Sailing on strange seas

Our latest Investment Strategy Quarterly looks at various geopolitical and macroeconomic themes, including consumer debt and employment, pension planning, and next year’s US election. Read all this and more in Investment Strategy Quarterly: Sailing on strange seas.

The Week in Markets – 30th September – 6th October 2023

We have now entered the tenth month of the year, October and it’s certainly now tradition to educate on history of the month. The Anglo-Saxon’s name for October was Winterfylleth, meaning winter and full moon. It’s certainly beginning to feel like winter after record high temperatures just three months ago.

The beginning of the week saw members of the US Fed come out and speak on the future of rates as Fed Governor, Michelle Bowman, confirmed she would be in favour of future rate hikes if “progress of inflation had stalled”. The main reason behind the pause in US rates during the September meeting, was for the Fed to assess the impact of the rate cycle. Investors now believe the door is still open for a further rate hike before the end of the year and the market narrative “higher for longer” has dominated markets.

US jobless claims data was released on Thursday afternoon, coming in at 207k, just under forecasted 210k. This points towards still-tight labour market conditions which will not be welcome news for the Fed. News has fed through to US treasury bond yields as we have seen huge daily moves this week. On Thursday we saw the US 10YR treasury set a 16 year high at 4.88%.

US Non-Farm Payroll (NFP) was released this Friday afternoon with 336,000 jobs created, smashing market expectations of a 170k increase, further indicating the strength of the US labour market. This is the largest monthly increase since February 2023.

German-based company, Birkenstock, the luxury sandals brand is planning its IPO next week on the New York Stock Exchange. The sandals brand has become extremely popular over the past couple of years in line with the comeback of the Crocs brand. Birkenstock has the backing of heavyweights as the Louis Vuitton private equity firm, L Catterton, will own approx. 83% of the brand after the offering. This is another example of companies choosing not to list in their native country and rather make the switch to the US!

UK Prime Minister, Rishi Sunak, this week was accused of the most “damaging U-turn in the history of UK infrastructure” as he announced the scrapping of the northern leg of the high-speed train (HS2) project. The train was planned to run from Birmingham to Manchester, cutting travel time to approx. an hour and there was hope for it to become a vital connection between the South and the North. The decision was announced with several other new policies such as the scrapping of A-level qualifications to create a new “Advanced British Standard” and a tax-free bonus for new teachers up to £30,000. Certainly, bold decisions to make before the election in 2024.

A new month certainly does not mean any changes to our investment philosophy. The message of diversification is as key as ever with the moves we have seen in the bond markets. This also reiterates the importance of long- term investing as opportunities are created by short term moves.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The centre holds

In this month’s Market Commentary, Raymond James’ European Strategist, Jeremy Batstone-Carr, discusses the global financial markets, takes a look at the UK and US economies, plus he examines recent challenges in China.

The Week In Markets – 12th August – 18th August 2023

It has been a tricky week in markets, with equities and bonds coming under pressure in developed markets, while data from China continues to indicate that the world’s second largest economy is weakening.

Last week’s confirmation of deflation in China was backed up this week by weaker than expected industrial production. There was also the surprise development that China will no longer be reporting on youth unemployment while they “optimise labour force survey statistics.” The last figure from June showed youth unemployment was 21.3%, and one questions whether China would have suspended youth unemployment data if the reading was a little more positive! In response to the continued weakening data there was surprise policy rate cuts for the second time in three months to try and stimulate the economy.

There was mixed data from the UK this week, with wage growth data coming in at the highest level since comparable records began in 2001. The figure of 8.2% (including bonuses) for the three months between April and June will make for uncomfortable reading for the Bank of England (BoE) and is likely to lead to further interest rate rises. Despite the acceleration in wage growth, unemployment nudged up to 4.2%. Wage data was followed by inflation data, with headline inflation continuing to fall, coming in at 6.8%. While it is pleasing that inflation continues to trend lower, core inflation (excludes food and energy) stayed at 6.9%, while services inflation increased to 7.4%. The impact of this was for bond markets to change expectations once again for peak UK interest rates, which have now moved out to 6%. 

On Wednesday we saw the yield on the US 10-year Treasury bond hit a 15-year high on the back of stronger than expected industrial production data and the release of the latest US Fed meeting minutes. The US economy continues to perform ahead of expectations which has led to a more consensual view that a US recession is less likely. This has led to inflation expectations over the longer-term increasing, pushing yields higher. UK government bonds also sold off this week, with the 10-year government bond yield breaching 4.7%, the highest level this year. Like the US, the UK economy is growing faster than economists had expected; the higher economic growth is expected to lead to more sticky inflation.

Much like 2022, higher bond yields have been a headwind for equities recently. The tech-heavy Nasdaq index, which had a very strong H1 2023, closed at a six-week low on Wednesday. There was some excitement in the IPO market, with Vietnamese electric car maker Vinfast listing this week. The share price more than doubled on open and at one point during its first trading day the share price had risen from $10 to $37! This valued the loss-making EV carmaker at more than Ford and BMW.

This was a tough week for most asset classes, continuing the weakness in August, after a strong July. The day-to-day noise can be uncomfortable and focusing on it too much can encourage short-term decision making, which we believe is often not in the best interest of returns. The bigger picture continues to point to economies proving resilient to higher interest rates, while inflation, in general has been trending lower from recent peaks over the last 12 months. This is accompanied by some of the highest yields available on bonds in 15 years and below average valuations for much of the equity market, all encouraging signs for future returns.

Andy Triggs, Head of Investments

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

Great Expectations

July has proved a strong month for investors in the financial markets, particularly across the stock markets of Western developed economies. Returns were generated against a backdrop of economic resilience, especially in the United States where, despite the Federal Reserve having raised interest rates in excess of 5.00%-points in little over a year, growth has persisted and even exceeded expectations.

Moving to the Next Stage

This year marks the 110th edition of the Tour de France, the most prestigious bicycle race in the world. And like the markets, the Tour is always challenging—and evolving. The three-week, grueling 2,200+ mile route changes every year and, surprisingly, starts in different countries—this year in Spain versus the UK, the Netherlands, Germany, Belgium, and Denmark over the previous five years! The point is, just like the Tour, economic and market cycles have different starting points, and no two routes are alike.

 

The Week In Markets – 3rd June – 9th June 2023

This has been a busy week in markets with a wide range of economic data released as well as surprise interest rate increases from the Canadian and Australian central banks.

The Reserve Bank of Australia (RBA) increased interest rates by 0.25%, taking the headline rate to 4.1%, an 11-year high. There were further surprises in the week when the Bank of Canada raised their headline interest rate to 4.75%, a 22-year high. A senior official cited surprisingly strong household spending and high core inflation as key reasons for increasing rates. The increase in rates came after a four-month pause where rates had been held at 4.5%.

After very strong US labour data last week, this week has seen surprisingly weak data from the US, which makes it difficult when trying to determine the current health of the world’s largest economy. Monday’s ISM services index for May came in at 50.3, the lowest level this year. The ISM surveys services firms purchasing and supply executives. A reading above 50 indicates expansion, while below 50 is seen as a contraction. The 50.3 reading for the US shows that the services sector is barely expanding. On Thursday US jobless claims increased by 28,000 to 261,000. The data measures the number of Americans filing new claims for unemployment benefits and has risen to the highest level since October 2021. The US dollar fell on the news with investors pricing in a higher probability of the US Fed pausing their interest rate hikes next week.

While the focus of most developed markets is on stubbornly high inflation, China appears to be facing deflationary pressures. The Chinese producer price index (PPI) fell -4.6% (year-on-year), the biggest drop in seven years. PPI measures the prices domestic producers receive for their output. Headline inflation for China came in at 0.2% and will put further pressure on the central bank to cut rates in an effort to try to stimulate the economy.

Revised Q1 GDP figures for the Eurozone mean the area is in a technical recession, with negative growth in Q4 2022 and Q1 2023. High inflation has negatively impacted the consumer, while rising interest rates are also beginning to slow economic growth. Last year a recession was fully baked into the price of most European equities and as such the news, while headline grabbing, has not negatively impacted the stock market. In fact, European equities have actually been a bright spot in 2023, with the largest nation, Germany, seeing their domestic stock market hit all-time highs in May.

The Halifax house price index showed that UK home prices have fallen 1% over the last year, the first time this index has shown a yearly drop since 2012. The impact of higher interest rates has led to increased borrowing costs for homebuyers and has stifled demand. Mortgage rates are once again rising and one would expect further pain in the housing market, especially if interest rates remain elevated in the medium term.

The mixed messages from economic data continued this week, which can make asset allocation challenging. We think in this environment it is sensible to maintain diversification and take a slightly cautious stance. We also believe the ability to be nimble will be an advantage going forward, allowing one to exploit heightened volatility, which we are currently witnessing in bond markets. A quick glance to next week sees US inflation data released on Tuesday as well as the US Fed meeting and setting interest rates – the big question is whether the US Fed will pause, or continue to take rates higher.

Andy Triggs, Head of Investments

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 27th May – 2nd June 2023

Five weeks ago, we spoke about the luxury brand Moet Hennessey Louis Vuitton (LVMH) becoming the first European brand to achieve the $500bn market cap value. However, the luxury goods market has been hit over the last two weeks. With the rally initially being driven by demand from China there has been a cooldown in sales, with LVMH shares falling -5.55% over the last month, down to a market cap value of $412bn.

House prices in the UK have fallen at their fastest annual pace in 14 years, as Nationwide reported a 3.4% drop in house prices in May. This fall in house prices is the largest (year-on-year) drop since July 2009, which will be welcomed by potential first time buyers, however rising mortgage rates are still a factor in play. With the UK’s inflation rate slowing less than expected to 8.7% and core inflation rising, the Bank of England are still expected to hold rates higher for longer and this in turn will drive up mortgage interest rates. For first time buyers or home owners whose fixed rate terms will be ending soon, a two-year fixed rate mortgage is around 5.49%, significantly greater than the 3.25% it was a year ago.

Wednesday was the last day of May with inflation results for many of European countries released. German inflation fell to 6.1%, its lowest level in over a year, with headline inflation also falling in France, Spain and Italy. With greater than expected falls in price growth, the next ECB meeting on 15th June in Frankfurt will be interesting to watch as investors had hoped for greater caution on further rate hikes. On Thursday, ECB President Christine Lagarde, acknowledged rate hikes are working but as ever maintained a strong tone stating the hiking cycle needs to continue “until we are sufficiently confident inflation is back on track to return to target”, referring to the inflation target of 2%.

Another hot topic this week has been the story of Artificial intelligence (AI). Nvidia are the world’s largest semiconductor company, who seemingly are the biggest winners of the AI boom as on Tuesday they briefly hit the $1trillion market cap mark. Nvidia are responsible for creating around 80% of the chips (graphic processing units) that power AI.  Only Apple, Alphabet (Google), Microsoft and Amazon have reached this $1trillion milestone, with Nvidia’s stock value tripling in under eight months reflecting the rush in interest. Despite the sky-high valuations, investors seem to believe Nvidia’s business has room for growth as AI is still in its early stages and has not yet seen mass adoption.

US Non-farm payrolls were released this afternoon, with a staggering 339k jobs added in May beating the market expectation of 190k. This is a rise to April’s revised figure of 294k. With the strong labour market and inflation in the country falling, the expectations of the US falling into a recession dampens, however it may prove that the next US Fed meeting is not the turning point for rates.

Early this week, Turkey’s president Mr Erdogan was re-elected, winning another five years in power in a decision that has split the country. President Erdogan, who has led the country for the last 20 years, secured 52% of votes in a narrow win, the closest the president has come to being unseated. Notoriously known for harsh levels of intimidation and jailing opposition politicians and journalists, the population are torn over the president’s use of state resources and control of media to influence the result.  With the dust settling, a spiralling economy, rampant inflation of 43% and significant Syrian migration commotion within the country are tasks the President will have to face immediately.

Continued signs of rate hikes, imminent recession fears and political unrest are just some of the issues challenging investors currently. Despite this we continue to focus on long-term opportunities, while ensuring there is sufficient diversification in portfolios to help protect against short term unease. To quote Simon Evan-Cook, who sits on our investment committee, with long-term investing it’s best to “keep your hands in the car at all times”.

 

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 20th May – 26th May 2023

It has been a busy week in markets and for the team at Raymond James Barbican. On Thursday, the team participated in an industry wide football tournament that was organised to help raise funds for a cancer research trust, Sarcoma UK. After impressing in the group stages and winning the group the team were knocked out in the quarter finals on penalties.

One of the biggest shocks this week was the release of the UK’s inflation rate. Headline inflation (year-on-year) for April was 8.7%, the first time it has fallen below 10% since August 2022. However, the drop in inflation was less than anticipated and core inflation (excludes the price of food and energy) was the main cause of concern as it rose from the previous month to 6.8% in April. UK government bond prices have fallen (yields rise) on the back of the data with the 2yr government bond yield rising above 4.5% as investors are now expecting further interest rate rises from the Bank of England (BoE). Rising inflation is also a key worry for the Prime Minister Rishi Sunak, who promised to halve inflation by the end of this year, requiring it to fall to 5%. It may have been too great of a promise as the Conservative party have lost seats in local elections and are under pressure heading into the national election next year.

Rising bond yields (falling prices) have been a theme this week with US government bonds also suffering following the release of US Fed meeting minutes. While there was acknowledgement that the need for further interest rate rises “had become less certain” it also wasn’t ruled out and this was enough to cause a sell-off in bonds.

UK Retail sales surprised this morning, rising 0.5% in April (month-on-month). This is up from the -0.9% in March which the Office for National Statistics believe were hindered by unusually heavy rain, keeping shoppers at home. This rise certainly suggests there has been little impact from the surge in inflation at this moment in time. Pound sterling has risen against USD to 1.235 since the news, following weakness earlier in the week. Households have been resilient, however it’s evident the squeeze will begin as 1.5m households face an increase in mortgage interest payments this year.

Ryanair, Europe’s largest airline by passenger numbers, have released a report stating they expect 10% traffic growth this year as they posted better than expected net profits of €1.43bn. Robust demand for airlines tickets show travel has not been affected despite rising interest rates and Ryanair plan to operate almost 25% more flights than pre-Covid levels this summer. CEO Michael O’Leary had a bearish tone on the future, however, as he believes demand for European short haul flights could drop this winter and early 2024 as consumer spending becomes strained.

The German economy is the largest in Europe and the fourth largest in the world after the United States, China and Japan. However, after revised figures, GDP in the country fell by -0.3% in Q1 2023. This follows the -0.5% in Q4 2022 meaning they are in a technical recession. The warm winter weather eased the pain felt from their over reliance on Russian energy but even a rebound in industrial activity and the easing of supply side issues were not enough to help the Germans avoid recession. The German Chancellor, Mr Scholz, appeared to be more optimistic about future growth in the economy stating the massive expansion of clean energy “would unleash the strengths of the economy” coupled with investments in semiconductor and battery factories.

The recent artificial intelligence (AI) excitement has led to a very narrow market rally, led by some of the mega-cap US growth stocks. Nvidia is one of the stocks that represents the AI rush. On Wednesday it released better-than-expected results and saw its share price rally around 25%, adding around $200bn to its market cap, which is now approaching $1 trillion. The company now trades at an eye-watering valuation and while the narrative is certainly compelling, we only need to look back a few years to see how it can be dangerous to get too carried away with powerful stories. During COVID-19, stocks such as Zoom and Peloton saw their share prices rise by significant amounts on the back of the work-from-home story, only to see falls of 80% or more since reaching highs.

The current market conditions have been challenging for portfolios this week, with bonds struggling while equity markets in general have also been weak. The bright spots have come from the technology sector and areas of Japan. We continue to be mindful around the lagged effects of rising interest rates and acknowledge the inflation and interest rate outlook could look very different in the coming months.

 

Andy Triggs, Head of Investments & Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

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