I’m Neil Birrell, Premier Miton’s Chief Investment Officer. Thanks for reading ‘Market Watch’, our monthly summary of the key events in financial markets.
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February – in brief
- Expectations for cuts in interest rates continue to dominate events.
- Financial markets were mixed, with Bitcoin and gold leading the way.
- There has been a dispersion of returns within stock markets.
New year, same focus
Yet again, central bank interest rate policy has been at the top of the agenda, with hopes of cuts relatively early in the year being dashed. March brings with it meetings of the European Central Bank, the Bank of England and the, all important, US Federal Reserve. It would be a major shock if any of them announced a change in rates, however, what they have to say about when they might start falling will be examined in great detail by investors everywhere.
Inflation is travelling back towards the target levels set by those banks in an acceptable manner, providing hope that interest rates will start falling around mid year, but that is not the guidance we are getting from many of the individuals voting at the meetings when they are talking publicly. They do not want their policy decisions to be pre-empted by financial markets, bond markets in particular. The expectations of lower interest rates from central banks, should lead to lower bond yields (effectively the interest rate received). That has much the same effect as lower interest rates, as companies can borrow money more cheaply and mortgage rates could be lower, meaning that stimulus is provided in the economy. In turn, that could reignite inflation. It is a difficult balancing act for the decision makers and one that investors react to in a significant way.
The chart below shows the Fed’s favoured measure of inflation, the price index for personal consumption expenditures. As you can see it is moving rapidly back towards their target rate of 2% year on year increase.
Source: Bloomberg 31.03.2019 – 31.01.2024
I would like to be able to suggest that this note in a month’s time will provide some clarity on when and how fast interest rates might fall, but I’ve said that before and not been able to do so, therefore, let’s just wait and see.
Markets, markets, markets
Bond markets displayed some volatility through the month, although they ended up a little lower, given the comments on interest rates above. Bonds are often thought of as lower risk, often boring investments, but neither of those features have been prevalent since inflation arrived back on the scene post COVID and they may stay exciting for a while longer. Having said that, the returns that are available from bonds in general, and some sections in particular, have become quite compelling.
Riskier asset classes have been more rewarding. Bitcoin has jumped nearly 45% in the first two months of 2024; the price is volatile and often driven by speculative investors, but the introduction of a new way to invest in Bitcoin, using Exchange Traded Funds (EFTs), has helped boost the price. ETFs are investment funds that are traded on stock markets. Similarly, if investors are willing to take more risk, it will benefit. Interestingly, gold has also been strong over recent months and that is often seen as a safe haven asset. It would seem a lack of clarity in the short term outlook is leading to mixed outcomes for financial assets.
Similarly, if investors are willing to take more risk, it will benefit. Interestingly, gold has also been strong over recent months and that is often seen as a safe haven asset. It would seem a lack of clarity in the short term outlook is leading to mixed outcomes for financial assets.
Source: Bloomberg 28.02.2023 – 29.02.2024
Similarly stock markets are getting pulled to and fro. On a global basis, they were strong, the FTSE All World Index rose by nearly 5%, driven by the US, which in turn was driven by the giant technology and communications companies that have become known as the Magnificent 7, although there are signs that group is fracturing, something we have commented on previously. Whilst Nvidia has continued from strength to strength on the back of improving sales expectations for its products, Alphabet (Google’s parent company), Apple and Tesla have gone the other way.
The UK stock market was disappointing as recessionary fears loomed and, in particular, small and medium sized companies remained under pressure.
Stop press…the budget
On the day of writing this, the Chancellor delivered his “budget for growth”. The only problem is that the forecasts for growth that accompanied the speech from the Office for Budget Responsibility (OBR) did not really back that up. The expectations for economic growth this year and next are 0.8% and 1.9%, albeit that is 0.5% more than the forecast last autumn, then between 1.7% and 2.0% looking out to 2028.
These are not economic growth forecasts to get excited about. However, it is growth, not recession and much of the rest of the world is likely to be growing faster than that, which could be a positive impact.
Notwithstanding that, the UK stock market can still provide good returns; it looks good value by historic and international comparison. More importantly, there are a large number of high quality UK companies across a wide range of industries doing business around the world and domestically that display attractive growth characteristics; these are the companies in which we seek to invest.
