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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

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

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

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

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

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

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

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

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

Andy Triggs, Head of Investments

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

Mind the gap!

In this month’s Market Commentary, European Strategist, Jeremy Batstone-Carr, discusses inflation and affordability in the UK, debt ceiling negotiations and compromise in the US, plus how enthusiasm for artificial intelligence has shifted into overdrive, and more.

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

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

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

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

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

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

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

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

 

Nathan Amaning, Investment Analyst

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

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

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

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

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

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

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

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

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

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

 

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

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

The Week In Markets – 13th May – 19th May 2023

Artificial Intelligence (AI) is likely to play an increasing role in the future. What exactly is AI? Simply put, it is a machines ability to perform traits of human intelligence, such as learning, problem solving and perception. Why is it the future? On Thursday, BT Group, Britain’s biggest broadband and mobile provider announced plans to cut up to 55,000 jobs by 2030 and adapt to new technologies such as AI. BT Group CEO, Phillip Jansen, believes after completing its fibre roll out and simplifying its structure with AI, the business will gain significant profits whilst delivering better customer service.

AI is certainly a concept investors are warming to but there are still concerns around the rules and guidelines it needs. CEO of Open AI, Mr Sam Altman, was called to Congress this week along with other top technology CEOs to touch on the risks AI could potentially pose to society, how it would affect the jobs market and why regulations for the technology was mandatory. “If this technology goes wrong, it can go quite wrong” were the words Altman shared before suggesting a federal agency be created in order to review AI programmes before they are released to the world. It is evident that AI may eliminate some jobs, but it is also likely we see job creation as training and education is introduced in the future.

On Wednesday we saw a slight rise in the unemployment rate to 3.9% from January to March, signalling weakening in the labour market. This is an indicator that the Bank of England (BoE) will consider before their next rate meeting on the 22nd of June. There has been an increase in the amount of people that are looking to join the labour force again and this helped alter the unemployment figure. We must highlight that over 2.5m workers have been out of work due to poor health since the pandemic, with the blame pointed at record-long NHS waiting lists. UK Chancellor, Jeremy Hunt, has recently provided greater funding for childcare costs in an effort to encourage more workers to return to the labour force.

Businesses owned by Mr Elon Musk are rarely side-lined in the news and this week is no exception. Twitter, the social media platform, has a new CEO taking the place of Mr Musk, and this is Linda Yaccarino, who has developed the nickname “Velvet Hammer”. Having previously run NBCUniversal, the ad’s sales business, her main objective has been identified; to bring back advertisers to the business. Since the $44bn takeover by Mr Musk, ad sales have halved to $2.5bn as brands were conflicted with the significant moves made by the previous CEO. Will Mr Musk give Ms Yaccarino enough room to operate and convince brands that they can operate in a less controversial environment? This question can only be answered in time.

Japan’s headline inflation for April (year-on-year) was higher than expected at 3.5%, with core inflation (which excludes the cost of fuel and energy) rising to 3.4% from the previous 3.1%. This is now a fresh four-decade high of inflation in the world’s third largest economy and investors are increasingly wary that Bank Governor Uedo will stray from his previous dovish stance and tighten policy in order to reach the 2% inflation target. Japan’s GDP for the first quarter of 2023 was stronger than expected at 1.6%, driven mostly by increasing tourism and strong corporate earnings.

News in markets is ever flowing and can be perceived in good or bad light. In these times we as always maintain our message on diversification and ensuring portfolios are not overly exposed to market narratives. It is important to focus on the long-term opportunities that are created in 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.

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