An unusual level of divergence between regions
Markets in the UK and Japan consolidated following recent gains, closing broadly flat. In contrast, emerging markets rose 5%, led by a gain of 8% in India. The US also made new record highs, advancing a further 4%, encouraged by better-than-expected inflation data. In sector terms, the rise was driven by a 6% recovery in tech stocks following a previous period of underperformance. Nvidia, the poster child for artificial intelligence, rose to top US$3 trillion in value, briefly overtaking Microsoft and Apple to become the world's most valuable company before succumbing to profit-taking at month end. Bonds closed 1% higher.
A month dominated by politics
In France, President Macron's early snap-election gamble failed to clarify anything and does not augur well for decision-making in government going forward. While Marine Le Pen's right-wing National Rally came first in the initial round, the second-round result was essentially a three-way tie, with the most likely path forward an uneasy coalition between the left-wing New Popular Front and Macron's centrist Renaissance Party. The success of both right- and left-wing parties at the expense of the centre has raised concerns about France's commitment to the EU project, with both blocs favouring more expansive fiscal policy at a time when France is already running a fiscal deficit of 5.5% of GDP and a debt ratio of 110% of GDP, far ahead of European Commission rules. Government bond spreads between France and Germany widened sharply, and the euro and equities fell, with the French index down 6% compared to a 2% fall for the broader eurozone index.
Of greater importance was the disastrous performance of President Joe Biden in the pre-election debate with former President Donald Trump, which led to an overnight collapse in ratings for the Democrats, putting Republicans firmly in the lead with four months to go. The General Election in the UK, meanwhile, had little impact on markets: the landslide victory for the Labour Party was largely as predicted, although the headline figure concealed a country far more divided than our first-past-the-post system may reveal, with Labour's share of the vote largely unchanged since its defeat in 2019.
Rate cuts begin in Europe as inflation returns to target at home
The ECB cut interest rates for the first time in five years, citing progress in tackling inflation, a decision following Canada, Sweden and Switzerland, where central banks have all cut recently. The Bank of England chose to keep rates unchanged at its June meeting, although hopes are high that it will follow suit in either August or September.
Economic news flow in the UK was generally ahead of expectations. GDP growth came in at 0.4% in May, twice the expected 0.2%. The annual rate of inflation fell to 2%, down from 2.3% in April, suggesting that restrictive monetary policy is doing its job. The good news for consumers is that wages continue to rise at a faster rate, up 5.4% per year between March and May, meaning that income for workers is rising in real terms. Overall consumer confidence improved for a third month in a row to the strongest level in more than two years.
In the US, inflation figures for May came in cooler than expected for the second month in a row, sending stock and bond prices higher. Weaker data is also starting to show up in the labour market, where job openings have turned down while job cuts have risen, evidenced by an uptick in weekly jobless claims; the rate of unemployment crept above 4% for the first time since 2021. Similarly, retail sales, consumer spending and sentiment surveys pointed to a slowdown in the consumer sector. Softer data revived hopes for a cut in rates as soon as September, and US bond yields moved lower, a trend echoed across the West.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Easing arrives at last, and a question for the AI trade
As we reach the mid-point of 2024, confidence in the economy and financial markets is much higher than it was at this time a year ago. Stocks have had a phenomenal run in recent months, and while the medium-term outlook remains positive, a period of consolidation is likely over the summer months as markets digest these gains.
Global monetary easing may not be swift or synchronised, but it is finally happening. Almost all major central banks are now on a path to interest-rate cuts, the exception being Japan. Policy easing expectations in the US have escalated once again, encouraged by the slew of weaker data, with markets pricing two cuts by year end and a strong likelihood of the first in September. The Bank of England is expected to move earlier.
The recovery in tech stocks may have limited room to run. The group's price-to-earnings multiple has bounced back above 28X, a level that has served as a ceiling over the past five years. A number of strategists have noted that a significant amount of hype is baked into current valuations, particularly among the big artificial intelligence plays such as Nvidia, whose price commands a lofty multiple of 77X earnings. A key question when valuing these stocks is that no one can be sure what the revenues are going to be. The answer lies in the extent to which AI can become a genuinely transformational technology that adds to total productivity and profits, rather than just making money for a handful of mega-cap stocks. Valuations, interest rates and earnings momentum all support a rotation in leadership going forward. Now is a good time to ensure equity allocations are suitably diversified, set up to thrive in the conditions of the future, not the past.
Allocations should be set up to thrive in the conditions of the future, not the past.
Equities outside of US mega caps remain attractive given an environment of stronger growth, gradual policy easing and improving corporate fundamentals. On a global basis our standard portfolios are overweight the UK, Japan, Asia and emerging equity markets.
The United Kingdom
The outlook for UK equities is the most compelling among major markets. The new Government's centrist and fiscally cautious approach is unlikely to significantly alter the short-term path of either the economy or the bond market, which should allow further scope for UK equities to continue to close the valuation gap with their global peers. The market is currently valued at ten times earnings; historical data from Liberum dating back to 1927 shows that when valuations are below 10X, returns in the following three to ten years have averaged around 14% per annum, and from starting valuations of 10–15X around 9–10%.
Japan
Japan remains attractive both in valuation terms and on improving fundamentals. A decade of shareholder-friendly reforms is enhancing corporate returns and profitability. At the same time, inflation has finally reignited in the economy, allowing businesses to raise prices and wages for the first time in decades.
Emerging markets
The US monetary policy outlook is likely to be most supportive for emerging markets, where equities are benefiting from stronger domestic demand and growth. India is taking steps to become an alternative manufacturing hub for global trade, with a low cost of labour, investment in infrastructure and a pro-business environment, and economic growth is accelerating towards 8%.
Bonds over cash
While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. Bonds also provide diversification in the case of slower growth but will not protect portfolios from the possibility that inflation remains higher for longer, with the exception of index-linked bonds.
Gold and commodities
Alternative assets such as gold and commodity stocks offer an additional source of diversification, allowing us to hedge against inflation and other potential risks and to capitalise on wider opportunities outside of traditional bonds and equities.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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