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Weekly Notes

The Week In Markets – 2nd April – 5th April 2024

We kicked Q2 off with the third bank holiday of the year, Easter Monday. Historians will tell you once upon a time until 1834, the UK had a total of 33 bank holidays but there will only be five more this year.

A “feeding frenzy” has begun in the UK but it’s not because of the Easter eggs consumed over the last weekend but rather due to the pickup in M&A activity of London-listed companies. Buyers are taking advantage of the low valuations within the FTSE 350 & FTSE Small Cap arena as twelve companies have already been bid for in Q1, a much higher level than 12 months earlier. Jeremy Hunt has been reported to have met with large firms in a bid to persuade them to list in London and re-establish the UK as a financial powerhouse. The initial sugar rush of bid premiums can be a good short-term boost for markets, however, over the longer term the UK could suffer if high quality businesses continue to be taken over by foreign investors.

Inflation in Germany has continued to ease as figures showed it dropped to 2.2% over March (year-on-year). This is a fall from 2.5% in February, in line with market expectation. Germany is edging closer to the 2% target and with a stagnant economy the hope will be that the European Central Bank (ECB) go ahead with rate cuts in June which could help kickstart the largest economy in Europe. Core Eurozone inflation for March fell more than expected to 2.9% (year-on-year), while headline inflation was expected to remain at 2.6% but surprisingly fell to 2.4% with food and energy costs falling. The inflation data does put forward a credible case for the ECB to imminently begin cutting interest rates, however, they may be reluctant to break rank early and may aim to hold on until the US Fed begins to cut rates. Economic data out of the Eurozone however may force their hand. Eurozone unemployment has held firm at 6.5%, a relatively low level of unemployment compared to history.

Last week we reported that the Swiss were the first major central bank to cut rates and this week inflation within the country has continued to ease. Headline inflation for March fell to 1% (year-on-year) when it was expected to be reported at 1.3%. This is the lowest level consumer prices have risen since September 2021, causing the Swiss Franc to weaken on the news. Investors are forecasting another two cuts in June and September.

US Non-Farm Payroll Data this Friday afternoon has raised eyebrows as a staggering 303,000 jobs were created in the month of March. We have not seen this figure of jobs created since May 2023 and it completely beat the market forecast of 200,000, highlighting the continued tightness in the labour market. February’s strong jobs number has been revised down slightly, so it will be interesting to see if this number is also revised down. Government bond yields rose (prices fell) on the back of the strong data as expectations for interest rate cuts were pushed out further on the back of the strong labour market.

One of the magnificent seven, Tesla, has continued their struggles this year. This week they reported a sharp fall in global sales, down almost 10% in comparison to Q1 last year. Tesla citied issues including disruption to shipping via the Red Sea region and an arson attack at their factory in Berlin. Tesla CEO Mr Elon Musk is always in the headlines with investors constantly questioning his stretched focus on the business. Just this week he called for the current Disney CEO Bob Iger to be sacked and endorsed former hedge fund manager, Nelson Peltz, to replace him following Mr Iger’s decision to halt all advertising spending on social platform X.

The start to the quarter has proved to be bumpy, much like the opening week of January. We have seen volatility pick up, driven by escalating tensions in the Middle East. For much of this year investors have not paid too much attention to the potential risks spilling out of the Middle East, however, that came firmly back on the agenda this week. Brent Crude oil rose above $90 a barrel as concerns around supply re-surfaced. Gold, which many see as a geo-political hedge, continued its recent strong performance and rose above $2,300 an ounce this week, making new-all-time highs. US inflation figures will be announced next week and signs of falling inflation could act as a catalyst for equities to regain their upward trajectory.

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 – 23rd March – 28th March 2024

Last year in the US Easter chocolate sales reached $5.4bn and early expectations are that sales will reach this figure once more, however this will be achieved by the increase in prices rather than volumes sold. Confectionery brands have had to hike prices due to a “cocoa crunch” as the price of cocoa has tripled over the past 12 months due to difficult weather conditions and disease affecting supply in West Africa.

UK retail sales for February (month-on-month) held flat despite negative market expectations of -0.2% following strong January figures. We have had one of the wettest winters this year affecting footfall in stores, however this was offset by an increase in the volume of online sales, the largest rise since July 2023. With UK CPI continuing to fall and the highly anticipated interest rate cuts expected to begin this summer, there is the expectation that retail activity will continue to rebound as pressures on the consumer begin to ease.

Bank of England (BoE) policy committee member, Catherine Mann, was one of two committee members who changed their view on increasing interest rates to keeping them steady. She warned that markets are expecting too many interest rate cuts this year and expects that the BoE will not cut rates before the US Federal Reserve or European Central Bank. High street banks have already begun to offer households and businesses cheaper loans ahead of interest rate cuts, which Ms Mann believes may be premature. Her change in stance to hold rates came after positive signs of a slowing jobs market with more companies reluctant to hire, a theme that may combat wage inflation.

In the US, the CEO of aircraft company Boeing has announced he will step down at the end of this year. Dave Calhoun’s company has been under severe pressure to reassure US regulators, airlines and passengers that their aircrafts were fit for purpose following the recent cabin panel blowout incident. The confirmation of key overhauls in management sent the stock up marginally this week, however the company’s share price has struggled since the blowout event, down 25% for the year and a long way off the highs set before Covid-19.

This Wednesday in Japan an emergency meeting between key policymakers was held to discuss the weak Yen as it hit a 34-year low against the US Dollar. Despite the Bank of Japan making the historic shift away from negative interest rates last week, the Yen has continued to fall against the US dollar. Japan Finance Minister, Shunichi Suzuki, said that policymakers would take “decisive steps” against the yen weakness, the last time he used such language was in 2022 when Japan intervened to buy the currency.

Today is the last working day in Q1 and brings to a close a strong quarter for equities, with it being the best start to a year for US equities since 2019. As we look out into Q2 there are reasons to be positive, with the possibility of falling inflation and interest rate cuts helping push equities and bonds higher. We have marginally increased interest rate sensitivity in portfolios, while also maintaining our small and mid-cap equity exposure, which could be big beneficiaries of falling interest rate expectations, something we witnessed at the end of 2023.   

We would like to wish everyone a fantastic long weekend. For those wondering it is estimated the UK will spend £415 million on Easter chocolate this 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.

The Week In Markets – 16th March – 22nd March 2024

Vladimir Putin cemented his position as leader of Russia, winning a record 87% of the vote, securing a fifth term in office. The longest serving Russian ruler since Stalin, Putin spoke before reporters thanking the public for their “overwhelming support” and outlined his goals for the next six years. The result was not a surprise to many!

We have been barraged with many data points this week. Starting with the UK, inflation for February was reported on Wednesday. Headline inflation (year-on-year) fell from 4% the previous month to 3.4%. Core inflation (excludes food and energy prices) also fell from the previous month and beyond market expectations to 4.5%. The UK continues to creep towards the 2% target with the fall in CPI consistent across many sectors. Food inflation has continued its sharp drop from a peak of 19.1% in March 2023 to 5% this February. Investors have staked bets for inflation to reach target before the summer, a task the UK may achieve before the US.

The Bank of England (BoE) met on Thursday and by lunchtime had announced a fifth consecutive pause in interest rates at 5.25%.  If we think back to the start of the year, this March meeting was circled on calendars as the day base rates would be cut. Fast forward to today and the vote for rates to remain at current levels by policymakers was almost unanimous. Dr Swati Dhingra, was the stand-alone member who voted for a 25-bps rate cut as the eight other members voiced concerns that inflation is on the right path but are wary of prices spiking again, particularly in the services sector. The notable shift in voting came from two members who had previously voted to increase rates, they now have changed tact and become more dovish, voting for a pause instead of hike. The market took this as a positive sign that rates will soon be cut, and UK equities and bonds rallied on Thursday; the UK large cap index climbing nearly 2%.

The US Federal Reserve board held their March meeting the day before the UK as they concluded to hold rates at 5.5%. Many data points in the US would have been vigorously analysed before the meeting and a conclusion of stickier than expected inflation with continued labour market strength has made the path for rate cuts more complicated. Fed Chair Powell stated that there is “sometimes a bumpy road towards 2%” for inflation and indicated that they still expect to cut rates by 75bps this year. This commentary sent US equity markets to record highs, with investors reacting positively to the news that three rate cuts in 2024 were still likely.

Japan’s central bank made a historic switch as they ended eight years of negative interest rates, raising the base rate to 0%. The change in the Bank of Japan’s (BoJ) approach signals that Japan is slowly emerging from a deflationary environment, however Governor Ueda, did not want to elaborate on the pace or timing of further rate hikes. Japan stocks responded positively as the Nikkei 225 rose 2.3% on the day closing at new record highs.  

Other central banks have met this week and there were a couple of meetings that left investor eyebrows raised. In Switzerland, the Swiss National Bank cut their base rate by 25bps to 1.5%, a surprising move making them the first major central bank to begin to ease monetary policy. On the other hand, Turkey’s central bank raised interest rates to 50% on Thursday eager to tackle inflation that continues to soar towards 70%.

Apple has had an interesting week. Rumours of a deal to build Google’s (Alphabet) Gemini artificial intelligence (AI) engine into the iPhone sent both stocks up beyond 2.5% on Monday. A partnership of both Apple and Google would be significant to rival Microsoft in the AI race as Google would expand its AI service to more than 2 billion active Apple devices. By the end of the week, Apple were fighting a federal case after the US accused the tech giant of creating “barriers” to protect their monopoly. One example citied was that Apple made it difficult to connect iPhones to rival smart watches, promoting the need for Apple watches. As they appeal the case, Apple shares fell 4% on the news adding to the tough year to date performance.

It has been a busy week in markets and pleasingly a positive week for equities and bonds. The general takeaway from central bank meetings is that interest rate cuts are still likely to occur in the short-term, despite sticky inflation data in 2024. Other parts of the portfolio have also performed well this week. Our focus on diversification leads us to hold assets such as gold in portfolios, alongside equities and bonds. Gold hit an all-time high this week of $2,222, helping benefit portfolios, while also aiding with risk management.

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 – 9th March -15th March 2024

There are many planned elections across the globe this year, but a change of political leadership in Haiti was not planned. However, Prime Minister Ariel Henry has announced his resignation. Mr Henry has led the country on an interim basis since July 2021 but over recent weeks pressure from heavily armed gangs, who have demanded his resignation, has grown. A “transition council” is set to be put in place to replace Mr Henry and restore order in the capital, Port-au-Prince.

 Looking up the North Atlantic Ocean to the US, inflation figures for February were announced this week. Headline inflation (year-on-year) ticked up to 3.2%, coming in greater than market expectations of 3.1%. Core inflation (excludes food and energy prices) fell from the previous month to 3.8% but still came in higher than expected. Inflation is certainly sticky in the US as higher costs in oil and shelter (rent) contribute to the rise in inflation. The inflation data is likely to deter the US Fed from any imminent rate cuts and the market moved their expectation of a first rate cut towards the summer. In response to a “higher-for-longer” narrative US and global bonds sold off.

Retail sales in the US fell over the month of February to 0.6%, rebounding less than the expected 0.8%. With inflation appearing to remain sticky, there are signs of slowing consumer spending over this first quarter of the year. Sales at petrol stations rose 0.9% reflecting a higher price at the pump, however online sales, personal care and health sales all fell. The number of Americans applying for new unemployed benefits also fell as weekly jobless claims came in at 209k from the previous 210k. Revisions of data points are certainly happening at a greater occurrence, as a revision to the previous weekly jobless claims showed laid off workers are finding work quicker and not spending a significant time on benefits.

In the UK, GDP data for January (month-on-month) was positive at 0.2%, boosting the hope that the UK recession is already over. Data from the Office for National Statistics (ONS) showed that a 3.4% jump in retail spending was the main contributor to growth. There was also a pickup in housebuilding to start the year as construction output saw a 1.1% jump. The UK will remain in a technical recession until GDP figures for Q1 24 are released, however the positive start to the year in terms of economic growth is certainly welcomed.

Japanese car manufacturer Toyota Motors has enjoyed huge success recently and this week agreed to give factory workers their biggest pay rise in 25 years. Toyota are not the only company doing this as Panasonic, Nippon Steel and Nissan also agreed to meet union demands of meaningful monthly pay increases. Japan Prime Minister, Kishida, who made a point to end weak wage growth in the hopes of boosting consumer spending, will be pleased union talks were positive. It is key that the wage growth momentum trickles down from large firms to the small and mid-sized firms in order to help boost spending in the domestic economy.

The Bank of Japan (BoJ) are also watching the wage growth cycle closely as they meet at the beginning of next week to discuss the potential end of negative interest rates that have been in place over the last nine years.

The impact of sticky US inflation led to a small pull back in both bond and equity markets. Commodity prices have ticked up on the back of a stronger economy, with crude oil rising above $80 a barrel this week and both the copper and silver price performing well. In general equities exposed to energy and mining performed poorly in 2023, however, they appear well placed to benefit from any signs of persistent inflation and have been the bright spot this week. Our resource exposure in portfolios is based on long-term views of scarcity of supply, with improving structural demand, however, the asset class also provides us with an inflation hedge and helps offset some of our growth focused equity positions, such as technology.  

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 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.

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