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The Week In Markets – 15th June – 21st June 2024

This week has seen Nvidia claim the top spot as the largest listed company, surpassing Microsoft. The company is the posterchild for artificial intelligence (AI) and its market capitalisation has risen by over $2 trillion in 2024 alone. The company is expected to experience extreme growth over the coming years as businesses invest in their AI capability.

Nvidia accounts for 80% of the market for AI chips that companies such as Microsoft, Amazon and Meta have all purchased to implement their own AI models. Tesla and X (formally Twitter) CEO, Mr Elon Musk this week made orders for server chips which will be used for the X AI tool, Grok. We’ve seen the continued impact that Nvidia and the “magnificent seven” firms are having on US equity markets as the S&P 500 and Nasdaq are both up 1% and 1.5% respectively this week.

Staying on the topic of the US, retail sales for the month of May (month-on-month) rose to 0.1%, below market forecasts of 0.2%. This figure can be interpreted as slowing consumer spending; however, this is slightly misleading as the fall in sales was due to the decline in gasoline (oil) prices, which skewed service station spending (dropping 2.2%). Retail sales ex Autos did not budge, remaining at -0.1% for the second consecutive month. A modest slowdown in US household consumption could be the tipping edge for the US Fed to cut rates in September.

There was positive news in the UK as for the first time since 2021, UK headline inflation returned to its 2% target. Core inflation (year-on-year) for May fell as markets forecasted to 3.5%. Goods inflation has fallen from it’s peak of 14% to now becoming deflationary, however continually strong services inflation at 5.7% remains the worry. It is key to note that the effects of subsidised energy bills is set to wear off later this year where markets can expect to see inflation rise again to 2.5%.

The Bank of England (BoE) met the following day after the inflation data and to no surprise kept interest rates firm at 5.25%. Members of the monetary policy committee are still waiting for more reassuring data as we know services inflation is still yet to moderate as far as expected and private sector wage growth has been noted as twice the appropriate level. The market is pricing in a 50% chance of a rate cut in August and the odds of a cut will likely be determined by inflation and jobs data next month. Staying with the UK, there was mixed data on Friday morning with retail sales beating expectations, however services PMI data was weaker than expected.

China continues to struggle, highlighted by weaker than expected industrial production. There were hopes that stimulus measures from Beijing would help turn around the world’s second largest economy, however, it appears the support package has not been big enough to meaningfully help. The Chinese renminbi continues to weaken against most major currencies, which could help their export market.

Market expectations were fulfilled from the Swiss National Bank (SNB), who cut interest rates for the second time this year to 1.25%. We reported on their first cut which came in March, but the SNB felt it was necessary to continue to cut rates despite a slight uptick in economic growth and inflation over the last two months. Chairman Thomas Jordan was also positive, hinting this was not the end of the easing. We are beginning to see diverging monetary policy in the developed world, although it is expected that the US and UK will join the Eurozone, Sweden, Switzerland and Canada in cutting rates later this year.

Equity markets continue to be led by a narrow range of stocks, which has made diversification a difficult strategy to follow of late. We continue to believe it makes sense to have a broad approach to equity investing, exposing portfolios to a wide range of sectors, styles and geographies.

 

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 June – 14th June 2024

This week has been a busy one for markets as we’ve seen the French President call for a snap parliament vote, manifestos released by the Conservative and Labour parties, as well as key UK & US data points.

On Wednesday, UK GDP (year-on-year) for April was reported at 0.6%, falling from the previous month’s figure of 0.7%. If we consider month-on-month data for April, GDP flatlined and this was the Labour party’s main point of attack on Rishi Sunak, claiming growth had stalled and there was nothing further the Prime Minister could do to counter this. The miserable weather has not been helping the UK economy, negatively impacting sectors such as manufacturing, construction and retail with April being reported as the wettest April since 2012.  

There were further labour market data releases as UK unemployment for April unexpectedly rose to 4.4%. Wages including bonuses remained hot at 5.9%, despite the market forecasting a drop to 5.7%. The Bank of England will meet next Thursday to set rates; however, it is almost a certainty there will be no cut in the interest rate given elevated wage growth. This will be the final meeting before the upcoming General Election on 4th July.  

The Conservative party have launched their 2024 election manifesto with policies including the return of the Help to Buy scheme, increasing the number of Doctors and nurses, increased defence spending and the abolition of national insurance for self employed workers. Two days later, Sir Keir Starmer announced the “pro-business” Labour manifesto, which included cutting hospital waiting lists, £1.8bn to upgrade ports and build supply chains, building 1.5 million new homes in the next five years and creating £8.6bn in tax revenue by abolishing the non-dom loophole. These weeklies will remain impartial to both parties, however the credibility of both manifestos has been questioned. Both parties will consider that unfunded tax cuts could cause another run-on Sterling and volatility in the gilt market.

Rounding up the UK, Raspberry Pi, known for designing single-board and modular computers, decided to IPO on the London stock exchange. Raspberry Pi has had a fantastic first week as a UK listed business, with the share price trading around £4, having listed at £2.80. This listing comes as a huge success for the London stock exchange which has recently suffered from other large companies choosing to list abroad. Deals like this could prompt firms to stay on the domestic market and even attract foreign company listings.

In Germany, we have seen the final figure for May’s inflation reported at 2.4%, a rise from the previous month’s figure of 2.2%. Around Europe it was expected that inflation would pick-up before falling to target later in 2024. Energy and food prices have been falling since the start of the year, so the pick-up was attributed to the end of the subsidised national transport scheme.

US markets were boosted with a pleasant surprise as inflation figures for the month of May fell. Headline inflation (year-on-year) fell to 3.3% and core inflation (excludes energy and food prices) fell to 3.4% from the previous month’s 3.6%. This has boosted equity markets with the S&P 500 and Nasdaq index up 1.7% and 3% for the week respectively. Like clockwork, the US Federal Reserve meeting was scheduled later that day and to no surprise, interest rates were held at 5.5%. Fed Chair, Jerome Powell, accepted that the most current data shows easing in inflation but stated the Fed wanted to “gain further confidence” before cutting rates. Markets are now pricing in just one rate cut for the year which could occur in a meeting before the US election in November.

At a company level Apple announced new artificial intelligence (AI) features into its technology. The news sent Apple’s stock soaring, rising above $3 trillion in market cap, leapfrogging Nvidia in terms of size.

Weaker inflation and evidence of slowing growth was supportive for fixed income markets this week, with yields on government bonds falling (prices rising). These areas of portfolios have been laggards in 2024, so it was pleasing to see a rebound here. UK equities pulled back throughout the week, after a period of strength, while European equities also struggled. The bright spot was the US, where lower inflation data and the news of Apple embedding AI into their phones boosted indices. Next week we will have the latest UK inflation data, where it is expected to fall further and could potentially be at the 2% target. If markets gain confidence that inflation is being tamed then we could see strength in both equities and fixed income as lower interest rates get priced in.

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 2024

The Month In Markets - May 2024

May was a choppy month, with a positive first half turning slightly sour towards the end of the month. The market’s fixation on short-term interest rates and inflation was once again the driving force for asset prices.

Starting with the UK there were two major events during the month, the scheduled release of inflation data and the unscheduled announcement that a general election would take place on 4th July 2024. While most expected an election in the autumn, Sunak surprised many by standing in the rain, calling for a general election in the summer. The Prime Minister may have felt that with stronger than expected economic growth, falling inflation and positive real wage growth, now may be an opportune moment to reverse the polls and try and retain power. While elections can have a big impact on equity, bond and currency markets, this election has not yet caused any wobbles in markets. The broad view seems to be that there will be a Labour victory, but any plans for aggressive spending will be curtailed by what happened to Liz Truss and the infamous mini budget of September 2022. As such it’s seen that Labour will have to play it safe, and that under Starmer they may become a pro-business party.

UK inflation data led to a sell-off in both UK equities and bonds. Despite headline inflation falling to 2.3%, the lowest reading in nearly three years, it was higher than the expected 2.1%. There were also higher than expected readings for core inflation and services inflation, leading to the prospects of a June interest rate cut being removed. The market is now viewing an August cut, post the election, as the most likely outcome.

The theme of takeovers continued in the UK equity market in May. There is a wide range of UK businesses trading at low valuations but performing well at a corporate level, which is making it very attractive for private equity and corporates to acquire firms. While much of the activity has been focused on the lower end of the market, deal sizes are increasing. Keyword Studios was bid for at a 73% premium to the closing price, for £2bn. The company was held in size in our UK smaller companies fund, which benefited from the immediate uplift to the share price on the bid news. Hargreaves Lansdown reported that they had rejected an offer from a consortium of private equity bidders who offered £5bn for the investment platform business. There is every possibility that a further bid could emerge for the company in June.

Over in the US, it was once again Nvidia that grabbed headlines. During the month they announced Q1 results which beat expectations and provided another big boost to the share price. The meteoric rise of the company, driven by artificial intelligence excitement, has helped propel the US equity market higher over the last 12-18 months.

Inflation in the US has proved to be sticky with many of the data readings above expectations in 2024. During May, headline inflation (for the month of April) came in at 3.4%, in line with consensus. US inflation is now considerably above UK inflation, a reversal of 12 months ago and something that many commentators did not expect last summer. The shelter component (rent) of the inflation basket has not fallen as many economists had expected and this has been one of the driving forces behind US inflation remaining considerably above target. Sticky inflation coupled with an economy that is performing well has led to the possibility that the US may not even cut rates this year, a far cry from the 6-7 cuts priced in in January. We think it likely that there will be one or two cuts made by the US Fed this year, although with the US election looming in November, they may need to act soon.

The buoyant US labour market showed signs of easing with Non-Farm Payroll data confirming less jobs had been added to the economy than anticipated. The current tightness in the labour market is leading to elevated wage inflation – the US Fed are keen to see evidence that the jobs market is cooling, and that wage growth is slowing before they pull the trigger and cut interest rates. Despite a period of slightly weaker US data, the overall picture of the US economy is still fairly strong, which should continue to support earnings growth in the near term. The positive news around Nvidia’s earnings helped advance the overall US index, with positive sentiment sweeping across the board.

Government bonds, across the developed world, have been disappointing in 2024. The sector did face headwinds once again in May, particularly the UK, where above consensus inflation data pushed back hopes for interest rate cuts. The backdrop for government bonds has been very challenged this year; lower interest rates typically favour government bond pricing, and this year has seen a huge reversal in expected rate cuts, from 6-7 cuts to now 1-2 rate cuts. We continue to view the asset class positively in terms of the prospect for positive real returns, with many of our government bonds maturing in the near term (at £100) and trading considerably below these levels, which will lead to above-inflation capital growth from now until maturity. To us, the day-to-day noise, is purely this, and won’t impact our strategy of holding these bonds to maturity. We also see government bonds as a potential hedge against any negative economic growth shock. While that is not our base case, we need to position portfolios for a wide range of outcomes. While inflation is the enemy of government bonds, commodities typically thrive in this environment; we have exposure here through holdings such as gold and commodity equities.

The Raymond James, Barbican portfolios nudged higher over the month, with UK equities and infrastructure producing strong returns during May. Japanese equities lagged, dragged down by the currency, which has continued to weaken. The Japanese Yen now looks very cheap on a wide range of metrics, and we believe there is a high likelihood the currency will mean-revert over the medium term, and as such we are comfortable with our exposure.

 Andy Triggs

Head of Investments, Raymond James, Barbican

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.

The Week In Markets – 1st June -7th June 2024

This week, as expected, the European Central Bank (ECB) cut interest rates by 25bps (0.25%), bringing interest rates down to 4.25%. This was the ECB’s first rate cut in five years. While the UK and US are still to cut rates, the ECB joins Sweden, Switzerland and Canada in reducing rates.

As ever, the commentary from ECB president, Christine Lagarde, was as important as the interest rate decision, allowing investors to gauge the ECB’s position on future cuts. Lagarde surprisingly upgraded both the inflation and growth outlook for Europe, leading some to question why they have cut rates. The market is pricing in another rate cut in 2024 and will be studying data closely.

This week the battle for 10 Downing Street continued as Prime Minister Sunak and Labour leader Sir Kier Starmer went head-to-head in a TV debate. They battled on several topics such as tax, the NHS, and immigration. The TV debates are coming thick and fast with a seven-way political debate taking place this evening.

Last week we covered the South African presidential race and the elections continued around the world. In Mexico, where they are currently experiencing a heatwave, the first female President, Claudia Sheinbaum, was elected after a landslide victory. The former climate scientist who is currently serving as the mayor of Mexico City, has promised to control the cartel violence, improve health and education and increase the living wage which is “a right not a privilege”.

Heading over to India, Prime Minister Narendra Modi has been in power for the last ten years and is set for a third term in power, however this term will be different. A coalition of Modi’s party (BJP) and the opposition INDIA will be formed with Mr Modi as the figurehead for the national democratic alliance. A world record was set with more than 640 million people voting in the election in the hope the new government would tackle elevated unemployment levels. The news that Modi would be unlikely to claim a majority led to the Indian equity index falling 6%.

This week the main US equity index hit a record high for the 25th time this year, powered by the technology stocks and most notably Nvidia. On Wednesday, Nvidia became the second largest company in the world by market cap, reaching $3 trillion and overtaking Apple. The company stock has risen 145% in 2024, adding over $1.8 trillion in value off the back of strong earnings and expectations of very strong demand going forward. A spate of weaker US economic data has also led to markets pricing in an additional rate cut this year and that has boosted the equity market.  

US Non-farm payrolls are released on the first Friday of the month and surprised today as for the month of May 272,000 jobs were created, exceeding the market forecast of 185,000. The previous month’s figure was revised down to 165,000, however this now seems an anomaly for the year highlighting the continued strength of the labour market.

Next week looks like a busy week with UK GDP and US inflation being reported. The US Fed will be hoping that inflation continues to move closer to their 2% target, which will allow them to cut interest rates before the presidential election. Here in the UK the economy has been proving stronger than expected and hopefully the data will show this is continuing. We currently see value in UK equities, with many businesses trading at distressed prices, however their underlying company performance is anything but distressed.

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.

Sizzle And Fizzle

In this month’s Market Commentary, our European Strategist, Jeremy Batstone-Carr, looks back on a ‘series of all-time highs’ for many global stock markets, efficient energy solutions needed to support the development of artificial intelligence, and potential impact of upcoming global elections on the financial markets.

The Week In Markets – 25th May – 31st May

As we head into the last week of May, the trend of M&A with UK companies continues to rise. Royal Mail’s parent firm, International Distribution Services (IDS) this week approved a deal worth £5.3bn from Czech billionaire, Daniel Křetínský.

The businessman, who also owns a stake in London football club West Ham United, has discussed the enormous responsibility that comes with owning the historic business. Promises within the bid have been made such as keeping the brand name and Royal Mail headquarters and tax residency in the UK, also ensuring that there would be no change to the union’s agreement of no compulsory redundancies (until 2025). Regardless of the government party in power at the end of the election, this deal is likely to be heavily scrutinised to protect Royal Mail’s identity in the UK.

On the topic of elections, the South Africa general election voting began this week and for the first time since 1994 the popular African National Congress (ANC) could be ousted with a record 70 parties participating in the polls. There have been several incentives by large brands to drive the population to the poll stations such as free Krispy Kreme doughnuts once you had voted and 35% off Ubers to the polling station. The final verdict will be announced this weekend, however initial projections show a coalition could be on the cards for the ANC.

In the US, equity markets have pulled back this week as investors have become more downbeat about the future of the economy. The US Federal Reserve release “The Beige Book” eight times a year which is a summary on the current economic conditions by each Fed district. In summary, the report described the current economic activity as flat considering prices increased modestly, the labour market is steady amid moderate wage growth and retail sales were moderating. The outlook was certainly clouded by great uncertainty and downside risk.

PCE inflation is the US Fed’s preferred measure of inflation, and the data was announced this afternoon. Matching market expectation, headline PCE (year-on-year) for the month of April remained at 2.7% and core PCE remained at 2.9%. There are further data prints that the US Fed will consider before their June meeting, however we can expect a further pause in base rates. Long term market assumptions of higher inflation for longer is proving correct.

South Korea has not had much airtime in our weekly’s before, however union members of Samsung have announced strike action in their first ever walkout over pay demands. Up until 2020, Samsung was known for not allowing workers to be represented by unions, now more than a fifth of the entire workforce will halt production and stop work for a day after rejecting the company’s deal of a 5.1% wage increase and have asked for additional clauses in the new deal such as extra days of annual leave and performance-based bonuses. The stock fell 2.75% on Wednesday, continuing the poor start to the year with the shares down 10% in 2024.

The European Central Bank is considered to be the first of the big three central banks to cut interest rates. This morning headline inflation rose from 2.4% to 2.6% and core inflation (excludes food and energy prices) rose to 2.9% exceeding market expectation of 2.8%. The slight increase in inflation was expected, however the level of rise comes as a surprise. Investors are still largely optimistic of a cut in next week’s meeting however we can expect to see a cautious approach from policymakers before authorising further rate cuts later this year.

The first half of the month was strong for markets, while the second half has been more challenging, with concerns around inflation once again coming to the fore. However, as we look out into the summer months there appears to be reasons to be optimistic for a range of asset classes. Economies continue to defy higher rates, continuing to grow, supporting company earnings, while fixed income markets now offer attractive yields. Our focus remains on mitigating risk and ensuring the portfolios are well positioned for a range of outcomes.

 

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 – 18th May – 24th May 2024

This week the main anticipated event was the release of UK inflation data for April. A dream scenario would have been inflation to fall to the 2% target rate which would seemingly be enough to convince the Bank of England to cut rates this summer. However, all UK economic data was pushed to one side with the shock announcement that a UK General Election will be called on 4th July.  

An eventful Wednesday started with UK inflation data which showed headline inflation had fallen to 2.3%, from 3.2%. Despite being close to target, the fall was not as large as expected and there was further disappointment with higher-than-expected core and services inflation. It appears the hike in minimum wages has led to sectors such as hotels and restaurants passing on the costs to consumers through higher prices. Markets are very reactionary as data prints are released and there is now the belief that a June rate cut is off the table. However, there is still key labour market data and CPI data before the next Bank of England Meeting.

UK Prime Minister, Rishi Sunak, later that day called a surprise general election in a move considered to be a high-stakes gamble. When Mr Sunak first came into power, he wanted the UK population to judge him on five promises including halving inflation, growing the economy and reducing debt. “Now is the moment for Britain to choose its future” he stated, as he will battle labour leader Sir Kier Starmer over the next six weeks for the chance to build on that progress.

As Mr Sunak was making his speech he was getting drenched by the rain and we can attribute poor UK weather to the most recent weak UK Retail sales data. For the month of April retail sales fell -2.3% (month-on-month), a significant surprise as expectation was only a -0.4% fall. The Office for National Statistics report shows that footfall in clothing, sports, games & toys and furniture stores were all affected by the heavy rainfalls and storms across the month. There are hopes the UK will see better weather as we approach summer and strong wage growth combined with falling inflation should boost consumer spending.

The UK has seen an uptick in mergers and acquisitions (M&A) activity this week, namely video games service company Keywords Studios, which has accepted a £2bn offer from Swedish private equity group EQT. The company has grown to one of the largest companies on the London stock exchange AIM market, providing services to developers of popular video games including Fortnite, League of Legends and Assassins Creed. The bid came at a 73% premium to the latest share price and pleasingly the company was a top 10 position in our favoured UK smaller companies fund, leading to strong gains in the fund on Monday. The week was littered with further M&A news flow, with XP Power rejecting a £468m offer as well as the bigger news that Hargreaves Lansdown had rejected a bid from private equity at the end of April, with the possibility of a further bid very possible. Not to be outdone it appears that BHP may still be in for Anglo American, and the possibility of an agreement cannot be ruled out. The elevated M&A activity continues to highlight the value both private equity and listed corporates see in UK equities, even if fund flows continue to move capital away from UK equities.

Europe’s purchasing managers index is an indicator of the economic trend in the manufacturing and services sectors. Composite PMI for May reached a 12-month high at 52.3 beating the market expectation of 52 and continuing the positive expansionary trend. This is positive data for the European Central Bank to consider before the anticipated 6th of June meeting where they may cut rates.

Death, taxes and Nvidia beating earnings is the new catchphrase as the company beat revenue expectations once again in Q1. Nvidia’s quarterly earnings reports have become a way for investors to gauge the strength of the AI boom. The better than expected results led to Nvidia’s market cap rising by more than the value of the UK’s largest listed firm in a single day, with the share price reaching $1000. Over the past year, the largest firms Microsoft, Google and Amazon have battled to purchase Nvidia’s processing chips as they aim to take the lead in the Artificial intelligence race (AI) and the latest development of AI models capable of creating videos and engaging in human conversation will certainly spur more orders.

After a strong May, markets pulled back in the second half of the week, with concerns around sticky inflation acting as a negative headwind to bonds and equities. Commodities also pulled back, with gold, silver and copper all taking a breather after recent strong performance.

Nathan Amaning, Investment Analyst

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

The Week In Markets – 11th May – 17th May 2024

After a speed bump in April, US equities have continued their advance higher this week, with a range of indices hitting fresh all-time highs.  The catalyst this week was slightly softer US inflation data which could allow the US Fed to begin rate cuts in the near future.

For much of 2024 US inflation data has been higher than expected, so there was relief when headline and core inflation came in as expected, at 3.4% and 3.6% respectively. Both figures were lower than the previous month and give support to inflation continuing to trend lower. Encouragingly, month-on-month inflation was marginally lower than anticipated, at 0.3%. Mr Powell also spoke early this week stating the central bank “will need to be patient” confirming they will stand firm until they see additional data prints before cutting rates.

Retail sales in the US for the month of April (month-on-month) were flat. Despite a 3.1% rise in gasoline station sales, sectors such as motor vehicles, non-store retailers and health & personal care stores dragged down the data as consumer spending appears to be cooling. There appears to be early evidence of a slowing US consumer, and we noted with interest that recent results from Apple and Starbucks showed negative sales growth; phones and coffee seem a good barometer for the health of the modern-day consumer! The US Fed will be taking note of the recent data points and it may provide them with more confidence to cut interest rates in the near term to provide support to both businesses and consumers.  

French Prime Minister, Mr Macron, on Monday won a record Є15bn of foreign investment pledged by global CEOs in sectors ranging from artificial intelligence (AI) to pharmaceuticals. He hosted the country’s annual “Choose France” summit, which aims to showcase France’s investment advantages and attract overseas businesses to operate in France.  The investments cover a span of 56 different projects and potentially lead to the creation of 10,000 extra jobs. Microsoft alone pledged to invest Є4bn into a data centre that will enhance their AI infrastructure and cloud capabilities.  

Germany’s inflation for the month of April came in unchanged from the previous month at 2.2%. This was in line with investor expectations and positively not far off the 2% target. Looking forward it is expected that headline inflation in Germany could rebound as high as 3% next month as geopolitics in the middle east continue to present issues to supply chains. A possible rate cut in the month of June by the European Central Bank (ECB) is still very much on the cards, although the path after this is less clear.

After many months in the doldrums, Chinese equities have been the bright spot in recent weeks as Chinese authorities have announced a range of measures to try to kickstart the economy and depressed housing market. Further measures were announced on Friday with an easing of mortgage rules alongside local governments buying apartments. The mainland China equity index is up around 30% since the lows in January, as investors have been lured in by depressed valuations and what appears supportive policy measures for the equity market.

UK equities took a breather this week after recent strong performance, however, with inflation data published next week there is potential for further moves.

At a portfolio level infrastructure, driven by the utilities sector, has been a recent bright spot. The initial explosion of artificial intelligence (AI) excitement hit the chip makers, and there now seems to be a narrative forming around the huge power needs required for AI, which is supporting utilities. As always our diversified approach allows us to be exposed to a range of sectors and themes in portfolios.

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 – April 2024

The Month In Markets - April 2024

UK equities produced another strong month, backing up robust performance in March, while gold led the way, as it had done a month earlier. Fixed income assets came under pressure in April as the reflation trade gained momentum.

Trading conditions in April felt similar to 2022 when inflation really began to bite. During that year the UK equity index was one of the limited bright spots in the year, while growth focused equities and fixed income fell on rising inflation expectations.

Economic data in the month did little to dampen the spirits of the reflation bulls. US Jobs data smashed expectations, highlighting continued strength in the labour market, which should support wages and the consumer. US inflation accelerated for the second successive month, coming in at 3.5%, which was the highest reading since September 2023. On a month-by-month basis inflation rose by 0.4%, which was again above forecasts. US inflation has consistently been higher than expectations in 2024. The result has been a dramatic shift in interest rate pricing. Only four months ago the market was convinced inflation would continue to fall and allow the US Fed to cut interest rates 6-7 times this year. However, we have witnessed a complete reversal on this thinking and now the consensus view is for only one interest cut this year in the US. One of the reasons for inflation not falling as far or fast as expected has been shelter (rent) inflation.

Here in the UK inflation fell to 3.2% for the month of March. While the fall continues a positive trend in the fight against inflation, 3.2% was slightly higher than expected and caused a sell-off in UK government bonds. However, UK inflation is now below US inflation, and the nation is no longer the inflation outlier versus its peers. The next inflation print is likely to be lower still, given the new energy price caps which kicked in on 1st April. The prospects of lower inflation, which let’s not forget hit 11% in October 2022, has boosted confidence amongst consumers and businesses, with UK consumer confidence hitting fresh two-year highs in April.

The reflation trade which has been in play for two months typically benefits sectors such as financials, resources and oil & gas. Given their large weighting in the UK market, UK equities posted another strong month to back up March. On the flip side within the US index there is very little exposure to miners and oil companies, which acted as a headwind for the US. There was a severe rotation in equity leadership midway through April, with artificial intelligence (AI) darling Nvidia falling over 10% in a single day, despite no company specific news. The fall wiped off over $200bn of value from the company, which is a staggering one-day move. Meta, another stock turbocharged by the AI theme, also saw a big daily decline on the back of Q1 results. While the headline numbers appeared positive, it’s clear that the AI focused companies are needing to invest heavily and Meta’s elevated capital expenditure (capex) surprised markets. It’s a trend we are seeing across tech companies, which for many years were seen as capital light businesses, however, they are now increasing capex at a high rate.

It is once again necessary to comment on UK mergers and acquisitions (M&A) activity given a few notable deals during April. Hipgnosis, the music back catalogues company looks set to be bought by Blackstone for $1.6bn, after a bidding war emerged. Another UK mid-cap stock, Tyman, a 186-year-old company, agreed to a US takeover for just shy of £800m. These mid-sized deals were eclipsed by a £4.3bn bid for cybersecurity company Darktrace, the bid once again coming from US private equity. At the end of the month, we saw BHP Billiton offer £31bn for Anglo American, in a bid to create the world’s largest copper company. While the bid was rejected, it highlights that foreign investors continue to see value in small, mid and large UK listed firms.

Japanese equities had a very strong start to the year, however a combination of a stalling equity market and sustained weakness in their currency led to a difficult month. The Bank of Japan recently hiked interest rates for the first time in 17 years, however, it is unclear if further hikes will materialise. There is still significant reform at a corporate level which should reward shareholders and over the medium term there is potential for the currency to mean-revert given it is trading at 34-year lows versus the US Dollar.

Gold hit new all-time highs during April, although towards the end of the month sold off, potentially on profit taking. We’ve previously commented on some potential drivers of the gold price, including increased buying from central banks and the Chinese consumer, which likely continued in April. Other commodities, such as copper continued its ascent higher, driven by increased demand expectations from AI power needs and the energy transition.

After a strong Q1 opening, April proved to be a more challenging month. Markets begun to digest the prospect of a “higher for longer” interest rate environment which put pressure on large parts of the equity market and fixed income asset class.  While the expectation for 6-7 interest rate cuts in the US was likely to be too optimistic, it’s entirely possible the pendulum has lurched too far in the other direction, once again overshooting. The short-term noise creates volatility and importantly opportunity, while for a long-term investor, patience is a required skill to look through this short-term noise. Fixed income holdings in portfolios have come under pressure this year, however, we continue to see value in the asset class, with many of the buy-and-hold government bonds in portfolios offering attractive positive real returns at maturity.

Andy Triggs

Head of Investments, Raymond James, Barbican

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.

Appendix

 

5-year performance chart

The Week In Markets – 4th May – 10th May 2024

This Thursday the Monetary Policy Committee (MPC) met to discuss interest rates and as expected there was a majority vote to keep rates unchanged at 5.25%. Over the course of this year, market expectations for rate cuts have been reduced but there is still the belief a rate cut could occur this summer.

The UK base rate has been held firm for the sixth meeting in a row, however investors were upbeat following Governor Bailey’s comments. He didn’t rule out rate cuts in next month’s meeting and mentioned that rates could possibly be cut by more than market expectations. Ahead of the June meeting, UK inflation data and wage data will be released arming the MPC to make fresh judgement on the state of the UK economy.

Positive news continues to flow out of the UK as this morning it was confirmed that the UK had exited recession. UK GDP for Q1 came in at 0.6% beating market expectation of 0.4%, ending the shallow recession that it entered in the second half of 2023.  There has been renewed strength in sectors such as retail, public transport and health, especially as we have seen a reduction in strikes. Sterling has risen on the good news up to $1.257.

In Germany, industrial output was disappointing over the month of March. Industrial production fell by 0.4% although it was a smaller decline than market expectation of 0.6%. Germany has long been Europe’s leading manufacturing hub and with 40% of manufacturing companies reporting a lack of orders over April we know the road for recovery of Germany’s economy remains long.

On Tuesday, Bank of Japan (BoJ) Governor, Mr Ueda, mentioned actions regarding the currency was a key topic in a meeting with Prime Minster Kishida. The Japan Yen has been sliding for more than three years, losing more than a third of its value since 2021, reaching levels last seen in the 1990’s. The weak Yen is hampering Japan’s economy with increased import costs, added inflationary pressures and squeezing households’ income.

Sweden’s central bank, Riksbank, has stepped out and made their first rate cut since 2016. After raising rates up to 4%, they have now cut rates by 25bps to 3.75% and are expected to continue to cut rates twice more this year. The Riksbank have said they are proceeding cautiously and don’t want to be out of sync with the European Central Bank or the US Federal Reserve. It is expected that they will pause rates at their next June meeting to assess the impact before continuing on their rate cut journey. The rate cut this week was seen as necessary as Sweden’s economy has remained weak over Q1 24 and households are continuing to feel the strain of higher costs. Sweden’s housing market has been under pressure due to higher rates as many homeowners have variable mortgages which have risen steeply as rates have been hiked to 4%.

In the US, weekly jobless claims rose to 231,000, much greater than market expectation of 210,000. This is the highest level of American’s filing for unemployment benefits in the last eight months and shows the US labour market is slowly cooling. This follows on from last week’s Non-farm payrolls report which showed the economy added the fewest jobs over the last six months. This will be positive news for the US Federal Reserve as they ponder on the right time to make their first rate cut. US equities have responded positively as the S&P500 is now up 1.7% for the week.

The positive momentum in May carried on this week with global equities pushing higher. UK equities, a perennial laggard over recent years, have sprung to life with the large cap index making new highs throughout the week. The mid and small cap indices are also beginning to move, albeit still someway off 2021 highs. US inflation data will be the key area of focus next week, and if there is evidence of progress in the battle against inflation then asset markets could continue to push on higher. 

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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