Developed markets lead the recovery
Global equities rose 3%, with developed markets outperforming emerging markets and Asia. Bonds also rallied on signs of a cooling US labour market, reinforcing speculation that the Federal Reserve will be able to cut rates later this year. The prices of both copper and gold hit fresh record highs, while mining shares moved up strongly and have now gained over 20% since the start of the year.
Strong earnings, and the first cracks in AI euphoria
US shares gained 3%, supported by a strong corporate earnings season with over 70% of companies ahead of forecast, highlighting the health of the economic environment. Artificial intelligence chipmaker Nvidia performed strongly on the back of another set of extraordinary results, underlining the high demand for AI-related chips. However, Dell Technologies, which also reported profits comfortably ahead of expectations, was sold off sharply, falling 18%. There are growing signs that it is becoming increasingly difficult for companies to match the lofty expectations of investors in the AI space.
Equities in the UK had another strong month, hitting a new record high to close 2% higher. Financials and industrials were once again the top contributors. Encouragingly, UK smaller companies also joined the party, topping the performance table with an impressive 6% gain amid a flurry of new bids. M&A activity for UK-listed companies this year has reportedly hit its highest level since 2018, a trend driven by overseas buyers, helping to fuel the idea that the UK market may be at a turning point in terms of global perception.
Cooling inflation, and an early election gamble
The UK economy trod water in April, having bounced back strongly in the first quarter, as rain stopped play. Consumer confidence has improved noticeably in recent months, supported by solid wage gains and lower inflation. The rate of inflation fell to its lowest level in three years, with the headline CPI slowing to 2.3% in the 12 months to April, down from 3.2% in March, although core inflation remained more of a concern at 3.9%. Markets are hoping that this will be enough for an interest rate cut in August, as the Bank of England's language has been gradually getting more dovish. Prime Minister Rishi Sunak fired the starting gun for the race to form the next government, calling an early general election for 4 July, a date that took many, including some of his own MPs, by surprise.
In the US, markets breathed a collective sigh of relief as inflation data cooled for the first time in six months, with headline CPI rising 3.4% on the year, slightly better than expected. The slowing of the US economy is also becoming more apparent: job vacancies fell, weekly jobless claims rose and retail sales stalled. First-quarter GDP was revised down to 1.3% annualised from an earlier estimate of 1.6%, driven largely by slower growth in personal expenditure, a sharp contrast with the 3.4% growth rate in the final quarter of 2023. Results from Home Depot and Walmart also confirmed that a consumer slowdown is underway.
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
Ahead of benchmarks across every key period
We are pleased to share that all of our standard portfolios have had a strong start to the year, significantly outperforming their respective benchmarks and in doing so achieving first or second quartile over all key periods of one, three, five and ten years, as at 31 May 2024.
The UK regains ground after years of underperformance
Global growth is forecast to remain robust, but the geographic mix is starting to change, with a recovery trend in the UK and Europe contrasting a slowdown in the US. The silver lining is that this should help ease the path of US inflation towards the 2% target rate, allowing the Federal Reserve to cut rates. Equities typically perform well when interest rates decline, as this tends to boost the economy and corporate earnings.
The UK is now regaining ground after years of underperformance. Commentators have long noted how cheap the market is, trading on a multiple of just ten times earnings with a dividend yield approaching 4%. The fundamental picture is now also improving. A good corporate earnings season has seen forecasts for the next two years edge up, with 2026 estimates projected to be 22% higher than in 2023. Banks reported their most profitable results in 20 years, yet still trade at below book value. Managements are keenly aware that their share prices are undervalued on a global basis: half of UK-listed companies have bought back their own shares in the past year, the highest proportion globally. A stronger domestic growth environment typically favours cyclical sectors such as financials, industrials and materials, along with smaller companies, and the value in these areas looking increasingly attractive at a time when fears about overheated US technology names grow stronger.
The outlook is less positive for the incumbent Prime Minister, as the latest polls point to a landslide victory for the Labour Party. Markets appear sanguine at the prospect. The previous general election in 2019 offered voters two radically different economic visions; the Labour Party has transformed since then, emphasising "partnership with business" and courting the City. The shadow chancellor, a former Bank of England economist, has pledged not to raise the most significant taxes (income tax, national insurance, capital gains tax and corporation tax) and committed to follow a set of fiscal rules virtually identical to those currently in place. This cautious strategy means the election outcome is unlikely to significantly alter the short-term path of either the economy or the bond market.
The UK market may be at a turning point in terms of global perception.
On a global basis our standard portfolios remain overweight the UK, Japan, Asia and emerging equity markets. These regions have lagged the US, and valuations look much more appealing.
Robust diversification
The recovery of the markets in recent months has been built on stronger growth and corporate profits. There remains a risk of complacency around inflation, a US soft landing, geopolitics and election outcomes in several key nations, meaning that robust diversification is important. All of these factors considered, however, the environment for risk assets remains positive.
Bonds over cash
While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. Bonds also provide some 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
Incorporating alternative assets such as gold and commodity stocks allows 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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