News

Please see below article received from M&G Wealth Investments yesterday afternoon, which anticipates the markets’ reaction to the result of the November 2024 US presidential election.

2024 has a busy election calendar and governments may be more inclined to reduce taxes and spend more, in an effort to win over voters.

The November 2024 US elections are still a long way off but with the US Presidential nominees now set, we’re starting to think about the future outcomes and market scenarios. Given the sharp policy differences between the two political parties the election outcome could have profound political, economic and market implications – but this is also dependent on the scale of the candidate’s victory. These are our thoughts and what we’re watching:

2025: Expect a deluge of legislation

In the past decade, presidents have moved to enact their flagship policies early in their term. This is because there’s a risk of the House and Senate changing in the ‘mid-term’ elections two years later. In addition, political parties tend to stop working to pass legislation or approve new appointments in the run up to elections. For example, Donald Trump’s key policy of tax cuts was delivered in 2017 and reduced the headline rate of corporate taxes from 35% to 21%. President Joseph Biden’s Infrastructure legislation came in 2021 and the Inflation Reduction Act in 2022. These are examples of key policies that have influenced the US economy and markets.

What does this mean? There’s a narrow window for legislation to be passed in the US. Regardless of who wins, we expect a deluge of new legislation in 2025 and we would expect both candidates to continue spending and borrowing.

If Biden’s Back

We’d expect a Biden victory to reinforce the existing agenda of The American Jobs Plan – investment in infrastructure, transportation, and manufacturing, alongside a focus on building alliances abroad.

Regulation of technology companies and artificial intelligence could be a new area of focus. So far, the European Union has been taking more significant actions to regulate technology companies than the US. We could see this change, as artificial intelligence impacts more areas of society. Within the election itself, the ability to create fake videos, images and voices could have a profound impact.

Immigration is also likely to be high on the agenda, as it’s a key political issue. Biden recently negotiated an agreement on immigration with the US Senate. However, the House of Representatives has declined to consider it citing that it’s too close to an election. If the House of Representatives doesn’t take any action on the current proposal, Biden will want to do that quickly at the start of his next term.

If Trump is Triumphant

We expect to see large tax cuts for companies and individuals if Trump prevails. The real estate sector would likely be a significant beneficiary, as this would support Trump’s personal business interests. Reducing corporate taxes would boost company profits, so we’d probably see an initial boost for stocks. Consumer spending power would increase as well. Longer term, though, this could lead to higher inflation.

Trump has made no secret if his disdain for higher interest rates. It’s not surprising, given that higher interest rates create a more challenging environment for property developers. Jerome Powell’s term as Chair of the US Federal Reserve ends in 2026 and the next President would have to nominate a successor. Trump might replace Powell with someone more likely to reduce interest rates. There is a longer term risk that if Trump were able to appoint several individuals to the Federal Reserve board willing to take direction from him, then monetary policy could cease to be fully independent. A scenario where the market loses confidence in US monetary policy is the biggest risk to financial markets. We might see interest rates reduced in the short term, but combined with tax cuts this could lead to higher inflation in the long run.

Foreign policy would also see change under Trump, with the United States pulling back from international diplomacy. Laws have been changed to prevent Trump from withdrawing the US from North Atlantic Treaty Organisation (NATO), a joint defense agreement created after World War 2.  He could undermine it in other ways, such as not providing funding or not appointing representatives to interact with the organization. With the conflict between Ukraine and Russia ongoing, this would weaken Europe’s position.

What does this mean for investors?

Markets tend to look through election ‘noise’ in the run-up until the outcome is better known. The US economy is in a strong place as a result of four years of spending and investment. It’s an increasingly insulated and self-sufficient economy. We haven’t changed our investment approach in anticipation of the election.  If Trump is re-elected then we expect increased volatility and unpredictability.  But, even with Biden continuing for a second term we’re still likely to face a volatile environment.

Over the past year, we’ve increased exposure to government bonds. Government bonds, and particularly US Treasuries, can perform well during periods of uncertainty. There’s also one potential silver lining: there has been greater divergence in economies recently – most notably in economic growth and inflation. If this trend continues, it could make it easier to have diversification within portfolios.

Please check in again with us soon for further relevant content and market news.

Chloe

15/03/2024

Please see below article received from Blackfinch this morning, which provides a detailed global market update for February 2024.

February was a record-breaking month for equity market returns, with several regional indices hitting all-time highs. The key stories were in the US and Japan, with US returns driven by the darling of the Artificial Intelligence (AI) world, Nvidia, boosting sentiment across the market. Japan boasted an impressive corporate earnings season, as well as stark improvements in corporate governance, which helped Japan’s largest index burst through the ceiling set at the end of 1989, when Tokyo real estate was the most valuable on the planet. On the economic front, the UK officially moved into its long-expected technical recession, which sparked some concern for domestic investors. Disappointing inflation data in the US was
largely shrugged off in equity markets by the sheer excitement of AI, as well as the US economy continuing its strong economic growth trend.

Bank of England hints that interest rate cuts are coming…
but not quite yet

• The UK officially moved into a technical recession – defined as two
consecutive quarters of falling national output – at the end of 2023.
The Office for National Statistics (ONS) reported that UK gross domestic
product (GDP) declined by a larger-than-expected 0.3% in the fourth
quarter, following a fall of 0.1% in the third quarter. Although this caused
some concern for local investors, Bank of England (BoE) Governor Andrew
Bailey said he expects this recession will be “shallow” and short-lived.

• UK consumer price index (CPI) inflation remained at 4% in January.
Economists had expected a small increase to 4.2%, meaning it was a softer
reading than predicted and reaffirmed hopes of meeting the BoE’s 2% target.

• The BoE’s decision to maintain interest rates at 5.25% in February, a 16-year high, was no surprise. However, the decision wasn’t unanimous, as varying Monetary Policy Committee (MPC) members voted in different directions, with some preferring to increase the rate by 0.25% and another member opting to reduce it by 0.25%.

• The ONS reported that annual growth in regular earnings, excluding
bonuses, was 6.2% in the fourth quarter of 2023, while pay rises, including
bonuses, reached 5.8%. Economists had expected 6.0% and 5.6%,
respectively. A strong jobs market and wage growth will likely make the
MPC apprehensive about cutting interest rates too soon.

China fighting an uphill battle to economic recovery

• China continued to fight deflationary pressures in January, adding to
uncertainty surrounding its economic outlook, with prices having fallen
at the fastest rate in 15 years. CPI inflation declined 0.8% year-on-year
for January, which marked the fourth straight month of declines and
the sharpest contraction since 2009, after the Global Financial Crisis.
The inflation rate was dragged down by falling food prices, which
dropped by 5.9% year-on-year.

• China did report some encouraging economic data in terms of increased
revenue. Revenue from tourism during the Lunar New Year holiday surged
47.3% year-on-year and surpassed 2019 levels. Domestic tourism spending
hit 632.7bn yuan (£69.7bn), according to government figures, thanks to a
domestic travel boom amid a longer-than-usual break.

• However, we are still seeing a continued trend that foreign direct investment (FDI) into China last year increased by the lowest amount since the early 1990s. China’s direct investment liabilities, a broad measure of FDI, rose by $33bn in 2023, down 81.7% from 2022, according to the State
Administration of Foreign Exchange.

US economy proves too strong for its own good, quashing hopes
of earlier interest rate cuts

• US CPI inflation declined to 3.1% in January, down from 3.4% in December,
but higher than the 2.9% reading economists expected. This was a
disappointing figure at the headline level.

• However, the Personal Consumption Expenditures (PCE) index – the
preferred inflation measure of the Federal Reserve (Fed) – increased by
2.4% in the year to January, down from 2.6% in December. This would have
helped reassure the Fed that inflationary pressures were easing. The core
PCE index, excluding food and energy costs, showed prices rose 2.8% in
the year to January, down from 2.9% a month earlier.

• Despite the positive PCE inflation news, the US jobs market appeared far
too strong for the Fed to consider cutting interest rates just yet. The US
Labor Department reported that employers added 353k new jobs in January taking the unemployment rate to 3.7%, still close to the 50-year low.

• The most disconcerting feature of the jobs report for the Fed was the
strength in worker pay, as average hourly earnings jumped by a surprisingly strong 0.6%. That was the fastest increase in two years, lifting the year-over-year increase to 4.5% from 4.3% in December. This is not the direction the Fed wants to see, as it views taming wages as a critical step in wrestling inflation down to its target.

Summary

As mentioned, it paid dividends to be an equity investor in February. Although economic data across the globe was somewhat mixed, investors in Western markets were again swept up in the AI craze. China was the surprise package for the month, however, with indices rallying due to more targeted stimulus measures from the government. Despite this, Chinese equities remain at 20+ year lows against broader equities. The mood music in the region is still gloomy, as overseas investment expanded at the slowest pace in 30 years in 2023, although GDP did grow by 5%.

Turning to bonds, the outlook turned negative on rate cuts, with the yield on the ten-year UK government bond (gilt) rising from 3.79% at the start of February to 4.12% by the end of the month, and with the ten-year US Treasury yield increasing from 3.92% to finish the month paying 4.26%. The outlook for high-quality investment grade bonds continued to improve, as February saw over $150bn in new issuance in the US, a record-breaking amount.

Away from equities and bonds, property and infrastructure both fell in value for the month. These assets are particularly sensitive to shifts in interest rate expectations and fell victim to the conclusion from the market that interest rate cuts may not come as quickly as previously hoped, especially in the US.

Please check in again with us soon for further relevant content and market news.

Chloe

08/03/2024

Please see below article received from EPIC Investment Partners this morning, which reports on the latest economic data from the US.

The Fed’s preferred inflation gauge, the personal consumption expenditure deflator (PCE) was broadly in-line with expectations in February, increasing 0.3%mom, slightly ahead of December’s 0.2% print. On an annual basis, PCE was 2.4%, in-line with expectations and 0.2% below the previous reading.  

The core print was along the same lines, coming in 0.4%mom, versus a prior of 0.2%, while the annual value ticked down a tenth to 2.8%, mainly due to base effects. Both the numbers were in-line with market expectations.   

Stronger data, including inflation, has very much been the theme so far this year. However, the Fed along with the market will be looking to see if this has been a “fluke”, or a new trend. Fed speakers Bostic, Goolsbee, and Daly all seemingly unperturbed and continued to tow the party line.  

Goolsbee said we shouldn’t extrapolate one month’s data, Bostic said it shows that the path to target inflation will have bumps along the way, and the dovish Daly repeated that she advocates for policy rate cuts ahead of reaching the 2% target. Additionally, the historically more hawkish Mester reiterated William’s message yesterday, stating that three cuts for 2024 “still sounds about right”.   

Meanwhile, New York Community Bancorp (NYCB) was again in the headlines yesterday after they released several announcements that spooked the market, who were already on edge since the lender reported its exposure to commercial real estate (CRE).  

Regulatory filings from its management “identified material weaknesses in the Company’s internal controls related to internal loan review.” The bank attributed the problems to “ineffective oversight, risk assessment and monitoring activities”.  

The news reignited the controversy that began in January when the company, a significant lender for New York apartments and CRE, announced it was amassing cash to safeguard against possible loan issues. The stock fell over 26% in after-hours trading, on top of the more than 53% it has already lost this year.  

As we have said before, US banks alone hold about USD2.7tn in commercial real estate debt, of which a significant percentage is now underwater.  

We reiterate, this could be a canary in the coal mine that we will be keeping a very close eye on. 

Please check in again with us soon for further relevant content and market news.

Chloe

01/03/2024

Please see below article received from EPIC Investment Partners this morning, which reviews the FOMC minutes from the January 30/31 meeting.

The FOMC minutes from the January 30-31 meeting revealed little on monetary policy direction. The minutes reiterated the Fed’s intention to wait for “greater confidence” in inflation moving sustainably towards a 2% target and emphasised the need for patience. Only a “couple” of officials seemed inclined to cut rates earlier due to the current restrictive policy stance compared to their colleagues.  

The minutes stated: “Most participants recognised the dangers of easing policy too hastily and stressed the need to carefully evaluate incoming data to determine if inflation is consistently moving towards 2%. However, a couple of participants highlighted the economic risks of maintaining a too restrictive policy for an extended period”. This was echoed in the press conference when Powell was asked about the possibility of a March cut: “that’s probably not the most likely case or what we would call the base case.”  

Furthermore, the minutes highlighted the progress towards the Fed’s dual mandate but cautioned that economic uncertainty could jeopardise this progress. “Members judged the risks to achieving the Committee’s employment and inflation goals were moving into better balance. Members considered the economic outlook uncertain and concurred that they were highly attentive to inflation risks.”  

Regarding inflation, the minutes detailed several risks, noting that the committee “saw inflation’s upside risks as diminished” but observed that inflation remained above the Committee’s longer-term goal. Some participants worried that progress towards price stability might halt, especially if demand increased or the healing of the supply side slowed more than anticipated. However, they also noted downside risks to inflation and economic activity, including geopolitical risks that could significantly reduce demand, potential adverse effects from slower growth in certain foreign economies, the risk of prolonged restrictive financial conditions, or the impact of weaker household balance sheets on consumption deceleration more than expected.   

Lastly, if you have ever thought about writing a book and want to be around like-minded people, then Iceland is your place. About one in 10 Icelanders publishes a book in their lifetime; by comparison, in the US only one in 5,000 have. The average Icelander reads more than two books a month. Remarkably, a blockbuster title can sell as many as 14,000 hardback copies in a country with a population of just 375,000. One reason for the prolific writing could be the country’s ancient storytelling tradition, going back some 800 years to the Icelandic sagas.   

Or it could just be needing something to do during those long 21-hour winter nights.   

Please check in again with us shortly for further relevant content and market news.

Chloe

23/02/2024

Please see below article received from Brooks Macdonald this morning, which provides a global market update following Nvidia’s earnings announcement.

What has happened

The market saw a surge of optimism, largely fuelled by Nvidia’s robust earnings report. This positive sentiment propelled the S&P 500, Nasdaq 100, and Dow Jones indices to record new all-time highs. The S&P 500 soared by 2.11%, marking its most significant single-day advance in over a year, with the IT sector leading the charge, gaining 4.35%. Additionally, the lower-than-expected weekly jobless claims in the US bolstered confidence in the economy’s resilience. As a result, the expectations for rate cuts by the Federal Reserve in 2024 dipped to a three-month low of ~80 basis points, less than half of the peak levels observed in mid-January.

Nvidia’s post earnings rally

Nvidia’s stock had a remarkable day, climbing 16.40% after its earnings announcement. This surge augmented Nvidia’s market capitalization by an unprecedented $277 billion, eclipsing the previous record for the largest single-session market cap gain held by Meta, which earlier this month saw a $197 billion increase. This leap propelled Nvidia to the fourth position among the world’s largest companies by market capitalization and to third place within the S&P 500. Nvidia’s year-to-date returns stand at an impressive 58.59%, outperforming all other S&P 500 constituents.

What does Brooks Macdonald think

During a week devoid of major economic data releases, the spotlight has been on Nvidia’s earnings announcement. There were reservations about possibly overstating the significance of Nvidia’s earnings. Nonetheless, the strong market response has confirmed the initial hype, demonstrating the substantial impact that the financial performance of a single company can have on broader market trends.

Please check in again with us soon for further relevant content and market news.

Chloe

23/02/2024

Please see below article received from Evelyn Partners this morning, which provides their thoughts on this morning’s UK inflation announcement for January.

What happened?

UK January annual headline CPI inflation came in lower than expected at 4.0% (consensus: 4.2%), versus 4.0% in December. In monthly terms, CPI was -0.6% (consensus: -0.3%), compared to 0.4% in December.

Similarly, core CPI inflation (ex energy, food, alcohol and tobacco) came in at 5.1% (consensus: 5.2%) vs 5.1% in December. In monthly terms, core CPI was -0.9% (consensus: -0.8%), compared to a rise of 0.6% in December.

What does it mean?

The broad downward trend in inflation is continuing, as disinflationary pressures are likely to drive the rate down towards the Bank of England’s (BoE) target of around 3% in Q4’24.

In the data, upside to inflation was driven by a roughly 5% increase in the Ofgem cap on household energy that fed through to gas and electricity prices. On the downside, goods price disinflation continues as retailers offer discounts at the start of the year, as seen in monthly falls from both furniture/household goods and food/non-alcoholic beverages CPI categories.

On balance, upside inflationary risks appear to be contained. First, wage rates are slowing and that is putting downward pressure on services inflation. Providing that headline CPI inflation continues to slow there will likely be less demand for higher wage rates. In other words, this reduces the circular risk of an upward spiral in wages and inflation.

Second, so far there is little sign of a significant pick-up in consumer prices from supply chain disruption and rising shipping costs caused by Houthi attacks in the Red Sea. Energy prices are also stable: Brent crude oil is still falling on a year-on-year basis. This reduces the risk of upside in retail petrol and diesel fuel prices.

Third, lead indicators point to more disinflation ahead. Given their statistical relationship with underlying producer prices, both core goods CPI inflation and services inflation are set to come down over the coming months. For instance, core goods CPI prices could well be flat on a year-on-year basis by the Spring from rising around 2%.

Bottom Line

The broader trend of inflation deceleration is continuing. Importantly, headline CPI inflation is running slightly below the BoE’s forecasts over the last few quarters. This supports the narrative that we have reached the end of the interest rate hiking cycle. Expect the BoE to cut interest rates in the coming months and provide some support to the gilt market.

Please check in again with us soon for further relevant content and market news.

Chloe

14/02/2024

Please see below article received from Brooks Macdonald this morning, which offers a global market update.

What has happened

Yesterday’s trading session saw a notable divergence with the Magnificent Seven underperforming the broader market. This underperformance was primarily driven by a significant drop in Tesla’s shares, which fell by 2.81%, making it the second-worst performer in the S&P 500 index for the year 2024, with a 24.3% YTD loss. In contrast, Nvidia managed to carve out a new record high, closing up by 0.16% and securing its status as the top-performing stock in the S&P 500 for this year, boasting a 45.9% YTD increase. Meanwhile, market optimism continued to flourish in Japan, with the Nikkei index climbing 2.57% this morning to reach a 34-year peak.

US CPI preview

Looking ahead to the US CPI report, the mood was bolstered by the New York Fed’s inflation expectation survey, which indicated a decline in 3-year inflation expectations to 2.35%, the lowest since 2013, from a previous level of 2.62%. The 1-year inflation outlook remained relatively stable at 3%. With the upcoming release of the US CPI data, Wall Street analysts are predicting a reduction in the core y-o-y CPI to 3.7% and a decrease in the headline CPI to 2.9%.

What does Brooks Macdonald think

We are closely monitoring the upcoming release of the US CPI data, scheduled for 1300 GMT today. This report is anticipated to be a critical indicator for the Federal Reserve’s monetary policy decisions, particularly any potential interest rate cuts for the remainder of the year. The Fed is looking for further evidence that inflation is headed to its 2% target before considering cutting rates; hence confirmation of a continuing downward trend could significantly influence market expectations and Fed commentary.

Please check in again with us soon for further relevant content and market news.

Chloe

13/02/2024

Please see below article received from EPIC Investment Partners this morning, which provides an update on Chinese and Hong Kong stock markets.

Chinese stocks bounced aggressively overnight in anticipation of a more forceful response to the ongoing rout, with regulators also planning to brief President Xi Jinping on market conditions. Although it remains uncertain if the upcoming meeting will result in new measures to bolster the market, investors are hopeful for a positive change after many false dawns.  

Since reaching their peak in 2021, Chinese and Hong Kong stock markets have lost approximately USD7tn in value, USD1tn of that in the last 13 days until last night’s rally. The Hang Seng closed over 4% higher, with the CSI 300 up nearly 3.5% and the CSI 1000 gaining 7%.  

Efforts by policymakers to stimulate the economy and stabilise the markets have so far not yet yielded any success in improving investor confidence. With the Lunar New Year holiday approaching, stabilising the stock market has now become a crucial goal for policymakers to prevent further damage to consumer confidence.  

Following the news of President Xi’s meeting, there were a series of statements earlier in the day. One notable statement came from the massive USD11.4tn Central Huijin Investment, a company holding stakes for the Chinese government in major financial institutions, which pledged to increase its purchases of exchange-traded funds. Additionally, the securities regulatory authority emphasised their commitment to ensuring stable market operations in a subsequent remark. 

Authorities have once again tightened trading restrictions, banning some hedge funds from placing sell orders, cracking down on short selling, and stopping investors from cutting stock positions in their leveraged market-neutral funds. On Monday, the securities regulator said it will guide brokerages to adjust their margin call levels and maintain “flexible” liquidation lines to limit forced selling.  

Earlier efforts had already included curbs on short selling, coupled with the state’s share purchases across the nation’s largest banks. However, the measures so far have shown little success in restoring investor confidence, which has been hurt in recent years by an economic slowdown, the implosion in the property sector, as well as Xi’s tightening grip on private enterprise.  

Please check in again with us soon for further relevant content and market news.

Chloe

06/02/2024

Please see below article received from Brooks Macdonald this morning, which provides a market update with specific reference to the US and the UK.

What has happened

The US stock market experienced a notable rebound, with the S&P 500 climbing 1.25% and largely offsetting the previous day’s 1.61% drop. Despite a second consecutive day of losses for US regional banks, which saw a 2.28% decline, and ongoing concerns about New York Community Bancorp, the broader market appeared to recover.

Big tech earnings continue

After the market closed, tech giants Apple, Amazon, and Meta reported earnings that surpassed expectations. Meta’s shares soared approximately 15% after hours, buoyed by higher-than-anticipated revenue forecasts for the first quarter and the announcement of further share repurchases and its inaugural dividend. Amazon’s shares rose 7%, reflecting a robust profit forecast for the first quarter, despite its sales guidance falling slightly short of expectations. Apple’s shares, however, dipped nearly 3% after hours due to a significant sales decline in China, which overshadowed an otherwise modest earnings beat.

Bank of England

In the UK, the Bank of England maintained its interest rates, in line with market expectations. The Monetary Policy Committee (MPC) was divided, with the majority opting to keep rates steady, two members advocating for a 25 basis point hike, and one member favouring a 25 basis point reduction. Governor Bailey emphasized the need for more evidence of inflation trending towards the 2% target before considering rate cutes. Similar to the Federal Reserve, the MPC’s stance appeared to be gradually shifting towards the possibility of rate cuts, as indicated by the removal of the previous explicit tightening bias and the statement that the MPC is prepared to adjust policy as necessary. Market expectations for a rate cut by May decreased, but the likelihood of significant rate reductions by the end of 2024 remained high.

What does Brooks Macdonald think

Looking forward, the focus will be on the US jobs report for January, which will provide early data for 2024 and could influence the Federal Reserve’s rate cut decisions, with March’s outcome still uncertain despite recent comments from Fed Chair Powell. Recent macroeconomic indicators suggest the possibility of a ‘soft landing’ for the US economy. However, historical patterns remind us that the effects of a rate hike cycle can be delayed and unpredictable, often culminating in significant economic impacts.

Bloomberg as at 02/02/2024. TR denotes Net Total Return

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Chloe

02/02/2024

Please see below article received from Invesco this morning, which summarises the market-moving events from Q4 2023.

Oil slick

SF: “After a yearlong decline, oil prices enjoyed an impressive recovery from June 2023, to reach highs for the year in September at low to mid $90s for both WTI and Brent. Subsequently, however, and despite the terrifying developments in the Middle East, sentiment turned relatively bearish through the end of December. Though there are many important variables driving the oil price, our analysis informs that price weakness likely stemmed from the market’s reassessment of US supply strength, coinciding with seemingly slowing demand growth.

“Perhaps more positive for US geopolitical clout, yet evidently a headwind for global oil prices, was the upward revisions to US second half 2023 supply, driven by improved drilling efficiencies and oil well productivity in shale. Indeed, according to the International Energy Agency December 2023 Oil Market Report, the US will have been accountable for 2/3rds of the non-OPEC (Organization of the Petroleum Exporting Countries) expansion (Canada, China, Brazil and Russia are other notable names). Simultaneously, OPEC’s output is expected to decline, reducing its global market share to 51% in 2023 – the lowest since the bloc’s creation in 2016.

“A subdued macro outlook heading into 2024 is driving downward revision to global oil consumption forecasts. This will likely be seen most acutely in Europe, whose economy is looking relatively weaker as the old continent suffers the strain of a broad industrial and manufacturing slump.

“Overall, the first three quarters of 2023 saw relative strength for oil as the Russia/Ukraine conflict continued into its second year, delivering ongoing disruption to the supply status quo. However, given the impressive supply response from the US, along with the apparent slowing in demand, the oil price has fallen back.

Moving forward, we would conclude that bold oil price forecasts have a tendency to take reputations to an early grave, so better to take hedges in either direction. To the upside UK equities and their preponderance of oil majors look a sound option. To the downside we would expect the disinflationary narrative to grow more certain, leaving bonds well placed to perform.”

Interest rates reach a summit

DA: “Our central case is that most monetary policymakers have reached the end of their tightening cycles, with the next step likely to be easing across major developed market economies. However, we are mindful that the path towards lower rates will likely be a choppy one. While the recent re-assessment of the market’s rate cut expectations will drive short term volatility, a peak in rates environment has generally been a good one for investors provided that a recession is avoided.

“In terms of what this means for asset allocation, we believe 2024 will be a good year for bonds. While painful, the string of aggressive rate hikes from central banks over the last two years have put the “income” back in “fixed income”. At these levels, it makes sense for investors to increase the maturity of their portfolios to lock in the current high-income levels. Absent a recession, equity markets have also generally done well in the run-up to, and after, the first rate cut. With this said, keeping a close eye on fundamentals and being selective about geographical and sectoral exposures will be key. The BoJ is the exception. We expect a gradual normalising of policy here and yields in Japan to edge higher in 2024.”

Recession fears fade

DA: “Given the more supportive inflation/interest rate backdrop in Q4, fears of recession have faded among market participants, providing another tailwind for financial market performance.

“In our view, any economic slowdown is more likely to be relatively brief and shallow (as opposed to pronounced and prolonged) as inflation continues to moderate and monetary policy tightening eases. Households and corporates are, in aggregate, in good shape having strong balance sheets and are less rate sensitive than they have been in the past. The US will likely continue to engage in fiscal spending as the election approaches further supporting growth. There will continue to be some economic damage, with some sectors and firms feeling the pain of higher rates as they refinance this year. However, we stress that different markets and sectors are at different points in the cycle and will have varying degrees of weaker or stronger activity. An official recession therefore may not occur in most regions, but some sectors and countries will go through technical recessions.”

Return of the Magnificent 7

DA: “The final quarter of 2023 delivered a welcome Christmas present for investors with exposures to Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – the so-called ‘Magnificent 7’. They accounted for c. 80% of the gains of the S&P 500 index in 2023. Excluding these names, the remaining S&P 493 was up only c. 7%, struggling with sharp interest rate rises, cost inflation and weakening economies. In contrast, the Magnificent 7 were up 96% (total returns in GBP). Although these moves were certainly extreme, they need to be viewed in context. In many ways, the Magnificent 7’s stellar performance is a rebound from the large declines of 2022, when they were collectively down c. 40%. They accounted for almost as much of the S&P 500’s decline in 2022 as they did the gains in 2023.

“While returns have been strong, the sheer size of the Magnificent 7 demands special consideration. Collectively, these tech stocks make up almost 30% of the S&P 500 index, the highest index concentration level in years. Apple and Microsoft alone, boast market valuations greater than the entire UK stock market. To evaluate the sustainability of their performance, investors should eschew reliance on charts of share price performance and focus instead on business fundamentals and valuations. While not unassailable these companies have large moats, very strong balance sheets, and many have revenue streams that are far less cyclical than tech companies of the past. They are however trading at lofty valuations which increases risk.”

UK – don’t call it a comeback

BG: “Whether it was the release of a stunning new Beatles’ track, David Tennant’s reprisal of The Doctor, or David Cameron’s return to cabinet, it’s fair to say the final quarter was brimming with UK comeback stories. Though less culturally significant, it was a similar story for investors, as after a tricky late summer selloff, and an equally weak October, UK stocks enjoyed a smart recovery, rounding out a rewarding year for the UK bourse. Despite delivering cash beating returns, however, those close to investment markets will know it has been another year of relative disappointment for the UK stock market. Unfortunately, for our domestic bourse, performance woe stems from a dual narrative, relating just as much to what is ‘not’ in the index, as to what is.

“As is well understood, a key determinant of global market strength this year has been the outsized returns of the mega cap US Technology names (known as the Magnificent 7), particularly given their association with the Artificial Intelligence growth engine. For the UK, however, at first blush there is very little Technology to get excited about, which seems to have contributed to a general disinterest from asset allocators. But beyond a headline categorisation level, such analysis looks a little misguided. Just a modest research effort would reveal several domestic businesses utilising A.I. technology extremely successfully within their businesses, improving the client offering and experience along with. Specific areas of success include high profile names within online retail, online education, and retail financial services. Antipathy towards the UK as ‘Non-Tech Player’ looks misplaced, therefore, rendering the valuation mismatch a little too stretched and representing an opportunity for the patient investor.”

Please check in again with us soon for further relevant content and market news.

Chloe

26/01/2024