Global equities had yet another volatile week but ended up 1.5% in local currency terms. The volatility had two main causes – big tech stocks and bonds.
Taking tech first, the stock price of Meta (Facebook) was hammered following disappointing results. A 25% decline resulted in the largest ever fall in market capitalisation seen in a day. This was then followed in short order by encouraging results from Amazon which saw the largest ever daily rise in market cap.
Facebook’s problems are in good part down to increased competition from TikTok and do not appear indicative of more general problems with the business models of the tech giants. Indeed, it was not just Amazon whose earnings beat expectations this quarter but also Apple, Alphabet and Microsoft.
Tech may well continue to suffer over coming months from the rotation away from highly valued growth stocks into cheaper value stocks. However, this is much more about the rise in bond yields and in some cases excessive valuations, rather than a major reappraisal (other than for Facebook) of their growth prospects which we believe remain strong and a major long-term attraction.
This brings us onto bonds, which sold off further last week with 10-year government yields rising 0.15%-0.25% in the US, UK and the Eurozone. Supposedly risk-free UK gilts lost 1.6% over the week and are down 4.5% since the start of the year. By contrast, UK equities are actually up 0.1% this year despite all the market turmoil.
The bond sell-off was triggered first and foremost by the Bank of England and the European Central Bank turning markedly more hawkish, echoing the US Fed the previous week. The UK MPC raised rates 0.25% to 0.5% as expected but the surprise was that as many as four out of the nine members voted for a 0.5% increase.
With UK inflation set to hit 7% in April and the Bank increasingly worried about a wage-price spiral, further rises of 0.25% look likely in both March and May. The MPC also confirmed it will start to run down its £895bn of QE-related bond holdings by not reinvesting maturing bonds.
The market is now pricing in UK rates reaching as high as 1.75% by year-end. However, this looks over the top with further tightening beyond May likely to be much more gradual. While the Bank’s primary focus is on getting inflation back under control, it will also have half an eye on growth. This is set to slow significantly as a result of the cost-of-living squeeze, notwithstanding the Chancellor’s £9.1bn hand-out last week to mitigate the 54% rise in the energy price cap.
As for the ECB, it kept rates unchanged and plans to continue its QE programme over coming months. The sting in the tail came from ECB President Christine Lagarde. In a marked change of stance, she refused to rule out a rate increase this year as a result of inflation picking up more sharply than expected and hitting a record high of 5.1% in January. Although the ECB still looks set to tighten policy much more slowly than the BOE and the Fed, a rate rise does now look likely later this year.
One other factor also contributed to the spike in bond yields, namely the US labour market report on Friday. Employment in January posted a much stronger gain than expected, the weakness of previous months was revised away, and wage growth continued to head higher. These numbers leave a US rate rise in March looking all but certain with four or five rate hikes on the cards for the coming year.
Our sizeable underweight of government bonds, along with the relatively low maturity of our holdings, has limited the losses our client portfolios have incurred from the bond sell-off. But much of the re-pricing by bond markets should now be behind us following the recent dramatic reappraisal of the outlook for monetary tightening. While yields still probably have somewhat further to rise, opportunities may well present themselves in this space and we are mindful of this.
Rupert Thompson
Chief Investment Officer