The World In A Week - Downside Surprise
Written by Ashwin Gurung
Downside Surprise in US inflation sees US small-cap stocks outshine US large-cap stocks.
In June, US headline inflation, as measured by the Consumer Price Index (CPI), fell by -0.1% month-over-month, lower than the expected increase of +0.1%. While the rate of inflation has been gradually declining since the end of 2022, this marks the first instance of deflation, where prices fell, with the last decline occurring in May 2020. Similarly, core inflation, which excludes the most volatile components of the index such as food and energy costs, came in below expectations of +0.2%, rising by +0.1%.
In contrast, Friday’s Producer Price Index (PPI) data, which measures changes in prices received by producers, rose by +0.2% month-over-month in June, exceeding expectations of +0.1%. Despite this upside surprise, the market showed little reaction, likely due to its minimal impact alongside surprising deflation numbers. While a rising PPI alongside a falling CPI could mean businesses are absorbing costs, prolonged differences might signal potential future inflation if producer costs are eventually passed on to consumers. Having said that, it is important to look at other economic indicators to understand the broader picture.
Nonetheless, the US small-cap stocks cheered the downside surprise in US inflation, as the cooling increased expectations that the Fed might begin cutting interest rates in September. The Russell 2000 Index, which measures the performance of approximately 2000 of the smallest publicly traded companies in the Russell Index, gained +4.4% in GBP terms last week, significantly outperforming the tech-biased Nasdaq 100 which fell -1.8% in GBP terms over the week.
This is a significant shift from the past few years, during which small-cap stocks have struggled due to high interest rates and borrowing costs, while strong US equity index returns have mainly been driven by large AI-focused tech stocks. This rally suggests that returns may be broadening across different market caps, and a possible shift towards small-cap stocks could be on the horizon. Regardless of the market trends, we maintain diversification across various asset classes and market caps, enabling us to capture opportunities while managing risk effectively.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 15th July 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - Labour’s Landslide
Written by Dominic Williams
Labour wins big, as markets remain calm, but challenges lie on the road ahead.
The predictions of Labour’s landslide victory materialised in the early hours of Friday morning, with the party winning 412 seats out of 650 in the House of Commons. The victory did not come as a shock, given that polls in the run-up to the election had predicted this outcome. Although Labour’s national vote share has barely changed since the 2019 election, increased support from Scotland boosted their seat count, as Labour took seats from the SNP. This victory gives Labour a strong mandate to move forward with their pledges. It is expected that they will remain fiscally disciplined, initially adopting the Conservatives' fiscal rules to reduce debt in the medium term, with a focus on growth to boost GDP. There may be a need for the new government to borrow for some of their plans, however markets may be more favourable to them than to the Tories, given the expected increased stability of the government remaining intact.
The expected win has been welcomed by markets, with the more domestically focused FTSE 250 increasing by +0.9% over the day on Friday. The broader FTSE All Share index rounded off the week rising by +0.8%. Government borrowing costs did not move much on Friday after the results, with 10-year gilt yields slightly dropping from 4.18% to 4.14%. Early gains from the election result were seen in housebuilding stocks, as it is expected that Labour will use their strong political capital in their first few days in power to announce planning reforms. The first true test for the new Chancellor, Rachel Reeves, will be her first budget, which will be presented in early autumn. This will show markets where her commitments lie, whether there will be an increase in taxes not mentioned in the manifesto, and if there are plans for further government borrowing or public sector cuts.
France’s first round of parliamentary elections concluded with Marine Le Pen’s right-wing party, Rassemblement National (RN), declaring victory. This left the country’s left-wing and centrist parties rallying together to try to prevent RN from gaining power by withdrawing candidates to favour those more likely to succeed against their RN opponents in the second round of voting. Markets reacted positively to these moves, with the MSCI Europe ex UK index returning +0.8% over the week, in GBP terms. The tactic appears to have worked, although the situation has left no single party with a majority, resulting in a hung parliament. This result is expected to cause a period of uncertainty.
US stocks continued their positive streak, with the S&P 500 finishing the week up +0.7%, in GBP terms. On Friday, data showed that the US labour market was beginning to show signs of cooling. The unemployment rate rose to 4.1% in June, surprising market expectations which had forecast the rate to remain unchanged from the month before at 4%. The Federal Reserve (the Fed) will be monitoring these numbers closely. As inflation slows down and unemployment begins to rise, these trends pave the way for the Fed to begin cutting rates.
Japan’s corporate governance reforms are benefiting Japanese companies, as the Topix, a broad-based Japanese index, hit a record high on Thursday. The index peaked at 2898.47, finishing the week up +1.3%, in GBP terms. Additionally, investors are betting on the artificial intelligence boom and the benefits it may bring to high-end Japanese manufacturers.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 7th July 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - French Uncertainty vs US Optimism
Written by Dominic Williams
The snap election in France continues to cause fear in markets.
The week ended with modest gains for US stocks, with small caps performing best, as evidenced by the Russell 2000, an index composed of 2000 small cap companies, gaining +1.6%, in GBP terms. Additionally, the Technology sector continued to perform strongly, and growth stocks outperformed their value counterparts. The technology-heavy Nasdaq index finished the week up +0.2%.
The US Core Personal Consumption Expenditures Price Index (PCE Index) showed that prices paid by consumers, excluding food and energy, rose by +0.1% in May. This is a deceleration from April’s upwardly revised figure of +0.3%. The Core PCE is the Federal Reserve’s preferred measure of inflation, and this deceleration suggests a potential path towards an interest rate cut in September.
Political uncertainty persists in France following Emmanuel Macron's snap election call. Both the far-right and far-left are in the lead in the polls, proposing policies to reverse Macron’s fiscal reforms, some of which include populist ideas conflicting with EU fiscal rules. Despite Le Pen's party scaling back on costly proposals such as delaying the reversal of Macron’s pension reforms, many unfunded policies remain, raising concerns over fiscal responsibility. A parliament dominated by extreme parties could lead to political gridlock, intensifying uncertainty and instability. Markets responded negatively, with the MSCI Europe ex-UK falling by -0.7% in GBP terms over the week.
In Japan, markets rose over the week. The MSCI Japan Index rose by +0.5% in GBP terms. The continued weakness of the yen supported export-heavy industries. While there were expectations of official intervention to stabilise the yen, only verbal reassurances were provided. Finance Minister Shunichi Suzuki stated that authorities were “deeply concerned” about the impacts of “rapid and one-sided” currency movements. Suzuki affirmed the view that excessive volatility in the currency market is undesirable and that authorities would respond appropriately.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 1st July 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - A broken record on market concentration
Written by Cormac Nevin
While we run the risk of sounding like a broken record by highlighting the extreme concentration on display in U.S and Global Equity indices, we think that the consequences are too profound for investors to ignore.
Last week witnessed Nvidia, the current darling of U.S equity markets benefiting from the AI infrastructure build-out, surge to become the world’s most valuable listed company. Nvidia’s market capitalisation (the value of all its outstanding shares) briefly eclipsed that of Microsoft on Wednesday before retreating on Thursday. Since 31st December 2022, Nvidia’s market cap has risen by $2.77 trillion (for context, the size of the UK economy is $2.74 trillion). The top five stocks in the S&P 500 Index by weight now constitute a record 27.1% of the Index as of May 2024. For context, this was 16% in August 2018 and only reached 18% at the height of the 2000s dot.com mania. Stock market indices are demonstrating radically reduced levels of diversification.
Such extraordinary share price moves are increasingly consequential in the context of markets now dominated by “passive” investors who only seek to replicate an index and will automatically buy more and more of a given stock as its market cap increases, creating a self-reinforcing dynamic which propels it higher. Over the last month, the largest purchasers of Nvidia stock have been index-tracking marketing participants in the form of Vanguard and BlackRock/iShares, while insiders such as the CEO, Jensen Huang, have been sellers.
The phenomenon of market capitalisation-weighted indices becoming dominated by fewer and fewer stocks is not just limited to the U.S markets. It can also be observed in global equity markets such as the MSCI World Index, which in turn have become dominated by the large U.S names which reduce geographic and sector diversification. For the year to date, the market cap-weighted MSCI World Index has outperformed its Equal Weighted equivalent by +12.9% vs +3.9%. As we have highlighted in the past, the MSCI World Momentum Index is now up a stunning +26.9% as the past winners keep winning!
Under these conditions of extreme concentration and momentum, we think it is exceptionally important to participate in the upside while maintaining our approach of diversification across geographies, across the market cap spectrum and with actively controlled allocations. These sorts of dynamics have a habit of reversing very violently after the last dollar of FOMO flows has been spent.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 24th June 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - The starting gun gets fired
Written by Chris Ayton
Last week was a positive week for both bonds and equities, supported by technology-related earnings results in the US as well as the starting gun being fired on interest rate reductions by major central banks. The MSCI All Country World Index rose +1.2% over the week. Within global fixed income markets, the Bloomberg Global Aggregate Index rose +0.4% in sterling hedged terms, with longer-dated bonds, which are more sensitive to interest rate reductions, posting some of the strongest returns.
In the US, a prominent index that tracks factory activity declined more than expected highlighting weakened activity in housing, construction and capital investment. The market took this as a sign of potential economic slowdown and a data point that could provide further scope for the Federal Reserve to start to cut interest rates, although this view was later tempered by some stronger than expected labour market data. The US equity market (S&P 500 +1.4% over the week in GBP terms) was also supported by continued strength in US chip maker, Nvidia, as it unveiled its next generation of Artificial Intelligence chips ahead of schedule. In the process, Nvidia’s market capitalisation surpassed $3 trillion, overtaking Apple to become the world’s second-largest listed company. Incredibly, one third of the S&P 500 Index’s +13% return in 2024 has come solely from Nvidia’s meteoric rise.
In Europe, financial news was led by the European Central Bank (ECB) reducing its benchmark interest rate by 0.25%, its first cut in over 5 years. However, ECB President, Christine Lagarde, said further rate cuts would be dependent on inflationary pressures easing further, something that will not be aided by recent data indicating upticks in both inflation and wages in Europe. Nevertheless, the MSCI Europe ex-UK Index was up +1.3% for the week in GBP terms.
News in Asia was dominated by a surprise election result in India. Based on exit polls, Prime Minister Narendra Modi’s BJP Party was expected to extend its existing parliamentary majority. However, on the contrary, they lost their overall majority. Although Mr. Modi will remain in power, his BJP party are going to have to rely on the support of an alliance of other smaller like-minded parties in order to pass further groundbreaking and business friendly economic, land and labour reforms that India requires in order to support its drive to become Asia’s new manufacturing powerhouse.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 10th June 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - It is never too early to remind ourselves of good practices
Written by Shane Balkham
The European Central Bank (ECB) is expected to cut interest rates this week. It is worth noting that both Europe and the US have experienced similar inflation dynamics since the pandemic. What is different though, is the way inflation has become politicised in the US, while in Europe it is seen as a central bank issue. As inflation has come down in Europe, the ECB has given a consistent narrative of following the data and, with inflation seemingly under control, we should see the cutting cycle commence.
In the US the inflation situation has become a lot more political, with attempts from opposition parties to directly blame the government for price moves. This puts undue pressure on the Federal Reserve not to make any rate cuts until the US presidential election is over. From the latest minutes of the Federal Reserve Open Market committee meeting, there was confirmation that the first-quarter US inflation data had increased the committee’s concerns about the pace and sustainability of lower inflation. This has dampened the odds of a nearer-term interest rate cut; the expectations for the 12th June, 31st July, and 18th September meetings are for nothing more than a holding pattern, waiting for data to corroborate a weakening labour market and consistent fall in inflation.
Noise surrounding the US election is increasing, as Donald Trump was found guilty of all 34 counts of falsifying business records. The Democrats took this as an opportunity to escalate campaigning, targeting Trump directly. In response, Trump’s campaign claimed that it had shattered its own fundraising record since the conviction on Thursday, raising a staggering $52m in online donations. In a time of headline-grabbing rhetoric, it is a timely reminder that this should not be a signal to change your long-term investment plans.
In the UK, the Bank of England confirmed last week that due to the announcement of the general election on the 4th July, there would be no press conferences or statements issued until after the election. The Monetary Policy Committee’s meeting on 20th June will still go ahead, with minutes issued, but no further narrative will be given to the markets.
While most equity markets ended the week in negative territory, Japan was an exception, as the Bank of Japan Deputy Governor signalled the end of the battle against inflation was in sight and that wages would likely continue to rise. We remain positive on Japanese equities and continue to be overweight relative to our long-term Strategic Asset Allocation.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 3rd June 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - Is a June rate cut still on the cards for the UK?
Written by Ashwin Gurung
According to official figures from the Office for National Statistics, the UK’s annual headline inflation fell to 2.3% in April, its lowest level since July 2021, down from 3.2% in March. However, this decrease was less than the anticipated 2.1%. Similarly, annual services inflation declined slightly from 6.0% to 5.9%, also falling short of expectations. These outcomes may have reduced the likelihood of the Bank of England (BoE) cutting interest rates as early as June. While inflation is on a downward trend and nearing its target rate, it remains sticky.
During the week, the UK Prime Minister Rishi Sunak announced a snap general election for July 4th. Some market participants believe that this development makes a rate cut in June even less likely than before. However, it is important to note that the BoE has independence from the Government in terms of how it carries out its responsibilities i.e., free from political influence, so the general election should have no direct impact on the decision of rates cuts in June.
Similarly, from an investment perspective, we don't expect the upcoming general election to significantly explain the performance of UK stocks. Data has shown that the election's impact is much lower compared to other economic factors such as monetary policy decisions, and their impact on markets is also incredibly difficult to foresee. Whatever the outcome, we remain positive on UK Equities as they continue to benefit from companies reporting positive earnings, implementing stock buy-backs, and higher mergers & acquisitions activity where we have seen numerous UK companies being bid for at premiums to their valuation. UK listed companies are considered to be attractively priced by both domestic and foreign companies.
In the US, market expectations are also leaning towards a delay in anticipated rate cuts due to continued strength in consumption and higher economic growth. The Federal Reserve's minutes from April’s policy meeting also highlighted the worry amongst Fed officials that there has been more limited progress on inflation than hoped. Members expressed a lack of confidence in proceeding with rate cuts given this uncertainty.
On the other hand, Japan is dealing with the opposite challenge of keeping inflation sustained. In April, Japan’s core inflation (which excludes fresh food) declined for a second consecutive month to 2.2%, while staying above the Bank of Japan’s (BoJ) price target. However, the trend is expected to reverse in the upcoming months as numerous Japanese companies prepare to implement the most substantial wage hikes in over three decades in spring wage negotiations. The BoJ is also optimistic that this will spur both spending and prices, ultimately increasing inflation.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 28th May 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - More Pay, Less Work
Written by Dominic Williams
Wage growth in the UK remained persistently strong, with the annual rate of pay growth in average weekly wages, excluding bonuses, unchanged at 6% in the three months through March, slightly higher than the forecast of 5.9%. However, the job market showed signs of softening, with vacancies continuing to fall, unemployment rising and the number of people claiming benefits increasing slightly. These mixed signals are unlikely to resolve the debate among members of the Monetary Policy Committee (MPC), at the Bank of England, regarding interest rates, although traders have slightly increased the probability of a June rate cut to just over 50%. Before the June decision, the members of the MPC will have two additional inflation reports to consider, alongside the mixed labour data. The Consumer Price Index (CPI) is set to be released on Wednesday, with forecasters anticipating a large decrease to 2.1% from April's 3.2%.
Annual inflation in the US eased in April to 3.4% from 3.5% in March, in line with forecasts. This data ended a four-month streak of inflation exceeding expectations. The news came a day after the Federal Reserve (the Fed) Chair, Jay Powell, warned that the central bank may need to maintain higher rates for longer. Despite this, traders in the futures market priced in the possibility of the Fed reducing interest rates twice in 2024. Following the data release, the S&P 500 Index climbed, hitting a record high before finishing the week in positive territory, up +0.1% in GBP terms.
At the end of the week, the central government in China unveiled a historic rescue package to stabilise the country’s struggling property sector. The People’s Bank of China (PBOC) lowered the minimum deposit ratio to 15% for first-time buyers and to 25% for second-home purchasers, in addition to reducing mortgage rates by 0.25%. The PBOC also scrapped the nationwide floor level of mortgage rates, allowing cities to set their own rates. Additionally, the PBOC provided RMB 300 billion ($41.5 billion) worth of loans to local governments to directly purchase unsold apartments.
There have been mixed signals regarding the state of China’s economy. China’s industrial production expanded year-on-year by 6.7% in April, exceeding market forecasts of 5.5% and significantly improving from the 4.5% gain recorded the previous month. In contrast, retail sales rose by 2.3% year-on-year in April, missing market forecasts of 3.8%. Nevertheless, markets remained positive, with the MSCI China Index finishing the week up +2.7% in GBP terms.
The mixed signals emerging from China underscore the significance of maintaining a diversified portfolio. While we do not directly hold individual Chinese equity funds in our asset allocation, our exposure to the region is attained through our Global Emerging Markets equity funds, which form a component of our broader diversified portfolio.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 20th May 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - Record-Breaking Rotations
Written by Cormac Nevin
Equity markets were broadly down across the globe last week, with the MSCI All Country World Index of global shares retreating -1.6% in GBP. While each of the major markets we track were negative, there was a wide degree of dispersion in returns, with the Chinese market down -4.3%, as measured by the MSCI China, the US market down -1.4%, as measured by the S&P 500, and the Japanese market down -0.6%, as measured by the MSCI Japan, all in GBP terms.
Under the surface of the headline market return, we have witnessed an extraordinary change in the type of stocks which have been driving returns versus those which have been retreating. Market leadership has shifted very abruptly from mega-cap US technology giants (often referred to as the “magnificent seven”) which have dominated returns in recent years, to previously neglected small-cap names which tend to be more sensitive to interest rates and economic growth. Over the 10 days to 19th July 2024, the Russell 2000 Index of smaller U.S. companies outperformed the NASDAQ 100 Index of large-cap tech titans by over +12%. This was the largest such movement between the two types of stocks we have seen since the bursting of the tech bubble in the early 2000s.
A number of plausible catalysts were given by market commentators for this rotation of market winners. Inflation data in the US and globally has continued to come in weaker than anticipated, while economic strength has also undershot expectations. This is viewed as giving central banks a green light to begin cutting interest rates, which is more beneficial for relatively highly indebted small-cap companies vs their cash-rich larger peers. The sharp increase in market probabilities of Donald Trump becoming the new US President is also another potential driver. He has floated the idea of taking US corporate tax rates down to 15%, which again would benefit more domestically-oriented small-caps vs larger companies who can use aggressive international tax planning to shift the burden overseas.
Whatever the future holds, the events of recent weeks have nicely illustrated the benefit of maintaining a highly diverse set of exposures to benefit from changes in leadership, rather than solely relying on index exposures which will naturally be concentrated on past winners.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 22nd July 2024.
© 2024 YOU Asset Management. All rights reserved.