Global equities rose a further 1.4% in local currency terms last week. However, a recovery in the pound to $1.27 left markets little changed in sterling terms.
US stocks gained 1.5% in local currency terms while Asia and Emerging markets rose around 2.5%, led by China. As for UK equities, the FTSE 100 was unchanged but small cap were up around 2%.
The main focus was the latest US consumer price numbers which came in broadly in line with expectations. Headline inflation slowed in April to 3.6% from 3.8% while the core rate (excluding food and energy) edged down to 3.4%.
Inflation remains some way above the Fed’s 2% target and this year there has been minimal progress in returning it any closer to target. Fed Chair Powell highlighted this very point last week and this is the reason why the Fed is holding off cutting interest rates for now, awaiting further confirmation that inflation is still heading in the right direction.
Even so, the data were good enough to reaffirm the market’s belief in a softish landing for the economy and allowed government bond yields to edge lower, driving modest gains in fixed income as well equities. The market expects US rates to be reduced by 0.25-0.5% by year-end, with the first reduction occurring in November, just after the elections.
Here in the UK, the debate continues as to whether the first rate cut will be on 20 June or 1 August, with the market split 50/50 between the two. As in both the US and Eurozone, the timing of the first cut is very data dependent and last week’s economic numbers provided mixed signals.
The unemployment rate edged higher to 4.3% in March and job vacancies continued to fall, pointing to a cooling in the labour market. However, underlying wage growth (excluding bonuses) was unchanged at a high 6.0%. The worry here is that wages are a big driver of services inflation which is where the bulk of the remaining inflation problem remains – both here and in the US.
Still, this week’s UK inflation numbers should make pleasant reading. The headline rate is expected to fall sharply in April from 3.2% to 2.1%, on the back of last month’s reduction in the energy price cap, while the core rate is forecast to slow to 3.6%.
China was also in the news last week. The latest batch of numbers showed the consumer remaining in the doldrums, with retail sales growth disappointing and slowing further in April, but industrial production picking up speed and surprising on the upside.
These trends look likely to reverse over the coming year. Consumer confidence should in time recover on the back of government support measures (yet more were announced last week) to prop up the property market where prices continue to decline.
The industrial sector, by contrast, has benefited from an upturn in exports. But Europe and the US are both concerned about China dumping goods into their markets and are taking action to prevent it. Indeed, President Biden announced on Tuesday a sharp increase in tariffs on some Chinese imports, most notably electric vehicles and their batteries, in addition to the tariff increases already planned for semiconductors.
Chinese equities have now rebounded as much as 30% from their low in January. Valuations are no longer as stupidly low as back then but the price-earnings ratio still remains attractive at only 10.5x (compared with 11.9x for the UK which also, by the way, continues to look cheap). If as we expect, government support means the economy comes close to hitting this year’s 5% growth target, Chinese equities along with other emerging markets should continue to fare relatively well.
This coming week, the highlight for global investors will be the first quarter results of Nvidia, the chip manufacturer and AI poster child. Here, the question is whether it will be able to continue the recent run of stellar results which have fuelled a 90% surge in the stock price this year and driven its market capitalisation up as high as $2.3 trillion. This now makes it the third largest US company, with only Microsoft and Apple larger with market caps of $3.1tn and $2.9tn respectively.
For UK investors, Wednesday’s inflation data will also clearly be a major focus.
This communication is designed for professional financial advisers only and is not approved for direct marketing with individual clients. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Investments are intended to be held over a medium to long term timescale, taking into account the minimum period of time designated by the risk rating of the particular fund or portfolio, although this does not provide any guarantee that your objectives will be met. Please note that the content is based on the author’s opinion and is not intended as investment advice. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the OEIC fund or discretionary fund management model portfolio is suitable and appropriate for their customer.
Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.
IBOSS Asset Management is authorised and regulated by the Financial Conduct Authority. Financial Services Register Number 697866.
IBOSS Asset Management Limited is owned by Kingswood Holdings Limited, an AIM Listed company incorporated in Guernsey (registered number: 42316).
Registered Office: 2 Sceptre House, Hornbeam Square North, Harrogate, HG2 8PB. Registered in England No: 6427223.
IAM 108.5.24
