3rd April 2024
Global Outlook
In the UK, inflation surprised by coming in lower than expected, putting pressure on the Bank of England to cut rates. It is unlikely that we will see a rate cut until at least May, or more likely June, but it is positive that interest rate cuts are certain. This is beneficial for consumers, corporates, and consequently, the stock market. Both the Federal Reserve and the European Central Bank have also stated that rate cuts will be part of their agenda in 2024.
Interestingly, despite the UK inflation figures, UK stocks are now trading close to a record discount relative to their Wall Street counterparts. This is mainly due to specific US stock valuations, such as NVIDIA, which have surged this year, making the aggregate disparity even stronger. The UK economy has held up better than forecasted, with a rise in dealmaking activity and share buybacks. There are certainly specific stocks in the UK from which we believe we can benefit, as evident in our fund selection, where the UK has been one of the largest contributors to portfolio growth.
Politics will also play a part in the UK, as Rishi Sunak has ruled out a May election, with the most likely date expected to be October 17th. By that point, we may have seen two or three interest rate cuts from the Bank of England, and the Conservatives are hoping that this will make voters feel more positive about the UK economy and boost confidence in their leadership. Polling still suggests that it is likely to be a Labour majority, as most political commentators expect. From a UK business perspective, most leaders want stability regardless of the government’s colour, which is the consensus we have received when speaking to investment experts in the industry.
In the US, the economy continues to power ahead, with 2024 expectations for GDP growth over 2%, versus just below 1% for the entirety of Europe. The US economy has benefited from energy independence. For example, gas prices in Europe surged by approximately 20% between early 2021 and 2022, while in the US, the increase was only around 3-4%, which was hugely important for discretionary income. The US government also boosted the economy with a $2.2 trillion economic stimulus bill during the pandemic, which has had a lasting impact on the US consumer. The Federal Reserve has had tighter control over inflation than Europe and the UK, for the energy reasons detailed, and this has also helped to boost share prices in the US.
In Asia, China has shown signs of resurgence, with industrial production accelerating, adding to the positive momentum in the region. China’s economic indicators are under close scrutiny for any indications of enhanced momentum following a period characterised by deflation, diminished consumer confidence, and a real estate liquidity crunch that has affected some of the nation’s most reputable developers in the past year. We have exposure to this region, and the recent turn in sentiment has helped bolster performance since the beginning of the year.
A&J Outlook
2024 has continued the recovery in risk assets and bonds with positive data around interest rate cuts and inflation continuing to fall. Economic growth has been better that expected in most developed economies. Value equities offered more protection against downside threats compared with their growth peers, as they tended to benefit most from strong recoveries after recession and trade on lower earnings multiples.
We still like selective growth stocks where there remains true innovation and potential for change, especially recent trends in consumer behaviour that were accelerated by the pandemic but prefer value equities on the whole. We also continue to hold our overall equity weighting at neutral. Fixed income has started looking more attractive with yields now at levels not seen in well over a decade. Bonds also remain an important diversifier in our portfolios. With inflation having seemingly peaked, we believe interest rates could begin to head lower as fears of a global recession pick up.
Duration has become appealing again as market participants shift their primary concern away from inflation and towards growth fears. We also hold an allocation to cash to offset some of this fixed income risk and dampen portfolio volatility. We have also been adding ‘alternative’ assets to the portfolios, which offer low-to-negative correlations to traditional asset classes (stocks and bonds) and give the potential to protect during times of significant market volatility, such as we are seeing at present.
UK
The UK market is very value-tilted and despite positive relative performance it is still highly attractive on a valuation-basis. The disparity between the US and the UK is now at it’s largest in terms of valuation. The main driver of UK equity outperformance will be relative valuations.
Europe
There is good value to be found in European equities and the region is attractive given historic valuation differentials to the US. Interest rates are expected to fall and this will be positive for the consumer and corporates.
United States
The US represents poorer value relative to the rest of the world due to the high proportion of tech companies that still command a multiple far in excess of the broader market, however it also has the best long-term earnings growth and some of the most outstanding quality companies, as well as the most innovative. In times of global stress, the US also tends to act as a safe haven investment, which props up markets. We have increased our US exposure as we do believe the US will remain an attractive investment option in the long-term, but with some obvious headwinds making us more cautious for now.
Japan
Japan defied all expectations in 2023 and was the real standout relative performer. In the future, Japan is anticipated to face heightened exposure to cost-push inflation characterised by volatility. This is attributed to escalating geopolitical risks, the impact of climate change, and elevated wages resulting from labour shortages stemming from the country’s diminishing working-age population. Thus, we expect poor relative equity performance from Japan. In the short-term, attractive valuations in the region may boost markets, but this will likely be short-lived.
Asia Pacific & Emerging Markets
Asia Pacific and Emerging Markets (EM) are predicted to see exceptionally strong GDP growth over the next several years and thus we are comfortable maintaining an overweight position. We currently like frontier markets as a more attractive investment option within the EM universe. Typically, market move in cycles and EM vs US performance is no different. We have been in an extended period of US equity outperformance, and we now expect this trend to change in favour of EM stocks. Emerging markets are projected to experience a challenging beginning to the year due to factors such as elevated interest rates, geopolitical changes, and the persistent strength of the US dollar. Nevertheless, as the growth trajectories of emerging markets and developed markets diverge, along with a growing demand for diversification away from the U.S. and relatively low investor positioning, EM is expected to become increasingly attractive this year.
Disclaimer:
The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 27th March 2024, and are subject to change.
The content of this publication is for information purposes and should not be treated as a forecast, research, or advice to buy or sell any particular investment or to adopt any investment strategy. It does not provide personal advice based on an assessment of your own circumstances. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice.
Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.
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