Markets around the world hit their respective highs over the last month. Since then there has been some modest volatility in most markets, however, most of the markets have returned to their previous highs. Japan is an interesting case, having eventually passed it’s 1980’s high point for the first time in 40 years. Japan’s market is bucking the trend in most developed economies, expecting rises in interest rates rather than declines. This is good for Japanese companies as that will make the Yen even stronger, making raw materials more affordable in the industry heavy country.
The US had even more good data released this month showing a strong labour market and wage growth, which can result in higher inflation if it is too high. Retail sales also accelerated at the start of this year. This means that interest rate cuts are still likely going forward, although not necessarily as quickly as previously thought earlier in the year.
While there is some concern that certain technology shares are overpriced this seems not to be the case in the wider US market. A ‘soft’ landing is seeming to be more probable from the recent recession, meaning that most investment managers are investing more in the US market as it has the more likely expected growth over the next couple of years.
Inflation in Europe is edging towards the target of 2.1%, again meaning that cuts to interest rates seem more likely in the summer, however, the European Central Bank seems to be holding fast to hard inflation targets, indicating that they will cut rates when the target is met, rather than pandering to pressure to reduce them earlier to help the economy.
Europe, similarly to the UK, does not have a huge technology sector which looks to be driving growth around the globe. However, there seems to be room for appreciation in European markets to outperform in real terms. The Euro and shares in the European exchanges seem cheap relative to their US counterparts, meaning exposure to this market could see good returns long term.
The UK is a different story. Whilst there has been some good news in that GDP turned positive in January after the recent technical recession, inflation fell by more than expected in March, and the housing market continued its recovery as well. Fears had been around since the recent raise of interest rates that both demand for and prices of housing stock would shrink in the current market conditions which are directly affecting mortgage costs. Now that house prices are stabilised, the Royal Institute of Chartered Surveyors house price index showing a steady 5% growth, house builders are re-entering the market which will have a positive effect on both the housing crises and the wider economy.
However, UK share prices, currently cheap by global standards, are unloved by investors. The UK stock market is dominated by sectors such as financials and energy, classed as value shares, and is weak in sectors like technology, classed as growth shares. The current trend, which shows no signs of retreating, is for growth shares. This means that for more cautious portfolios and for very long term investments UK shares offer a lot of value, but are expected to underperform over the next few years. Some UK funds in specialised sectors may outperform, but generally are expected to fall a little by the wayside compared to their US/European or Global peers.
The UK budget in March was a bit of a non-event in terms of the effect on the markets. There were no surprises with everything announced either in advance or already expected. However, the cut in national insurance has worried macro-economists as it has not been fully costed. 2 years ago Rishi Sunnak announced a rise in NI to help pay for social care, now ministers are aiming to get rid of NI entirely! Has the social care crises been resolved in the last 18 months? Of course not. Up to 70% of local council’s budgets are currently being spent on social care for the elderly and children and 1 in 5 councils are in real risk of going effectively bankrupt. Whilst a tax give away can often be expected in a Budget before a general election, the cut in NI won’t benefit the largest Tory base, pensioners. Only workers pay national insurance, pensioners, savers, and those who live on their investments don’t, therefore I believe its simply a trap for the next government, ie Labour. They will have to start their term with no real money to play with and one of the first things they will have to do is reverse these cuts or raise taxes heavily elsewhere, none of which will be popular. They likely won’t make any real headway in their first, and possibly only, term, making a Conservative comeback more likely.
Finally, Emerging Markets and Asia Pacific are in a similar position to the UK but for different reasons. Their markets are undoubtedly cheap, but with so much of their growth coming from commodity prices we don’t expect much upside to those values in the coming months.
