Andrew’s Views
Markets fell worldwide at the end of April, with the exception of the UK. The FTSE 100 has recently not only closed above 8,000 for the first time, but then within a month closed over 8,400. Most worldwide market have since not only recovered their April losses, but went on to further rises and are again hitting record highs, with the unfortunate exception of Japan.
Inflation is remaining ‘sticky’ in a lot of places around the world, meaning that central banks aren’t cutting interest rates as quickly has people had hoped and predicted. Inflation is being stubborn, but it is slowly reducing around the world leading to expectation of cuts to interest rates in both the UK and Europe in the summer, with the Federal Reserve in the US following later in the year.
Strong and resilient data flowing from the US, Europe and the UK is showing that people are continuing to spend and buy homes even with the interest rates as higher as they currently are, this is good news for equities around the world and is one of the reasons that markets are currently still growing. We expect to see the current surge continue throughout 2024, however, there are some geopolitical events which could stop that from happening; tensions in the Middle East could affect Oil prices again, and there are 2 big elections to be held within the next 12 months, both the UK and the US.
Joe Biden’s America has seen the economy grow at record levels both in terms of GDP and job growth, even when you strip out the rebounding effect of the Covid Lockdowns. His $3trillion infrastructure bill has made a real difference to people and companies, even if the Republicans refuse to believe it. I believe markets will react well to either President getting another term. Biden on his record and Trump on his perceived ‘business friendly’ polices. What worries me currently is the price of US shares. AI stocks are very much in favour and pretty much every company that has an AI component seems to be doing very well because of it, and this may well continue, but I’m a little concerned about the possibility of a repeat of the 2000 ‘Tech Bubble Bursting’ when the same thing happened with internet companies. It took a decade or so more for companies to really harness the power of the technology and actually make money from it. Maybe those lessons have been learned, but I believe US shares outside of the tech sector are currently the better buy.
The US tech sector is also the reason why both the UK and Europe also look very attractive right now. As mentioned in previous updates these sectors are very cheap at the moment as they are seen as having less potential than their technology sector peers. However, this could very well be the reason why they are an excellent buy right now. The UK especially is full of what are called Value stocks, things like pharmaceutical companies, financials and banks, as well as energy and mining companies. These sorts of companies do exceptionally well when growth stocks like technology shares start to fall. To me they are very good long-term purchases, even if the technology bubble doesn’t burst.
The emerging market sector did well last month, as predicted, with gains over and above the rest of the world. With the exception of China I see these markets as having good long term growth potential, but I don’t see them continuing these gains in the short term. China’s continuing housing crisis (having a housing surplus unlike the rest of the world which has a shortage) is costing the Government both political points as well as actual money. The middle class is seeing the value of their main asset decline year on year and they would like the government to do something about it, but there are still millions of unfinished homes that developers owe loans on, so much so that the banks do not want to lend money to anyone else, so the government’s hands are tied. I see this as a very long-term problem of which there are no quick solutions.
The rest of Asia Pacific is looking good right now with the fundamentals being very solid. However, Japen is once again struggling with high inflation, leading to an increase in interest rates and a stronger yen, all of which is bad for their export heavy economy.
Fixed interests fell a little in May with the expected cuts seeming a long way off, but we still believe that the next 24 months, during which we expect to see multiple cuts from all the main central banks, will see the values rising over both the short and long term.
