What’s happened in markets?

KEY MARKET MOVEMENTS (% change)
1WK 1MO 3MO YTD 1YR 3YR 5YR
FTSE All Share 0.25 -0.96 -1.86 5.48 8.45 12.27 3.38
Euro Stoxx 50 1.89 1.68 4.88 18.54 24.98 18.59 7.64
S&P 500 1.71 1.07 3.20 9.90 9.30 14.56 10.99
Japan Topix 3.12 5.95 9.90 15.73 19.40 16.07 6.09
MSCI Asia Pac. 0.67 -1.76 -2.45 2.05 -0.33 3.43 -0.11
MSCI Emerg. Mkts. 0.52 -1.06 -1.49 3.03 -0.39 4.69 -0.23
Jo’burg All Shares -0.20 -0.71 0.15 8.77 19.60 19.18 10.31
UK Gov’t Bonds -1.82 -1.41 -2.73 -2.06 -17.33 -10.99 -3.51
US Gov’t Bonds -1.40 -0.41 1.39 2.00 -2.51 -4.56 0.81
Global Corp. Bonds -1.19 -0.58 0.58 2.36 -0.92 -1.92 1.51
Emerg. Mkt. Local -0.63 0.47 3.00 4.91 6.22 -0.43 0.24
Figures in the respective local currencies as at the end of trading on 19/05/2023.

In the US, retail sales (excluding auto and gas) were up by 0.6% in April (above the 0.2% consensus), following two consecutive monthly declines. These can be quite volatile figures but were taken as a positive by markets. US weekly initial jobless claims also came in better than expected at 242,000 (below the 251,000 forecast) in the week ending 13 May, following fraudulent filings the previous week in Massachusetts, which overinflated claims figures.

The news continues to be dominated by the US debt ceiling negotiations and last week saw some positive developments. The talks between the White House and Republicans in Congress aim to reach an agreement over how much money the federal government can borrow. Earlier in the week, House Republican Speaker Kevin McCarthy stated that the debt ceiling negotiations were in a “much better place”, but by late on Friday, the Republicans had walked out of talks. Sentiment improved over the weekend with further discussions between US President Joe Biden and McCarthy scheduled for Monday 22 May.

In the UK, the unemployment rate crept up to 3.9% in the three months to March, from 3.8% in February, although wage growth showed little sign of easing which will reinforce policymakers concerns over inflationary pressures. In a speech at the British Chamber of Commerce’s annual conference, Bank of England Governor Andrew Bailey said the dramatic drop in energy prices should have a downward pull on the annual inflation rate from April, but warned that further rate rises might be needed if inflation remained persistent.

In Europe, the European Commission raised its annual forecast for economic growth in the euro area and also warned of stubbornly high inflation.

In corporate news, US retailer Home Depot missed its first quarter revenue expectations as consumer spending on home improvements was down compared to the pandemic boom. In marked contrast, Walmart bucked the tone on consumer spending and reported better than expected earnings in the three months to 30 April, as price conscious consumers focused on staples rather than discretionary purchases. Earnings were also mixed in emerging markets as China opened up again following its zero-Covid policy. Chinese online retailer Alibaba missed quarterly revenue expectations but multimedia and technology giant Tencent posted its fastest jump in quarterly revenue in more than a year, up 11% in the three months to March.

In other news, leaders of the G7 nations met in Hiroshima, Japan to discuss geopolitical issues such as the war in Ukraine, China, sanctions, climate strategy and the rapid development of artificial intelligence (AI). This is the first time the emerging technology has been addressed at the event and leaders called for the formulation of “guardrails” around the global advances in AI.

In markets, indications that US officials could be moving towards a deal on the debt ceiling supported equities and led to some positive moves. However, emerging market equities (-2.0%) underperformed developed markets (+0.4%) as Chinese economic data continues to disappoint. In terms of style, growth (+2.6%) continued to outperform value (-2.3%), and large capitalisation stocks (+0.5%) led small caps (-0.9%). Information technology (+4.5%) was the best performing sector over the last 30 days, closely followed by communication services (+4.1%). Energy (-6.4%) was the worst performer over the short term, while materials (-5.3%), real estate (-3.6%), utilities (-2.5%) and financials (-1.7%) also lagged.

In fixed income markets, yields rose on the back of hawkish rhetoric from a number of central bank speakers meaning bond prices fell. Looking at the yield curve, the one-month Treasury bill is the one to watch in terms of how markets think the debt ceiling negotiations are going. It has been volatile and is currently trading around 5.4 which is high.

In terms of commodities, European natural gas prices fell back into the normal trading range for the first time since the energy crisis started. As Europe rebuilds its stocks following the Russian squeeze on energy supplies, prices fell below €30 per megawatt hour last week, the lowest level since June 2021.

ECONOMICS
Latest Consensus

Forecast
UK GDP (QoQ) 0.1 –
UK PMI 54.9 54.6
UK CPI (YoY) 10.1 8.2
EU GDP (QoQ) 0.1 –
EU PMI 54.1 53.5
EU CPI (YoY) 7.0 –
US GDP (QoQ) 1.1 1.1
US PMI 51.9 –
US CPI (YoY) 4.9 –

What’s happened in portfolios?

We retain our defensive positioning on equities and fixed income in the face of continued monetary tightening and also the tightening of credit conditions, following the US banking turmoil, which we see impacting earnings and growth.

In equities, the quality funds have pulled back a little over the month to date, following the hawkish rhetoric from central banks, but these are short-term movements and outperformance continues on a year-to-date basis. Fundsmith Equity Fund in particular has been a really strong performer.

The hawkish remarks from central banks have also affected the fixed income markets and driven up yields, putting more pressure on longer duration bonds which have lagged the broader market. The year to date, however, has been more supportive of longer duration.

Within real assets, there were no major earning announcements over the last week, but there has been continued support for Target Healthcare REIT over recent weeks, with the share price up over 10% following its latest net asset value update. A lot of emphasis has been on the inflation protection offered by the portfolio management, which is also pivoted more towards organic growth and pushing through strong revenue growth on the back of underlying structural tailwinds.

Our alternative strategies also provided good news with the release of Round Hill Music Royalty Fund’s impressive annual results. It was also reported that CEO Josh Gruss has purchased nearly 15 million shares, taking his total holding up to over 6%. This alignment of management interests with the shareholders is a positive move and reflects well on the long term prospects and the underlying fundamentals of the trust.

What’s happening this week?

23 May • EU Flash Purchasing Managers’ Indices | 24 May • UK Inflation Rate | 26 May • US Core PCE Price Index