A relaxed read on the issues of the day
The UK stock market struggled during June, despite good news on the economy. The headline inflation figure fell to 2% in May, helped by a slowdown in food and drink inflation. The Bank of England decided to hold interest rates for the time being, but an interest rate cut in August is a distinct possibility, if the BoE has enough evidence for it to think that inflation won’t tear away again. Consumer confidence continues to rise in the UK, supporting a more positive outlook.
In aggregate the US stock market continued its inexorable rise this month, with the main index up over 5% in June, and over 16% so far this year. Enthusiasm for Artificial Intelligence as an investment theme continued to drive share prices in technology, although other sectors such as utilities and materials were much weaker by contrast. The US economy continues to grow with a strong outlook in both services and the manufacturing parts of the economy. Job creation also remains strong, but unemployment has risen a little more than expected, to 4%. With inflation coming down in line with expectations, the Fed has begun to look ahead to when it might reduce interest rates from the current level (5.5%). The timing of a rate cut could be swayed by which candidate is successful in the US election. While neither of the main parties are likely to rein in spending, the Republican party may be more aggressive in its plans to cut taxes and this could factor in the Fed’s decision. The contest for the White House has been finely balanced but the debate between Mr Biden and Mr Trump at the end of June raised concerns over Mr Biden’s capacity to continue in the role for another term. Polls following the debate saw an acceleration in support for Mr Trump, which we suspect will have intensified following the dramatic events in Pennsylvania.
Elections in Europe have generated some volatility in both equity and bond markets during June. EU elections saw far-right parties gain seats from liberal and left-leaning parties, with the uncertainty compounded in France where President Macron unexpectedly called an election. As Europe moves past peak election season, political clarity should help to stabilise markets as investors wait to see improvements in the economic data.
In Japan, the yen remains weak, which is benefiting exporters, financials and the IT sector. While returns have not been poor so far this year, being on a par with those from our own equity market, Japan’s weak currency does result in higher import costs, which, in turn, can lead to inflation. We remain optimistic that as interest rates fall in other parts of the world Japanese equities will benefit and share prices have the potential move higher.
In bonds, government bonds delivered positive returns in June on the back of interest rate cuts from some central banks (Canada and Europe) with cuts expected later year from others (US and UK). Bond markets do not currently have ambitious expectations for rate cuts this year (cuts are typically good news for the performance of bonds) and consequently we think that this should pave the way for positive returns from the asset class in the second half of the year. Returns were also positive from corporate bonds, although we continue to see that in some parts of the market, government bonds may offer better value. In portfolios, a blend of government and corporate bonds looks to offer a good balance for investors at the moment.
Despite the uncertainty that elections create, history tells us that over the long term, they have only a minor influence on investment returns. We will continue to look for investment opportunities amid the uncertainty and take comfort from the returns that markets have delivered over the first half of the year. As we look forward, we continue to believe that markets have the potential to deliver attractive returns in the second half of the year.
This information is intended for professional financial advisers only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such.
5th August 2024
Cappuccino Commentary
A relaxed read on the issues of the day
The UK stock market struggled during June, despite good news on the economy. The headline inflation figure fell to 2% in May, helped by a slowdown in food and drink inflation. The Bank of England decided to hold interest rates for the time being, but an interest rate cut in August is a distinct possibility, if the BoE has enough evidence for it to think that inflation won’t tear away again. Consumer confidence continues to rise in the UK, supporting a more positive outlook.
In aggregate the US stock market continued its inexorable rise this month, with the main index up over 5% in June, and over 16% so far this year. Enthusiasm for Artificial Intelligence as an investment theme continued to drive share prices in technology, although other sectors such as utilities and materials were much weaker by contrast. The US economy continues to grow with a strong outlook in both services and the manufacturing parts of the economy. Job creation also remains strong, but unemployment has risen a little more than expected, to 4%. With inflation coming down in line with expectations, the Fed has begun to look ahead to when it might reduce interest rates from the current level (5.5%). The timing of a rate cut could be swayed by which candidate is successful in the US election. While neither of the main parties are likely to rein in spending, the Republican party may be more aggressive in its plans to cut taxes and this could factor in the Fed’s decision. The contest for the White House has been finely balanced but the debate between Mr Biden and Mr Trump at the end of June raised concerns over Mr Biden’s capacity to continue in the role for another term. Polls following the debate saw an acceleration in support for Mr Trump, which we suspect will have intensified following the dramatic events in Pennsylvania.
Elections in Europe have generated some volatility in both equity and bond markets during June. EU elections saw far-right parties gain seats from liberal and left-leaning parties, with the uncertainty compounded in France where President Macron unexpectedly called an election. As Europe moves past peak election season, political clarity should help to stabilise markets as investors wait to see improvements in the economic data.
In Japan, the yen remains weak, which is benefiting exporters, financials and the IT sector. While returns have not been poor so far this year, being on a par with those from our own equity market, Japan’s weak currency does result in higher import costs, which, in turn, can lead to inflation. We remain optimistic that as interest rates fall in other parts of the world Japanese equities will benefit and share prices have the potential move higher.
In bonds, government bonds delivered positive returns in June on the back of interest rate cuts from some central banks (Canada and Europe) with cuts expected later year from others (US and UK). Bond markets do not currently have ambitious expectations for rate cuts this year (cuts are typically good news for the performance of bonds) and consequently we think that this should pave the way for positive returns from the asset class in the second half of the year. Returns were also positive from corporate bonds, although we continue to see that in some parts of the market, government bonds may offer better value. In portfolios, a blend of government and corporate bonds looks to offer a good balance for investors at the moment.
Despite the uncertainty that elections create, history tells us that over the long term, they have only a minor influence on investment returns. We will continue to look for investment opportunities amid the uncertainty and take comfort from the returns that markets have delivered over the first half of the year. As we look forward, we continue to believe that markets have the potential to deliver attractive returns in the second half of the year.
This information is intended for professional financial advisers only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such.