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.

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