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Weekly Notes

The Week In Markets – 2nd March – 8th March 2024

The focus in the UK this week was on the March Budget, which was dubbed the “The Budget for Long Term Growth”. After much heckling and jeering the Chancellor announced his plans to boost the economy, while attempting to close the gaps in the polls with the Labour Party. We saw the arrival of a new British ISA, a measure introduced to encourage more people to invest in UK equities. This measure has been in the pipeline for some months, although it has faced push back from various groups. Jeremy Hunt’s decision to push ahead with the British ISA is hoped to help “grow our economy, reward investors and support British businesses”.

There were other major announcements, such as National insurance (NI) being cut by an additional 2%, the earnings threshold for child benefit increased to £60,000, the windfall tax on oil and gas companies extended to 2029 and the higher rate of capital gains tax on residential property reduced from 28% to 24%. Overall, there were no major surprises in the Budget, and markets seemed fairly pleased with the outcome, with both UK equities and UK government bonds rallying on Wednesday.

This week we saw our latest example of mergers and acquisitions (M&A) in the UK as Nationwide agreed to purchase Virgin Money in a £2.9 billion deal. Just last month Barclays bank purchased the banking operations of supermarket Tesco for £600m. Many banks currently trade on low valuations, despite increasing profits recently and having strong balance sheets, as such the trend for M&A could continue going forward. The same is true for the whole UK market, where there has been a recent pick up in M&A activity, largely driven by foreign buyers picking off cheap UK assets. While this provides a short-term boost for investors, over the long-term it could damage the UK market as companies are picked off.  

The European Central Bank (ECB) met for their second meeting of the year on Thursday and as expected they held the base rate firm at 4.5%. Investor expectations for the first-rate cut has now been pushed back to June as ECB President, Christine Lagarde, mentioned cuts were not discussed this meeting but the “dialling back of our restrictive stance” will begin in following meetings. Incoming data releases will be pivotal towards the rate decision as inflation falls towards the 2% target, while the ECB will also evaluate Q1 wage data before making their move. We have previously written that it is likely the ECB will not cut before the US Fed make their first move, for fear of devaluing their currency, however, the data may force the ECB’s hand to act sooner rather than later.

US Non-farm payroll data was announced this afternoon with 275,000 jobs being added to the economy in February despite the market expectation of 200,000 jobs. This shows the continued resilience in the labour market, highlighting the strength of the US economy. The US Fed will consider all data points before deciding to cut interest rates later this year.

Apple have had a tough start to the year. They have just been hit with a €1.8bn EU antitrust fine and now they face another dilemma as iPhone sales in China have fallen 24% (year-on-year) over the first six weeks of 2024. China contributes just under a fifth of total sales for Apple. Huawei are China’s leading tech giants in smartphones, and they have seen sales rise by 64% over the same period. Apple are one of the “Magnificent Seven” stocks that contributed to the extraordinary US market performance in 2023, however it appears that their bubble may have burst.

Super Tuesday is a term commonly known in the US as the beginning of the race for the White House during an election year. Voters in 15 states chose their candidate to run for Presidency and the expected winners were no surprise as Joe Biden and Donald Trump emerged as front runners. Republican Nikki Haley did her best but came short in convincing the party that it was time to dump Trump.

It was a largely positive week for equity and bond markets. After a stellar end to 2023, UK assets had started the year on the back foot but have begun to erase earlier falls. One asset class that has regained its shine has been gold, which is approaching all-time highs once again.

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 – 24th February – 1st March 2024

Today marks the first day of March as we close the chapter on February. History has shown that February is on average the second worst month for equity returns. However, despite all the narratives we can currently think of, this February is turning out to be an anomaly. The S&P 500 and tech-heavy NASDAQ are up beyond 3%.

In the UK, house mortgage approvals have risen in January to 55,227. This was a surprise as it beat market expectation of 52,000 and signals the largest rise in approvals since October 2022. Recovery of the UK housing market is underway following the squeeze of higher restrictive policy environment over the past 2 years. The Bank of England (BoE) are expected to cut interest rates heading into Q2 2024, and mortgage rates will follow the trend. Rates on the two-year and five-year for mortgages have also continued to fall from their peak last July. The government’s latest proposal of a 99% mortgage scheme in an attempt to encourage first time buyers has also received mixed reviews.

Shein is a Chinese clothes retailor that has in recent years gained huge popularity through apps such as YouTube and TikTok. It was downloaded twice as many times as Amazon’s app over 2023 making it the world’s most popular shopping app. The reason we bring it up is because this week, UK Chancellor Hunt held talks with Shein in a push for the company to list on the London Stock Exchange. A listing the size of Shein’s would be a huge accomplishment for the UK, who have struggled to attract IPOs and retain promising companies who have listed in the US. Bloomberg have estimated the float could total up to $90billion!

US inflation figures were out on Thursday as the US Fed’s preferred measure of inflation, PCE, was announced. Headline PCE in January (year-on-year) fell to 2.4% from the previous 2.6% in December as Core PCE also fell to 2.8%, 10bps lower than December. The timing of the first interest rate cut by the US Fed remains uncertain and recent policymaker commentary have indicated they are in no rush to make that first cut.

Japan inflation figures were also released this week as headline inflation (year-on-year) was 2.2% in January, falling from 2.6% the previous month. This is the third consecutive month inflation has fallen and as core inflation hit the central banks target of 2%, the end of negative interest rates is a possibility in the following month of April. Energy costs falling has been a significant contributor to the slowdown as government subsidies assisted in curbing oil and gas bills. The challenge for the Bank of Japan (BoJ) will be to balance falling inflation but also tackle the two consecutive quarters of falling GDP alongside the weak Yen. Off the back of positive inflation figures, Japan’s Nikkei approaches the 40,000 level.

Next week is the March Budget as we eagerly await to see what measures will be announced. This event is largely regarded as Rishi Sunak and Chancellor Hunt’s last opportunity to sway the imminent election back towards the Conservatives.

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 – 17th February – 23rd February 2024

Last week we noted that Japan fell into a recession, so it may surprise some that this week we are commenting on Japan’s Nikkei index hitting an all-time high, surpassing the previous high which was set on 29th December 1989. It has taken 34 years for the index to get back to previous highs after the bursting of the Japanese equity bubble at the end of the 1980s. The Nikkei index has been on a tear in 2024, rising 17.5% (in local currency terms) and taking top spot for the best performing equity market this year.

The Japanese equity peak that was attained in 1989 was often referred to as the “iron coffin lid” as it became the symbol of Japan’s many years of economic stagflation. However, 34 years later that lid has been lifted, helped by a falling Yen which has boosted the exporters, while foreign investors have fled Chinese equities and found solace in Japan. Japan’s government will also have seen the benefits of their subsidised scheme, “savings to investments”, which allowed domestic households to invest into a Japanese NISA (Nippon Individual Savings Account). A scheme like this would certainly benefit the UK market and something that the Chancellor seems to be exploring ahead of the March Budget.

While the word “recession” can sound scary, we must remember that equity markets are forward-looking mechanisms, discounting the future as opposed to present and it is why equity markets often bottom and recover well before the economic low. Indeed, in the UK, the mid-cap index has historically delivered returns of around 20% in the following 12 months once a technical recession has started.

China appears to be making attempts to revive their property market and broader market as on Tuesday they announced a reduction in their benchmark mortgage rate. A 25-bps cut to their five-year loan prime rate is the largest cut since the rate was introduced in 2019 and now stands at 3.95%. Investors still however seem to be waiting for further support measures as although the rate cut was immediate, existing mortgage holders will not benefit from a loan repayment reduction until next year. A follow-up of cash injections into lenders, housing projects and developers is widely expected.

A lot of discussion around US markets over the past few months has been around the “Magnificent Seven” but we are certainly seeing Nvidia’s sway over the market growing at an absurd rate. Nvidia embodies the artificial intelligence movement as the semiconductor company’s chips are considered market leading. On Wednesday, Nvidia reported record revenues of $22bn for Q4 and full year revenue for 2023 of $60bn, leading to a market rally as the S&P 500 rose 2% and tech-heavy Nasdaq rose 3%. Nvidia added $250bn in market cap on the earnings news, the biggest single increase on record, and now stands just shy of $2 trillion in value. Who knows if we are in bubble territory, there are certainly parallels that can be drawn to 2021, however, it is clear that Nvidia is backing up the hype with very strong earnings growth and product demand.

There is positive news in the UK as energy bills are set to fall to their lowest levels in two years. From the month of April energy regulator Ofgem are set to cut the price cap by around 12%, equating to an average saving of almost £240 per household. This will be the lowest level since prices were raised as a consequence of Russia’s invasion of Ukraine in February 2022. Ofgem however are still facing the issue that a record £3.1bn remains in unpaid bills. Energy prices have been a significant contributor to rising inflation and as this continually falls, investors believe this could help bring inflation down to target of 2% by June.

Eurozone inflation has continued to ease as headline inflation (year-on-year) fell to 2.8% in January. Expectations of an ECB rate cut have recently been pushed back to May and it’s estimated the ECB won’t cut rates before the US Fed.

It’s been a fascinating week in markets, which was dominated by the results of one single company, Nvidia. Their recent success helped propel the majority of global indices higher as the belief around the artificial intelligence revolution increases.   With such a high profile company posting significant gains there is likely to be an element of “FOMO” (fear of missing out), however, we continue to believe a well-diversified portfolio, across a range of asset classes remains appropriate. This will of course include Nvidia, alongside many other positions, and ensures portfolio performance is not dictated by one company.

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 – 10th February – 16th February 2024

The UK economy has officially fallen into a recession in the second half of 2023. The most anticipated recession has finally arrived many months later as data on Thursday confirmed GDP fell by -0.3% in Q4 2023. Market expectation was that GDP would only fall -0.1%. This disappointment was offset by better than expected GDP data for the month of January, pointing towards a mild and short-lived recession.

At the start of January 2023, Prime Minister Rishi Sunak made five promises, one was to grow the economy. We are in a pivotal year for the Conservative party, and this failed promise may be one of the reasons the party lose the upcoming general election. There are various reasons for the slowdown at the end of 2023; industry strikes were prevalent, poor weather kept shoppers’ home and the list goes on. The March Budget is less than three weeks away and may be one of the last chances that the Prime Minister and Chancellor get to turn the tide in favour of the Conservatives.

Politics is not our area of expertise so let’s turn back to UK inflation data which was released the day before on Wednesday. Headline inflation (year-on-year) held steady at 4% despite market expectations of a slight rise and the same was the case for core inflation, (excludes food and energy prices) reported at 5.1%.  Inflation is certainly at its sticky point and the Bank of England (BOE) must consider this before their next meeting. UK wage growth (excluding bonuses) is trending lower but still running at 6.2%. This is still double the pace that the BoE would deem acceptable to bringing inflation down to the 2% target. There were some positives in the inflation report, with food prices falling on a month-on-month basis for the first time in two years.

Valentines day was celebrated on Wednesday and this day was chosen as a tactical strike day. Delivery food drivers for companies such as Deliveroo and Uber Eats staged a strike in demand for better pay and conditions. It involved up to 3,000 drivers and riders who are generally classified as self-employed, meaning their employers are not obliged to pay them the national living wage of £10.42 an hour. This wage will be rising in April and the workers want to be compensated for the “cold, rain and absurd distances” that they have to brave. On Friday morning UK retail sales shocked the market, with January’s data showing the biggest recovery in retail sales since April 2021 with people buying more across all categories except clothing. This, coupled with positive results from companies such as NatWest led the market higher on Friday and capped off a good week for UK equities.

Inflation in the US was a shock to markets as inflation came in hotter than expected, contradicting UK data. For January the inflation rate (month-on-month) rose to 0.3% and core inflation rose to 0.4%. This data disappointed and markets began to sell off, the S&P 500 dropped 1.4% on the Tuesday. The story of the US economy has been a defiant one as it remains robust, and this has meant expectations of rate cuts have firmly been pushed to the US Federal Reserve’s May meeting rather than March. In both the US and UK, the last mile for inflation is proving the toughest. The Russell 2000 index (US small cap index) proved particularly volatile this week, falling over 4% on the back of the higher inflation data. However, it has also experienced some very positive days of late and over the last five trading sessions is still in positive territory.

Recession has also arrived in Japan as they contracted at the end of 2023. GDP growth over Q4 2023 was -0.4%, a complete blow to investor expectations of 1.4%. The road to economic recovery in Japan will surely begin when the central bank decide to exit their decade long ultra-loose monetary policy. Weak domestic demand however makes it difficult for the Bank of Japan (BoJ) to pivot towards monetary tightening as they plan to do so by April. Large cap Japan stocks have performed extremely well during this period helping drive the Nikkei 225 index up 15% year to date. This has been offset by a weakening yen which has fallen over 5% versus GBP.

While Q4 2023 data was disappointing, more recent data suggest economies are re-accelerating which has spurred on hopes of very mild recessions and future growth. This combined with lower rates and falling inflation is the bull case for equities. We are positioned for this, but equally hold a range of assets that should benefit if this base case does not occur.

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 – 3rd February – 9th February 2024

While western countries have battled with inflationary pressures China has been faced with a contrary issue. Persistent deflation has been a problem since October 2023 and there was no change this week, with inflation coming in at -0.8% (year-on-year), beyond market expectations of -0.5%. China has not seen these levels of deflation since September 2009.

China is facing three main problems; persistent disinflation/deflation that we mentioned above, the collapse of their stock market, which is down around 60% over three years and a falling property market. The world’s second largest economy has struggled to effectively stimulate the economy following the end of the COVID curbs in 2022 and the emphasis is really on the Chinese government to provide a solution.

Catherine Mann, a member of the UK Monetary Policy Committee (MPC) spoke this week and revealed her vote was to raise interest rates by 25bps (0.25%) to 5.5%. Her reasoning included the prospects of real incomes rising, continued tightness in the labour market and geopolitical events such as the attacks on the Red Sea trade route having the potential to raise UK inflation once again. The MPC is split over decisions on the base rate and investors have shifted views on the first rate cut to May 2024.

In the US, weekly jobless claims, the number of Americans filling for unemployment benefits, fell to 218,000, slightly below market expectations of 220,000. It’s interesting that high profile layoffs have not led to a surge in claims, likely meaning workers seem to be easily finding new jobs. Large tech companies such as TikTok, Amazon and Google have cut their working staff and most recently, Frontdesk, a US-based tech startup, fired 200 employees over a 2-minute Google meet call. Good news of sustained labour market strength weakens the case for the US Fed to cut rates in March, again moving expectations to May.

Uber Technologies is a brand that needs no introduction with its popular taxi service and food delivery service worldwide. Just this week Uber reported their first operating profits as a listed company, a pivotal moment for the company after their aggressive expansion plans paid off. The US firm reported $1.1bn profit in 2023 and we saw a 1% rise in the share price on Wednesday, now valuing the company at $147bn. Next week, Uber CFO is set to announce whether Uber will buy back shares or even pay out a dividend to investors.

The political elections continue this week as voters in Pakistan headed to the polls on Thursday. Strangely, the Ministry of Interior in Pakistan announced the suspension of mobile phone cellular services nationwide to “maintain the law-and-order situation”. Understandably this enraged the nation, with events described as an attempt by those in power to manipulate the election outcome. Former Prime Minister, Imran Khan, has already been jailed and barred from the ballot for corruption.

We have often said predicting the future is impossible and recent world events prove this. Diversification is as key as ever as we continue to shape portfolios. While we monitor and review markets on a daily basis, we prefer to focus on the long-term (multi-years) when it comes to strategic decision making.

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 – 27th January – 2nd February 2024

In January we covered surprisingly weak UK retail sales, so H&M’s disappointing results this week weren’t necessarily unexpected.  The Swedish clothing firm is popular in UK high streets and shopping centres but saw sales fall by 4% over December and January. This has led to CEO Helena Helmersson handing in her resignation, suggesting a change in leadership is required. H&M have struggled to compete with brands such as Zara and online fast fashion giant Shein, as they failed on profitability objectives resulting in closing stores and laying workers off.

The Bank of England met on Thursday afternoon, holding interest rates firm at 5.25%. It was expected that this first meeting of the year was too soon for any rate cuts to occur and only one Monetary Policy Committee member (MPC), Swati Dhingra opted for a cut. The voting was a three-way split as two members voted for a 25bps rise while the final six voted to keep rates stable. Governor Bailey mentioned there had been a “shift in the BoE’s thinking” towards inflation, unemployment and wage growth levels needed to be achieved before a pivot on policy; this led to investors pushing back expectations of a first rate cut to May.

The eurozone has narrowly avoided a recession with Q4 2023 growth coming in flat at 0%. Market expectations were that GDP would be negative at -0.1% and this was based on the two largest economies, Germany and France, contracting and posting no growth. The belief among investors is that the European Central Bank (ECB) will only cut rates at their next meeting if the US Fed cut rates over fears of devaluing the Euro. It seems evident that the ECB need to make a move in order to stimulate the eurozone. 

On a more positive note, German inflation eased more than expected to 2.9% after December’s anticipated anomaly rise. Germany is the largest energy consumer in the Eurozone with high energy prices burdening their manufacturing industry however the recent drop in energy prices contributed to the fall in inflation. There will be another inflation print before the ECB’s next meeting in March so a falling trend could spur the ECB to make their move.

Germany and France are alike in another matter as both countries are seeing protests from farmers. There is a phrase “no country riots quite like the French” and the farmers are no exception. French farmers blocked major highways around Paris over pay disputes. Inflationary pressures have raised the costs of major inputs such as energy, fertiliser and transport and this has now been added to by excessive regulation. This put immediate pressure on newly appointed PM, Gabriel Attal, and he announced the scrapping of diesel tax increases for farmers and extra steps to reduce red tape on farmers.

Earnings season continued in the US and we saw mixed results from the so-called ‘Magnificent Seven’. Meta (Facebook) and Amazon posted better than expected results, with Meta even initiating a dividend, which sent share prices soaring after-hours. Apple’s results were underwhelming with concerns around China leading to growth fears; shares in the $3 trillion company dropped over 2% in after-hours trading.

US Non-Farm Payrolls data has just been released and surprised to the upside as 353,000 jobs were added to the economy in January. This came in almost double market expectations of 180,000. The continued strength of the labour market highlights the current resilience of the US economy and caused investors to question whether the Fed will need to cut rates in the near term. We witnessed US government bonds sell-off on the news.

On Thursday Formula One driver Lewis Hamilton, announced his decision to leave Mercedes at the end of the 2024 season, joining rivals Ferrari. The announcement of the seven-time world title winner joining coupled with a positive earnings report sent Ferrari stock up 11%, reaching an all-time high. The right driver in the right team can be a very powerful combination and indeed reflects some of the qualities we look for when selecting fund managers for our portfolios. We believe the right investment team is important, but that team must also operate in the right business (culture) in order to maximise and sustain performance.

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 January – 26th January

Storm Isha and Storm Jocelyn battered the UK this week, with winds of up to 99mph being recorded. The storms brought disruption to travel, with much of the country operating under weather warnings. Investors in Chinese equities will have felt like they have been through a storm of late, however, there were signs of blue skies ahead after government intervention this week.

Chinese authorities stepped in this week with a raft of measures aimed at supporting the economy and improving stock market confidence. They cut the bank reserve rate by 0.5% in a move that should see around $140bn injected into the economy. The cut was the biggest in over two years. The Chinese regulator also sought to limit short-selling of Chinese stocks, as well as highlight future plans to support the real estate sector. There is an expectation that this change in tact from China could see further stimulus measures over the near-term. The announcements had the desired impact with Chinese and Hong Kong indices staging strong rallies in the second half of the week, lifting benchmarks from multi-year lows.

While the world’s second largest economy appears to be stalling the world’s largest economy, the US, reported stellar Q4 growth, exceeding expectations. The economy grew at an annualised pace of 3.3% in Q4. This strong growth rate, occurring at a time when inflation was falling, has helped further fuel the soft-landing narrative. US equity markets continued to advance this week, reaching new all-time highs, driven by the mega-cap names. The US small cap index remains well below highs; the strength of the US economy has the potential to lead to a recovery in smaller companies.

Staying with the US it looks as though it will be Trump vs Biden in the leadership race to be the next US President. We saw Ron DeSantis drop out of the presidential race and endorse Trump, who has also defeated Nikki Haley in the New Hampshire primaries.

At a company level we saw Q4 results from some of the large US companies. There were disappointing results from Tesla, whose stock price dropped over 10% on the news. While chipmaker Nvidia can seemingly do no wrong, others in the sector are not enjoying the same success – both Texas Instruments and Intel released underwhelming results with no expectation of a short-term turnaround.

The European Central Bank (ECB) maintained headline interest rates at 4.5% this week, which was expected.  ECB President Lagarde continues to push back on the prospects of a spring rate cut – all eyes will be on Eurozone inflation next week to help gauge whether an imminent rate cut is likely.

There was positive news from the UK with better-than-expected services and manufacturing PMI data. The UK economy has shown resilience over the last 12 months and continues to muddle through, despite the pressure of interest rates at 5.25%.

In what has been a busy week we have seen Japanese inflation fall below target (2%), reaching two-year lows. This is despite interest rates still being held in negative territory in Japan. With little inflationary pressure, there is a diminishing likelihood of tightening of policy by the Bank of Japan.

The mixed start to the year for equity markets continues with regions such as Japan and the US performing very well, while China and Europe (including the UK) have been weaker. Bond markets in general have come under pressure as inflation and economic data have led investors recanting on the probability of rate cuts in the spring. Markets continue to be very short-term focused, with each data point or quarterly earnings report leading to volatility and shifts in sentiment. We continue to believe this short-term trend creates fantastic opportunities for long-term investors, who are willing to extend their time horizon.

 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 – 13th January – 19th January 2024

The Artificial Intelligence (AI) theme was a key driver of performance in 2023 with firms such as Microsoft and Nvidia battling to be the market leader of the technology. Both firms have greatly benefitted from the AI “bubble” and this week Microsoft overtook Apple as the world’s largest company by market capitalisation. Currently standing at a valuation of $2.9 trillion, the firm is the largest investor in the popular ChatGPT application and have been adding AI into Microsoft products such as Bing search engine.

UK inflation has been on a sharp decline from its high of 10.4% in February 2023, however for December 2023 (data released on Wednesday) we saw headline inflation rise for the first time in 10 months. Surprising economists, CPI rose to 4% from 3.9% and was higher than the expectation of 3.8%. Core inflation (excludes food and energy prices) froze at 5.1%. Following the last Autumn statement, there was a rise in tobacco duty at the end of November and this has been reported as the key driver of inflation, adding 0.1%. Intriguingly, only 12.9% of the UK population (aged 18 and above) smoked cigarettes over the past year, a record low proportion as the UK Government continue to tackle smoking prevalence.

Finalised inflation data from the Eurozone was released late Wednesday morning. Headline inflation as expected rose from November’s 2.4% to 2.9%. Core inflation fell in line with market expectation to 3.4%. The European Central Bank (ECB) stood firm on their decision to pause interest rates as they did not expect inflation to fall as quick as investors had hoped. Wages in the eurozone have now been singled out as the largest risk to the fight against inflation as market expectations for 2024 are 4.3%. As wages increase, costs for firms increase and this cost is then passed through to the price of goods and services, hence pushing up inflation.

Germany are leading exporters of machinery and vehicles however prevalent inflation, high energy prices and falling global demand has led to the economy contracting -0.3% over 2023. Europe’s largest economy did manage to avoid a recession as GDP over Q4 2023 was flat, recovering from the negative print in Q3. Economists do not have an optimistic tone on 2024 for the country as they estimate energy prices will have to halve in order for the country to regain competitiveness, something that is seen as unlikely to happen.

UK retail sales were released just this morning and the falls were alarming. Retail sales (year-on-year) for December fell -2.4%, a large deviation from investor expectations of 1.1%. Month-on-month, for December, they fell -3.2%, well below expectations of -0.5%. This is the worst monthly drop (excluding the pandemic) since 2008 and again the fear of a recession in the UK has risen as we await Q4 2023 figures. British luxury brand, Burberry, have announced a fall in operating profits amid slowing luxury demand – further signs of consumers pulling back on non-essential goods. The sharp drop in figures is likely to be taken as good news to investors, sales are dwindling due to the restrictive monetary policy, and this makes the chances of interest rates cuts occurring more likely.

If we look across the Atlantic to the US, retail sales tell another story as sales rose in December (month-on-month) 0.6%, above forecasts of 0.4%. This was boosted by increases in car sales and online purchases. The US economy is still strong, unemployment remains low, and wages are now rising above inflation. All this has made investors question whether the expectation of interest rate cuts starting in March 2024 was a little premature. As a result of this, we have seen weakness in the US bond market along with small cap equities, which are often the most interest rate sensitive parts of the market. Fed Governor, Christopher Waller, said the US Fed would be “moving carefully and methodically”, not giving away any indications on monetary policy.

Data from China this week showed their recovery from COVID-19 continues to be bumpy. While the economy grew by 5.3% in 2023, growth in Q4 was very lacklustre, as the effects of the re-opening of the Chinese economy wain. The COVID-19 bounce is well and truly over, which could lead to limited growth in 2024 for the world’s second largest economy. Youth unemployment data, which hasn’t been shared for six months was now reported and showed youth unemployment at a little over 14%, lower than the high of 21% in June 2023. While China’s outlook is more precarious than it has been in many years, the stock market has heavily discounted this, with equity markets down over 50% for the last three years.

The bumpy start to 2024 continued this week with a mix of data helping to muddle views about inflation and interest rates. Focusing on single data points can be limiting; it is often better to focus on the trend. We continue to see the trend in inflation as lower, and this should be supportive for a wide range of asset classes in 2024.  

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 – 2nd January – 5th January 2024

Happy New Year and welcome to the first weekly note of the year. The current high interest rate environment looks to have led to people trading down as discount grocery stores Aldi and Lidl ran up their best ever trading day on Friday 22nd December. It is estimated that half a million shoppers switched permanently from the mainstream Tesco and Sainsbury to the discount stores. Tesco are set to release reports on how they fared over the Christmas period.

It is difficult to sit at the start of the year and forecast what is going to happen. However, that doesn’t stop us from making predictions and planning for a variety of different outcomes. Will inflation remain sticky or fall to the 2% target? Will central banks cut rates more than expected? Will we see the long and variable lags of monetary policy? Will we avoid a recession? Will potential elections influence markets? All valid questions that only time will answer.

On Thursday afternoon, labour leader, Sir Kier Starmer gave his first speech of the year. In his speech “Project Hope” he set out five main missions which include getting Britain building houses again, to decarbonise UK energy by 2030 and getting the NHS back on its feet.  Election years can have significant impact on investor sentiment so it will be important to stay on top of the political landscape this year.

Halifax bank reported UK house prices (year-on-year) rose for the first time in eight months as prices were 1.7% higher than the previous December. This has been due to a tight sellers’ market with not as many houses up for sale. In this higher interest rate environment mortgage rates have surged, and activity has fallen. However, as we have seen the pause in interest rates and investors flirting with the idea rates will be cut soon, buyers and sellers have begun to return to the market. The feeling is that as more people come to market, house prices could fall within the 2% to 4% mark and with mortgage rates continuing to drop, buyer confidence should increase, seeing more movement in the housing market.

US job openings was the first insight of the year into the labour market, with openings falling to 8.79m in November. This will be encouraging for the US Federal Reserve as a sign that the labour market is cooling and strengthen investor expectations of rate cuts later this year. Another positive sign for the US Fed is that the number of people quitting their jobs fell to 3.47m, the lowest level since February 2021. With less people quitting and job-hopping this should help ease wage growth.

We then received mixed market messages this afternoon as December US Non-Farm Payrolls data was released and surprised as 216,000 jobs were added to the economy. This came in largely above market expectations of 170,000. The strength of the number of jobs added to the economy should keep pressure on wages and bonds yields rose on the back of the data as investors mulled over whether an expected six interest rate cuts in 2024 was too optimistic.

The Eurozone may be in bigger trouble than first anticipated as business activity contracted in December. Purchasing Managers Index (PMI) is an index that indicates the direction a sector is heading (whether contractionary or expansionary), and the services PMI is currently still in the contractionary zone at 48.8. This could point towards a recessionary period as growth struggles continue; Q4 2023 GDP data could be negative as it was in Q3 2023.

Eurozone inflation as predicted by ECB President, Christine Lagarde, rebounded to 2.9% (year-on-year) in December. It was anticipated that the rise would occur due to the change in the energy price base, but core inflation (excluding food and energy) dropped to 3.4% in December from 3.6% the previous month. This strengthens the ECB’s decision to continue to hold rates firm.

The Santa Rally certainly delivered in the closing month of 2023, however, the first week of 2024 has been subdued. The tech-heavy NASDAQ 100 has just seen five back-to-back days closing down. The last time this event occurred was in December 2022, and following this the NASDAQ 100 went on to post stellar gains in 2023. We continue to stand by our beliefs on diversification within portfolios, allowing us not to be caught out by short term volatility. After such a strong end to the year, it is natural that there is an element of profit taking and rotation of out last year’s winners. We continue to see great value in many areas of the equity and fixed income markets and believe the backdrop of declining inflation, mild growth and an end to high interest rates should be supportive for asset markets.

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 – 16th December – 21st December 2023

There are just four days to Christmas Day, but celebrations have begun early as markets have continued to soar. Falling inflation within the Eurozone and UK has continued to spur markets on.

UK inflation was released on Wednesday, falling to 2-year lows. Headline inflation for November (year-on-year) fell to 3.9%, down from 4.6% the previous month. Core inflation (excludes food and energy prices) fell to 5.1%, beating expectations of 5.6% and October’s previous 5.7%. This strengthens the case for interest rate cuts by the Bank of England (BoE) next year and investors have begun to price rate cuts by the beginning of Q2 2024. UK government bonds, which have been unloved for much of the year, have performed very well over the last six weeks, and this week was no different. The yield on the 10-year UK government bond fell to 3.5%, after reaching 4.7% only weeks ago, as investors reacted to lower inflation and the expectation of rate cuts in early 2024.

Eurozone inflation for November was released on Tuesday, showing inflation is now only just above the 2% target. 2.4% was the final figure (year-on-year) which was in line with market expectations and a fall from the previous month’s 2.9%. European Central Bank (ECB) President, Christine Lagarde, has warned against investors celebrating too soon and pushed back on early interest rate cuts. However, the market has so far dismissed her comments, believing the ECB will be forced to cut rates early in 2024. The yield on the 10-year German Bund dropped below 2% this week.

Assessing Eurozone inflation at a country level, it is tough not to be optimistic with regards to inflation. Year-on-year inflation dropped in 21 of the EU’s member states and remained the same in three more. In the case of Italy, headline inflation (year-on-year) has dropped off a cliff since September, falling from 5.3% to 0.6% in November, again largely driven by energy. It appears that for certain nations, deflation could soon be more of a risk than elevated inflation.

US home sales have risen in November by 0.8% (month-on-month), breaking five consecutive monthly falls. The popular US 30-year fixed rate mortgage rose to a 23 year high of 7.8% in late October but has since dropped off to 6.6% as US treasury yields have fallen. The market expectation that interest rates will be cut in 2024 has also fuelled the housing market, however two thirds of home owners are currently locked into mortgages under 4%. This will mean mortgage rates will have to continue to fall before we see significant shifts in the housing market. US equities have continued to advance this week and bond yields fall, with the US 10-year yield now falling through 4%. The market is now pricing in six interest rate cuts in 2024.  

In the US, two of Hollywood’s big five studios, Warner Bros and Paramount, have held discussions for a possible merger. The main motivation behind the deal is to combine the streaming services, Paramount Plus and Max (formerly HBO) in order to better rival Netflix and Disney Plus, who are dominating the streaming space. Netflix has recently cracked down on account password sharing, leading to more account openings and are up to 247.2m subscribers. The combination of Paramount Plus and Max subscribers would still be under 160m.

The strong moves in December have been pleasing to see, helping push portfolios to their highest levels in 2023. With plenty of cash still on the sidelines, M&A activity picking up and interest rate cuts potentially around the corner there is reason to believe this rally can continue into 2024.

This will be our last weekly round-up of 2023 and we would like to thank everyone for their support over the year.

 

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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