Commentary for May 2024

Market Overview

In a reversal of the April sell-off, financial markets rebounded strongly in May. 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.

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 for the month, amid a flurry of new bids. It was reported that M&A activity for UK-listed companies for this year has hit its highest level since 2018. This trend has been driven by overseas buyers, helping to fuel the idea that the UK market may be at a turning point in terms of global perception.

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. The headline CPI slowed to 2.3% in the 12 months to April, down from 3.2% in March. However, 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 in recent weeks.

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. He had been expected to wait until Autumn to allow more time for the economy to recover from the cost-of-living crisis, but after inflation slowed to within a whisker of the 2% target, the Prime Minister chose to take an early gamble.

In the US, markets breathed a collective sigh of relief as inflation data cooled for the first time in six months. Headline CPI came in slightly better than expected, rising 3.4% on the year. The slowing of the US economy is also becoming more apparent in the data. There have been some early signs of a weaker labour market and softer consumer spending, with job vacancies falling, weekly jobless claims rising and retail sales stalling. Q1 GDP was revised down to 1.3% annualised from an earlier estimate of 1.6%, driven largely by slower growth in personal expenditure. This slowdown contrasts sharply 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.

Performance Update

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 have achieved first or second quartile over all key periods of one, three, five and ten years, as at 31/05/24.

Looking Forward

Looking forward, global growth is forecast to remain robust. However, 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 10X 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 the most profitable results in 20 years, yet despite recent strength 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, representing the highest proportion globally. In sector terms, a stronger domestic growth environment typically favours cyclical sectors such as financials, industrials and materials, along with smaller companies, which are more closely connected to the performance of the economy. The value in these areas is looking increasingly attractive at a time when fears about overheated US technology names grow stronger.

The outlook is less positive for incumbent Prime Minister Rishi Sunak, 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: Boris Johnson’s pledge to “Get Brexit Done” against Jeremy Corbyn’s socialist agenda. However, the Labour Party has transformed since then, emphasising “partnership with business” and courting the City. Shadow chancellor Rachel Reeves, 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. She has also 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.

Our Strategy

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.

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.

On a global basis our standard portfolios are overweight the UK, Japan, Asia and emerging equity markets. These regions have lagged the US and valuations look much more appealing. 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 (except for index-linked bonds). Incorporating alternative assets such as gold and commodity stocks allows us to hedge against inflation and other potential risks and capitalise on wider opportunities outside of traditional bonds and equities.