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Monthly Notes

The Month In Markets – December 2023

The Month In Markets - December 2023

Markets resembled a see-saw for much of 2023, rising up one month, only to fall back down the following month. However, after strong moves upwards in November, markets did not see-saw down to earth, but extended gains to finish the year off strongly.

Stock market gains in December are often referred to as the “Santa Rally”. Investors had clearly been well behaved this year and avoided being on the naughty list; they were rewarded with handsome returns across equity and bond markets this December.

The rally in markets appears to have been driven by continuing conviction in the view that inflation is fast approaching target in developed markets and soon central banks will be able to cut interest rates which should help support the consumer and corporates alike. The key has been the change in expectation – over the summer months, bond and equity markets were pricing in a much more challenging environment; one of high interest rates and stubborn inflation. A combination of economic data and central bank rhetoric has helped changed the narrative recently.

Markets were supported by pleasing inflation data from developed markets during December (data covers November). Here in the UK, inflation came in at 3.9%, much lower than expected. The UK has closed the gap in recent months with its peers, after being a clear outlier with elevated inflation. Across the pond, US headline inflation was 3.1%, while Eurozone inflation was 2.4%, only marginally above the 2% target. Within the Eurozone, countries such as Italy are now flirting with deflation. This data will make it challenging for the European Central Bank to persist with holding interest rates in restrictive territory as we head into 2024.

Alongside inflation data, the US Federal Reserve, Bank of England (BoE) and European Central Bank (ECB) all met to set interest rate policy with all three central banks continuing to hold rates at current levels. Accompanying the meetings were press conferences, with US Fed Chair Jerome Powell appearing particularly dovish, mentioning the prospect of the first interest rate cut. His contemporaries, Andrew Bailey (BoE) and Christine Lagarde (ECB), attempted to deliver a much firmer message that their fight with inflation was not yet over, and the prospect of rate cuts was premature, however, the market did not take note and continued to believe the data would dictate rates cuts in the first half of 2024.

The labour market continued to paint a rosy picture, with unemployment remaining low across developed markets while wage growth is now outpacing inflation in most major markets.

This cocktail of data helped provide markets with the sense of a dramatically improving picture for 2024; low probability of recession, falling inflation and falling interest rates. It was enough for asset prices to continue their march up from November, with almost all assets advancing, a complete reversal of 2022 when assets all fell together.

UK fixed income assets, including government bonds and corporate bonds performed exceptionally well in December. This was driven by falling interest rate expectations, with the more interest rate sensitive (typically longer-maturity) bonds seeing the biggest gains. Global bond markets in general continued to make handsome gains following positive moves in November. The major global bond index had its best two-month period since 1990.

Most major equity markets made gains during the month, with small and mid-cap stocks generally leading markets higher. Within the UK, the large cap equity index delivered circa 4%, while the more domestically focused mid-cap index advanced over 9%. Small and mid-cap equities are viewed as more interest rate sensitive; these stocks struggled in 2022 and for much of 2023, but the big shift in inflation and rate expectations led to large gains towards the end of the year. The same was true in the US, with the Russell 2000 (US small cap index) following up a strong November with a stellar December, making it one of the best two-month periods on record.

It’s interesting to note that most of the equity gains were driven by a ‘re-rating’, that is stocks becoming more expensive, as opposed to expectations of higher profits and earnings in 2024. We still see continued value in many equity markets, with the potential to re-rate further, but are also mindful of pockets of the equity market which are now looking expensive.

The rally in Q4 was broad-based with equities and bonds advancing together. While much of 2023 was bumpy, by year-end most asset markets were at year-to-date highs. The same was true for our portfolios, which rallied strongly towards the end of 2023. While cash rates have been at their highest levels for many years, our portfolios still managed to outperform a typical one-year fixed rate deposit. History has repeatedly shown that over the long-term cash as an investment lag both bonds and equities and we continue to believe this will be the case going forward.

We would like to thank everyone for their support in 2023 and wish you all a Happy New Year!

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 – November 2023

The Month In Markets - November 2023

Just as night follows day, it turns out that in 2023 a good month in markets follows on from a bad month! While asset markets struggled in October, we saw a widespread rebound in November.

In aggregate, it was a strong month for equities and bonds. The apparent catalyst for the rally was a drop-in interest rate expectations across most major economies. In 2022, both bonds and equities struggled as markets were caught out by inflation and the subsequent interest rate rises required to tackle inflation. It makes sense, therefore, that a fall in inflation along with the expectation of deeper interest rate cuts in 2024 would lead to a recovery in bond and equity markets.

At the very start of November, the US Fed and Bank of England (BoE) had their latest monetary policy meetings. At both meetings, interest rates were held at current levels, with central bankers resisting taking interest rates any higher at this juncture. This was the second meeting in succession that both the Fed and BoE had held interest rates steady and was enough for the market to believe that we may now have reached peak interest rates for this cycle. The prospect of the end of rate rises gave markets a much-needed boost after a difficult October.

There was a second boost to markets in mid-November when inflation data suggested the Fed and BoE had been correct in rejecting the chance to take interest rates higher. Inflation data from the US and UK showed promising signs as it continued to fall closer to the 2% target. While there is a way to go, the improvement from 12 months ago is stark. Headline inflation for the US came in below expectations at 3.2%. Shelter (rent) is the largest component of the US inflation basket, and this is still driving US inflation, however forward-looking data indicates this should begin to fall in 2024 and should help the US Fed get inflation closer to the 2% target. Here in the UK, we saw headline inflation fall to 4.6%, from the previous month of 6.7%. This was the biggest drop since 1992, which was, in part, driven by lower price caps on energy coming into play on the 1st October. The fall in inflation was much needed for Prime Minister Sunak, who vowed to halve inflation by the end of 2023, a target he now looks like achieving. The impact of lower inflation on asset prices was dramatic. Small and mid-cap equities, which are often seen as more interest rate sensitive, rallied significantly. The UK mid-cap index rallied over 6% during November, outperforming the large-cap index by more than 4%.

Labour markets continue to prove resilient with the most recent US jobs data showing a further 150,000 jobs were created. While the speed of growth is declining, we are yet to see any major cracks in the labour market. If people are staying employed, they will likely continue to spend and keep the economy going – remember consumption typically accounts for around 2/3 of GDP in most developed markets. While employment levels remain low, we are now witnessing real wage growth for employees, where the average wage is increasing above the level of inflation. Here in the UK wages grew on average by 7.7% (inflation 4.6%) and in the US wages grew by 5.2% (inflation 3.2%). Positive real wage growth should be a boost to consumption. For much of 2022 and parts of 2023 inflation was outstripping wage growth, contributing to the cost-of-living crisis, hopefully, we are now at a sustained inflection point.

There were differing outcomes for gold and oil during the month. By month end gold was knocking on the door of all-time highs (in USD). The same cannot be said for oil, where the price of a barrel has fallen from $95 in October to $75 in November. This is despite elevated geo-political tensions in the Middle East. It appears concerns around demand going forward, as economies are expected to slow in 2024, are weighing on the price. Inventory data highlighted higher than expected levels of oil inventory in the US, pointing towards weaker demand. Lower oil prices, while bad for oil producers, should act as an effective tax cut on most consumers and corporates and be a net positive to the overall economy, while further easing inflationary pressures. 

The Autumn Statement ‘for growth’ was a bit of a non-event for markets, with no major policy changes at this stage. There were some positives for workers, with cuts to National Insurance, and at the margin, this should support consumption. On the day markets were fairly benign.

After months of back and forth between inflation and interest rates, November felt like a big month where the consensus very clearly shifted to developed markets now being at peak rates, and confidence that the battle against inflation has largely been won. This shift and easing of financial conditions were enough to lead to a rally across most asset classes. It was once again a timely reminder about the dangers of being out of the markets, with equities delivering in one month what one might currently expect from cash over one year. With many investors still sat on the sidelines, there is a wall of money which could re-position into risk assets should sentiment pick up. While this would be a short-term boost, we are drawn to the potential for long-term returns from equities with low valuations and bonds with high all-in yields.

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 – October 2023

The Month In Markets - October 2023

October was a challenging month; however, gold bucked this trend, producing strong returns. The precious metal is held across portfolios at Raymond James, Barbican. We believe it is important to broaden the investment toolkit, from simply equities and bonds, to include other asset classes such as commodities and infrastructure.

Gold is often thought of as a safe-haven asset, while also having an element of inflation protection, given it is a real, or physical, asset. It’s perhaps because of these characteristics why the gold price pushed above $2,000 oz during the month of October. Geo-political risks escalated significantly in October following the events in the Middle East. The heightened concerns and risks to the global economy will likely have pushed investors to assets such as gold. However, government bonds, often an asset class that performs well in crisis, failed to respond. The attacks by Hamas led to concerns around the supply of oil from key producers such as Iran. The oil price rallied, pushing close to $100 a barrel. Higher oil prices are inflationary, through cost-push inflation and as such inflation expectations nudged higher during the month, likely explaining why government bonds were out of favour, and gold was the safe-haven asset of choice.

Equities fell during the month. The chart does not tell the full story, with the small and mid-cap parts of the market coming under pressure. Within the UK the mid-cap index fell by over 7%, while the large-cap UK index fell by circa 4%. This trend of large cap companies outperforming was consistent across developed markets. There will have been a range of factors driving this; mid-cap stocks are often seen to be more interest rate sensitive – higher oil and higher rate expectations were apparent over October. A flight to safety in equities often results in investors moving up the market cap spectrum to larger companies, which can be perceived to be more reliable; the events in the Middle East could have triggered such a move.

US inflation data showed that inflation remained steady at 3.7%. While this is a dramatically improved picture from 12 months ago, inflation has nudged up from the 3% low in June. The main reason for this is the rise in oil prices over the summer months – this feeds straight into gasoline prices in the US, pushing inflation up. We’ve also seen the shelter (rent) component of inflation remain sticky, although there is an expectation this will moderate as we head into 2024. UK inflation also remained steady, at 6.7%. Again, the inflation picture has improved over 2023, however, the headline figure is significantly above target. We should see a drop in the figure as the latest energy price cap came into effect on 1st October 2023, with the average household bill expected to decline by 7%.

While certain leading indicators slowed around the globe, suggesting that higher interest rates are beginning to bite, Q3 GDP data from the US showed the economy grew at an annualised pace of 4.9%. Excluding the COVID-19 rebound this was the highest US GDP release since 2014.  The consumer remains strong in the US, supported by excess savings built up during months of lockdown. US government spending is running at elevated levels, often seen during periods of recession, which is driving growth. This is unlikely to be sustainable over the long-term, given the current budget deficit.

Following previous pauses by key central banks it is possible we are now at, or close to peak interest rates for this point in the cycle, with interest rate cuts likely to start in 2024. We have taken the opportunity to step out of money market funds, which were held as a cash proxy, and add more to short-dated government bonds, effectively locking in attractive nominal yields and adding a more defensive tilt.

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 – September 2023

The Month in Markets – September 2023

The month of September was slightly calmer than the previous summer months. General weakness in non-UK equities was partially offset by sterling weakening against most major currencies.

The month started with what felt like quite major news from the UK, although it seemingly slipped under the radar and gained little coverage in traditional media channels. The Office for National Statistics (ONS) made meaningful revisions to their economic growth figures for the UK post Covid. The ONS added nearly 2% to the size of the UK economy. The revisions showed that by the end of 2021 the country was actually above pre-Covid levels and not 1.2% smaller, as previously estimated. The popular headline of the UK being the worst performing economy in the G7, it turns out, was simply wrong, with the country performing in line with the other G7 nations. The news, which was released on 1st September, had very little impact on the UK market. We’ve witnessed sentiment towards UK equities deteriorate over recent years, and part of this was the perceived underperformance of the UK economy relative to its peers since Covid-19. One might have expected a pick-up with the data revisions, but to date there hasn’t been any marked change to sentiment, or UK equity valuations. The mid-cap, more domestically exposed UK index actually finished down for the month of September.

Staying with the UK, there were reports in the financial press regarding a potential ISA shake up, with Chancellor Jeremy Hunt looking to get people to back UK-listed companies. We will have to see if anything is revealed in the Autumn Statement in November. Any such moves could boost UK equity demand and ownership, potentially reversing the outflows we are currently seeing from UK equities and boosting valuations.

Elsewhere this month the big news came from the US and UK central banks, who both declined the opportunity to increase interest rates any further, and instead “paused”, allowing them time to assess data and observe any impact from the lagged effects of the aggressive rate hikes to date. Heading into September it was widely anticipated that the Bank of England (BoE) would increase interest rates. However, inflation data came in lower than expected, with both headline and core inflation showing marked improvements, along with the expectation of further falls this year. This was coupled with employment data which showed unemployment had risen to 4.3% (from the recent lows of 3.5%). This was enough for the BoE to end their run of 14 straight interest rate rises and leave the rate at 5.25%. Back in July it was expected that UK interest rates would peak at around 6.5% and remain above 6% for all of 2024. There has been a noticeable shift lower in expectations over the summer months. BoE Chief Economist Hugh Pill, said his preference would be for rates to not go as high as previously anticipated, but stay elevated for longer, without sharp drops on the way down. He used a mountain analogy, stating his preference was for a Table Mountain (South Africa) approach, as opposed to a Matterhorn (Alps) profile, where interest rates rocketed higher, but came down just as quickly on the other side.

It was a slightly different story in the US, where inflation nudged up to 3.7% on the back of stronger oil prices. Despite inflation coming in above expectation, the US Fed held rates steady. Although pausing, the US Fed did say they expected a stronger economy in 2023 and 2024 and would therefore likely hold rates at elevated levels for longer. This was enough to hit equity and bond markets and we witnessed the yield on the 10-year US Treasury (government) bond hitting 16-year highs.

After displaying surprising strength in 2023, sterling (GBP) weakened over the month versus most major currencies, including a close to 4% decline versus the US Dollar (USD). While the gold price suffered, black gold (oil) continued its recent rally to reach year-to-date highs. A combination of stronger than expected global economies (leading to higher demand) and supply constraints, largely due to Saudi Arabia and Russia, have led to a boost in the oil price.

At a portfolio level some of the laggards of 2023 stepped up, once again showing the benefits of having diversification at the heart of our process. Our exposure to resources, which is in part driven by the energy transition theme, benefitted from higher oil prices. Our exposure to short-maturity US government bonds also performed well as a combination of USD exposure and high yields providing attractive returns over the month.

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 – August 2023

The Month In Markets - August 2023

August was a tale of two halves, with the start of the month proving extremely challenging, before a mini rebound was staged towards the end of August. Most equity markets posted negative returns for the month, while bond markets were fairly flat over August.

As reported last month, China is the largest constituent of most emerging markets and Asian benchmarks. After a strong rally in July, Chinese equities suffered in August, falling over 7% in sterling terms. This had the effect of dragging down the emerging markets and Asian indices.

Concerns surrounding Chinese growth have been growing over recent months. It is not just lower- than-expected growth that is plaguing the country, but also concerns around their real estate sector. Chinese property developer Evergrande, which faced a liquidity crisis in 2021, filed for chapter 15 bankruptcy protection in New York during August. Another property developer behemoth, Country Garden, did not pay two dollar bond payments, calling into question the state of the company, its liquidity and its balance sheet position. While the market has been aware of potential issues in the Chinese property market, there was an expectation that the Chinese government would step in with meaningful support and reform. However, to date, policy response has largely disappointed, with the lowering of interest and mortgage rates not viewed as significant enough to help the troubled sector recover.

Elsewhere, the weakness in equity markets at the start of the month was not driven by concerns of faulting economic growth; on the contrary, the continued surprising strength of developed economies led to a re-pricing of interest rates and inflation expectations. The higher-for-longer mantra led to equities de-rating. The good news for the economy was bad news for equity (and bond) markets. We view the good news being interpreted badly by equity markets as a short-term trend; we believe that healthy consumers and businesses should support company earnings and growth over time.

Following strong US Q2 GDP data, released at the end of July, the Atlanta Federal Reserve’s GDP Now forecast model estimated Q3 GDP to be running at a 5.8% annualised pace, fueled by strong industrial production and housing sales. This much stronger data showed the strength of the US economy, even in the face of higher rates. The market digested the news by increasing long-term inflation expectations due to a stronger economy, which would lead to higher demand, and also lowered the number of rate cuts it expects in 2024. It was the longer-dated (more interest rate sensitive) parts of the bond market that were hit hardest, with the yield curve steepening. Although GDP data from the UK was not as strong, we did see month-on-month GDP increase by 0.5%. This had a similar effect on UK markets; long-run inflation expectations rose, the yield curve steepened and bonds, alongside equities sold off. UK wage data put further upward pressure on bond yields, with average earnings including bonuses coming in at 8.2%, much higher than consensus. However, there were some positives with such strong wage growth; consumers are now experiencing real wage growth, given inflation fell to 6.9% in July (data released in August). The same is true in the US where wage growth is now rising faster than inflation.

While economic data for the first 20 days of August was strong, there was a clear deterioration in data towards the end of the month. Services and manufacturing Purchasing Managers’ Index (PMI) across Europe, the UK and US all made for dismal reading, showing most areas to be in contraction and falling more than expected. Durable goods orders from the US along with consumer confidence was also disappointing. This led to a reversal in some of the optimism about economic growth and led to lower bond yields (higher prices) while equities rose on the back of lower yields and interest rate expectations. The market was further supported by commentary from US Fed Chair, Jerome Powell, who spoke at the annual Jackson Hole Symposium. He appeared to be fairly dovish in his message, lowering the likelihood of significant interest rate rises going forward.

Over recent months markets have yo-yo-d up and down with little direction or clear trend. There seems to be extreme short-term thinking with most market participants currently, with every key data point moving markets. While it can be frustrating, this short-term viewpoint of the market is likely to create excellent opportunities for investors who can take a longer-term time horizon, look through the noise and exploit the short-term volatility. We have been attempting to do just this in recent months, across both bond and equity markets. We continue to see highly attractive long-term value across both bonds and equities. We want portfolios that can take advantage of the opportunities, but carry sufficient diversification, acknowledging the uncertainty the economy faces as we head into 2024.

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 – July 2023

The Month In Markets - July 2023

After a shaky start, the month of July proved to be very strong for equity markets, with select fixed income markets also joining the party. This year’s equity laggards – emerging markets, Asia and UK – all saw a resurgence. 

When we consider emerging markets and Asian equity indices, it’s worth remembering that the biggest constituent of both indices is China. The Chinese market was up approximately 9% (sterling terms) in July and was a key driver of returns for the indices.

So, what propelled Chinese equities in July? Well, it seems the old mantle of ‘bad news is good news’ was in play. China’s economy is stalling, and the re-opening boom has been short-lived. The country is on the brink of experiencing outright deflation, while the weakness in the global economy is negatively impacting China’s export market, which has been the economic heartbeat over the last 20 years. While this may all sound like ‘bad news’, it does, in fact, increase the likelihood of intervention and policy support to try and stimulate the economy going forward – this is the ‘good news’. It is likely that Chinese equities advanced in anticipation of government intervention. By the end of the month, China’s top policymakers had addressed the situation and pledged to step in and support domestic demand with stimulus and policy measures, that were to be implemented in a “precise and forceful manner”.

Inflation data for China made interesting reading, coming in at 0.0%, flirting with deflation. More worryingly was a 5.4% drop in producer prices compared to 12 months earlier. Producer price index (PPI) data is a good leading indicator of future inflation, and this data print points towards China tipping into deflation in the coming months. This will have an impact on the global economy as well, with China now effectively exporting deflation to the rest of the world through falling prices for many of its exports. This should be a benefit to the Western world which is continuing to grapple with inflation in their economies.

Both UK equity and bond markets were boosted by headline inflation coming in below expectations at 7.9%, a 15-month low. The past year has been characterised by UK inflation continually being higher than anticipated so it made for a refreshing change to receive some positive inflation news. The impact of the data led to a shift in market expectations that UK interest rates would peak at 6.5%, to a new peak rate of 5.75%. Lower interest rates should in theory benefit consumers and corporates alike, through lower borrowing and financing costs. As such equities caught a bid, with the mid-cap index the winner on the day, rising over 3%.

UK assets have been unloved and under-owned pretty much since the Brexit vote. Selling pressure has intensified recently as the UK has grappled with political issues alongside stubbornly high inflation. The news that the country may finally be getting a grip on inflation could help improve sentiment and potentially reverse these outflows from UK assets, which would be extremely powerful for valuations. There is clearly a long way to go, but July has offered some green shoots of hope.

Equities, in general, were buoyed by the market’s increased belief of a soft-landing scenario playing out – inflation falling close to target, without labour markets and economies cracking. US economic data backed up this narrative – their headline inflation fell to 3% and the labour market continued to exhibit strength. There are still risks to this thesis, and the full impact of aggressive interest rate hikes is still yet to be seen. However, economic growth and employment continues to highlight resilience, particularly in the US, which is the world’s largest economy.

Our approach of country diversification and focus on fundamental analysis meant portfolios had exposure to the cheaper, unloved areas of the equity markets which performed well in July. Markets are complex systems and ever-changing, so it makes sense to have an adaptable approach that recognises the world can and will look different in the future.

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. 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.

Andy Triggs

Head of Investments, Raymond James, Barbican

The Month In Markets – June 2023

The Month In Markets - June 2023

June’s monthly note could very easily read “See May monthly note”. The key themes of elevated UK inflation and excitement around artificial intelligence (AI) that were discussed in May have dominated markets in June as well.

As can be seen from the chart it was generally a good month for equities, and a bad month for anything non-equity. It appears the equity market is taking the glass half full approach, shrugging off higher interest rates, instead focusing on the prospect of the global economy avoiding a recession and companies being able to deliver strong earnings growth over the coming years. This is most evident within the US equity market, which, after a weak 2022 has rebounded very strongly in both the month of June, and 2023 more generally. Non-equity assets had a more disappointing June, and fixed income assets have had a lackluster 2023. They have adopted a more glass half empty mantra, with persistent inflation and higher interest rates plaguing the asset class in 2023.

Let’s dig a little deeper into the US equity market, which continued to rally in June. We have written about the strength of the AI focused stocks in recent notes, which have almost single handedly propelled the US equity market higher. Although not covered in the charts, it was pleasing to see increased breadth in the US market – the equal weighted S&P 500 index actually outperformed the S&P 500 index (market cap weighted) in June. Over the course of 2023 the equal weighted index is still lagging by circa. 10%, despite the recent rally. Stronger economic data coming out of the US in June was likely a driver for the broader rally. We witnessed Q1 GDP come in at 2%, a big rise from the 1.3% estimate, showing the US economy is still growing at moderate levels, despite many commentators expecting a recession to be upon us already.

The theme of AI has certainly not retreated, and we have seen companies such as Nvidia and Apple continue to do well. In May, Nvidia’s market cap hit $1 trillion on the back of a huge AI driven rally. Not to be outdone, Apple closed on 30th June with a market cap of $3 trillion, a new closing-high for the stock.

The technology sector, and Nasdaq index more broadly, were hit hard in 2022, with higher rates negatively impacting valuations. Many commentators had suggested that high valuations were valid in a world of ultra-low interest rates, however, with higher rates, lower valuations were appropriate – we witnessed a de-rating of valuations in 2022. Interestingly, this year we have seen interest rates and bond yields (at the short-end of the curve) continue to rise – if the playbook of 2022 was in play, one would expect the technology sector to have continued to struggle this year. The opposite has been the case, and we have seen technology and other growth stocks re-rate (become more expensive) in spite of rising interest rates. It will be interesting to see if this strength can continue.

The UK equity market was the weakest developed market during the month (in sterling terms). As noted at the beginning of the article, elevated inflation has been a burden for the UK and June was no different. Headline inflation was reported at 8.7% once again, when it was expected to fall, while wage growth and core inflation for the month of May (reported in June) were both higher than expected. The result of this saw the Bank of England (BoE) raise interest rates by 0.5%, taking the rate to 5%, it’s highest level in 15 years. It’s worth noting that the US Fed did not raise interest rates at their previous meeting, while the BoE in fact increased their pace of hikes from 0.25% to 0.5%, highlighting the UK’s continued fight against inflation. With the market now pricing in peak UK rates at around 6%, there has been increased scrutiny on the UK economy, and question marks over whether the economy can handle that level of rate without a recession ensuing. The UK mid-cap index, which is seen as more domestically exposed, has significantly underperformed the UK large cap index, which has more international exposure, by revenue. The gap was around 2.5% in June, however if we look back over the last 18 months when inflation expectations began to increase, the gap is around 30%!

The UK equity market is now trading on a discount to its own history and a significant discount to the rest of the world. While the outlook is indeed challenging, and not being made easier by higher interest rates, the economy at present is performing ahead of where most CEOs and economists expected. We’ve seen consistent upgrades to economic growth forecasts throughout the year and in the month of June saw profits upgrades from key retailers Next and ABF (Primark owner), not something one typically associates with a troubled consumer. The market is clearly pricing in much tougher days ahead for consumers, but right now, the consumer is standing strong. One of the reasons for this is likely to be the delayed response to higher interest rates – indeed many people have enjoyed significant wage increases, but are yet to see debt payments, such as mortgage costs increase yet. Savers are also benefitting from greater returns on their savings, and this is propelling the ability to spend.

And so to bond markets (fixed income). US and UK government bonds and high-quality corporate bonds fell in price during the month. This was largely driven by increasing interest rate expectations in both countries. Typically, bonds have an inverse relationship to interest rates. While US inflation was reported at 4% during the month, the US Fed struck a hawkish tone at the press conference, highlighting their willingness to resume interest rate hikes to tackle inflation. As touched upon already, the UK BoE didn’t’ just talk tough, they acted, by raising rates by 0.5%. We have seen yields on UK government bonds with short maturity (1-3 years) rise to above 5%. With inflation expected to fall towards 5% by the end of the year, government bonds are starting to offer positive real returns once more.

Emerging markets and Asia continued their struggles, once again partly driven by China. During the month, China cut interest rates on short-term borrowing in an effort to help kickstart the economy. With an inflation rate of just 0.2%, there is little concern that reducing interest rates will lead to problematic inflation levels.

The end of the month also brings an end to the first half of the year. Within equity markets last year’s losers (US growth stocks) have become this year’s winners, while the winners of 2022 (such as banks and oil) have become this year’s laggards. Developed market government bonds are yet to catch a bid, and have continued to suffer, albeit to a much lesser extent than 2022. We do believe these bonds are offering a lot of value on a forward-looking basis, while also likely providing good diversification benefit to equities. The short-term outlook for the global economy has a high degree of uncertainty at present, however most equity markets have discounted some of this uncertainty into prices. With such uncertainty and much of the interest rate pain yet to be felt, we do think one needs to tread a more cautious path. With high expected nominal returns on assets such as cash and government bonds investors can now be compensated without taking excess equity risk at this stage in the cycle.

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. 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.

Andy Triggs

Head of Investments, Raymond James, Barbican

The Month In Markets – May 2023

The Month In Markets - May 2023

May proved a very tricky month for UK assets, with both equities and bonds suffering meaningful drawdowns in the second half of the month. Elevated inflation data appeared to be the main driver of the UK underperformance, with markets now pricing in UK interest rates to peak at 5.5% in 2023.

On the surface the UK inflation data looked ok; headline inflation fell to 8.7%, the first time the year-on-year figure had been below 10% since August 2022. However, the fall in inflation was less than had been expected and importantly core inflation (which strips out volatile items such as food and energy) came in at 6.8% – the highest reading since 1992. The worry is that high inflation expectations are becoming embedded in consumers’ minds and as such wage demands will be elevated, which in turn will force businesses to raise prices to protect their profit margins – a vicious inflation loop is created. In order to ‘break’ this inflation psyche, the Bank of England (BoE) may be forced to raise rates to such a level that it leads to rising unemployment, which should in theory reduce the upward pressure on wages and lower demand for goods and services in the economy – all of which should lower inflation.

The market now expects UK interest rates to peak at 5.5% later this year. Interestingly, interest rates are only expected to fall to 4.8% by the end of 2024. This is now quite different to the outlook in both the US and Eurozone, where interest rates are expected to fall much further by the end of 2024.

As we have written about previously, there is often an inverse correlation between interest rates and fixed-income prices. We witnessed both UK government bonds (gilts) and UK corporate bonds fall in value in May on the expectation of higher rates. UK equities were also hit hard, most likely driven by concerns higher rates may limit consumption and spending, which would be bad for corporate earnings.

The excitement around artificial intelligence (AI) reached new heights this month. The main beneficiaries have been the largest US technology focused companies, with Nvidia the poster child of this hype. During the month Nvidia released their Q1 earnings and were very positive about their future, expecting strong demand for their products (microchips) on the back of an AI revolution. In the immediacy after the results, the company added around 25% to its market cap, a staggering $220 billion! At one point the company market cap rose above $1 trillion. The strength of the largest companies in the US stock market have masked what has been pretty anaemic share price performance from the average US company this year. The narrowness of the market has presented difficulties for diversified portfolios; however, we still believe this is a sensible approach.

There are dangers with investing purely in stories and narratives and potentially avoiding fundamental analysis. We only have to look back to 2020 and some of the ‘COVID’ beneficiary stocks such as Zoom and Peloton. Share prices advanced so much and became disconnected from fundamentals, and the outcome was that share prices subsequently came crashing down in a magnitude of approximately 90% from the highs. The thesis was correct in many ways – remote working was a positive for Zoom and more and more people are likely to exercise from home, benefitting Peloton, however, expectations were just too high and as a result share prices disappointed following the initial large rally. We saw a similar case with Beyond Meat – a company that produces plant-based meat. Shortly after listing on the stock exchange the share price rose above $220 a share in 2019 as investors became attracted to the potential for huge growth as consumers shifted to more plant-based diets. Once again, the thesis is broadly correct, however, investors overpaid for the story and the current share price is around $12.50 – a fall of over 90% from highs. Now we are not necessarily predicting this for some of the AI beneficiaries; however, we are mindful of being overly exposed to this part of the market at these valuations.

Japanese equities have been strong in 2023 and this continued in May. The country remained in lockdown longer than many of its developed peers, which held back the economy. However, after fully reopening in the second half of 2022 economic growth has modestly picked up. There continues to be reform in the Japanese stock market too, which places a greater emphasis on governance, engagement and shareholder value creation. All this has made Japanese equities more attractive to investors and helped boost share prices. It’s worth noting alongside this Japanese equity valuations are low by historical standards which may have also contributed to the moves.

In terms of global economic outlook, the anticipated recession is still not materialising and economists are either giving up on this view or pushing out the start date to 2024. Economic data continues to be conflicted, with the labour market remaining healthy and business surveys picking up. This is offset by the tightening of lending standards by banks and a cooling of housing markets, driven by much higher mortgage costs. This friction in economic data can make it challenging to have a strong conviction in positioning. In this environment we believe diversification continues to be a sensible approach, while also paying attention to valuations across asset classes. It’s pleasing that we are finding opportunities selectively across bonds and equities, which offer good value over the medium-long term.

 

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. 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.

Andy Triggs

Head of Investments, Raymond James, Barbican

The Month In Markets – July

The Month In Markets - July

The month of July did not particularly feel like a great month. There was little to no progress with Russia’s invasion of Ukraine. Inflation data continued to come in at eye-wateringly high levels. Supply woes continued and Google searches for the word “recession” spiked. Yet despite all of this, risk assets in general produced strong positive returns during July. 

So why did the price of developed market equities and bonds rise this month? We don’t believe it was caused by an improvement in the short-term economic outlook, given economic data was weak during the month.

Additionally, it wasn’t because inflation appeared to be peaking. The most recent inflation data reported came in at 9.4% and 9.1% in the UK and the US respectively, reaching fresh 40-year highs. It was interesting to see that bonds and stocks prices increased despite these higher-than-expected inflation rates, as opposed to earlier in the year when these assets declined in value as a result of heightened inflation data.

What then was driving markets, if not positive data? We believe that during this month, investor attention shifted, and asset prices entered a strange state in which bad economic news was embraced. If inflation worries dominated the first half of the year, then concerns about economic growth dominated July.

The market has begun to discount the possibility of central banks having to backtrack on their interest rate hikes, something that is being referred to as the “Fed Pivot”. If the economy shows too many signs of slowing and the risk of recession increases, central banks could be forced to pivot away from the higher interest rate path and either pause or even cut interest rates in order to support the economy. The weak economic data of July fueled investors beliefs that the “Fed pivot” was coming into play. Historically, inflation falls in recessionary environments as demand declines, unemployment rises, and business investment slows.

Thinking at very simplistic levels, if the problems affecting the asset markets this year have been high inflation and rising interest rates, it makes sense that asset prices can rebound if we start to consider a world where inflation could fall, and interest rates won’t reach the lofty heights that were previously expected.

We can draw parallels from the final quarter of 2018, leading into 2019. Although inflation was muted then, the US central bank was embarking on the final leg of their interest rate hiking cycle. Quarter 4 of 2018 and the month of December were very tricky for equity markets, as they begun to price in a higher interest rate environment. However, by the end of the year, economic data had deteriorated, and the market determined that rates would not reach the previously priced in levels and in fact the US Fed would pivot and begin to ease monetary policy. This is what occurred; the US Fed never raised rates in 2019 and instead cut rates later in the year. In terms of asset prices, we saw equities and bonds perform very well in 2019 as valuations for equities increased (due to lower rates) and bond yields declined (prices rose). While we aren’t categorically saying it will happen again, it is always useful to study similar periods in history and take both downside and upside risk into account.

The old adage of “buy low, sell high” may have also been in play in July. The first six months of the year have been extremely challenging with steep declines in bonds and equities. There will be some long-term investors deploying cash at these levels. Large parts of the bond universe are offering yields that we haven’t seen for a decade. There are risks associated with this, but we know starting yield is a good predictor of future returns. Likewise, equity valuations have contracted this year and for investors who believe the price you pay matters and impacts future returns, July provided an attractive long-term entry point.

You will notice from the monthly chart that Asia ex-Japan and Emerging Markets equities lagged their developed counterparts. One of the biggest drivers of this was weakness in China, which is the biggest country exposure in most Asian and Emerging market benchmarks. Over the month there were renewed lockdowns as COVID-19 cases were detected and China implemented its Covid-zero policy. This rattled markets, while it has also taken its toll on the population, with dissent rising in the country. The Chinese real estate market was also under pressure in July, with reports from S&P Global Ratings that property sales could fall 28%-33% in 2022.

In times of heightened volatility investors are often more susceptible to behavioural biases. It’s likely many investors wanted to run for the hills and sell to cash after such a difficult June. However, in doing so, they would have missed out on an exceptionally strong month of July. No doubt these investors are now wrestling with the difficult decision of whether to invest at much higher levels than four weeks ago.

While we believe in active management and making tactical changes to portfolios, it is very rare that we make big sweeping portfolio changes. This is a very purposeful approach, and is a process designed to remove (or at least limit) our own emotions getting in the way and leading to sub-optimal decisions.

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. 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 – June

At a headline level June was yet another tough month, in what has been a difficult first half of 2022. However, the chart below does not provide the full picture of what occurred during the month, where key market changes could have implications for asset prices going forward.

For the majority of 2022 the market’s focus has been on inflation. More specifically it has been on the fact that central banks around the developed world were behind the curve on inflation and would have to raise interest rates more than they were telling us, in order to help cool inflation.

That provided a very difficult backdrop for both bonds and equities, which largely sold off in lockstep and in turn provided a very difficult backdrop for multi-asset investors. We typically hold assets such as government bonds to act as a hedge to equities; that clearly hasn’t worked this year.

However, during the month of June there were signs of a shift in the market’s focus. The market has now become nervous that in reacting to inflation, central banks, and in particular the US Fed, could now tip economies into recession. Their efforts to cool demand will effectively go too far (something referred to as a “hard landing”), destroy too much demand and ultimately lead to a recession. Now this is by no means a given, however, the probability of this occurring has increased. In effect, a risk that was not on investors’ minds six months ago, has now appeared.  

The shift from inflation concerns to growth concerns resulted in some changes in market leadership. Commodities, which have been on a tear this year, and are seen as economically sensitive, nose-dived from mid-June. High-yield bonds, which react negatively to growth concerns also went south during the month. On the flip-side, government bonds, which have been moving downwards this year, appeared to buck that trend and held firm while equities fell during the second half of June. The UK market, which has been very resilient this year, had a more challenging month. The index has significant exposures to sectors such as energy and mining which were dragged down by falling commodity prices.

Concerns around an economic slowdown or even recession would make most people run for the hills. However, things are rarely that straight forward, and its important to think through the various scenarios that could play out.

In a slowing environment, where demand is weaker and commodity prices fall, inflationary pressures could ease. If inflationary pressures were to ease, the need for higher interest rates would diminish. Now if most of the problems this year have been because of higher inflation and higher interest rates, then falling inflation and slower interest rate rises could in theory be supportive for a wide range of assets.

This is now being referred to as the “Fed pivot”, and there are considerable amounts of column inches being dedicated to this subject matter currently. The view is that the actions of central banks (and markets) so far have now been enough to slow the economy and cool future demand which will bring down inflation.  In this environment the US Fed will not need to be as aggressive going forward and could pause, or even pivot and shift away from their tightening interest rate policy. Parallels here can be drawn from 2018. The US Fed were raising interest rates, which led to a very volatile final quarter of 2018, with equities falling significantly and bond markets also struggling. However, by the end of the year, the hiking cycle stopped, and indeed pivoted, and 2019 was a very strong year for both equity and bond markets.

As is often the case, trying to call the bottom in markets is a difficult and dangerous game. The low in markets in the financial crisis was in March 2009 and the bottom for Covid-19 was in March 2020. This was prior to the jobs data announcement that showed 20 million people lost their jobs in one month! These turning points still felt extremely uncomfortable and there seemed little improvement in the situation. Yet markets are forward looking, and they behave in ways that is often not reflective of the here-and-now, but more reflective of where we will be in the next 12-24 months.

Portfolio activity in June within our bond element of the portfolio saw us reduce exposure to some of the more economically sensitive areas (such as high yield) and add in more US government bonds (unhedged). Overall, we continue to make portfolios more resilient to economic downturns, but are also mindful that risk assets, such as equities, have fallen considerably this year and that central bank policy could change in the coming months. 

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. 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.

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