This note contains an overview of our market views, what we are watching, and our portfolio strategy. These developments may not mean changes to your portfolio so please contact your Client Advisor for the latest update on your portfolio.
At a glance
Equity markets pushing to new record highs
Last week, stocks from the US to Europe and the UK closed again at all-time highs, and government bond prices rose as yields fell, after April inflation data in the US came in broadly as expected. Inflation fell slightly, which marked a welcome relief from the rising trend we’ve seen in the first three months of the year. In recent weeks, US economic growth has cooled, which should also help with inflation, and is in line with our forecast for the pace of expansion of the US economy to ease from 2.5% in 2023 to just over 2% in 2024. Overall, a slightly slowing US economy will likely provide the Fed with room to start lowering interest rates in the second part of the year. For now, Fed officials still stand united in wanting more than a single number to relax their view that rates should stay high for a while longer. In terms of earnings, while the season is almost over, this week investors will likely focus on Nvidia (Wednesday), given its strong stock market performance so far this year (and in 2023) and the general focus on Artificial Intelligence.
Beijing steps in again, Iran has limited impact on oil
Onshore and offshore Chinese stocks have staged a recovery in recent weeks. Last week, China announced additional measures to support the housing market and Chinese stocks closed the week around 2% higher. For now, though, we’re still cautious on China’s recovery as waves of support measures over the past two years have failed to turn the sector around. Amidst global pressure and as the upcoming US election slowly comes to the forefront, the Biden administration unveiled a bundle of tariff hikes on Chinese goods including the ‘New Three’ exports priorities (electric vehicles, solar panels and batteries). More generally, geopolitical events appear to resurface every now and then, though so far with limited effects, such as the passing of Iran’s President in an accident, which has so far lifted oil prices by a small amount.
Further evidence of an economic recovery in Europe
In our latest Counterpoint publication, we highlighted that the economic situation in Europe (and the UK) has improved, showed by rising purchasing managers’ indices (PMIs) and improving business and consumer confidence. This improved economic data led us to increase our allocation to European equities, given that they also appear to be more attractive than their US peers. This week, we’ll look to see if PMIs have continued to rise in May (data out on Thursday). Market consensus expects to see a continued improvement in services activity and recovery in the manufacturing sector, albeit less pronounced for the latter. We believe the European Central Bank will start cutting interest rates in June, so the economy could be further supported by improving credit conditions and investment flows. This bodes well for European assets. In the UK, all eyes will be on inflation (Wednesday), which is likely to have slowed notably, possibly coming close to the 2% central bank target. The market debate is whether the Bank of England too will cut interest rates in June or perhaps at the following policy meeting in August.
How we’re positioned in flagship portfolios
A better European outlook means we switch from bonds to equities
The outlook is improving in Europe and interest rate cuts are likely on the horizon, so we decided to add exposure to Europe ex UK equities. We financed the purchase by slightly reducing our European investment grade bond exposure, where the differential with ‘risk-free’ government bonds, also known as ‘spread’, has tightened further. Elsewhere, we’re keeping our overweight exposure to global small-cap equities as valuations and the economic backdrop are supportive.
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Information correct as of 21 May 2024.
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