Whilst we could easily write ad nauseam about Labour’s landslide general election victory, it seems pointless as UK financial markets have actually remained sanguine given the fact that the fiscal and economic growth implications of the policies from both the Labour and Conservatives parties weren’t that far apart – but in all honesty, after such a interminable election campaign, to quote Jason Sudeikis in the TV series ‘Ted Lasso’, we are like Michael Flatley at 11:59pm on St. Patrick’s Day: all tapped out!
In any case, the US central bank, the Fed has again remained front and centre for financial markets during the valuation period (covering the three months, 5 April 2024 – 5 July 2024).
Consequently, the big narrative over the past three months has, as we alluded to in the last valuation overview, been the changing story around US interest rates.
The US economy appears to be like a new joiner at the gym, who sees their fitness improve over time – as the resilience of the economy to the highest interest rates in a generation has been remarkable and suggests to us that it too has effectively got fitter after the initial stress of the very aggressive increase in interest rates during 2022/23.
However, recent economic data releases in the US have started to show signs that growth is potentially slowing.
For example, the ‘quits rate’, which measures resignations as a proportion of total employment, has dropped and is now running at just over 2%, suggesting to us that it is starting to become harder to change jobs. This should help to lower wage growth, and in turn, inflation, and that will be a big relief to Fed policymakers.
Additionally, although consumer spending has remained strong thanks to the strength of the employment market, signs have started to appear that households are starting to cut back on their discretionary spending. For example, although the retailer Walmart announced that while they were benefitting from higher income families trading down in search of cheaper prices, they noted that customers were prioritising staples over expensive, discretionary items. Elsewhere, the coffee chain, Starbucks along with Yum! Brands (operator of KFC, Pizza Hut and Taco Bell) have both recently reported a decline in their sales.
As such, we believe we are finally moving toward US interest rate cutting territory – and this coupled with an economy that overall is still growing, we consider bodes well for global financial markets.
As for the UK, with unemployment rising and CPI inflation down to 2%, policymakers at the Bank of England may have been tempted to cut interest rates when they met last month had it not been for the general election. Although the Bank of England is independent, a change in interest rates so close to polling day could have raised questions that it was politically generated – consequently, now the election is out of the way, we believe policymakers will start to ease monetary policy.
It’s interesting that sometimes politics matter for financial markets, and sometimes they don’t! Unlike the UK election, the snap elections in France (the nation’s two-phase election concludes in a couple of days), has caused political and economic uncertainty.
Income Element
Given several central banks (including the European Central Bank and the Swiss National Bank) have already started to reduce interest rates, coupled with the fact that inflation readings continue to slow, corporate bond yields will undoubtedly fall and prices (which move inversely to the yield), will rise as interest rates get reduced.
Consequently, our strategy of holding a diversified spread of secure companies with investment-grade credit ratings and stable income until their maturity continues to look sensible.
Long-Term Growth Element
Whist political news flow over the past three months emanating from the US and UK had all the makings of a Netflix drama (following Donald Trump’s conviction in the US for hush money payments to Stormy Daniels; and the betting scandal over the date of UK’s general election), these controversies had no impact on global share prices.
In a similar vein, although geopolitical risks have not gone away, we thankfully haven’t seen any notable escalation – as such the valuation period was yet another three-month period that was dominated by interest rate speculation volatility.
However, hopefully this volatility will start to ease as we believe central bank policymakers have more than enough room to cut interest rates given inflation readings are close to 2% in the US and Eurozone, and at 2% in the UK, coupled with the fact that disinflationary trends are still present.
During the valuation period we added to the portfolio’s European exposure. With equities within the eurozone palpably on tenterhooks following Emmanuel Macron’s (the French President), decision to call a snap election, we took advantage of the resulting sell-off and added to holdings of Premier Miton European Opportunities and Lightman European, and initiated positions in Artemis SmartGARP European Equity, Guinness European Equity Income and the Vanguard Developed Europe ETF.
In the US, given the current artificial intelligence (AI) frenzy, we have adjusted the weightings of the US funds to reduce the exposure to the so called ‘Magnificent Seven’. These aren’t a band of gunfighting cowboys, but a group of very highly valued technology companies (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla).
Today’s AI hysteria has some similarities to the technology bubble in 1999/2000, as back then companies with little or no revenue, let alone profit, just had to add a”.com” suffix to get a sky-high valuation. Although over the pursuing years, the internet did transform commerce, productivity and the global economy (and there is no question that AI will change the face of technology as we currently know it), equity valuations back then were clearly wrong and there is a risk that is true again today – hence the skew change.
Interestingly, worries that the Magnificent Seven are overvalued has highlighted the relative attractiveness of UK equities, with good share price gains during the valuation period coming from the likes of HSBC and AstraZeneca, while Anglo American became a takeover target.
Elsewhere, we continue to like the long-term structural story for Indian stocks following the re-election of Narendra Modi as the Indian Prime Minister.
For clients with Ethical portfolios, unfortunately the investment performance of shares in socially responsible companies continues to lag those achieved by the broader market.
The Investment Management Team
