the world presented and discussed world events and financial trends. All eyes were on US Fed chair Jerome Powell, who delivered a keynote speech on Friday 23 August. The clear takeaway from his presentation was that the US Fed is now ready to act and reduce interest rates. He stated, “the time has come for Fed policy to adjust,” and in recognition of a slowing jobs market said the Fed “will do everything” to support a strong labour market. This speech was the clearest indication that the Fed pivot is now in play and we are entering a period of policy easing as inflationary pressures subside and the US economy slows. In theory, this can be an extremely attractive backdrop for risk assets; falling inflation, moderate growth and lower interest rates should support company earnings and valuations. The risk is that the US economy cools too much and tips into recession, although that is not the current base case for the majority of investors. Looking out into 2025, the bond market is pricing in around 2% of interest rate cuts over the next 12 months. Whether or not the US Fed will commit to such aggressive moves is unclear, especially if the US economy continues to advance.

Asian markets were slightly disappointing over August. There continues to be major concerns around the world’s second largest economy, China. The property market remains in the doldrums and stimulus measures to date haven’t been bold enough to support the housing market. Weaker house prices have weighed on the Chinese consumer and had ripple effects across the globe. Luxury goods companies, even those outside of China, have frequently relied on the Chinese consumer for growth. We’ve seen Burberry and LVMH issue profits warnings recently, linked to a weakening Chinese consumer market.

Economic data in August looks to have been pivotal and has ushered in an imminent easing cycle from the US. At the same time, the deterioration in labour market data has increased risks to the global economy. As a result, we continue to be balanced in our portfolio positioning, recognising the opportunities from rate cuts, but acknowledging the risks of a slowing US (and therefore global) economy. Our non-equity bucket is well positioned to deliver if growth slows, while our equity exposure remains highly diversified, with exposure to a range of sectors and geographies.

Andy Triggs

Head of Investments, Raymond James, Barbican

 Appendix

5-year performance chart

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

The Month In Markets – July 2024

So much for a quiet summer! From markets to politics a lot went on over the last month and we will try and unpack it all here.

There were significant political changes during July. Here in the UK, Labour, as expected, took power following a landslide election result. While changes of government can have big implications for asset markets, Labour had long been expected to win the election and as such the result was largely priced in already. This Labour government has been viewed by many as pro-growth, and with relative political stability compared to our European and US counterparts, UK equites have actually come back on to the radar for international investors this month.

The final round of French elections led to the New Popular Front winning the most seats, although there was no majority. The inconclusive result could lead to gridlock in French politics over the coming months and years.

In the US there was a failed assassination attempt on Donald Trump at one of his rallies. The assassin came very close, with a bullet skimming his ear. The attempt on his life has not stopped Trump from continuing with his election campaign. President Joe Biden did however withdraw his candidacy for another term in the White House. He has been under mounting pressure following a series of well publicised slip ups and decided it was in “the best interest” of his party and country.

Aside from politics there were some interesting dynamics playing out in markets, which isn’t really reflected in the performance chart. Mid-month there was a huge leadership change in the market. The trigger for this rotation was a period of softer US economic data, with the US inflation data acting as the final catalyst to kickstart the rotation. With US inflation coming in lower than expected, the market once again began to price in a higher number of rate cuts. Much like the end of 2023, this hope of interest rate cuts spurred on small cap stocks, at the expense of large cap stocks. Alongside this there were the first whispers of doubt around the artificial intelligence (AI) investment narrative. Investors have begun to question if and when all the investment in AI will generate a return on that investment, and at what profit margin. Companies such as Microsoft, Meta and Apple are piling billions of dollars into AI capital expenditure, but the return from this expenditure is yet to be fully understood. The AI darling stock Nvidia, which is selling chips to companies such as Microsoft, has delivered exceptional earnings and share price growth over recent quarters. However, in the month of July the market cap of Nvidia fell by around $1 trillion – roughly four times the size of the largest UK listed business! Investors appeared to take profits on their AI trades and re-allocate to small cap stocks, which are typically more interest rate sensitive, and should see prospects improve if we have lower interest rates but a robust economy. Over the course of July, the US small cap index outperformed the main US index by over 8%.

The rotation wasn’t just in the US, it happened on a global scale, with some of the laggers of 2024 starting to deliver, while the market leaders begun to falter. We do often witness short-sharp rotations, and it will be interesting to see if this rotation plays out over August. One of the best ways to insulate portfolios from these rotations in markets is to have diversification within equities. This ensures all your eggs are not in one basket. Increasingly, we are seeing global equity indices as not being well diversified, by either country representation or equity style. Passive investors in global equity benchmarks are now taking on significant US equity exposure, and within that a considerable amount of technology exposure. For those investors, the month of July was most likely painful.

As already mentioned, Labour taking power in the UK was seen as creating a level of stability in UK politics, something that has not been in place in recent years. This coupled with increasing political tensions in parts of Europe and the US has made the UK a more attractive destination for investors. Alongside this, we have seen UK economic growth forecasts upgraded, along with inflation being maintained at 2%. This was enough to provide good support for UK assets in July, with equities and bonds performing well.

At the end of the month the Bank of Japan surprised the markets by increasing interest rates for the second time this year. The news helped to strengthen the currency, which is trading at multi-year lows versus a basket of currencies. The strength of the Japanese Yen more than offset some weakness in the larger cap Japanese stocks to lead to a positive month.

Away from equities, areas of the fixed income market showed positive signs during July. Momentum grew around the possibility of an increasing number of interest rate cuts later in this year, fuelled by some softer US economic data, including inflation that came in lower than expected at 3%. While the US Fed resisted cutting interest rates on the last day of the month, commentary from Fed Chair Jerome Powell pointed towards a cut at their last meeting.

The month of July favoured many funds in the portfolios which had struggled to date in 2024. It was pleasing to see that as the market rotated, we were able to still perform well, which was enabled by the portfolios being well diversified.

Andy Triggs
Head of Investments, Raymond James, Barbican

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Appendix
5-year performance chart

The Month In Markets – June 2024

The Month In Markets - June 2024

June was an eventful month, with political events dominating headlines. This was alongside the news of Nvidia becoming the world’s largest listed company (even if just for a few days) and UK inflation falling to the target of 2%.

Following on from a poor showing in the EU elections, French President Macron called a surprise snap election, with the first round of voting taking place at the end of June. There was no need for Macron to send the French citizens to the voting booths, however, he felt it was the right thing to do after Le Pen’s National Rally (NR) party received more than double the votes compared to Macron’s Renaissance party. French markets were negatively impacted on the news of the elections, with both equities and bonds falling in price. The Euro also suffered on the election news, with GBP reaching a 22-month high against the Euro.

The first round of the election, which took place on the last day of the month, was won by Le Pen. The second vote will now see if Le Pen can secure an absolute majority. The polls suggest this is unlikely, although not impossible. The pain for French equities and the Euro meant European equity markets were the laggard in the month of June.

The build-up to the US election ramped up in June, with President Biden and Republican candidate Trump going head-to-head in a live debate. There was broad consensus that Trump came out on top, and the market quickly priced in a higher probability of Trump returning to the White House. Interestingly, equity markets responded favourably to the news. While there are concerns about Trump, he is seen as being pro-business and pro-consumer. When he last took power, he introduced sweeping tax cuts that are due to expire in 2025. He is seen as the most likely to extend these tax cuts. While there are negative implications for government debt levels, through lower tax receipts, it should help business profits and consumer expenditure.

It feels slightly strange to write, but the UK political backdrop appears relatively calm compared to many of our peers! With the election due to take place on 4th July, it is assumed that Labour will take power, with a majority, and this will lead to a level of relative stability for the country.

Staying with the UK, inflation data (for the month of May) was released, which showed that headline inflation had fallen to 2%, the Bank of England’s (BoE) official target. This was the lowest level of inflation since July 2021. While the BoE maintained interest rates, evidence that inflation is at target could encourage them to reduce interest rates in the coming months. UK wage growth is now running comfortably above inflation, which should help support the consumer and encourage spending. The one fly in the ointment regarding the labour market was that unemployment had risen to 4.3% and has been trending higher over recent months.

Over in the US, headline inflation came in at 3.3%, broadly in line with expectations. The US Fed’s preferred measure of inflation is the Personal Consumption Expenditure (PCE) index, which was flat month-on-month, the lowest reading since April 2020. The yearly figure of 2.6% was encouraging to see, and potentially opens the door to a rate cut in September for the US. While there was progress for the UK and US in their battle against inflation, Canada, Australia and the Eurozone saw mild rises in inflation, which will certainly keep central bankers on their toes. Japan saw inflation come in ahead of consensus at 2.1%. This country remains the outlier, as the central bank is trying to stoke inflation, as opposed to tame it. There is early evidence that inflation expectations are becoming more entrenched in Japan which should be a positive, and lead to a pickup in spending from consumers and businesses, who sit on large cash piles. The Bank of Japan (BoJ) have continued to take their time over raising interest rates in Japan, which has negatively impacted their currency. The yen, which looks extremely cheap on a range of metrics, continued to trend lower in June, reaching 38-year lows versus the USD. The currency also slid against GBP and is down over 10% for the first half of 2024. This has been painful for the Japanese holdings in portfolios (in GBP terms).

At a company level, Nvidia breached the $3 trillion market cap level and briefly surpassed Microsoft as the world’s largest listed company. The moves in the semiconductor company share price have been staggering, with the company adding $1 trillion of value in 32 trading days. Towards the end of the month the share price did sell-off, falling around 15% at one point, allowing Microsoft and Apple to rise above it, in terms of market cap. Apple, after a weak start to the year, saw its share price rally significantly in June on the back of an artificial intelligence (AI) announcement around “Apple Intelligence”. The big hope here is that the introduction of AI into new devices will trigger an upgrade cycle, with consumers replacing old iPhones and iMacs in order to access Apple Intelligence.

Technology excitement extended to the emerging markets over June, with companies such as Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung seeing strong moves in share prices. These two companies helped buoy the Asia pacific ex Japan and emerging market indices.

There were two notable corporate bids during June in the UK, with the consortium of private equity bidders returning with a higher offer for Hargreaves Lansdown, as well as Carlsberg having a bid rejected for Britvic. Given the improving outlook for the UK economy, potential for political stability and cheap valuations we expect corporate activity to remain elevated throughout the year.

It was a mixed month in general, with the equity market being led higher by a narrow range of sectors. This made it difficult for genuinely diversified approaches, with concentration and high stock specific risk being rewarded. Our approach aims to reduce these risks, particularly at times when valuations and expectations are elevated. We will continue to tread a careful path through markets, maintaining diversification and taking a sensible approach to valuations, where we believe that the price you pay for an asset will have a big impact on long-term returns. While the geopolitical backdrop is challenging, economies are continuing to grow and company profits remain healthy. Yields on fixed income assets are now at attractive levels and there continues to be a range of opportunities for long-term investors.

 

Andy Triggs

Head of Investments, Raymond James, Barbican

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Appendix

5-year performance chart

The Month In Markets – May 2024

The Month In Markets - May 2024

May was a choppy month, with a positive first half turning slightly sour towards the end of the month. The market’s fixation on short-term interest rates and inflation was once again the driving force for asset prices.

Starting with the UK there were two major events during the month, the scheduled release of inflation data and the unscheduled announcement that a general election would take place on 4th July 2024. While most expected an election in the autumn, Sunak surprised many by standing in the rain, calling for a general election in the summer. The Prime Minister may have felt that with stronger than expected economic growth, falling inflation and positive real wage growth, now may be an opportune moment to reverse the polls and try and retain power. While elections can have a big impact on equity, bond and currency markets, this election has not yet caused any wobbles in markets. The broad view seems to be that there will be a Labour victory, but any plans for aggressive spending will be curtailed by what happened to Liz Truss and the infamous mini budget of September 2022. As such it’s seen that Labour will have to play it safe, and that under Starmer they may become a pro-business party.

UK inflation data led to a sell-off in both UK equities and bonds. Despite headline inflation falling to 2.3%, the lowest reading in nearly three years, it was higher than the expected 2.1%. There were also higher than expected readings for core inflation and services inflation, leading to the prospects of a June interest rate cut being removed. The market is now viewing an August cut, post the election, as the most likely outcome.

The theme of takeovers continued in the UK equity market in May. There is a wide range of UK businesses trading at low valuations but performing well at a corporate level, which is making it very attractive for private equity and corporates to acquire firms. While much of the activity has been focused on the lower end of the market, deal sizes are increasing. Keyword Studios was bid for at a 73% premium to the closing price, for £2bn. The company was held in size in our UK smaller companies fund, which benefited from the immediate uplift to the share price on the bid news. Hargreaves Lansdown reported that they had rejected an offer from a consortium of private equity bidders who offered £5bn for the investment platform business. There is every possibility that a further bid could emerge for the company in June.

Over in the US, it was once again Nvidia that grabbed headlines. During the month they announced Q1 results which beat expectations and provided another big boost to the share price. The meteoric rise of the company, driven by artificial intelligence excitement, has helped propel the US equity market higher over the last 12-18 months.

Inflation in the US has proved to be sticky with many of the data readings above expectations in 2024. During May, headline inflation (for the month of April) came in at 3.4%, in line with consensus. US inflation is now considerably above UK inflation, a reversal of 12 months ago and something that many commentators did not expect last summer. The shelter component (rent) of the inflation basket has not fallen as many economists had expected and this has been one of the driving forces behind US inflation remaining considerably above target. Sticky inflation coupled with an economy that is performing well has led to the possibility that the US may not even cut rates this year, a far cry from the 6-7 cuts priced in in January. We think it likely that there will be one or two cuts made by the US Fed this year, although with the US election looming in November, they may need to act soon.

The buoyant US labour market showed signs of easing with Non-Farm Payroll data confirming less jobs had been added to the economy than anticipated. The current tightness in the labour market is leading to elevated wage inflation – the US Fed are keen to see evidence that the jobs market is cooling, and that wage growth is slowing before they pull the trigger and cut interest rates. Despite a period of slightly weaker US data, the overall picture of the US economy is still fairly strong, which should continue to support earnings growth in the near term. The positive news around Nvidia’s earnings helped advance the overall US index, with positive sentiment sweeping across the board.

Government bonds, across the developed world, have been disappointing in 2024. The sector did face headwinds once again in May, particularly the UK, where above consensus inflation data pushed back hopes for interest rate cuts. The backdrop for government bonds has been very challenged this year; lower interest rates typically favour government bond pricing, and this year has seen a huge reversal in expected rate cuts, from 6-7 cuts to now 1-2 rate cuts. We continue to view the asset class positively in terms of the prospect for positive real returns, with many of our government bonds maturing in the near term (at £100) and trading considerably below these levels, which will lead to above-inflation capital growth from now until maturity. To us, the day-to-day noise, is purely this, and won’t impact our strategy of holding these bonds to maturity. We also see government bonds as a potential hedge against any negative economic growth shock. While that is not our base case, we need to position portfolios for a wide range of outcomes. While inflation is the enemy of government bonds, commodities typically thrive in this environment; we have exposure here through holdings such as gold and commodity equities.

The Raymond James, Barbican portfolios nudged higher over the month, with UK equities and infrastructure producing strong returns during May. Japanese equities lagged, dragged down by the currency, which has continued to weaken. The Japanese Yen now looks very cheap on a wide range of metrics, and we believe there is a high likelihood the currency will mean-revert over the medium term, and as such we are comfortable with our exposure.

 Andy Triggs

Head of Investments, Raymond James, Barbican

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

The Month In Markets – April 2024

The Month In Markets - April 2024

UK equities produced another strong month, backing up robust performance in March, while gold led the way, as it had done a month earlier. Fixed income assets came under pressure in April as the reflation trade gained momentum.

Trading conditions in April felt similar to 2022 when inflation really began to bite. During that year the UK equity index was one of the limited bright spots in the year, while growth focused equities and fixed income fell on rising inflation expectations.

Economic data in the month did little to dampen the spirits of the reflation bulls. US Jobs data smashed expectations, highlighting continued strength in the labour market, which should support wages and the consumer. US inflation accelerated for the second successive month, coming in at 3.5%, which was the highest reading since September 2023. On a month-by-month basis inflation rose by 0.4%, which was again above forecasts. US inflation has consistently been higher than expectations in 2024. The result has been a dramatic shift in interest rate pricing. Only four months ago the market was convinced inflation would continue to fall and allow the US Fed to cut interest rates 6-7 times this year. However, we have witnessed a complete reversal on this thinking and now the consensus view is for only one interest cut this year in the US. One of the reasons for inflation not falling as far or fast as expected has been shelter (rent) inflation.

Here in the UK inflation fell to 3.2% for the month of March. While the fall continues a positive trend in the fight against inflation, 3.2% was slightly higher than expected and caused a sell-off in UK government bonds. However, UK inflation is now below US inflation, and the nation is no longer the inflation outlier versus its peers. The next inflation print is likely to be lower still, given the new energy price caps which kicked in on 1st April. The prospects of lower inflation, which let’s not forget hit 11% in October 2022, has boosted confidence amongst consumers and businesses, with UK consumer confidence hitting fresh two-year highs in April.

The reflation trade which has been in play for two months typically benefits sectors such as financials, resources and oil & gas. Given their large weighting in the UK market, UK equities posted another strong month to back up March. On the flip side within the US index there is very little exposure to miners and oil companies, which acted as a headwind for the US. There was a severe rotation in equity leadership midway through April, with artificial intelligence (AI) darling Nvidia falling over 10% in a single day, despite no company specific news. The fall wiped off over $200bn of value from the company, which is a staggering one-day move. Meta, another stock turbocharged by the AI theme, also saw a big daily decline on the back of Q1 results. While the headline numbers appeared positive, it’s clear that the AI focused companies are needing to invest heavily and Meta’s elevated capital expenditure (capex) surprised markets. It’s a trend we are seeing across tech companies, which for many years were seen as capital light businesses, however, they are now increasing capex at a high rate.

It is once again necessary to comment on UK mergers and acquisitions (M&A) activity given a few notable deals during April. Hipgnosis, the music back catalogues company looks set to be bought by Blackstone for $1.6bn, after a bidding war emerged. Another UK mid-cap stock, Tyman, a 186-year-old company, agreed to a US takeover for just shy of £800m. These mid-sized deals were eclipsed by a £4.3bn bid for cybersecurity company Darktrace, the bid once again coming from US private equity. At the end of the month, we saw BHP Billiton offer £31bn for Anglo American, in a bid to create the world’s largest copper company. While the bid was rejected, it highlights that foreign investors continue to see value in small, mid and large UK listed firms.

Japanese equities had a very strong start to the year, however a combination of a stalling equity market and sustained weakness in their currency led to a difficult month. The Bank of Japan recently hiked interest rates for the first time in 17 years, however, it is unclear if further hikes will materialise. There is still significant reform at a corporate level which should reward shareholders and over the medium term there is potential for the currency to mean-revert given it is trading at 34-year lows versus the US Dollar.

Gold hit new all-time highs during April, although towards the end of the month sold off, potentially on profit taking. We’ve previously commented on some potential drivers of the gold price, including increased buying from central banks and the Chinese consumer, which likely continued in April. Other commodities, such as copper continued its ascent higher, driven by increased demand expectations from AI power needs and the energy transition.

After a strong Q1 opening, April proved to be a more challenging month. Markets begun to digest the prospect of a “higher for longer” interest rate environment which put pressure on large parts of the equity market and fixed income asset class.  While the expectation for 6-7 interest rate cuts in the US was likely to be too optimistic, it’s entirely possible the pendulum has lurched too far in the other direction, once again overshooting. The short-term noise creates volatility and importantly opportunity, while for a long-term investor, patience is a required skill to look through this short-term noise. Fixed income holdings in portfolios have come under pressure this year, however, we continue to see value in the asset class, with many of the buy-and-hold government bonds in portfolios offering attractive positive real returns at maturity.

Andy Triggs

Head of Investments, Raymond James, Barbican

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Appendix

 

5-year performance chart

The Month In Markets – March 2024

The Month In Markets - March 2024

March was a strong month for a range of assets and brought to a close a pleasing first quarter. The positive momentum, particularly in equity markets, came off the back of elevated returns in the final two months of 2023.

There was somewhat of a reversal in equity leadership this month, with recent laggard, the UK, appearing as the top equity market during the month. UK corporate and government bonds outperformed their global peers as well, marking a strong month for UK assets.

The UK Spring Budget was in the spotlight at the start of the month, however, it was a fairly bland budget truth be told, although the lack of surprise was well received by markets, particularly the bond market, which is still carrying the scars of the now infamous mini budget in September 2022. Perhaps more powerful for UK assets was a combination of falling inflation and strong corporate activity.

Headline UK inflation fell more than expected to 3.4% and more importantly the outlook for the coming months is that inflation will be at, or even below, the 2% target. After being an outlier to the upside for much of 2023, the UK could in fact have sustained lower inflation than our developed market peers as we look forward to the remainder of this year (and into 2025). With inflation falling to target, the Bank of England (BoE) should soon be able to ease monetary policy which should support all UK assets. Economic data during the month showed that the UK economy is now likely already out of a technical recession. Labour markets are still strong, with the average worker now benefitting from a real pay rise, with wages growing faster than inflation, but importantly not at unsustainable levels which could cause inflation to spike once more. It’s been extremely unfashionable to be positive on the UK, however, we can make a very plausible argument for UK equities and bonds at this point in the cycle.  

Mergers and acquisitions (M&A) activity in the UK market carried on at pace during March, with five listed companies bid for. The largest bid by size was Nationwide’s £2.9bn offer for Virgin Money. Over recent months we have seen a wide range of buyers for UK assets, including foreign and domestic private equity, as well as foreign and domestic corporates. The heightened activity, with bid premiums ranging from 12% – 61% in March helped boost UK equity indices. During the month ITV sold its 50% stake in Britbox to BBC studios for £255m cash and said they would return the proceeds through a share buyback plan. We are witnessing a considerable amount of share buybacks from UK listed companies. With depressed equity valuations, buyback programs can create significant long-term value for shareholders.

Stepping aside from the UK, global equity markets continued to advance. There were signs of leadership change; for many months it has been the “magnificent seven” mega cap names in the US pushing markets higher, but we are now seeing increased breadth in equity markets and some of the unloved areas beginning to advance. We see this as a healthy trend and one that favours our diversified approach.

Japanese equities had another impressive month, building on very strong performance in January and February. There is considerable momentum in the market, with allocators increasing weightings to the region. The Japanese Yen has weakened significantly over recent months and that has helped support the earnings of the large overseas exporters within the index. During March there was a landmark change in monetary policy with the Bank of Japan (BoJ) increasing interest rates for the first time in 17 years, taking interest rates out of negative territory. There is growing confidence that the Japanese economy is on a stronger footing and that the deflationary risks the country has faced are receding. The initial interest rate rise is likely to be followed by further interest rate hikes later in the year, although the BoJ will proceed with caution.

While the BoJ were raising rates we witnessed the first major central bank cut rates, with the Swiss National Bank surprising markets and reducing their headline interest rate by 0.25%. So far Europe, the US and UK have continued to hold rates steady, although we could see the first cuts occur over the summer months if inflationary pressures subside.

Gold hit new all-time highs during March with the spot price rising above $2,200 an ounce. It appears that many central banks are increasing their allocations to physical gold, potentially at the expense of US government bonds. There has also been a big pick-up in demand for gold from China. With the Chinese real estate market facing significant headwinds, many Chinese investors are moving away from this asset class and storing their wealth in gold.

Gold wasn’t the only commodity rising in March, with the oil price ticking up over the month. This helped support the oil sector, boosting share prices. Sustained rises in commodities such as oil could cause problems for the inflation doves; the huge spike in oil in 2022 was one of the big drivers of inflation.

Overall, a strong month and a strong quarter for capital markets and our investment portfolios. It was pleasing to see a broadening out of equity market performance from simply large-cap technology focused companies to other parts of the market, such as resources and financials. Our diversified, valuation sensitive approach ensured we held exposure to some of these unloved areas that rebounded. Gold is an asset we hold across all portfolios and was a big contributor during the month. We continue to see good long-term value in large parts of the equity market and are also finding compelling ideas in the fixed income market, with positive real yields now available. The strong run over the last five months has rewarded investors handsomely and provided returns significantly above those available on cash.

 

Andy Triggs

Head of Investments, Raymond James, Barbican

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Appendix

5-year performance chart

The Month In Markets – February 2024

The Month In Markets - February 2024

February was a strong month for equity investors, led by last month’s laggard in Asia ex Japan equities. Fixed income assets remained under pressure and did not participate in the equity rally.

Over recent months we have written about weakness in the Chinese equity market, which has dragged down Asian and emerging market indices. There was a strong rebound this month as Chinese equities rallied around 10% in sterling terms. Given China is the largest weight in most Asian and emerging markets it helped propel these indices higher. It appears the market is starting to believe that Chinese policymakers are determined to end the equity market rout, while there are early signs of improving economic and earnings data. Only time will tell if the rally will be sustained, but foreign flows back into China have ticked up.

The continued story driving the US equity market centered around artificial intelligence (AI), with Nvidia continuing its exceptional share price rally. The company released quarterly results mid-way through the month, and it once again beat revenue and earnings expectations, leading to strong gains. The shares rose 16% on the news, adding an astonishing $272bn (£219bn) in market cap in a single day. To put this into perspective the largest UK-listed company is AstraZeneca, which has a market cap of around £165bn. The staggering moves have led to Nvidia’s market cap breaching $2 trillion. At an index level, the US market has appeared very strong both in February and for the last 12 months or so. However, that performance has largely come from a handful of stocks, labelled the “Magnificent Seven”. Many other parts of the US market have actually struggled over the short-term and have been overlooked, with investors instead focusing on the alluring narrative surrounding AI. This can create opportunities, with unloved stocks, which have strong fundamentals, offering good long-term potential. As investors who focus on both valuation and diversification, we are naturally drawn to these parts of the market, while also allocating to the mega-cap names through passive vehicles and a technology focused fund.

UK equities were a laggard during the month. There was the headline grabbing news that the UK fell into recession in the second half of 2023. However, the latest economic data indicates that the economy will quickly exit recession and it will have been an extremely mild contraction. While the word “recession” can spook investors, history has shown that UK equities typically perform very strongly over the following 12 months after the start of a technical recession. While this may sound counterintuitive it is worth remembering stock markets are forward looking discounting mechanisms, considering the future environment for companies as opposed to the immediate state of play in economies.

Fixed-income markets remained under pressure during February. The main reason for this was the shifting expectations around when the first-rate cuts will begin. Heading into 2024 the market expected US, UK and European rate cuts to kick off in the month of March. However, a raft of positive economic data and sticky inflation has led to those expectations being kicked down the road, to late Q2 for the first-rate cuts. This led to modest rises in bond yields, negatively impacting prices.  

Outside of markets there were developments in the US where it now appears likely that it will once again be Biden vs Trump in the race to the White House. It looks like a very close race, however with over six months to go there is the potential for change. There are key elections in many countries this year, including the UK.

At a portfolio level, there were small changes made within the fixed income exposure, reducing exposure to US government bonds in favour of exposure to UK and global bonds. While the UK has been perceived to be an outlier in terms of inflation relative to its developed peers, there is every possibility that UK inflation will soon be below US inflation and potentially at, or below, the 2% target in Q2. This could provide support for both UK equities and bonds and as such a modest increase in exposure felt prudent. We do continue to be mindful about our overall interest rate sensitivity and many of the government and corporate bonds we hold are focused on short-dated holdings, which tend to exhibit less interest rate sensitivity and less volatility. It has been a strategy that has served us well since 2022 and we continue to favour the front end of the curve, while selectively adding longer-dated bonds to provide some portfolio hedging.

Andy Triggs

Head of Investments, Raymond James, Barbican

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

 Appendix

5-year performance chart

The Month In Markets – January 2024

The Month In Markets - January 2024

Strong gains in November and December across almost all asset classes did not extend into January. The month was characterised by mixed performance in the stock market, with major indices experiencing fluctuations amid a variety of factors.

Economic indicators pointed to continued expansion, although concerns about inflation and the potential for central bank tightening measures persisted. It was these concerns that weighed on fixed income markets, pushing yields higher (and prices lower). During the month of January, inflation data from the US and UK came in higher than expected. US headline inflation rose from 3.1% to 3.4% (year-on-year), while UK inflation rose for the first time in 10 months, from 3.9% to 4%. This data knocked the wind out of the ‘inflation is defeated’ sails and led investors to question whether the optimism of November and December was merited. The short-termism of markets currently leads to heightened volatility and market movements around key data releases, such as inflation. While these inflation prints in January were higher than expected it is worth remembering that inflation in January 2023 was 10.1% in the UK and 6.4% in the US – the trend has very clearly been towards lower inflation.

Equity performance in January was more varied, with countries such as Japan and the US performing well, while China was a clear laggard. We witnessed Japanese equities hit their highest levels since 1990, driven by the large cap exporters which have benefitted from significant weakness in the Japanese Yen. The more domestically focused mid and small cap stocks in Japan didn’t keep pace, although it is possible that the rally will broaden out which will benefit these smaller companies. At a domestic level inflation seems to be under control while interest rates remain in negative territory – a complete outlier in developed markets! Valuations continue to look compelling in many parts of the Japanese equity market and more shareholder friendly management teams has led to an improvement in profitability and dividends. Japan has also benefitted from investor flows which are now diverting from China and going to the other large, liquid markets in Asia such as Japan and India.

US equity markets hit fresh all-time highs towards the end of the month, two years after the previous highs. US economic data continued to highlight the resilience of the economy, with Q4 GDP reported at 3.3%, higher than the 2% expected growth. The labour market continued to add jobs at a pace, with the government and healthcare sectors two of the biggest contributors to hiring. The US government continues to spend spend spend, running aggressive budget deficits. Quite how sustainable this is remains to be seen, but in the short-term it is helping offset the negative impacts from higher interest rates. Unlike 2022, when sectors such as technology were hit extremely hard due to rising interest rates and bond yields, the technology sector so far helped power on the US market.

The artificial intelligence trend is gathering momentum, with investors pouring money into the perceived beneficiaries, such as Nvidia and Microsoft. We’ve now witnessed Microsoft become a $3 trillion company and surpass Apple as the largest US listed company. The concentrated US market, with a handful of the largest companies accountable for the lion’s share of market gains makes it difficult for a diversified approach. By its very nature diversification sees risk spread across a whole range of stocks, while with hindsight the best approach would have been to hold a few companies in size and nothing else. This is an inherently risky strategy and over the long-term would likely provide significant volatility and difficult periods. The excitement around the “magnificent seven” tech-focused stocks continue to grow, which is likely to lead to more capital inflows into them in the near-term. However, it is important to keep discipline and structure in approach to these companies and be wary of both the investment opportunity, but also valuation risk. History has shown us countless times that overpaying for investments is a punishing strategy. We have exposure to all of the aforementioned stocks but blend these companies with a wide range of other equity investments across the globe.

The weak spot in the US market in January was the regional banks, which fell significantly. There continues to be concerns over their exposure to commercial real estate, particularly the office sector, which is seemingly going through the same struggles the retail sector went through a decade ago, with office valuations falling by around 25% in 2023.

China’s woes continued in January, with the equity market suffering steep declines. The property sector has been under pressure and there seems to be little sign of improving. Sentiment was further knocked towards the end of the month with Chinese property developer Evergrande being ordered to liquidate, the company had more than $300bn of liabilities. The weakness in the stock market is likely to cause serious issues for Xi Jinping and we did witness the government step in to try and stimulate the market with various policies including limiting short-selling and allowing their wealth fund to increase purchases of Chinese equity ETFs.

The general outlook for the global economy has been trending up, with the market assigning a higher probability for a so-called soft landing. Companies are expected to grow earnings at meaningful rates in 2024 and 2025, while inflation should trend lower. The easing of interest rates should, in theory, be supportive for a range of asset classes. We continue to tread a careful path, mindful of risks, but equally seeing opportunities across a broad range of investments. Areas such as short-dated corporate and government bonds should offer positive real returns with limited interest rate sensitivity, while areas of the equity market trade on low valuations, which is historically very positive for long-term returns.  

Andy Triggs

Head of Investments, Raymond James, Barbican

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Appendix

5-year performance chart

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