Spencer Maynard Wealth Management No Comments

Market Commentary: July 2024

May proved to be a decent month for both equity and bond market returns which were boosted by improving economic conditions coupled with anticipation of interest rate cuts by the Bank of England (BOE) and the Federal Reserve (FED) later this year.  There were some exceptions with small losses in Japanese equities and Global Government bonds however most of this was attributed to currency moves as Sterling rallied against most other developed currencies.

Within equities, both the UK and US large cap companies hit all-time highs during May.  The UK market has led the charge over the last 3-months posting gains of 9.5% and has also seen further broadening out of returns with small caps now outpacing large caps on a year-to-date basis.   The UK economy expanded by 0.6% over the first quarter of this year, surpassing expectations and marking the fastest growth in two years.  Despite upcoming UK elections on July 4th, the market seems relatively unphased about the possibility of a leadership change given the recent advance of sterling.  European stocks also performed well posting gains of 2.5% over the month.  This was driven by improvements in economic activity with signs of recovery in both the services and manufacturing sectors as well as corporate earnings exceeding expectations.  Both Japan and Emerging Markets posted small gains in local currency terms however this was more than offset by currency moves resulting in small losses in GBP terms.

There has been a significant shift in terms of expectations around the trajectory of inflation and monetary policy across regions.  At the end of 2023, markets were expecting the US to be a ‘first mover’ in terms of interest rate cuts and had priced in as many as 5-6 cuts throughout 2024.  Fast forward to today, the European Central Bank (ECB) have led the charge cutting rates by 0.25% on June 6th.  In the UK, headline inflation (CPI) has fallen near the Central Bank’s target of 2% however service and wage inflation remain stubbornly high at around 6% creating some uncertainty as to when the BOE will be able to cut rates.  Conversely, the chances of an imminent rate cut in the US appear to be fading with expectations of perhaps one rate cut later this year.  This uncertainty around the path of interest rates is likely to remain a source of volatility for government bond markets over the near term.  The big picture is that inflation is in a much better place than it was a year ago. We should not lose sight of this fact.

We have seen a positive start to the year for equity markets, but the road ahead will likely be bumpy as we navigate macroeconomic and geopolitical pitfalls. In any case, we are encouraged by the fact that economic activity is improving, and inflation levels are at a more manageable level then they were at their peak 18-months ago.  As always, this should present some interesting investment opportunities over the medium to long term.

Spencer Maynard Wealth Management No Comments

Market Commentary: June 2024

After interest rates peaked in November 2023, investors began to eagerly anticipate the point at which the Bank of England, the Fed and their counterparts would consider the battle against inflation won and begin to cut interest rates. Their eagerness drove markets up in a fierce rally at the end of the year, but as central banks have been much slower in taking action, markets have been back pedalling for much of 2024. Although in April UK equities were an exception, with Asia and emerging markets equities also making gains.

There was a pullback in the US stock market, which fell nearly 2% over the month. Inflation has not fallen as fast as expected and dampened hopes of near-term interest rate cuts. The consumer price index (CPI) for March ticked up, bringing the annual reading to 3.5% from 3.2% in the previous month.  The rise in inflation and strong jobs market data, pushed back the markets expectation of when the Fed would look to start cutting rates. Earlier in the year there had been high expectation of around six interest rate cuts this year. This euphoria has dwindled to maybe one or two rate cuts. Inflation numbers, however, do look much healthier than a year ago, but equity markets are looking for lower interest rates to push higher and are instead ebbing and flowing according to the latest musings of Fed chairman Jerome Powell. With the US making up approximately 70% of the global equity market, it’s no surprise global equities also declined, but Europe and Japan were weak performers too. In the case of Japan, a weak yen has been the headwind, but we expect this to recover as interest rates in the US eventually start to come down. The performance of Japanese businesses has not been an issue and their earnings have remained strong.

The standout market for the month was the UK which bucked the trend and delivered over a 3% positive return. Whereas in previous months it has all been about the US and the technology sector, April saw a return to less fashionable areas of the market such as financials and resources, which make up a significant component of the large cap UK index (the FTSE 100). The excitement was not contained to the largest companies. We also saw an increase in overseas buyers swooping to snap up UK businesses, which drove positive returns further down the market cap spectrum. With many businesses in this part of the markets delivering strong earnings that are not fully reflected in their share prices, interest from foreign acquirers seems likely to continue for some time.

Emerging markets also delivered a positive return, on the back of a rebound in China’s economy. The recent growth figures were better than expected, showing a 5.3% improvement, suggesting that policy support may be starting to have the desired effect. It has been a long path for the Chinese economy over the last few years. It may now have found a bottom. If that proves to be the case, investors may start to return to the market again, which would be a powerful driver for returns.

Slow to materialise interest rate cuts have been a headwind to other asset classes too, with property, infrastructure and bond markets also waiting for good news. As a result, bond markets were weak in April. The narrative of “higher for longer” interest rates to bring inflation back down to central banks’ 2% target level had a negative impact on all parts of the bond market: government debt, corporate bonds, high yield and emerging markets. Uncertainty over when the promised cuts will emerge has caused some volatility. The big picture is that inflation is in a much better place than it was 12 months ago (we should not lose sight of this) and that bonds are offering an attractive level of return at the moment.

Spencer Maynard Wealth Management No Comments

Market Commentary: May 2024

Most asset classes posted gains in March on the back of improved economic data globally as well as expectations that central banks will begin cutting rates by year end 2024.

Equity markets continued their upward trend with broad based gains across regions in March.   UK equities (+4.4%) were the best performing market.   The March Budget was delivered in the UK and the messaging was positive – Britain’s recession is over; inflation is under control and interest rates will be cut. This led to the office for Budget Responsibility (OBR) forecasting the UK economy will be growing above trend by the end of the year.  The US also posted decent gains (+4%) as the economy remains resilient with better-than-expected manufacturing and retail sales data reported.  Overall, equities were the best performing asset class over the 1st quarter with both the US and Japan delivering double digit returns over the period (11.2% & 12.2% respectively).  Outside of developed markets, we have seen a rebound in Chinese equities over the past two months.  Despite its ongoing property sector weakness – economic and inflationary data had improved owing to strong demand during the Lunar New Year period which helped lift these stocks which are trading at historically low valuation levels.

Bonds saw some in recovery in March with both government and corporates ending the month in positive territory.   The best performing part of the market was the UK government index which delivered a +2.6% gain over the month.  This came off the back of the Bank of England suggesting the rates could be cut starting in the summer.  Despite the gains in March, UK gilts and other G7 sovereign bonds have still posted modest losses year to date.   This is due to the shift in interest rate expectations.   Bonds rallied sharply at the end of 2023 on expectations that central banks would cut rates anywhere from 6-7 times in 2024.  At this point, markets are pricing in closer to three rate cuts and the timing of cuts keeps getting pushed out further as inflation data remains sticky.

Within the alternatives space, there were gains in the commodity sector, notably in precious metals. Ongoing geopolitical conflicts in the Middle East and Ukraine continue to drive the flock to ‘safe haven’ assets.   This uncertainly has led central banks to boost their gold holding and push the price to all-time highs.  Meanwhile further escalation in Gaza and the Middle East has also lifted oil prices at a time when OPEC continues to agree to production cuts enacted last year.  Property and infrastructure investments also generated gains over the month.

It’s been somewhat of a mixed start to 2024 as equities and bonds returns have diverged. Inflation and interest rates are likely to dominate investor sentiment and market returns. At this point, better than expected global economic growth coupled with recent signs that inflation has not entirely dissipated suggests that central banks may be on hold for a little while longer.

Spencer Maynard Wealth Management No Comments

Market Commentary: April 2024

February was generally a good month for equities with both Developed and Emerging markets posting gains while the UK was roughly flat over the period.   By contrast, fixed income markets finished the period lower with weakness across government and investment grade bonds. Alternative investments, such as property and infrastructure posted negative returns while precious metals posted modest gains.

The market moves witnessed in late 2023 and early 2024 have been driven by uncertainty regarding the outlook for inflation and interest rate policy. In November 2023, there was growing expectations that “sticky inflation” was behind us and that Central Banks were likely to cut interest rates sooner than expected. This led to a sharp rally across equities and bonds in November & December lifting most asset classes, particularly interest rate sensitive areas such as small cap stocks and real estate. The year-end exuberance has been tempered somewhat in January & February as inflation data has ticked up and Central Banks have communicated a more cautious tone indicating that any interest rate cuts may be delayed to later in the year.  This has led to mixed results with equities continuing to rally while bonds have given back some of their earlier gains in late 2023.

All developed markets generated positive returns over the month. The best performing market was Japan (+4.3%) which is leading other regions on a year-to-date basis. After much talk and many years of disappointment, there is real change taking place which is unlocking value within that market. Unwinding of cross share ownership, huge improvements in corporate governance & management buyouts running at the fastest pace in a decade are just some of the drivers behind the Japanese stock market performance. The US (+4.1%) also posted strong gains with large cap technology stocks continuing to outperform on the back of strong earnings results as well as being viewed as the primary beneficiaries of the Artificial Intelligence ‘boom’.  Emerging Markets (+5.2%) had a particularly strong month owing largely to a significant rebound in the Chinese equity markets.    Chinese markets had hit a multi-year low coming into the month but rebounded sharply on better-than-expected economic data as well as announcements by the government to cut mortgage rates and provide supportive measures for the stock market.

Bond markets had a more challenging time in February with broad based weakness across US, UK, and European sovereign bonds. The worst performing part of the bond market was the UK government index which pulled back -1.6%. Much of the weakness is attributed to the fact that expectations that rate cuts were not as imminent as previously expected. In the US, headline inflation figures rose slightly to 3.1% while Q4 2023 GDP figures remain healthy at 3.2% leading to expectation that inflation may remain sticky for longer. In the UK, wage growth has been a major focal point when it comes to inflation and latest readings came in higher than expected (5.8% including bonuses) which also indicated that rate cuts may be put on hold for some time. In the credit market, investment grade bonds saw negative returns while US and European high yield bonds generated gains spreads continue to tighten.

It’s been somewhat of a mixed start to 2024 as equities and bonds returns have diverged. Inflation and interest rates are likely to dominate investor sentiment and market returns. At this point, better than expected global economic growth coupled with recent signs that inflation has not entirely dissipated suggests that central banks may be on hold for a little while longer.

Spencer Maynard Wealth Management No Comments

Market Commentary: March 2024

The start of 2024 has delivered a mixed bag in terms of returns. Developed equity markets were generally positive, (except for the UK), while it was a much tougher start to the year for emerging markets, which sold off in the region of -4.0%. Alternative investments, such as infrastructure and property and the fixed income universe also had a tough January, all posting negative returns.

We saw in the last months of 2023, risk assets and bond markets rally hard on the back of the “pivot” by central bankers from raising rates to potentially cutting them this year. However, after this strong performance in November and December, markets have started to take stock in January. From being very positive on potential interest rate cuts, investors have been less dovish around expectations towards monetary policy. This follows the Federal Reserve (Fed), Bank of England (BOE) and the European Central Bank (ECB) indicating that rates cuts are now likely to start later than they had previously implied.

Outside of the UK equity market, developed markets generated positive returns. The best performing market was Japan which delivered a positive return of +4.4%. After much talk and many years of disappointment, there is real change taking place which is unlocking value within that market. Unwinding of cross share ownership, huge improvements in corporate governance & management buyouts running at the fastest pace in a decade are just some of the drivers behind the Japanese stock market performance.  The US equity market was the next best performer, returning +2.8%. However, the returns were very much concentrated in the large technology sector and even more specifically in the “Magnificent 7”, while many parts of the market made no headway. The strength of these stocks and their large exposure within the global equity index had a similar positive impact on the broad global index.  Asian and emerging markets were weak over the month returning -3.1% & -4.2% respectively. Ongoing economic weakness in China and rising geopolitical concerns in the Middle East were drivers for the poor performance.  The potential postponement of interest rate cuts was the main reason for the negative return of the UK equity market, which declined -1.0%.

Bond markets in the US, UK & Europe all lost ground in January, giving back some of the positive returns we saw at the end of last year. Credit, high yield and government bonds all declined. The worst performing part of the bond market was the UK government index which pulled back -2.7%. This was driven by central bankers’ warnings that interest rate cuts were not as imminent as previously indicated. The sense that the US Fed was not ready to cut interest rates was reinforced by remarks from Fed Chairmen Jerome Powell, who stated that a cut in March was unlikely, which went against the grain of that previously indicated. The narrative became more cautionary, with comments that the Fed were looking for “greater confidence” that inflation was heading to their target levels of 2%. It is easy to understand central bankers caution after all, inflation has hit levels not seen in 15 years, which took everyone by surprise. Plus, we have the lesson of the 1970s, when interest rates were cut too soon, which allowed wage inflation to continue to spiral upwards. None of the central bankers in the developed world want to be remembered as the second Arthur Burns. He was the Fed Chairmen in the 1970’s who went too soon with interest rate cuts, leading to that subsequent ramp up in wage inflation.

A challenging start to 2024 but inflation does look like it is generally under control. Both bond and equity markets will probably be driven around the narrative on the possibility of interest rate cuts. It does look highly likely that rates will be cut at some point, but when exactly remains to be seen.