IN BRIEF
- De-escalation in the Middle East saw a recovery in stock markets over the month.
- Pre-March data tells a very different story to today’s outlook.
- US earnings results continue to support the gains seen in main market indices.
For information purposes only. Any views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
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The month of April
During March, markets moved lower as Investors became less willing to take risk from the onset of the tensions involving Iran. Once we moved into April, markets regained their stride as it became clear the US, and seemingly Iran, wanted to de-escalate events. The resultant fragile cease-fire, later extended to Israel and Lebanon, has been sufficient to enable markets to move higher from their low point at the end of March.
As April progressed, investors clung to the positives from these geopolitical developments, enabling stock markets recovered much of their March losses. Over the month, the strongest returns were seen from Asian and Emerging Markets which have benefitted from a softer US dollar and strong returns from Korea and Taiwan, whose technology industries continue to be supported by strong demand for memory chips and semiconductors.
The US stock market has fared well over April, enabling it to reach a record high by month end as reported corporate earnings have continued to impress. With US banks setting a positive tone early in the month, this was continued with large technology company results. However, the breadth and strength of results across the market have enabled most companies to beat expectations and instill an optimistic management tone, even when a more cautious outlook is conveyed.
Economic releases over the month also proved supportive, with a strong rise in the Manufacturing component of April’s Purchasing Manager Indices (PMI’s – surveys that track business activity), an occurrence repeated in the US, Europe and the UK. This somewhat unexpected result was explained by firms stockpiling – a cautionary action to get ahead of anticipated price hikes and component shortages emanating from supply chain disruptions from the Strait of Hormuz blockade.
As above, it is important to be careful when taking economic releases at face value, especially when reporting is for a period before geopolitical upsets like we saw at the end of February. One example of this was a surge in retail sales across both sides of the Atlantic, contrasting with consumer confidence in both regions taking a nosedive. Recognising the distinction between historic reporting, and forward-looking indications of intent, could give cause to weigh the changing outlook. A more careful assessment was echoed from both investor and business sentiment surveys, which turned sharply lower as the less certain business operating environment took hold.
Similarly, consensus beating gross domestic product (GDP) growth figures for the UK economy were put into context by a more severe downward revision to the UK growth outlook from the Organisation for Economic Co-operation and Development (OECD).
Notwithstanding the growth narrative becoming less certain, investors may take some comfort from employment data in both the US and UK continuing to look robust. This proved a more positive result than some of the prematurely pessimistic forecasts that had emerged.
Other economic developments related to inflation and the setting of interest rates by the central banks. As was to be expected, there were early signs of the persistent oil price above £100 per barrel making its way into some of the inflation data, while consumer inflation expectations also took a leap upwards. However, the data did little to confirm that this was becoming more widely entrenched with inflation figures (excluding the volatile inputs of food and energy prices) reporting a decline in the UK. However, the duration of the shipping blockade in the Strait of Hormuz is likely to have a growing impact on these numbers. This is not only restricted to oil exports from the region but also encompasses global fertilizer supply (with the potential to affect crop yields later in the year) as well as broader supply chain disruption that may damage manufacturing and industrial processes across the globe.
Amidst an uncertain backdrop, the central bank interest rate committees in the UK, Europe and the US held their respective meetings towards the end of the month. As they balance near-term inflationary pressures against a slower growth outlook, a wait-and-see approach was largely adopted as interest rates were unchanged. While empahsising their commitment to tackling inflation, they resisted the urge to be too penal with rate increases for now.
Since the start of March, we have seen more price swings with government bonds across western and emerging markets driven by inflation concerns and the interest rate outlook. We do think these issues will give way to growth concerns the longer the Strait of Hormuz remains closed. In that scenario, bonds may help provide some stability if stock markets weaken, although they can still be subject to some ups and downs.
In the UK, domestic politics continued to provide some angst for the UK Prime Minister. Although parliament voted against a probe into whether the Prime Minister misled the House of Commons on his appointment of the former US ambassador, this issue is yet to go quiet. With looming local elections, it is likely the political noise will continue to weigh on UK financial markets, especially if they perceive any softening in UK fiscal discipline. However, a mood of gloom already extends to the perception of the UK economy as demonstrated by the Ipsos public poll signaling low confidence for the UK economy, a sentiment shared by most investors.
This was echoed in Europe too, with the ZEW Economic Sentiment indicator (a survey measuring business confidence) declining sharply as businesses expressed concern about rising energy prices and input disruptions. This added to the downbeat revision for German GDP, alongside a contraction of the Services component of PMI data and a sharp decline in the consumer confidence figures.
It is worth reminding investors that while businesses do not operate in an economic vacuum, economies are not the same as financial markets. Robust corporate reporting has resisted the assumption that stock markets would remain more sensitive to unfolding geopolitical events. However, although the ceasefire in Middle East persists, the Strait of Hormuz blockade still poses a major threat to global supply chains.
Key positioning for portfolios
The last change to portfolios occurred on 20th February:
- Our overall equity weighting for each portfolio was rebalanced, allowing us to maintain a controlled allocation to the positive corporate earnings growth outlook.
- After a robust performance, Pacific Equities were reduced in favour of an increase in Emerging Markets, enabling us to take profits from areas driven by the Asian technology theme. This enables a broader Emerging Market allocation supported by both fiscal and monetary policy improvements.
- Due to greater budgetary and inflation threats, Government Bonds were reduced. This was allocated according to risk limits to either high quality corporate bonds with attractive yields and low risk of the issuer defaulting on the bond, or an increase to Emerging Market Debt benefiting from an improvement in the country fundamentals seen across Emerging Markets.
- Risk monitoring and management continues to be a core priority across all portfolios.
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