Some useful form shown by some equity markets - improvement for the rest of the year remains an imponderable
5 July 2023, 12:49
Yesterday was ‘Independence Day’ in the United States; So, I thought it might be appropriate to submit a half-term report on global equities supplemented by some comments and observations on the international bond market, foreign exchange, and the mushrooming activity in cryptocurrencies. What a six months it has been, both in terms of economics and politics!
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Inflation has been rampant across the spectrum – more so in the UK. It reached 11.1% and is now down to 8.7%, whereby in Europe it reached 9.2% in 2022 and it fell to 5.5% in June 2023.
Why the differential between UK and the EU? – It is mainly energy costs that have been at a lower level in the EU, with some countries, such as Germany, have been happy to buy Russian oil last year, whereas the UK refused to do so, and its parlous energy crisis has been exacerbated by a lack of an overall energy policy. Inflation in the US has fallen to 4% thanks to it being energy self-sufficient.
War continues to rage in Ukraine, which continues to damage the supply chain. Putin, as we know, has suffered a setback with the Wagner mutiny. How damaging this will be to the Putin dynasty remains to be seen.
However, peace in our time, seems a long way off. It also should not be forgotten that the world’s economies are still struggling to recover from the global pandemic of 2020/21.
Interest rate increases have been rampant in the last six months, as the main tool to fight inflation. The FED has led the charge implementing increases eleven times to 5.5%-5.75%.
The MPC has implemented thirteen increases to 5.5% but were slow out of the blocks in making measurable increases. In essence, interest rates are quite a blunt though effective instrument for Central Banks to stamp on inflation.
Conversely, the country should have been weaned off quantitative easing months ago, if not years ago. Quantitative easing was very necessary 15 years ago in response to the banking crisis, but during his tenure as Governor, Mark Carney should have trimmed back on the Bank’s bond-buying activity, as well as implemented a gradual increase in a commercial rate structure.
Against that economic and geopolitical background global equities have experienced mixed levels of achievement. The NASDAQ, the S&P500 and the Nikkei 225 have acquitted themselves with aplomb.
The DAX and CAC, which only have thirty and forty constituent stocks, have posted reasonable gains, but they are hardly a barometer of the German and French economies.
The normally ebullient Hang Seng has been caught in a vortex of Chinese politics and the Shanghai Composite illustrates the underperformance of China’s economy by their high standards, post the pandemic. Set out below are the closing levels of the main global indices on Friday 1st July 2023 – year to date.
Global indices year to date - FTSE -0.30%, FTSE 250 -3.75%, DAX +14.91%, CAC40 +12.47%, DOW JONES INDUTRIAL AVERAGE +3.84%, S&P500 +16.38%, NASDAQ COMPOSITE +32.74%, NIKKEI225 +29.06%, HANG SENG -6.10%, SHANGHAI COMPOSITE +2.75%.
Apple (+55%), Amazon (+52%), Tesla (+142%), Alphabet (+34%), Nvidia (+195%), Meta (+130%) and Microsoft (+42%) constitute a major part of the profits generated in the NASDAQ so far this year. Having experienced reverses in 2022, techs are very much the flavour of the day so far this year.
It seems worryingly unhealthy that seven stocks are responsible for the momentum behind the NASDAQ’s progress and for that matter the success of the NYSE. Banks have been off colour since SVB, Signature Bank and First Republic were exposed for balance sheet and liquidity weaknesses, largely caused by exposure bond market prices, which had fallen rapidly (rising yields).
The unconnected Credit Suisse debacle did not help the European banking sector’s cause either.
Unsurprisingly pandemic vaccine stocks such as Pfizer (-28%) and Moderna (-31%) have been friendless in the ring so far this year, after a terrific run on the rails in the previous two years!
As for the UK, telecoms, mining, banks, and utilities have been out of favour this year, as have BP and Shell in a more modest way, having been much in demand in 2022.
Last year, the defence sector in the US and in the UK (BAE Systems) blazed the trail. House builders were decent ‘Arfur Daleys’. This year they have fallen away, due to the mortgage crisis and the cost of borrowing.
Since BREXIT, international investors have had a negative take on the UK. Funds have tended to head elsewhere rather find suitable havens on this wonderful ‘Sceptred Isle.’
The Government needs to illustrate the benefits of BREXIT considerably better than it has to date. This would help immeasurably to restore confidence in investors.
Assets look so cheap here in the UK. Hence it attracts so many corporate raiders for our assets. The performance of the FTSE 100 and the 250 has been dispiriting to date. The Government needs to provide improved stimulation for business rather than keep beating the drum of financial prudence.
On a positive note, some retail brands have strongly performed this year – M&S +48%, NEXT +16% AO World +41%.
Unsurprisingly, airlines have also risen like the ‘phoenix from the ashes.’ – IAG +26%, Ryanair and easyJet both up by 46% year to date.
Japan’s Nikkei has been a star performer so far this year. It is only about 5000 short of the 38,957 in reached during the asset bubble of 1989.
The Rugby World Cup of 2019 and the Olympics of 2020 looked as if they would provide a great springboard for the revival of Japanese equities. However, the pandemic certainly helped in temporarily ‘bursting that balloon.’
Improved corporate governance and greater clarity over ownership of companies has contributed to the NIKKEI’S success this year.
IPOS in the US have been parsimonious by its high standards and smaller in size than usual – just 79 to date down 36% on last year. However, when conditions improve, ARM Holdings, Flutter and CRH will take their chance in New York rather than in London.
IPOS in London have been negligible in size and are down 30%. Companies are valued about 30% lower in London than on ‘The Street of Dreams.’
The Dollar has been very strong all year thanks to the aggressive stance adopted by the FED and these interest rates hikes have seen bonds yields rise sharply.
Consequently, government bonds have taken funds away from equities as yields of 4% to 5% provide attractive yields. Crypto Currencies are proving very popular, despite a lack of Central bank regulation, which hopefully will be rectified before too long.
Bitcoin, as an example has seen its price rally from $13,100 to 30,800 – up 135% - Prenez garde! This product is for those who have been well advised.
What of the rest of the year? Much depends on how fast inflation falls and how quickly the cost of borrowing eases. Recession still stares many countries in the face.
The US looks like it will avoid it. However, Europe and the UK remain vulnerable to a modest recession.
So, stock picking will be a pre-requisite.
