July was another good month for equity markets, with declining inflationary pressure and resilient economic data. However, central banks remained hawkish, Simon Watts explains.

July was another good month for equity markets, with declining inflationary pressure, relatively resilient economic data (particularly out of the US) and continued excitement over artificial intelligence (AI) all providing support. However, further interest rate rises and hawkish rhetoric from central banks, given the uncertainty about how ‘sticky’ underlying inflation will be, meant that government bonds struggled despite promising signs in terms of headline inflation. The Bank of Japan surprised the markets by modifying part of its monetary policy, this change was seen as a step towards policy normalisation / tightening and resulted in higher Japanese government bond (JGB) yields (albeit at 0.6% the 10-year JGB yield is still very low). Perhaps less surprising was the announcement by China’s Politburo that it would be providing fresh policy support to stimulate economic growth which has disappointed since China reopened, after abandoning its zero-Covid policy late last year.

Global equity markets (+3.2%) rose strongly over the month, in local currency terms. Regionally, the prospect of policy stimulus from China helped emerging market stocks (+5.4%) generate some of the strongest returns. The US stock market (+3.4%) also performed well due to increased hopes of an economic ‘soft-landing’ and its relatively high exposure to AI related companies. In comparison, UK (+2.2%), Europe ex UK (+1.5%) and Japan (+1.3%) lagged. In terms of style, value / cyclical stocks (+4.1%) marginally outperformed growth (+3.2%) orientated equities. This pattern was also reflected in the sector performance, with energy (+6.5%), communication services (+6.3%), materials (+5.5%), and financials (+5.3%) by-far the best performing areas. At the other end of the spectrum, information technology (+2.6%), utilities (+1.9%), and healthcare (+1.5%) sectors trailed the most.

Within fixed income markets, returns were more subdued due to the general expectation that central banks would keep interest rates higher for longer. Looking at the detail, while global government bond prices fell (-0.2%) only marginally, there was some disparity across markets, for example, UK government bonds (+0.8%) rallied sharply due to much lower-than-expected inflation data. Global investment grade credit (+0.6%) generated a positive return over the month as spreads tightened, and at the risker end of the credit spectrum the same was true with global emerging market debt (+1.6%) and global high yield (+1.4%) also performing well in July.

In terms of real assets, listed property and infrastructure stocks performed roughly in line with equities over the month with the global listed infrastructure (+2.1%) and global REITs index (+3.8%) both generating positive returns. Commodities (+6.3%) generated the best returns for the month, however, there was significant divergence across the different markets. Crude oil (+16.1%) and industrial metals (+6.9%) were the strongest areas. Oil prices were buoyed by additional supply cuts by Saudi Arabia, while industrial metals were helped by the expectation of economic stimulus measures in China. Agriculture (+2.6%) rose mainly because of rising wheat prices due to the withdrawal of Russia from the UN-brokered Black Sea Grain Initiative. However, the drought in Europe and the onset of El Nino are also seen as putting upward pressure on agricultural prices more broadly. Finally, gold (+2.6%) was also positive, benefiting from the prospect of being closer to, if not at, peak interest rates and a weaker US dollar over the month.

INDEX END JUNE VALUE END JULY VALUE
FTSE 100 7531.53 7699.41
DJ Ind. Average 34407.6 35559.53
S&P Comp 4450.38 4588.96
Nasdaq 100 15179.21 15757
Nikkei 33189.04 33172.22
£/$ 1.2703 1.2835
€/£ 0.85927 0.8568
€/$ 1.0909 1.0997
£Base Rate 5.00 5.00
Brent Crude 75.41 85.43
Gold 1919.35 1965.09

This month’s values quoted as at 31/07/2023. The above values are sourced from Bloomberg and are quoted in the relevant currency.

Continue reading “July’s investment market commentary”

Clients of Nedbank Private Wealth can get in touch with their private bankers directly to understand how their portfolios are responding to market events or call +44 (0)1624 645000 and speak to our client services team.

If you would like to find out more about how we help manage clients’ investments, please also contact us on the number above. Or you can get in touch using the links to the forms towards the end of this page.

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned here may not be suitable, and is included for information only and is not a recommendation. You should always seek professional advice before making any investment decisions.

Are we seeing a return to the ‘old normal’? Bonds are back and active managers want to utilise the opportunity for clients, by targeting attractive bonds and avoiding the worst. Louis Hutchings explains.

  • Over the last 15 years, Quantitative Easing (QE) has supported bond prices, supressed volatility and rewarded investors who adopted fixed income beta strategies. 
  • However, last year’s sharp rise in interest rates and market volatility has created opportunities for active bond managers to add value. 
  • In fact, our analysis reveals that in periods of high volatility, active bond managers have demonstrated a significantly higher likelihood of outperformance relative to periods of lower volatility. 
  • Interestingly, quality matters given the greater dispersion among manager returns during higher volatility. In other words, finding active managers with experience of navigating such market environments will be to key to investor success.

 The end of QE marks a different approach to bond investing

It’s September 2008 and Ben Bernanke, the then Chair of the US federal Reserve, is about to lead the US economy into uncharted territory by using quantitative easing (QE) for the very first time.

A bold move, certainly. But he had little option other than to give it a try. The interest rate lever had already been pulled, and economies were at a juncture, with financial collapse or a dice roll the only options.

Thankfully, the dice roll paid off and economies have rebuilt themselves from their nadir, but not without a cost to market stability. The commitment to do “whatever it takes” had a profound impact on markets, where a doubling of core equity valuations, the longest running growth cycle, new highs for bond prices and bitcoin’s ascent to almost $100,000 are just a few examples of the resulting distortions.

Of course, lots has been made of the subsequent dialling up in risk across the industry – where asset managers tested the bounds of their mandates, overweighting risk wherever possible. A less explored area is the impact QE had on general bond market volatility.

But before we jump to that, let’s just first clear up what exactly we mean by volatility. A common misconception is that volatility is all about directionality. Instead, what we’d colloquially call “choppy” or “range bound” markets often exhibit greater volatility than aggressively moving, but directional ones.

Over the last 15 years, bond markets have mostly been directional, which is of little surprise when we think about the mechanics of QE. In its simplest form, QE is the process by which central banks buy longer term sovereign bonds in the free market. The impact of doing so pins down the yields of the bonds directly involved, as well as those bonds which are benchmarked against them (to which there are many thousands). With yields tightly controlled by central banks, price movement was positive, but limited – effectively forced to oscillate within constraints dictated by policy makers.

We can see this when delving into the data. If we focus on non-recessionary market environments since 1990, the average US government bond market volatility (as measured by the MOVE Index –  the yield curve weighted index of the normalized implied volatility of 1-month Treasury options) is ten points lower during times of QE versus periods when QE was not in use (see Figure 1).

Figure 1: QE suppressed bond market volatility

Source: Bloomberg, Nedgroup Investments

Focusing in on the above chart, you can see that when the bond purchasing program began during the onset of the Great Financial Crisis, bond volatility was unsurprisingly elevated.

Central bank intervention resulted in a material reduction in market volatility, however the fragility of the market was such that central banks were forced to remain accommodative for some time, limiting supply. On the demand side, a lack of appetite for the meagre yields on offer meant that buyers were equally hard to come by, with purchases coming primarily from price-insensitive buyers.

The lack of excess on both sides acted as a lingering anchor on broader bond market volatility – but what were the implications of this?

Volatility’s link to active management

Imagine you compete on a weekly basis for your local ten-pin bowling team “Livin’ on a Spare”. You are a serious team, despite your questionable name, so rightfully aghast when Bernanke Bowl decides to leave the barriers up.

Your team is full of star bowlers and have become accustomed to winning a strawberry flavoured slushy after several podium finishes. This week is different though.

Instead of “The Gutter Gang” shrieking with excitement when one of their players notch a single pin, they have been able to reach a respectable score, ricocheting their way towards a strike or two. Indeed, so have all the other teams, with dispersion across the board a lot lower than normal and average scores much higher.

Having the barriers up in bowling, is akin to the impact of QE on fixed income, where we have already seen has the effect of significantly reducing volatility. With volatility low, individual bond returns become clustered around that of an index, making it incredibly challenging for even the most skilled managers to add value.

Let’s put some numbers to this. If you were to look at the proportion of active fixed income managers who outperform the benchmark, across closely tracked bond peer groups[1], you would find that only 49% of managers outperform in low volatility environments, versus 60% in high volatility environments.

Figure 2: Higher volatility has meant a higher likelihood of outperformance from bond managers

Source: Morningstar, Bloomberg, Nedgroup Investments

A huge swing, where during low volatility less than half of active managers outperform and in high volatility nearly two-thirds do. Naturally, focusing purely on average manager performance has its limitations, since it tells us nothing about the range of performances across managers.

Delving into this further, we found that manager dispersion increases by over 2-times during high volatility environments compared to low volatility environments.

 Figure 3: Higher volatility has brought on greater dispersion of manager returns

Source: Morningstar, Bloomberg, Nedgroup Investments

Therefore, despite volatility tending to improve the prospects for the average manager, the gap between the best and worst widens significantly.

Implications for bond investing going forward

In the same way a barrierless bowling lane highlights a truly accomplished bowling team. Volatility creates opportunities for active managers to add value for clients, by using their skill to target the most attractive bonds, avoid the worst, and in doing so allocate capital to its most efficient use. The opposite is true, however, for the unskilled manager, whose fallibility is brought to the fore by volatility.

It is reasonable to expect the recent bond market volatility to continue, and with it the fortunes of a highly skilled manager. Over the last 18 months, markets have gone through a period of abrupt transition, with central banks across the globe raising interest rates at the fastest pace in decades.

Despite signs of taking effect, the cumulative impact of this tightening is yet to be fully reflected in areas such as growth, unemployment and inflation.

Progress has of course been made on the inflation front, helped in part by falling commodity prices and general base effects. However, it is arguably too early to call victory just yet, with imbedded stickiness probable, given labour market tightness.

Furthermore, out of fear of repeating the events of the 80s (taking their foot off the break too soon and allowing the inflationary flames to regain momentum) central banks are likely to veer on the side of doing too much, rather than too little. Rates will therefore stay elevated for longer, putting pressure on sovereign ratings as debt servicing becomes strained, with rates no longer at zero (or lower bound).

But perhaps equally important, is that we are moving from a sedative period of QE to one of QT, where central banks will no longer be mopping up excess bond supply, but instead adding its own.

Moreover, this will all be happening at differing rates and intensities across the globe, as countries find themselves in very different cycles, fuelling further market volatility.

Such a high volatility environment will undoubtably have its own challenges, but it should also act as an opportunity for a highly skilled active manager to excel. The task now is finding the right one.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand more about how we manage money on their behalf, or call +44 (0)1624 645000 to speak to our client services team.

If you would like to find out more about how we manage clients’ investments, please contact us on the same number as above. Or you can get in touch using the forms linked towards the end of this page.

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.

One upside to the steady stream of central bank rate hikes is that higher interest is now finally being paid on cash savings. After years in which returns on cash were virtually zero, savings accounts paying over 5% may sound appealing, but is cash an answer for your long-term goals?

Cash might be particularly appealing given it comes after three long and difficult years. First, we had Covid-19, which felt like the world as we knew it was coming to an end. Then, just when we thought we were returning to normal times, Russia invaded the Ukraine and almost simultaneously, after years of ultra loose monetary policy, inflation assaulted our economies. Interest rates, which had remained at historically low levels since the financial crisis in 2008-09, suddenly started to rise as central banks increased their base rates to battle rampant inflation. With thirteen base rate rises in the UK alone since December 2021, cash now offers a decent rate of return, so can it be a welcome shelter  from the turbulence of financial markets?

There is no straightforward answer that covers all scenarios. Much will depend on your financial circumstances, composure when faced with volatile returns, and time frames, but as a general rule cash is not a suitable long term investment. This is true in general, but particularly now.

Cash – the smiling knife

There is no doubt that cash feels safe. But what is the price demanded for that safe, comfortable feeling? Is it robbing you of opportunity?

Whether you’re invested and tempted to move your money into a savings account, or whether you’re a long-term cash holder who has been waiting for an opportunity to invest but now finds cash looks attractive, there are a few things you should consider:

  • Cash is returning significantly less than inflation – you will be accepting a real term loss with immediate effect until inflation drops (at which point cash rates are also likely to drop). A gap as low as 3% between your returns and the inflation rate would halve the value of your money over 24 years.
  • Ah, I hear you say, but I don’t intend to hold cash over 24 years. This is only temporary. OK, I would answer, but when you do decide to jump from cash back into the stock market, it’s likely you’ll pay a lot more for the shares you buy. Why? I’ll cite just two out of a number of reasons:
  1. The maxim of “buy low, sell high”. Aside from a handful of technology stocks (Nvidia being the prime example) equity valuations are either fair value or cheap. This is the time to buy, not to sell. Would you sell in a housing slump? Probably, not. Neither should you sell in a stock market slump.
  2. Markets are rising 80% of the time.* This means that when you can no longer get the current rate on your cash deposit, you might look back at today’s prices and wish you had invested more now.

If you’re currently invested, it’s also worth remembering that while the bottom number on your investment statement may have moved up and down rather uncomfortably recently, any losses are not locked in unless you decide to sell.

It’s also worth remembering that our portfolios are so highly diversified that the likelihood of significant, permanent loss of capital is minimal. In fact, the biggest risk to your capital is the human tendency to sell at the wrong time.

Capturing the opportunity

It’s easy to get caught up on the negative headlines, particularly as there’s a tendency not to publish positive news, but it’s inevitable that threats breed opportunities.

Our focus is on managing the threat and capturing the opportunity. Environmental change, an aging population, a shift in spending patterns, artificial intelligence – all of these are long-term opportunities which we are nurturing within your portfolios and can exploit, along with opportunities the market throws at us to buy cheaply.

Below are four key areas of change where we currently see investment opportunities:

Everyone’s circumstances are different and there might be good reasons to hold some of your assets in cash. But you should always consider this as part of a professionally thought-out financial plan, often in conjunction with your wealth planners, tax advisers and legal specialists.

If turbulent markets are causing you concern, or if you feel now might finally be the time you have been waiting for to invest, speak to your private banker. They can explore your options, including cash, and ensure they still match your appetite for risk and your long-term financial goals.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand more about how we manage money on their behalf, or call +44 (0)1624 645000 to speak to our client services team.

If you would like to find out more about how we manage clients’ investments, please contact us on the same number as above. Or you can get in touch using the forms linked towards the end of this page.

Sources: Fidelity – Here’s how to defeat inflation, Nedbank Private Wealth: MSCI World, 12 month periods – March 1990 – December 2018

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.

Despite many challenges and ongoing uncertainties, Q2 saw global markets post yet another set of strong equity returns after what was an already solid start to the year, Simon Watts explains.

May was a slightly bizarre month, with markets having one eye on the US debt ceiling ‘pantomime’ and the other on anything related to artificial intelligence (AI).  The fast-approaching date at which the US would default on its debt, signalled to be early June, caused the usual last-minute brinkmanship and related market volatility. Thankfully, an agreement was reached at the end of month that enabled the debt limit to be increased. While this was broadly expected, surprises can happen especially when emotional humans are involved. Interestingly, market attention during May was also focused on something completely unhuman, this being the frenzied search for stocks benefiting from AI technology, given the recent hype around tools such as ChatGPT (an AI chatbot). The moves propelled technology stocks such as Nvidia (which makes processors and software for this area) into a select group of companies worth over US$1 trillion, pushed it to even more stretched valuations (P/E 193), and extended the rally in what has been a very narrow number of mega cap stocks this year. In fact, without the 10 biggest names in the S&P500 which is up circa +10% year to date, the return of this index would so-far have been roughly flat!

Global equity markets (-0.3%) were broadly unchanged, in local currency terms, despite the hysteria regarding AI impacting certain stocks over the month. Regionally, the prospect of currency appreciation, as a result of the potential for tighter monetary policy by the Bank of Japan’s new governor, has increased foreign buying and helped stocks in Japan (+4.5%) generate some of the strongest returns recently. Apart from Japan, the US (+0.6%) was the only other major market that managed to generate a positive return during May, aided by its relatively high weight to the information technology sector.  In comparison, Europe ex UK (-3.0%) and UK (-5.2%) lagged the most, reflecting in part their limited exposure to AI related stocks. In terms of style, growth stocks (+2.0%) significantly outperformed value / cyclical (-4.2%) orientated equities. This pattern was also reflected in the sector performance, with information technology (+8.2%), and communication services (+2.2%) by far the best performing areas. At the other end of the spectrum, energy (-9.0%), materials (-7.0%) and consumer staples (-6.3%) sectors trailed the most.

Within fixed income markets, returns were mostly negative due to the general expectation that central banks would need to tighten policy further. Looking at the detail, while global government bond prices fell (-0.4%) only marginally, there was a lot of disparity across markets, for example, European government bonds rallied abruptly towards the end of the month due to lower-than-expected inflation data. In comparison, US Treasuries (-1.1%) and UK Gilts (-3.4%) declined sharply due to signs that inflation may take longer to fall (remain sticky). Global investment grade credit (-0.9%) generated a negative return over the month as spreads widened, and at the risker end of the credit spectrum the same was true with global emerging market debt (-0.9%) and global high yield (-0.6%) also falling during May.

In terms of real assets, the more interest rate sensitive property and infrastructure markets significantly underperformed equities over the month with the global listed infrastructure (-5.2%) and global REITs index (-4.7%) both generating negative returns. Commodities (-5.6%) also fell sharply, however, there was significant divergence across the different markets. Crude oil (-10.7%) and industrial metals (-8.4%) were the weakest areas, due mainly to concerns about economic activity, especially with weaker than expected data coming out of China. Agriculture (-4.2%) also fell due to declining wheat and soybean prices. Finally, gold (-1.3%) was also negative, due to the headwinds of rising bond yields and a stronger US dollar over the month.

INDEX END MAY VALUE END JUNE VALUE
FTSE 100 7446.14 7531.53
DJ Ind. Average 32908.27 34407.6
S&P Composite 4179.83 4450.38
Nasdaq 100 14254.09 15179.21
Nikkei 30887.88 33189.04
£/$ 1.2441 1.2703
€/£ 0.85921 0.85927
€/$ 1.0689 1.0909
£ Base Rate 4.50 5.00
Brent Crude 72.6 75.41
Gold 1962.73
1919.35

This month’s values quoted as at 30/06/2023. The above values are sourced from Bloomberg and are quoted in the relevant currency.

Continue reading “June’s investment market commentary”

Clients of Nedbank Private Wealth can get in touch with their private bankers directly to understand how their portfolios are responding to market events or call +44 (0)1624 645000 and speak to our client services team.

If you would like to find out more about how we help manage clients’ investments, please also contact us on the number above. Or you can get in touch using the links to the forms towards the end of this page.

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned here may not be suitable, and is included for information only and is not a recommendation. You should always seek professional advice before making any investment decisions.

The week of 12 June 2023 saw encouraging signs on inflation and growth from the US continue the technology-led rally in equities and prompt a pause in rate hikes. Although central banks signalled that further rate increases would be necessary to bring inflation down.

What’s happened in markets?

KEY MARKET MOVEMENTS (% change)
1WK 1MO 3MO YTD 1YR 3YR 5YR
FTSE All Share 0.87 -0.95 3.95 4.23 11.06 10.09 3.39
Euro Stoxx 50 2.45 2.28 9.28 18.99 32.84 14.37 7.96
S&P 500 2.62 7.49 11.81 15.77 22.32 13.93 11.57
Japan Topix 3.42 8.15 20.23 23.16 26.53 15.77 7.73
MSCI Asia Pac. 3.02 5.04 8.49 7.47 4.20 3.30 1.02
MSCI Emerg. Mkts. 2.93 5.61 10.40 8.97 5.63 4.20 1.27
Jo’burg All Shares 1.98 0.39 8.95 9.31 21.44 19.12 10.46
UK Gov’t Bonds -0.93 -3.38 -6.76 -3.98 -13.70 -11.74 -4.20
US Gov’t Bonds -0.02 -1.18 -0.48 1.78 -0.62 -4.51 0.58
Global Corp. Bonds 0.22 -0.07 1.07 2.91 2.31 -2.77 1.49
Emerg. Mkt. Local 0.72 0.77 5.16 6.90 10.58 -1.13 1.01
Figures in the respective local currencies as at the end of trading on 09/06/2023.

In the US, the main event was inflation with May’s prices up 4% year on year, their slowest pace since March 2021. Although still double the Federal Reserve’s target of 2%, the figure was slightly below the 4.1% expected and down from 4.9% in April. In terms of other data, US weekly jobless claims were unchanged from the previous week at 262,000, their highest level since late-2021.

With encouraging signs of continued growth in the economy and falling inflation, the Federal Reserve (Fed) announced a pause in rate hikes at its June meeting, after 10 consecutive increases. Although it appears it will be a ‘skip’ rather than a prolonged pause as Fed chair Jerome Powell noted that “nearly all” committee members expect it will be “appropriate to raise interest rates somewhat further by the end of the year”.

In the UK, the economy rebounded as monthly gross domestic product (GDP) growth for April came in at 0.2%, following a 0.1% contraction in March. However, this data was rather overshadowed by the wages data released the day before, which reported record wage growth of 7.2%, the highest year-on-year growth since records began. With the stronger-than-expected labour data and signs of economic growth, forecasts are for the Bank of England (BoE) to raise rates for the thirteenth consecutive time at its June meeting. BoE governor Andrew Bailey commented on the continued tightness in the labour market and said that inflation will come down but it’s “taking a lot longer” than expected.

As expected, the European Central Bank (ECB) announced another 25 basis points rate rise from 21 June 2023, taking its key deposit rate to 3.5%, its highest level since 2001. ECB president Christine Lagarde commented after the meeting that policymakers “still have ground to cover” and that further increases were likely in July.

Elsewhere, The People’s Bank of China cut its one-year medium-term lending facility rate by 10 basis points to 2.65%, as Beijing attempts to shore up its shaky economic recovery. The Bank of Japan, meanwhile, maintained its loose monetary policy and ultra-low interest rates despite stronger-than-expected inflation, but this dovish decision led the Japanese yen to weaken.

On the corporate front, artificial intelligence (AI) continues to be a prominent trend, as Oracle reported strong sales figures and raised its guidance to the surging demand for AI infrastructure. Adobe also reported record revenue after adding generative AI technology to Photoshop.

In other news, BlackRock, the world’s biggest asset manager, pushed further into cryptocurrencies by filing an application with the US Securities and Exchange Commission to offer a bitcoin exchange-traded fund (ETF). If the application is successful, the fund will trade on the Nasdaq exchange and be the first publicly traded bitcoin ETF in the US.

In the market roundup, emerging market equities (+5.9%) gained traction after China cut rates to promote stimulus, while developed markets (+5.2%) remained strong especially in the technology space. In terms of style, growth (+6.9%) continued to benefit from the strong performance of technology stocks and outperformed value (+3.7%), while large cap stocks (+5.5%) outperformed small caps (+4.7%). Information technology (+11.6%) remained the best performing sector while real estate (-2.3%) was the worst over the last 30 days. Gold (-1.2%) has been weak as the opportunity cost of holding it increases as interest rates rise. In the fixed income market, bond returns have been much lower than equity returns of late. The risk-on tone and concerns over inflation have led government bonds to underperform.

ECONOMICS
Latest Consensus

Forecast

UK GDP (QoQ) 0.1
UK PMI 54.0 53.6
UK CPI (YoY) 8.7 8.4
EU GDP (QoQ) -0.1
EU PMI 52.8 52.5
EU CPI (YoY) 6.1
US GDP (QoQ) 1.3 1.4
US PMI 50.3
US CPI (YoY) 4.0

What’s happened in portfolios?

Within equities, our more cyclical exposures have been the outperformers over the month given the risk-on environment. Our value manager Dodge & Cox Global Stock Fund has benefited from its overweight to financials, some of which were up between 8 to 12%. It was also helped by an overweight to China, as Asian markets have been doing well since The People’s Bank of China lowered its short-term lending rate. Our emerging markets manager, TT Emerging Markets Equity Fund, also outperformed due to its China exposure.

In fixed Income, the more hawkish rhetoric from central banks pushed yields higher, triggering our longer duration funds, which are more sensitive to interest rate rises, to underperform our shorter duration ones, both in investment grade credit and government bonds.

For real assets, our indirect holdings in property and infrastructure, through the Nedgroup Global Property Fund and ATLAS Global Infrastructure, were the outperforming areas. Given the risk-on environment, they followed equities higher and gave a positive return. Meanwhile, our direct holdings in commercial property and renewables were negative and underperformed due to the higher yields, particularly in the UK.

Interestingly, within our alternative strategies, Gore Street Energy Storage Fund released its Q1 2023 update, and its net asset value (NAV) increased last quarter, despite its discount rate rising by 1.8% since the end of last year. This indicates that higher yields are filtering through to what our investment trusts use for their valuations.

What’s happening this week?

21 June • UK Inflation Rate | 23 June • EU HCOB Flash Purchasing Managers’ Indices | 23 June • US S&P Flash Purchasing Managers’ Indices

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how their portfolios are responding to market events, or call +44 (0)1624 645000 to speak to our client services team.

If you would like to find out more about how we manage clients’ investments, please contact us on the same number as above. Or you can get in touch using the links to the forms towards the end of this page.

Sources: Nedbank Private Wealth and Bloomberg, Reuters, US Department of Labor, and Financial Times.

The value of investments can fall, as well as rise, and you might not get back the original amount invested. Exchange rate changes affect the value of investments. Past performance is not necessarily a guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios and is referenced for illustrative purposes only, not as a recommendation, not least as it may not be suitable. You should always seek professional advice before making any investment decisions.

May was all about the US debt ceiling discussions and a quest for stocks invested in artificial intelligence. These moves saw a rally in technology stocks while the rest of the global equity markets remained broadly unchanged. Simon Watts explains.

May was a slightly bizarre month, with markets having one eye on the US debt ceiling ‘pantomime’ and the other on anything related to artificial intelligence (AI).  The fast-approaching date at which the US would default on its debt, signalled to be early June, caused the usual last-minute brinkmanship and related market volatility. Thankfully, an agreement was reached at the end of month that enabled the debt limit to be increased. While this was broadly expected, surprises can happen especially when emotional humans are involved. Interestingly, market attention during May was also focused on something completely unhuman, this being the frenzied search for stocks benefiting from AI technology, given the recent hype around tools such as ChatGPT (an AI chatbot). The moves propelled technology stocks such as Nvidia (which makes processors and software for this area) into a select group of companies worth over US$1 trillion, pushed it to even more stretched valuations (P/E 193), and extended the rally in what has been a very narrow number of mega cap stocks this year. In fact, without the 10 biggest names in the S&P500 which is up circa +10% year to date, the return of this index would so-far have been roughly flat!

Global equity markets (-0.3%) were broadly unchanged, in local currency terms, despite the hysteria regarding AI impacting certain stocks over the month. Regionally, the prospect of currency appreciation, as a result of the potential for tighter monetary policy by the Bank of Japan’s new governor, has increased foreign buying and helped stocks in Japan (+4.5%) generate some of the strongest returns recently. Apart from Japan, the US (+0.6%) was the only other major market that managed to generate a positive return during May, aided by its relatively high weight to the information technology sector.  In comparison, Europe ex UK (-3.0%) and UK (-5.2%) lagged the most, reflecting in part their limited exposure to AI related stocks. In terms of style, growth stocks (+2.0%) significantly outperformed value / cyclical (-4.2%) orientated equities. This pattern was also reflected in the sector performance, with information technology (+8.2%), and communication services (+2.2%) by far the best performing areas. At the other end of the spectrum, energy (-9.0%), materials (-7.0%) and consumer staples (-6.3%) sectors trailed the most.

Within fixed income markets, returns were mostly negative due to the general expectation that central banks would need to tighten policy further. Looking at the detail, while global government bond prices fell (-0.4%) only marginally, there was a lot of disparity across markets, for example, European government bonds rallied abruptly towards the end of the month due to lower-than-expected inflation data. In comparison, US Treasuries (-1.1%) and UK Gilts (-3.4%) declined sharply due to signs that inflation may take longer to fall (remain sticky). Global investment grade credit (-0.9%) generated a negative return over the month as spreads widened, and at the risker end of the credit spectrum the same was true with global emerging market debt (-0.9%) and global high yield (-0.6%) also falling during May.

In terms of real assets, the more interest rate sensitive property and infrastructure markets significantly underperformed equities over the month with the global listed infrastructure (-5.2%) and global REITs index (-4.7%) both generating negative returns. Commodities (-5.6%) also fell sharply, however, there was significant divergence across the different markets. Crude oil (-10.7%) and industrial metals (-8.4%) were the weakest areas, due mainly to concerns about economic activity, especially with weaker than expected data coming out of China. Agriculture (-4.2%) also fell due to declining wheat and soybean prices. Finally, gold (-1.3%) was also negative, due to the headwinds of rising bond yields and a stronger US dollar over the month.

INDEX END APRIL VALUE END MAY VALUE
FTSE 100 7870.57 7446.14
DJ Ind. Average 34098.16 32908.27
S&P Composite 4169.48 4179.83
Nasdaq 100 13245.99 14254.09
Nikkei 28856.44 30887.88
£/$ 1.2567 1.2441
€/£ 0.87676 0.85921
€/$ 1.1019 1.0689
£ Base Rate 4.25 4.50
Brent Crude 80.33 72.6
Gold 1990.00 1962.73

This month’s values quoted as at 31/05/2023. The above values are sourced from Bloomberg and are quoted in the relevant currency.

Clients of Nedbank Private Wealth can get in touch with their private bankers directly to understand how their portfolios are responding to market events or call +44 (0)1624 645000 and speak to our client services team.

If you would like to find out more about how we help manage clients’ investments, please also contact us on the number above. Or you can get in touch using the links to the forms towards the end of this page.

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned here may not be suitable, and is included for information only and is not a recommendation. You should always seek professional advice before making any investment decisions.

The week of 5 June 2023 saw weaker than expected data releases and early signs of slowing growth, but central banks remain focused on reining in stubbornly high inflation.

What’s happened in markets?

KEY MARKET MOVEMENTS (% change)
1WK 1MO 3MO YTD 1YR 3YR 5YR
FTSE All Share 0.16 -1.46 -3.02 3.80 3.36 10.11 3.21
Euro Stoxx 50 -0.17 2.01 4.40 17.06 18.04 14.75 7.96
S&P 500 1.88 4.17 8.04 12.35 4.29 13.37 11.29
Japan Topix 1.72 5.17 10.79 16.86 16.41 13.90 7.09
MSCI Asia Pac. 1.27 0.60 0.08 2.87 -4.11 2.84 0.06
MSCI Emerg. Mkts. 1.26 1.33 1.28 3.90 -4.22 3.38 0.04
Jo’burg All Shares 0.71 -0.42 1.03 7.35 13.35 18.24 10.21
UK Gov’t Bonds 1.76 -3.43 -1.39 -2.78 -15.36 -11.25 -4.02
US Gov’t Bonds 0.73 -1.56 2.70 1.99 -2.32 -4.54 0.60
Global Corp. Bonds 1.00 -0.94 2.54 2.92 -1.02 -2.30 1.50
Emerg. Mkt. Local 0.82 0.27 3.90 5.10 3.77 -1.80 0.18
Figures in the respective local currencies as at the end of trading on 09/06/2023.

The US saw an unexpected slowing in the services sector as the Institute of Supply Management (ISM) gauge of prices paid for services came in at 50.3 for May, a three-year low and just above the 50 mark that separates expansion from contraction. The manufacturing sector has already been slowing so these could be potential signs the impact of monetary tightening is beginning to come through. Weekly jobless claims jumped to 261,000, well above expectations and the highest level since late 2021, but economists cautioned against reading too much into the figure given the volatility of this report. Speculation remains over whether the Federal Reserve (Fed) will pause rate hikes at its next meeting on 14 June.

In the UK, there was more volatility in the housing market as the UK’s two largest lenders, Halifax and Nationwide Building Society, both reported a fall in house prices for April, suggesting the market had not seen its traditional spring boost.

The euro area economy contracted for two consecutive quarters according to revised data, meaning it has fallen into a technical recession. However, European Central Bank president Christine Lagarde reaffirmed the central bank’s hawkish stance on interest rates, stating “future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to our 2% medium-term target”. A 25 basis point hike in interest rates is expected in the ECB meeting on 15 June.

The Bank of Canada delivered an unexpected 25 basis point rate hike following a similar surprise from the Reserve Bank of Australia the previous day.

In corporate news, Apple unveiled its new ‘mixed reality’ headset Vision Pro, which will be available early next year with a sticker price of US$3,499. This is the company’s first major product launch for a number of years.

In other news, the US Climate Prediction Centre confirmed that El Niño conditions had emerged in May, with the latest weekly indices above the threshold for an El Niño event. This can lead to a higher frequency of natural disasters like dry, hot conditions, which have negative effects on harvests and food supplies and risk putting renewed upward pressure on food prices and inflation.

In the market roundup, developed market equities (+2.6%) continued to outperform emerging markets (+1.5%) over the last 30 days, with artificial intelligence tech stocks doing most of the heavy lifting. In terms of style, growth (+4.3%) outperformed value (+0.6%) over the month, despite the opposite being true last week over the short term. Information technology (+8.8%) retained its position as the best performing sector over the month, while consumer staples (-4.8%) continued to be the worst.

In the fixed income market, yields have been volatile but within a relatively constrained range due to investor speculation over the Fed’s next move on interest rates.

The news in the commodity market focused on the increase in oil prices over the week due to Saudi Arabia’s promise of a production cut in July, following the meeting of OPEC+ in Vienna earlier this month.

ECONOMICS
Latest Consensus Forecast
UK GDP (QoQ) 0.1
UK PMI 54.0 53.9
UK CPI (YoY) 8.7
EU GDP (QoQ) 0.1 0.0
EU PMI 52.8 53.3
EU CPI (YoY) 6.1
US GDP (QoQ) 1.3
US PMI 51.9 52.4
US CPI (YoY) 4.9 4.1

What’s happened in portfolios?

We remain defensively positioned as the tightness in monetary policy and credit conditions continue to impact overall activity within economies around the world.

In equities, the shift upwards in yields has led to underperformance in some of our quality managers over the short term,  but our value managers, such as Dodge & Cox Global Stock Fund, have performed well, supported by oil and strong energy sector performance.

In terms of fixed income, the longer duration sovereigns have come under a bit of pressure due to recent rising yields, although longer duration has been the place to be over the year to date.

It remains a good environment for real assets although not much to report in terms of net asset value releases this week. We just wanted to highlight the relative outperformance of our defensive areas such as gold and ATLAS Global Infrastructure which have been the stand-out performers on a year-to-date basis.

In the current uncertain environment, alternative strategies continue to provide diversity from the traditional asset classes of equities and bonds. Private equity remains a driver of capital growth and total return and has provided a good level of support short term as well as on a year-to-date basis. In particular from Oakley Capital Investments where underlying earnings have remained strong and resilient.

What’s happening this week?

13 June • US Inflation Rate | 14 June • UK Gross Domestic Product | 15 June • EU ECB Interest Rate Decision

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how their portfolios are responding to market events, or call +44 (0)1624 645000 to speak to our client services team.

If you would like to find out more about how we manage clients’ investments, please contact us on the same number as above. Or you can get in touch using the links to the forms towards the end of this page.

Sources: Nedbank Private Wealth and Bloomberg, Reuters, European Central Bank, Bank of Canada and Financial Times

The value of investments can fall, as well as rise, and you might not get back the original amount invested. Exchange rate changes affect the value of investments. Past performance is not necessarily a guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios and is referenced for illustrative purposes only, not as a recommendation, not least as it may not be suitable. You should always seek professional advice before making any investment decisions.

The week of 29 May 2023 saw agreement in the US debt ceiling negotiations and investor focus return to economic data. Mixed reports on the US labour market left opinions divided on the Federal Reserve’s next move on interest rates in June.

What’s happened in markets?

KEY MARKET MOVEMENTS (% change)
1WK 1MO 3MO YTD 1YR 3YR 5YR
FTSE All Share 0.16 -1.46 -3.02 3.80 3.36 10.11 3.21
Euro Stoxx 50 -0.17 2.01 4.40 17.06 18.04 14.75 7.96
S&P 500 1.88 4.17 8.04 12.35 4.29 13.37 11.29
Japan Topix 1.72 5.17 10.79 16.86 16.41 13.90 7.09
MSCI Asia Pac. 1.27 0.60 0.08 2.87 -4.11 2.84 0.06
MSCI Emerg. Mkts. 1.26 1.33 1.28 3.90 -4.22 3.38 0.04
Jo’burg All Shares 0.71 -0.42 1.03 7.35 13.35 18.24 10.21
UK Gov’t Bonds 1.76 -3.43 -1.39 -2.78 -15.36 -11.25 -4.02
US Gov’t Bonds 0.73 -1.56 2.70 1.99 -2.32 -4.54 0.60
Global Corp. Bonds 1.00 -0.94 2.54 2.92 -1.02 -2.30 1.50
Emerg. Mkt. Local 0.82 0.27 3.90 5.10 3.77 -1.80 0.18
Figures in the respective local currencies as at the end of trading on 02/06/2023.

Market focus over the week of 29 May was on US jobs growth, which came in almost twice as strong as forecast at 339,000 in May, against expectations of 195,000. The unemployment rate, however, rose slightly to 3.7%, from 3.4%, and coupled with a slowdown in wage growth left opinions divided on what the Federal Reserve (Fed) might do with interest rates at its meeting in June. The next big economic indicator will be the US consumer price index (CPI) report for May due on 13 June. The Fed’s Beige Book, a survey which reflects comments and views from contacts outside the Federal Reserve System, indicated that while the US economy was indeed slowing as hiring and inflation eased, there were still signs that the economy remained too hot in certain areas. In more positive news, the US Senate finally passed the debt ceiling agreement in a 63-36 vote on Thursday 1 June.

In the UK, inflation remains stubbornly high as the CPI rose by 8.7% in the 12 months to April 2023. Although down from 10.1% in March, the fall was less than expected causing gilts to plunge and putting further pressure on the Bank of England to take further action. Britain and Italy now have the joint highest rate of inflation among the Group of Seven advanced economies.

Eurozone inflation for May eased more than expected and fell to a 15-month low of 6.1%, down from 7.0%. This enabled bond yields in Europe to rally, especially towards the end of May. The euro area unemployment rate fell in April to its lowest level since the formation of the single currency, coming in at 6.5%. However, European Central Bank (ECB) President Christine Lagarde remained hawkish over interest rates stating that inflation was still too high and further monetary tightening was in the pipeline. Although most policymakers at the ECB’s May meeting voted to slow the pace of rate increases to a quarter point.

There was weaker news out of China as its manufacturing purchasing managers’ index (PMI) came in at 48.8 (against 49.5 expected), the lowest reading since December 2022, while service sector activity expanded but at the slowest pace in four months in May.

Meanwhile, Saudi Arabia (the world’s top oil exporter) agreed to deliver an additional production cut of one million barrels per day in July. This is the biggest reduction in years in a bid to prop up prices following a meeting of the influential Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, in Vienna on 4 June.

In corporate news, both Salesforce and Zoom reported higher than expected earnings and promoted their investments in the development of artificial intelligence.

In terms of market roundup, developed market equities (+3.0%) were ahead of emerging market equities (+1.8%) over the last 30 days, as the weak economic data from China dented sentiment. In terms of style, growth oriented sectors (+5.6%) outperformed value stocks (+0.1%), with information technology stocks continuing to benefit from the growing investment in artificial intelligence (AI). Information technology (+11.6%) was by far the best performing sector over the last 30 days, while consumer staples (-4.5%) was the worst.

In fixed income markets, as bond yields rose over the month, global government bonds (-1.3%) underperformed and high yield (+0.2%) remained flat. Although there has been some variation in government bond markets through May, as US yields moved higher but European yields moved lower, following the better-than-expected inflation release. Meanwhile UK bond yields moved much higher on the back of the recent worse-than-expected UK CPI figure.

In terms of commodities, the traditionally safe haven of gold (-3.8%) underperformed while the more cyclical oil (+5.1%) turned positive after the US Senate gave the green light for the debt-ceiling bill and in anticipation of last weekend’s OPEC+ meeting in Vienna.

ECONOMICS
Latest Consensus Forecast
UK GDP (QoQ) 0.1
UK PMI 54.0 53.9
UK CPI (YoY)  8.7  –
EU GDP (QoQ) 0.1 0.0
EU PMI 52.8 53.3
EU CPI (YoY) 6.1  –
US GDP (QoQ) 1.3  –
US PMI 51.9 52.4
US CPI (YoY) 4.9 4.1

What’s happened in portfolios?

In equities, our holding in the S&P 500 closed last week at a nine-month high, up 0.5%. It was helped by the agreement on the US debt ceiling, the prospect the Fed might finally pause its rate hikes at the next meeting, and signs that inflation is still falling. Year to date the S&P 500 is up a positive 10% and our quality defensive managers, iShares Core S&P 500 ETF, Fundsmith Equity and NIF Global Equity were also up around 10% over the period. They were boosted by their holdings in tech stocks which are benefiting from the growth in AI, such as Microsoft, Alphabet, Amazon and Meta.

Last week in fixed income markets, PIMCO Global Investment Grade Credit was helped by its 30% exposure to Europe, as government bonds rallied there following the lower-than-expected CPI data. Over the year to date, longer duration areas continue to outperform as yields have fallen.

In terms of real assets, our indirect holdings in property and infrastructure followed equities lower over May but remained in line with their benchmark indices. Interestingly, our more defensive direct holdings in care homes and 3i infrastructure outperformed.

In our alternative strategies, Princess Private Equity announced it was to resume new investment activity, targeting high quality, mid-market companies.

What’s happening this week?

8 June • EU GDP Growth Rate | 8 June • US Initial Jobless Claims | 13 June • UK Unemployment Rate

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how their portfolios are responding to market events, or call +44 (0)1624 645000 to speak to our client services team.

If you would like to find out more about how we manage clients’ investments, please contact us on the same number as above. Or you can get in touch using the links to the forms towards the end of this page.

Sources: Nedbank Private Wealth and Bloomberg, Reuters, Federal Reserve, Office for National Statistics, Eurostat, South China Morning Post and US Bureau of Labor Statistics

The value of investments can fall, as well as rise, and you might not get back the original amount invested. Exchange rate changes affect the value of investments. Past performance is not necessarily a guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios and is referenced for illustrative purposes only, not as a recommendation, not least as it may not be suitable. You should always seek professional advice before making any investment decisions.

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