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Please see this week’s Markets in a Minute update from Brewin Dolphin providing a brief update on the key factors currently affecting global investment markets. Received last night:

Last week was supposed to be all about Nvidia’s earnings results, which took place just after the U.S. market closed on Wednesday.

Many analysts described the release as one of the most important corporate results in history, even perceived by some as more influential than last week’s speech by Federal Reserve (the “Fed”) Chair Jay Powell at the Jackson Hole Economic Symposium.

In the end, was it worth the hype? Yes and no.

Unpicking the poster child

Nvidia is the poster child of the artificial intelligence (AI) revolution and a direct beneficiary of the billions of dollars of investment into AI infrastructure. Its stock has added nearly $3trn in market value over the two years since ChatGPT captured the imagination of the public. At one point, it surpassed Apple and Microsoft to be the stock with the biggest market capitalisation in the U.S. equity market.

Given Nvidia’s weight of almost 7% in the S&P 500 index, big moves either way directly impact the index, and it has the potential to make or break the current market rally.

Nvidia’s outlook guidance will also offer a read-across for other semiconductor companies on AI spending, and act as a barometer for the AI investment theme that’s lifted the share prices of mega-cap technology companies. It was indeed a very consequential earnings report.

In the end, Nvidia continued its string of positive earnings surprises compared to analysts’ average estimates:

• Second quarter revenue was a record $26.3bn, up 16% from the previous quarter and up 154% from a year ago.
• Third quarter revenue is projected to be $32.5bn, plus or minus 2%.
• Gross margin came in at 75.1%, though this was a decrease from the 78.4% seen in the previous quarter.
• Nvidia also announced a $50bn share buyback.

These results are hard to fault and continue to demonstrate the insatiable demand for Nvidia’s cuttingedge chips, systems and services.

Everything’s rosy, right?

Well, Nvidia’s stock price fell over 6% on the next trading day. The problem is that its investors have grown accustomed to blowout earnings in the previous quarters. For instance, in the period ending July 2023, Nvidia’s reported revenue was a whopping 22% above estimates. In contrast, the latest quarter saw a much less impressive 4% earnings beat (earnings surpassing expectations), and a declining trend in the size of the earnings beat.

There are also concerns about supply chain and delay issues with the latest chip system (Blackwell), though Nvidia CEO Jensen Huang offered reassurances that supply will be abundant.

There tends to be lot of noise around quarterly earnings, but the longer-term AI investment thesis remains intact in our view. Nvidia’s CUDA software has led to a critical mass of developers within its ecosystem, which makes switching Markets in a Minute | 2 supplier difficult. This, combined with a short product innovation cycle, helps it stay well ahead of competitors (hence defending its 75%+ gross margin). Its forward price/earnings ratio of 35x is not out of whack for such a strong, unique quality-growth compounder.

However, there are concerns around hyper-scalers (Nvidia’s key customers) developing their own chips. While Nvidia is likely to lose some market share in the AI chips space, the key thing is that the entire market is growing.

We acknowledge this is a very volatile stock and markets are quick to anticipate and price in any changes in outlook. So, how do you play it?

We think having diversified exposure via a basket of selected top semiconductor names (chip foundries, equipment makers, designers and software companies) across the supply chain is a good approach to access the semiconductor investment thesis.

How much impact do Nvidia’s earnings have on markets?

The answer to this trillion-dollar question is… not as much as people would’ve thought.

On the day Nvidia’s share prices slumped, five out of seven of the so called ‘Magnificent Seven’ stocks (Apple, Microsoft, Nvidia, Meta, Alphabet, Amazon and Tesla) were up. The S&P 500 index was flat, meaning the rest of the market ex-Nvidia rose on the day. The S&P 500 equal-weighted index and the Dow Jones Industrial Average index made new record highs.

Why is that?

As discussed above, Nvidia’s results were actually very strong. Perhaps not strong enough to support another leap up for Nvidia, but certainly strong enough to remove the uncertainty clouding AI-related investments and draw the curtain on another healthy corporate earnings season.

With Nvidia’s results out of the way, markets can firmly focus on the economic fundamentals and look forward to upcoming interest rate cuts by the Fed. Economic data out last week was music to the ears of investors and as goldilocks (not too hot, not too cold) as one can hope for.

U.S. consumers remain resilient

The upward revisions to the second quarter U.S. gross domestic product (GDP) data probably did heavy lifting in supporting the market post Nvidia’s earnings results. Usually, these GDP revisions data don’t spur much market attention or reaction, but as we know, traders are now in a phase of (unhealthy) obsession with any data related to U.S. consumers.

Second quarter U.S. GDP growth was revised up from 2.8% to 3.0% (quarter-on-quarter, annualised), and it was driven by a meaningful upward revision to personal spending from 2.3% to 2.9%. This suggests U.S. consumers remained resilient, and helped ease recession concerns.

Now, the usual argument is that GDP data is lagging given that second quarter results cover up to June. But the latest weekly initial jobless claims offered support to the soft-landing thesis, as first-time unemployment claims have trended lower in the past few weeks. Additionally, personal consumption and income data continued to expand in July.

It’s hard to square the recent data with a narrative of a U.S. economy about to fall off a cliff. The goldilocks element is that U.S. inflation is moving in the right direction. July’s core personal consumption expenditure price index, the Fed’s preferred measure of underlying inflation, came below estimates on a year-on-year basis, while the 0.2% monthly advance is consistent with the Fed’s 2% inflation target. These economic fundamentals have supported a sharp rebound in global equities, a retreat in bond yields and a deprecation in the U.S. dollar index.

It seems that, finally, we have confidently reached the point where inflation is no longer the biggest concern to markets and central bankers. Aside from the U.S., there’s good news on the inflation front in key major economies such as the UK and the Eurozone.

UK and Eurozone inflation is normalising

In the UK, the British Retail Consortium shop price index fell 0.3% year-on-year, its first contraction since October 2021. Inflation has come a long way to normalise from the Covid supply chain squeeze and the energy price surge of the past three years. While this is a data point the Bank of England will appreciate, it’s not enough for another rate cut in September.

In the Eurozone, inflation slowed from 2.6% to 2.2% in August. Inflation in Germany, the largest economy in the area, has reached the 2% milestone. Markets cheered as the normalisation back to 2% inflation is finally in sight after a long battle by the European Central Bank (ECB) to fight inflation that was as high as 10.7% around two years ago.

With the normalisation of inflation, there is a strong case for monetary policy to return to less restrictive levels. For the Eurozone, the icing on the cake is that wage growth has slowed markedly in the second quarter. This is an indicator the ECB focuses on, so this further builds the case for another rate cut in September, which markets have now fully priced in.

All in all, the backdrop of easing monetary policy, ongoing economic expansion, and healthy corporate earnings are reasons for optimism for risk assets going forward.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Andrew Lloyd

4^th September 2024

Please see below the Daily Investment Bulletin from Brooks Macdonald, received on 03/09/2024:

What has happened

A quiet start to the week was pretty much a given yesterday as US markets were closed on Monday for the US Labour Day holiday. With the US closed, there was less direction for investors in global equity markets. As a case in point, the pan-European STOXX600 equity index was practically flat yesterday, recording a marginal fall of just -0.02% in local currency terms, but still close to its latest record closing high it set at the end of last week. Overnight, Asian equity markets have also been trading in a fairly narrow range.

Euro area economic survey data

Euro area final manufacturing Purchasing Manager Index (PMI) data for August was out yesterday. Overall, there were upward revisions from the preliminary first-read data, with the Euro Area final print at 45.8 (slightly better than the preliminary reading of 45.6). That said, it was still below the 50-separation mark between month-on-month contraction versus expansion in broader economic activity. The flipside of the marginally better data is that it led markets to dial down very slightly the size of expected interest rates by December: by the close yesterday, investors were pricing in 61 basis points (bps) of cuts from the European Central Bank by year-end, down -1.8bps relative to the previous day.

US elections latest

In nine weeks’ time, we have the US elections to be held on Tuesday 5th November. The latest political poll surveys and forecast models are continuing to point to a very tight race. One projection from the company FiveThirtyEight is currently giving a 57% chance of victory to Democrat presidential candidate Kamala Harris, with 43% to her Republican rival Donald Trump. The polls are similarly tight, with company RealClearPolitics showing a polling average currently giving Harris a lead of 1.8 percent nationwide, but such a small lead is still inside the generally accepted margin of error of most polls.

What does Brooks Macdonald think

US voters arguably have two presidential candidates with pretty divergent policy ambitions. Democrat presidential candidate Harris is proposing selective price controls as well as tax increases on corporations, plus tax increases on high earners, in order to support low- and middle-income workers. By contrast, her Republican rival Trump is signalling tax cuts and deregulation in order to reduce costs for both consumers and businesses. As a result, in terms of the possible market impact, there could be some not insignificant relative different outcomes for investors to think about – that said, with such a tight political race currently, it is very hard to pre-emptively decisively factor either outcome into asset prices.

Bloomberg as at 03/09/2024. TR denotes Net Total Return.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Charlotte Clarke

03/09/2024

Please see below, an article from Brewin Dolphin providing a brief update on the key factors currently affecting global investment markets. Received last night – 28/08/2024

Equity markets globally continued to rebound last week, and the U.S. S&P 500 index was a whisker away from its all-time high. Recent economic data helped ease recession fears while Federal Reserve (the “Fed”) Chair Jay Powell announced on Friday, at a speech at the Jackson Hole Economic Symposium, that the time has come for the Fed to cut interest rates.

This is music to the ears of traders, households and businesses. There has been a lot of speculation and expectation (resulting in disappointment and confusion) over interest rates in the past year, so to hear such clarity of impending rate cuts from the Fed Chair is both pivotal and a relief. Despite the revelation, Powell fell short of suggesting how the Fed may proceed. Again, there’s an emphasis on data dependency and the assessment of the balance of risk. There’s no doubt that incoming economic data will continue to be scrutinised.

Does a downward revision in U.S. jobs growth matter?

Last week, the revisions to U.S. jobs growth data gained a lot of attention, though market impact was rather muted. Usually, these statistical revisions are a non-event, but any data release related to the labour market is heavily scrutinised by traders.

According to the U.S. Bureau of Labour Statistics, the number of nonfarm payroll positions (which exclude farm workers, private household employees, unpaid volunteers, business owners and some self-employed) will likely be revised down by 818,000 for the 12 months through March. That’s a bumper figure, and the biggest revision since 2009. It translates to about 68,000 fewer jobs created each month than previously thought.

I remember how stunning it was to see several nonfarm payroll releases announce gains of 300,000 jobs over the past year. It turns out the actual state of the U.S. labour market is much less robust.

Does that matter? Yes and no.

Yes, because it adds to the evidence of a cooling U.S. labour market and really seals the deal for a rate cut in September. We don’t know the distribution of this downward revision in job numbers – could it be more concentrated in more recent months? If that’s the case, the lagged impact of higher interest rates could be gathering pace (think of the ‘boiling frog’ syndrome). In this scenario, the Fed could be expected to end the current restrictive monetary stance as soon as possible to avert a recession.

Some economists may argue that no, the revisions don’t matter too much (even after sizeable downward revisions) because the job data was so robust, and the monthly pace of job gains was still a whopping 174,000 on average. This is still a healthy pace of hiring and a picture of economic resilience. The muted market reaction suggests the rate cuts are well priced in, and markets decided the data wasn’t too bad.

How low can the Fed go?

Beyond September, the question is: how much further can the Fed cut? Perhaps even the Fed has no idea given its dependence on data. We think barring a recession, the pace of rate cuts is likely to be measured.

The aggressive rate cuts priced in by the bond market appear to be overdone if the economy continues to expand. For instance, the Fed’s median interest rate projections (the so-called ‘dot plot’) suggest the Fed funds rate will be just above 4% by the end of 2025. That compares with about 3% currently implied by the Fed funds futures. While the next dot plot may see downward revisions, the current 100-basis point disconnect seems big.

If the U.S. economy continues to hold up, are the 100-basis point interest rate cuts priced in by markets for the end of 2024 and 2025 warranted? We think probably not. What we can learn from the past two years is that the market pricing of interest rates can change drastically. What is significant is that we’re moving into the next phase of the interest rate cycle. While we don’t know the exact quantum, the direction of travel of interest rates is highly likely to be south over the next 12 to 18 months – important information to consider for both businesses and households, for example if you’re holding a lot of cash or if you’re looking to buy a property.

The price of gold soars

As a result of the intensifying expectations of interest rate cuts by the Fed, the U.S. dollar has weakened notably across a basket of major currencies. Meanwhile, gold prices blasted past $2,500 to an all-time high last week.

Gold prices, which are denominated in U.S. dollars, tend to strengthen with a weaker dollar. They’ve been on a tear of late, having risen around 21% this year. Prices have been supported by increased central bank purchases, as emerging market central banks look to increase gold as a percentage of their reserves.

Gold, an asset traditionally expected to retain or even increase in value during times of market turbulence, has been a beneficiary of the ongoing geopolitical and economic uncertainty. It served as an effective hedge in the recent bout of equity market volatility, for example. Furthermore, gold prices have recently re-aligned with their fundamental driver: real interest rates. Gold prices tend to move in the opposite direction to real interest rates (for example, the higher the interest rates, the lower the gold prices) because gold generates no income.

With global central banks likely to cut rates simultaneously over the next six to 12 months, and U.S. growth moderating, the stars are aligned for gold to perform well and deliver as a portfolio diversifier.

The UK is recovering – but some fears of inflation remain

Turning to the UK, and there are more signs the economy is recovering. The latest purchasing manager indices (PMI) for manufacturing and services show both expanded more than expected in August. This is rather special, because manufacturing PMIs in the U.S. and the Eurozone both contracted in August. This sets a good backdrop for Q3 gross domestic product (GDP) growth – and don’t forget, GDP was already expanding at +0.6% in Q2 and +0.7% in Q1, respectively.

However, there are concerns that higher inflation will return. The large wage increases given to train drivers and junior doctors raise concerns on further public sector and labour union wage demands.

In addition, on Friday, energy regulator Ofgem announced an increase of 10% to the energy price cap from October. While expected, this risks feeding into consumers’ inflation expectations. The Bank of England (BoE) already expects UK CPI to re-accelerate to 2.7% in Q4 from the current 2.2%. As a result, markets are no longer betting that the BoE will cut interest rates again in September, with the next cut more likely to be in November.

Overall, the markets have priced in higher UK interest rates compared to those in the U.S. for at least the next 12 to 18 months. For instance, U.S. interest rates are expected to be at about 3% by the end of 2025, versus about 3.7% in the UK. This has contributed to the recent strength in sterling, which surged past 1.32 versus the U.S. dollar last week, meaning £1 now buys $1.32.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

29^th August 2024

Please see the below daily update article from EPIC Investment Partners:

Following on from our Demographics Matter article we take a deeper dive into South Korea’s demographic crisis, characterised by an alarmingly low birth rate and a rapidly ageing population. Despite various government incentives to encourage parenthood, many young Koreans remain unconvinced that having children is a more worthwhile investment than pursuing personal fulfilment through luxury and leisure activities. 

South Korea, Asia’s fourth-largest economy, has continuously recorded the lowest birth rate globally, a situation that shows no sign of improvement. Efforts to reverse this trend, including proposals to establish a dedicated ministry for demographic challenges, have so far failed to yield the desired outcomes. The lifestyle choices of Generations Y and Z, prioritising experiences over long-term commitments like marriage and parenthood, further complicate these efforts. Park Yeon, a 28-year-old fashion influencer, exemplifies this trend: “I’m all about YOLO (you only live once),” she says, prioritising self-reward and immediate happiness over saving for marriage and children. 

It has been suggested that the younger generation’s tendency to prioritise status and online recognition over traditional markers of success, such as home ownership and family, contributes significantly to the declining birth rate. Jung Jae-hoon, a professor at Seoul Women’s University, points out that the high spending habits of young Koreans reflect their pursuit of personal and social validation, leaving little room for savings or family planning. Data indicates that the savings rate among individuals in their 30s has declined over recent years, despite interest rate hikes aimed at curbing consumer spending. Additionally, there has been a marked increase in spending by younger Koreans on luxury goods, high-end dining, and travel. 

Financial concerns remain a significant barrier to childbearing, as highlighted in a recent survey by research firm PMI Co., where nearly half of the respondents cited job insecurity and education costs as the primary reasons for not having children. This economic strain, combined with the preference for immediate gratification, helps explain why government measures such as subsidies and extended parental leave have failed to reverse the trend. South Korea’s creation of a new ministry dedicated to demographic issues reflects a strategic shift, yet the cultural and economic barriers remain. 

New analysis by Michael Clemens of the Peterson Institute for International Economics provides a fresh perspective on South Korea’s demographic dilemma. Clemens suggests the country could see a 10% decline in income per citizen within 18 years due to the ageing population, assuming no additional immigration post-2024. His research indicates that the shrinking labour force will diminish the productive capacity of the economy more rapidly than can be offset by increased capital accumulation or current pronatalist policies. This will result in a decline in per capita income, further exacerbated by the growing financial burden on the working-age population, who must support an increasing number of dependents, including both the elderly and children. 

Clemens argues that traditional pronatalist approach might not be sufficient to counteract the demographic decline. Instead, Clemens suggests that temporary labour migration could play a crucial role in mitigating economic stagnation. Using countries like Malaysia as a model, South Korea could potentially alleviate pressure on its labour market and support economic stability. However, this economically promising approach raises important questions about migrant rights and integration. 

To prevent severe economic stagnation and reduce the financial burden on the younger generation, tackling the demographic crisis in South Korea, and even globally, will require a comprehensive strategy that balances economic incentives with cultural and social shifts.  

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Charlotte Clarke

28/08/2024

Please see the below article from Tatton Investment Management detailing their thoughts on markets over the past week. Received this morning 27/08/2024.

Late summer heatwave

Global stocks have turned things around from the early August sell-off. Up until the end of last week, the gains of the recovery were strong and remarkably stable. Last week’s main capital markets event was Federal Reserve chair Jerome Powell’s speech at the annual Jackson Hole central bankers conference. He basically confirmed a steep path down in US interest rates to start in September, and markets approved. This is good news, but investor optimism is a little unnerving; markets seem to be running a little hot.

For the S&P 500, the two-week period following the sell-off was in the top percentile of any two-week periods of the last 50 years. Daily gains were remarkably smooth – to an extent you rarely see. But many of the previous concerns are still here (slower growth and stretched US valuations) so we shouldn’t be surprised if another bout of volatility comes soon.

The dollar has weakened, seemingly because of slower US growth and the Fed’s expected cuts. But the US economy is still expansionary, according to the most reliable business sentiment surveys. Company earnings forecasts are going up too. Investors bristled at Kamala Harris’ interventionist economic proposals last week, but the election is unlikely to hurt strong corporate earnings too much regardless of who wins.

Markets are currently under a spell of ‘goldilocks’ mentality: they are happy with slower growth if it means lower rates. But this could be self-defeating. If valuations and corporate credit are supported enough by the goldilocks narrative, growth will be stronger after all, meaning less of a need for rate cuts. That is exactly the debate we have seen in recent weeks. Powell’s messaging was dovish, but if he keeps talking down US economic strength it could unnerve markets for the opposite reason. We could see another bout of short-term volatility. This isn’t a big problem for long-term investors, but we shouldn’t be lulled into a false sense of security.

Who’s afraid of UK wage rises?

The Bank of England cut interest rates earlier this month, and bond markets expect them to continue cutting over the next couple of years. But the monetary policy committee’s (MPC) more hawkish members keep warning about wage inflation. Opposition politicians have suggested that the government’s recent public sector pay rises are an example of this.

Put simply, though, we don’t think these public sector pay deals will materially affect inflation. BoE governor Bailey suggested as much earlier this month, and bond markets wouldn’t bet on more rate cuts if inflation was about to spike. Services inflation, which is more sensitive to wages, keeps falling and was below economists’ expectations in July. The drop in headline inflation will feed through to wages too, since many pay packets are indexed to CPI.

Hawkish MPC members argue that the recent inflation spike has structurally increased workers’ pricing power – and hence inflation pressures are higher – but these claims are hard to evaluate when cyclical effects are still being felt. Survey data from service providers suggest wage pressures are close to the long-term average, and growth seems to be as much to do with productivity gains as price pressures. If we were about to see a wage-price spiral from higher pay demands, all these indicators would be showing the opposite.

The UK rate cut path is not as steep as elsewhere for both cyclical (growth is improving) and structural (the BoE has a more restrictive legal framework) reasons. But bond markets have a benign inflation outlook, predicting another rate cut in the Autumn. Current public sector pay deals are more about ‘catch up’ after years of real-terms cuts – and those agreements tend to be short-run. The MPC has its hawks, but the majority opinion will be driven by the data, which points to a steady fall in rates. Nothing in recent wage data suggests otherwise. 

The monopolistic seven?

Google is an illegal monopoly, according to a US federal judge. The Justice Department is reportedly considering breaking up the tech giant in response. That would be a huge blow not just to parent company Alphabet, but the entire ‘Magnificent Seven’ big tech stocks. The Mag7 dominated for most of this year, but investors have become concerned about their high valuations, leading to recent underperformance. Antitrust cases against tech giants would certainly give investors more to worry about – a sign that US politicians are cracking down on their market power. What happens depends on the upcoming election, but neither major party seems fond of silicon valley.

This isn’t a problem for the entire Mag7. Nvidia and Tesla can’t really be described as predatory monopolies, for example. But internet companies like Alphabet, Amazon and Meta are in many ways prime targets of antitrust litigation: they dominate new tech spaces, and actively limit competition by buying up competitors or investing to “make the ecosystem exceptionally resistant to change” (in the words of a former Google executive). Newer entrants can’t realistically compete without policy intervention – which makes it more likely it will come.

For a long time, US politicians were reluctant to pursue big tech; cases against Google and its ilk were mostly in Europe. This is probably because the US benefits from its national champions acting like monopolies abroad: capital flows back to the US, bolstering stock markets and tax revenues. That has changed under President Biden, and Washington now sees fewer benefits in giving its tech giants free reign.

It isn’t clear that the global dominance of US tech has helped American companies or citizens more broadly, for example, and most voters prefer government intervention to level the playing field. Antitrust pressure will not go away anytime soon.

Please continue to check our blog content for advice, planning issues, and the latest investment market and economic updates from leading investment houses.

Alex Clare

27/08/2024

Please see the below an article from Epic Investment Partners providing their thoughts on the jobs data and the anticipation of Powell’s speech at Jackson Hole:

This week, we have focussed on jobs data and the anticipation of Powell’s speech at Jackson Hole. Today we are turning our attention to a factor often overlooked but crucial for job creation: the growth of the working-age population.

Back in December 2000, the US working-age population was flourishing at a robust pace of 3.9 million annually. Fast forward to today, and the latest figures paint a starkly different picture, with growth estimates hovering at around 1.7m per year, compared to an overall population of 342 million. This slowdown matters because GDP growth relies heavily on the number of people employed and their incomes.

The US Congressional Budget Office (CBO) projections on US population growth are worth considering. While the population is set to reach 383 million by 2054, this growth is decelerating. More importantly, the civilian non-institutionalized population aged 25 to 54 – prime working years – is projected to increase at a mere 0.3% annually, a sharp contrast to recent decades.

The implications are clear: a slower-growing workforce means fewer people contributing to the economy, which can dampen GDP growth and put downward pressure on wages. While not necessarily negative, as real wages are what truly matter, this highlights that underlying demographics do not support sustained high inflation. Even achieving 2% inflation may be challenging given the ageing population and slower growth in demand from the working-age population.

While the US enjoys a more favourable position compared to countries like China, Japan, and Germany, where the working-age population is shrinking, the global trend of slowing working-age population growth cannot be ignored. This will put downward pressure on economic growth rates worldwide in the coming years.

So, while Powell’s speech and jobs data grab headlines, let us not forget the silent force shaping our economic future: demographics. Prior to the pandemic, bond yields had been falling for decades, in part due to the slowdown in the rate of population growth. So, it is conceivable that bond yields could return to those lower levels in the years to come once the current excessive budget spending in the US slows to more normal levels.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Andrew Lloyd DipPFS

23/08/2024