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The Week In Markets – 22nd July to 28th July 2023

It has been a busy week in the sporting calendar with the FIFA Women’s World Cup underway in Australia and New Zealand as well as the fifth Ashes Test taking place at the Oval.   

Data releases have been quiet on the UK side this week; however, we did see results from some of the largest UK listed companies such as Lloyds Bank and Shell. Shell reported a 56% fall in profits to £3.9bn, a result of falling energy prices, leading to a slowdown of their share repurchase programme. Shell experienced record profits last year, benefitting from the then rise in energy prices after Russia invaded Ukraine leading to fears on supply shortages. The banking sector has been in the spotlight for much of this year, driven by the collapse of Silicon Valley Bank. It was pleasing to see Lloyds post a robust set of results which included an increase to their dividend. The bank did however set aside £660m as a provision for bad loans, highlighting that they do expect the economy to remain under pressure in the near term.

An event highly anticipated this week was the US Federal reserve meeting on Wednesday determining the next move of US interest rates. Rates were raised by 25bps as US Fed Chair Jerome Powell noted the economy “still needed to slow and the labour market needed to weaken” before we see a cut in interest rates. This is now the 11th rate hike in the last 12 meetings after we saw a pause in rates in June. Despite weaker than expected inflation data in July, the US Fed highlighted their determination to tackle inflation with this latest rise. The Fed may have felt vindicated with their decision on Thursday as both GDP data and unemployment claims data was much better than expected, highlighting the current resilience of the world’s largest economy. The belief that inflation will fall, employment will remain robust, and a recession will be avoided – the so called ‘soft-landing’ scenario – is increasing.

Following the US Fed decision, we saw the European Central Bank (ECB) also raise their benchmark interest rate by 25bps to 3.75%, the highest level seen over the last 20 years. ECB President Christine Lagarde usually follows the meeting with a hawkish tone and this meeting was no different. She claimed to want to “break the back of inflation and we will get there, come what may”. Eurozone inflation fell to 5.5% in the month of June, which was a positive sign, however the outlook for economic growth has begun to look challenging with countries such as Germany suffering slowing growth. Most recently Russia’s withdrawal from the Black Sea grain initiative could lead to a pickup in food prices, which would provide further inflationary pressures.

On Friday morning we saw the Bank of Japan (BoJ) hold interest rates at 0.1%, however they announced a loosening to their yield curve control policy. This is BoJ Governor, Kazuo Ueda’s, first major policy change since he took control in April this year and the effects saw the yields on the 10yr Japan government bonds rise to their highest levels since September 2014 (prices fall). Investors are now left to consider if this move is the beginning of more structural policy change and a potential tightening cycle.

After last week’s fireworks in markets, driven by lower-than-expected UK inflation data, this week has been relatively benign in markets. The latest rise in interest rates from the US could very well be their last, while it looks as though the ECB are towards the end of their hiking cycle as well. The key question as we head into the end of the year and beyond is whether the impact of the lagged effects of interest rate rises causes excessive economic damage. Time will tell, but we believe the best way to approach this is to include a range of assets in portfolios that can perform in a variety of market conditions and avoid being too concentrated in risks and exposures. 

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.

The Week In Markets – 15th July – 21st July 2023

It was Wimbledon finals weekend and we saw Carlos Alcaraz win an epic five-setter, claiming his first Wimbledon title. Carlos Alcaraz denied Novak Djokovic a fifth successive Wimbledon title and became the first champion outside of the “Big four” of Djokovic, Federer, Nadal and Murray to win the Wimbledon men’s final since 2002. With this win, history has been made and this could be a symbolic moment for the sport with the passing on of the crown.

It’s felt like a long time since we were able to report on better-than-expected UK data, but we are able to do that this week. UK inflation data was released on Wednesday and came in below consensus. Headline inflation fell to 7.9% in June from the previous month’s 8.7%, with core inflation (excluding food and energy prices) falling to 6.9%, below the 7.1% expected. The data had a profound impact on UK markets, with the large cap UK index rising close to 2% on the day, while the more domestically focused mid-cap index rose over 3%. We also witnessed a big re-pricing within bond markets. Prior to the data the expected terminal rate for UK interest rates was 6.5% – this fell to 5.75% on Wednesday. This should hopefully feed into mortgage rates over the coming weeks. Chancellor of the Exchequer, Jeremy Hunt, as ever doubled down that the government and Bank of England (BoE) have had to make tough decisions on inflation in recent months and there is still a way to go to reach the inflation target of 2%.

We have also seen the release of UK retail sales this week, another key measure on the health of the economy. Month-on-month, consumer spending was 0.7% greater in June, coming in ahead of expectations. There was a bounce up in food sales, department stores and furniture stores.

Tata group are an Indian conglomerate that own Jaguar Land Rover and this week they announced a deal to build an electric vehicle battery plant in Britain, a major boost for the UK car industry that currently lags the US and EU in the green space. It will become the first Tata gigafactory outside of India, potentially creating up to 4,000 jobs at a total investment of £4bn. The factory has plans to scaleup and provide almost half of the battery production needed in the UK by 2030, in line with Britain’s plans to ban the sales of new petrol and diesel cars from the same year.

US retail sales gave a different story this week as they rose 0.2% (month-on-month) in June, lower than the 0.5% expected. Sales at supermarkets and service stations fell and spending at restaurants and bars slowed. Online sales led the way and surged 1.9%, the most over the last six months, and we are likely to see further gains next month due to Amazon hosting their Prime day promotion – the biggest one to date. With retail sales still rising albeit not as strong as before, the US Fed is still likely to increase interest rates next week following on from a ‘skip’ at their last meeting.

Japan inflation was released this morning and will certainly catch investors eyes as core inflation came in at 3.3% for the month of June (year-on-year). This was in line with expectations, but it is now the 15th consecutive month core inflation has been above the 2% target. An increase in utility bills in addition to increases in food prices is diminishing households disposable income and this data will be closely analysed by the Bank of Japan (BoJ). Sustained inflation for such a period of time has investors debating whether the BoJ will phase out their controversial yield curve control. 

There has been further M&A activity this week in the UK market, with US private equity firm Searchlight Capital agreeing to buy the UK listed asset manager Gresham House in a £470m deal. Given the relative cheapness of UK assets currently it is no surprise to see firms swooping in and picking off UK businesses and we would expect this trend to continue if we don’t see a re-rate of UK equities.

It has been a positive week for portfolios, boosted by strong performance from UK assets, while sterling weakening has also been a driver of returns. US mega-cap growth stocks have seen big swings this week, with Microsoft reaching a new all-time high earlier in the week, although this was offset with large falls in Tesla, Netflix and Nvidia on Thursday.

To round up the weekly, I refer to Carlos Alcaraz’s historic performance again. Alcaraz was certainly the underdog heading into the final and underdogs can undoubtedly be overlooked in the investment world. We maintain the message that it is important to have diversification within portfolios and certainly include underdogs, such as UK equities, alongside the fan-favourites, such as US 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 – 8th July – 14th July 2023

Last week we entered the month of July but seemed to miss the opportunity to mention a famous fact about the month. July was renamed in honour of Julius Caesar, who was born in July, changing it from the previous name Quintilis. The historic facts keep coming as we are just days away from the 54th anniversary of Apollo 11, the first spaceflight to land on the moon.

The UK unemployment rate for the month of May was released on Tuesday, coming in at 4%. This was a rise from the month before (3.8%) and if we were analysing this data alone we would assume that the UK labour market has begun to weaken. However, strong wage growth put things into perspective as we have seen a 7.3% (excluding bonuses) jump in wages in the three months to May. This is the highest release since the report began in 2001 and could be enough to convince the Bank of England (BoE) to further raise interest rates as they fear a wage-price inflation spiral could ensue. Yields on the two-year government bond initially rose at the start of the week on the back of this strong wage data.

On a more positive note, US inflation has continued to descend with headline inflation down to 3% (year-on-year) and core inflation (excludes food and energy prices) falling to 4.8%. Both the fall in headline and core inflation were greater than consensus expectations. A significant drop in inflation was a result of the fall in energy prices which rose in 2022 after Russia’s invasion of Ukraine but has since dropped 16.7% over the last year. The US Fed’s decision to pause rates at the last meeting was a calculated decision in order to determine the impact the rate rises had on the economy to date. Although there are signs that the economy has responded to the significant interest rate hikes, the US are still shy of the 2% target, and we could see the Fed raise rates further in order to get over that line.

US Producer Prices Index (PPI) rose 0.1% in the month of June and were also up 0.1% on a year-on-year basis, further encouraging signs that inflation in the US could continue to fall. PPI measures the costs of goods for manufacturers; if their input costs are not increasing there is little need for the manufacturers to increase the price of finished goods. The PPI increase was the smallest year-on-year rise since August 2020.

The better-than-expected US inflation and US PPI data acted as a boost to both equities and bonds, and the impact was felt across the pond with UK assets also joining the party. This week we have seen Morgan Stanley release a note stating that UK equities and credit are the cheapest in the world. They suggested that falling inflation in the second half of the year could act as a catalyst for a re-rate of UK assets.

The risk-on nature of markets, coupled with an expected imminent end to the US Fed hiking cycle led to the US Dollar weakening against most major currencies, including sterling. We have seen the rate reach new 15-month highs of $1.31. A firmer UK currency is normally associated with stronger domestic equity performance. It’s worth noting as well that import prices should come down as the currency appreciates, which would help the battle with UK inflation.

China’s post pandemic recovery is quickly losing steam and the central bank have been called upon to use policy tools such as medium-term lending facilities in order to weather the storm. China’s exports fell at their fastest pace, down 12.4% in June as the global demand for goods falls. Exports to the US are the top destination for Chinese goods however they have fallen significantly, and domestic consumption is sluggish. The Chinese government set a GDP growth target of 5% this year after falling short in 2022, however, expectations for the economy heading into Q3 2023 are being revised downward. China year-on-year PPI data came in at -5.4% this week. The fall in factory gate prices could see China effectively exporting deflation to the rest of the world as the prices of their goods falls.

Rounding up the weekly, we have certainly had more positive news this week, particularly around US inflation, resulting in a bounce back in markets. As always we maintain the necessity for diversification within portfolios in order to benefit from market moves, while also aiming to protect portfolios from heightened volatility.

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

The Month In Markets – June 2023

The Month In Markets - June 2023

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

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

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

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

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

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

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

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

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

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

Appendix

5-year performance chart

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

Andy Triggs

Head of Investments, Raymond James, Barbican

The Week In Markets – 1st July – 7th July 2023

This week we entered the seventh month of a year that has certainly been full of surprises. We haven’t been bombarded with a multitude of data releases like previous weeks, however, we’ve seen markets respond significantly to the data, creating a challenging week for both equities and bonds.

This week saw the high street lender Halifax release housing data which showed UK house prices fell 2.6% on a year-on-year basis. This is the biggest annual decline since June 2011 and with continued elevated interest rates we could see further weakness in the housing market. In reaction to the Bank of England (BoE) raising interest rates to 5%, banks will have to adjust mortgage rates to reflect this. The average five-year fixed rate mortgage has now risen to above 6% – we last saw these levels in November 2022 following the reaction to then Prime Minister Liz Truss’ “mini” budget. High street bank bosses, just like investors, are expecting further interest rate hikes by the BoE this year in an effort to tackle inflation, with concerns that fixed rate mortgages could reach 7% by the end of summer. While this may not be an immediate problem, given the high proportion of households on either a fixed-mortgage, or no mortgage at all, if rates are held at these high levels for an extended period of time, more and more consumers will be negatively impacted. It is estimated there are around 2.4 million fixed mortgages that will need to be refinanced between now and the end of 2024.  

Staying within Europe, Germany, which is Europe’s largest economy, recently fell into a technical recession. This week we saw the release of the nation’s manufacturing Purchasing Managers Index (PMI), an index that calculates the expansion or contraction in the manufacturing sector. For the month of June, we saw the Manufacturing PMI revised down to 40.6, down from 43.2 the previous month. A PMI figure below 50 highlights a contraction, with Germany’s PMI now contracting at its fastest pace in over three years. There was better news for Germany’s services sectors, which continues to expand, albeit at a slowing pace. The data came in at 54.1, down from 57.2 for May.

On Wednesday the latest US Fed meeting minutes were released, as well as a press conference from the US Fed member John Williams. Both the meeting minutes and Williams’s comments were seen as hawkish with the Fed member stating “we still have more work to do”. US government bonds sold off on the news, with further interest rate hikes now expected this year.

Bond markets continued to weaken on Thursday following the release of very strong private payrolls data, which pointed to 497,000 private payrolls added in the month of June. This was considerably ahead of expectations and highlights the strength of the private labour market. It wasn’t just US government bonds which sold off, UK and European bonds resumed their recent slump as a ‘higher-for-longer’ mantra was adopted by investors. We are now witnessing higher yields in the UK than compared to the aftermath of the mini-budget last year. 

Staying with US labour data, this afternoon has seen the release of the closely watched US Non-Farm Payrolls data. For the first time this year, the data came in slightly lower than consensus, with 209k jobs added against an expected 230k. However, the data still points to a healthy labour market, while wages grew at 4.4% year-on-year, which is now real wage growth in the US given inflation is at 4% currently. The data has re-affirmed the belief that there will be further interest rate hikes from the US Fed.

It has been a difficult week in markets with positive correlations between equities and bonds resuming, driven by concerns around inflation and further interest rate hikes. With yields at the highest levels since the financial crisis and valuations in most equity markets trading at discounts to history, it feels as though patience and time are two characteristics that investors need to focus on.    

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.

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 – 24th June – 30th June 2023

Sintra, a small town in the west of Portugal, hosted a three-day European Central Bank (ECB) forum that featured some of the key policymakers from across the world.  ECB President Christine Lagarde was joined by US Fed Chair Jerome Powell, Bank of England (BoE) Governor Andrew Bailey and Bank of Japan (BoJ) Governor Kazuo Ueda. They exchanged views on current topics such as inflation and interest rates, while also sharing ideas about the future, including artificial intelligence (AI) and central bank digital currencies (CBDC).

Each policymaker gave their views on the impact that recent interest rate hikes have had upon economies and the rounding statement from US Fed Chair Jerome Powell certainly stood out from the rest. When asked if the US could reach the 2% inflation target in the next year, Powell voiced his concerns regarding core inflation, stating it would take until 2025 to reach the 2% target. “We will be restrictive as long as we need to be” is a message that worries investors as it is clear we have not yet seen the peak in rates. BoE Governor Bailey and ECB President Lagarde both indicated they are also prepared to continue with additional rate hikes.

On Thursday we saw better than expected US GDP growth for Q1 2023 rising to 2% from the 1.3% previous estimate. Strong consumer spending led GDP higher as it rose 4.2% for the quarter, the highest pace since Q2 2021. There was more positive US data as we saw initial jobless claims fall from 265,000 to 239,000, a sign of continued strength within the US economy despite the recent 50bps interest rate hikes by the US Fed since the collapse of Silicon Valley Bank. With such strong figures the chances of the “imminent” recession seem to be fading and the belief in a soft landing is becoming more prominent.

Eurozone inflation has been released this morning after countries such as Germany, Spain and France also released preliminary figures for June. Headline inflation fell to 5.5% from the previous 6.1% but core inflation (excludes food and energy prices) was the more worrying figure as it rose from 5.3% to 5.4%. Eurozone unemployment stayed resilient at 6.5%, matching the previous month of April’s reading. These figures are expected to be examined by the ECB ahead of next month’s meeting where we can be almost certain of another 25bps rise to interest rates.

Closer to home, UK GDP for Q1 2023 has been disappointing at 0.2%, falling from 0.6% the previous quarter. With falling GDP, the risk of a recession remains elevated as the squeeze on households will continue as interest rates have risen to a 15 year high of 5%.  The full effect of the interest rate hikes are yet to be seen, especially as millions of homeowners will be coming off two-year fixed mortgages towards the end of the year and the jump in new rates will most certainly cut into a larger percentage of disposable income. The higher mortgage costs will be somewhat offset by falling energy and food prices which we should see over the coming months, as well as strong wage growth.

Nationwide house price data was released this morning and showed UK house prices dropped by 3.5% on an annual basis compared to June 2022. Nationwide stated that they expected the recent increase in mortgage borrowing costs to be a “significant drag” on housing activity. Although house prices have fallen on an annual basis, they are still marginally higher than compared to the start of 2022 and over 20% higher since the start of 2020. On a more cautious note, Zoopla reported an average 5% drop in asking prices for their listings, in a sign that prices may be adjusting against the backdrop of higher rates. More promising for the UK was OpenAI’s decision to locate their first non-US office here in London. OpenAI are the developers of ChatGPT, and the move is seen as a big vote of confidence in the UK’s ability to be at the heart of the AI revolution that is expected over the coming years. 

Rounding up the week, our key message as ever stands, maintaining a long-term investment mindset to markets best allows to take advantage of the short-term instability. We will continue to blend asset classes in portfolios and take advantage of new opportunities, most recently purchasing direct UK gilts (government bonds). Diversification never goes out of style.

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.

Weekly Note

The Week In Markets – 17th June – 23rd June 2023

Last week the US Fed paused its interest rate hiking cycle after raising interest rates at 10 consecutive meetings over a 15-month period. This week the Bank of England (BoE) didn’t quite surprise markets with a pause, but instead increased rates by 50bps to 5%. Investors were largely expecting a 25bp rise this month, however the significant 50bps rise has now taken interest rates to its highest level since 2008.

“Significant news” referring to stickier inflation and high wage growth were the main reasons for the BoE raising interest rates. Seven out of nine committee members voted for the 0.5% increase with the other two members opposing the rate increase and voting for a pause as they are more optimistic that forward looking indicators point to steep falls in inflation going forward. Governor Bailey however reiterated that they would do whatever is necessary in order to bring inflation back to the 2% target. This move has as ever fed into mortgage rates with high street banks now quoting over 6% for two-year fixed rate products.

UK inflation was worrying to see on Wednesday and as ever played a strong part of the BoE’s decision. Headline inflation in May was 8.7%, the same level as April, with core inflation rising to 7.1% from 6.8% the previous month. The headline inflation level is uncomfortable for many key policymakers within the country and most notably for Prime Minister Rishi Sunak, who at the beginning of this year pledged to halve inflation by the end of 2023. The 2024 general election is continuing to look less and less favourable for Mr Sunak and the Conservatives, as failing to keep promises in addition to rises in mortgage costs for millions of homeowners diminishes confidence in the party.

Fresh after news of the BoE interest rate rise, the Rail, Maritime and Transport union (RMT) announced 20,000 of its members would be continuing strikes over the month of July. The union settled a deal with Network Rail but have failed to agree deals with other trainline operators, with pay offers considered too low to combat the rising cost of living. The Open Championship (golf) and the fourth and fifth Ashes tests (cricket) are some of the events due to face disruption.

News around Germany’s economy has been disappointing since it was announced they had fallen into a technical recession over Q1 2023, however this week we have seen the greatest planned foreign investment in Germany’s history announced. Intel, one of the world’s largest semiconductor manufacturers has agreed to spend over $33 billon on two chip-making factory plants as part of an expansion push in Europe.  Approximately 7,000 construction jobs will be created along with 3,000 high tech jobs at Intel as they battle to restore market share in the chipmaking industry, rivalling the likes of Nvidia, whose stock value is up 165% in 2023.

In the US, initial jobless claims have remained high at 264k, the 20-month high from last week. This is calculated as the number of people filing for unemployment benefits for the first time and continued elevated numbers could be an indication of a softening labour market.  Such data releases will be considered by the US Federal reserve who paused interest rate hikes in last week’s meeting and are in a “meeting by meeting, data dependent phase” of its tightening cycle. It is broadly estimated that the US Fed will continue to keep rates elevated for longer in order to combat inflation.

We have recently been meeting with a lot of fund managers who all leave us with interesting takeaways. One UK equity fund manager mentioned that in the 30 years of his career he had never been so excited for the opportunities within his asset class, with the next 10 years offering incredible potential in his opinion. We will continue to partner with talented fund managers in order to support our investment ideas and assist diversification across asset classes, investment style and regions.

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.

Weekly Note

The Week In Markets – 10th June to 16th June 2023

On Wednesday we saw the US Fed leave interest rates unchanged at 5.25%. After 15 months of consecutive interest rate increases this pause could be a significant moment. US Fed Chair, Jerome Powell, stated that the pause was “out of caution” which allows the Fed to gather more information on the impact hikes have had on the economy.

US inflation data was released on Tuesday giving the US Fed little time to react to the changes. Year-on-year headline inflation continues to decline, coming in at 4%, slightly lower than consensus. Core CPI was a little higher at 5.3%, however this is the lowest reading in 12 months. Shelter (rent) which represents 43% within the CPI bucket continues to run hot growing 0.6% (month-on-month). Inflation however is still double the US Fed’s target and although we have seen a pause in hikes, it will be interesting to see if we have seen the peak in this rate cycle or whether it really was just a skip.

The US Fed considers a range of economic data when assessing the health of the US economy. One of the key variables is the labour market and this week’s initial jobless claims once again came in higher than expected and may be a signal of a deteriorating US labour market. The labour market has been extremely resilient in the face of rising interest rates, however, initial signs of fragility are potentially creeping in.

In the UK, the chances we will see a pause in interest rate hikes is becoming less likely after significantly strong wage growth, which was reported this week. Wage growth excluding bonuses (over last 3 months) rose 7.2% which is far greater than the Bank of England (BoE) would be comfortable with. The main reasons wage growth has been so strong is due to companies almost “hoarding” workers given the recent difficulties of hiring in a tight labour market. Workers are also demanding greater pay in order to combat inflation and ease the pressure on rising household bills. Markets are ramping up bets of further interest rate hikes and we have seen this feed through to government bonds. The 2-year UK government bond is currently trading at similar levels that we last saw in September 2022, following the Liz Truss proposed budget.

On Thursday the European Central Bank (ECB) met in Frankfurt and announced another 25bps interest rate hike, taking rates to 3.5%, their highest level since 2001.  After revised data points in many European countries, Eurozone GDP fell -0.1% with the region slipping into a technical recession over Q4 22 and Q1 23. As ever, ECB President Christine Lagarde, seems adamant on reaching the 2% inflation target and it is almost a given that there will be further rate hikes in July.

Japan’s stock market has been a bright spot this year. The Nikkei index has now reached the 33706-mark, doing so for the first time in almost 34 years. Japan has sustained solid growth in their economy this year and still has extremely low interest rates – pretty rare in the times we live in. When we look deeper into Japanese companies, from an Environmental, Social and Governance (ESG) point of view they are improving on all cylinders. For example, Uniqlo, a growing retail company, are in the process of raising employee pay up to 40%. Company profits are rising driven by the rise in consumer spending and the tourism sector is certainty back and booming. The currency (Yen) has been weak this year, which is helping to improve the competitiveness of their significant export market, while it has also helped support foreign tourism to the country. Year-to-date the currency has weakened by over 11% against GBP.

Staying with the theme of currencies, we have seen the US dollar weaken further against GBP over the course of the week. At the time of writing the rate is approaching 1.28 vs GBP, a far cry from less than a year ago, when the exchange rate got close to parity following the September mini budget. For sterling investors, the strength of GBP this year has been a headwind to returns for unhedged foreign assets (when returns are translated back to GBP).

With the constant data releases, it is easy to succumb to market narratives.  “Time in the market is more important than timing the market” is a common mantra in investing and perfectly describes our approach. The importance of long-term investing allows us to take advantage of short-term opportunities and not be caught out by short-term noise.

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 Month In Markets – May 2023

The Month In Markets - May 2023

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

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

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

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

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

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

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

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

 

Appendix

5-year performance chart

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

Andy Triggs

Head of Investments, Raymond James, Barbican

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