Global equities were broadly flat last week but lost 1.2% in sterling terms as the pound gained close to 2% against a weaker dollar, rising to $1.28. UK, European and Japanese equities all saw modest gains but the US and China were down 1.9% and 3.4% in sterling terms.
Bonds had a good week with Treasuries and Gilts benefited from a retreat in longer dated bond yields and posting gains of 1.0% and 0.7%. But gold was the star performer, with the price rising close to 5% to a new all-time high of $2180/oz.
There was a lot of macro news last week but in truth no big surprises. The monthly US payroll numbers were a major focus as ever and proved a mixed bag. February saw a robust and larger than expected gain but increases in previous months were revised down significantly, including January’s blow-out report. The unemployment rate also ticked higher and wage growth slowed. Along with recent weaker than expected business confidence numbers, recent releases point to some, but not a dramatic, slowdown in the economy.
In his bi-annual testimony to Congress, Fed Chair Jerome Powell said little to change the market’s view that rate cuts are likely this year but will require a further fall in inflation, along with some slowing in growth. Still, he was possibly slightly more dovish than anticipated. The market is now pricing in rates starting to be lowered in June with 3-4 cuts by year-end, which seems very plausible.
The ECB meeting was also uneventful. Like the Fed, it too wants to see further confirmation that inflation has been beaten before cutting rates but has also hinted that rates could start to be cut in June.
Meanwhile in China, the National People’s Congress saw the authorities adopt a growth target for this year of 5%, unchanged from last year. While this was at the top end of expectations and further policy support measures were promised, there was some disappointment over the lack of detail. Hence last week’s retreat in Chinese stocks – although they have bounced this morning, bucking the declines seen elsewhere.
Here in the UK, the Chancellor cut the National Insurance rate by a further 2p at a cost of £10bn or so, with the cost partially paid for by some small tax hikes including a crackdown on tax breaks for ‘non-doms’. Overall, the budget represented a small boost to the economy and should help ensure a return to positive growth this year.
This rather better macro backdrop will benefit small and mid-cap stocks. They are considerably more exposed to the UK economy than the FTSE 100, as 75% of the latter’s revenues come from overseas. The stronger tone to the pound is also supportive of small and mid-cap outperforming as a stronger currency reduces the value of overseas earnings in sterling terms. We continue to believe small and mid-cap have the greatest upside in the UK.
Jeremy Hunt also announced a £5,000 ISA for investing in UK shares. While at the margin this may encourage some extra inflows, it is unlikely to have a big impact. The much larger inducement to hold UK stocks remains their cheapness – the UK’s current price/earnings ratio of 10.9 is close to 40% lower than the average of the rest of the world.
Gold does not normally merit a mention but this week it does, now that it has finally broken through its previous all-time high. While gold is far from the most predictable of assets, prospective Fed easing, continued geopolitical tensions, heavy central bank buying and a weaker dollar all remain positives.
There is also a positive side to gold’s unpredictability, namely its low correlation to mainstream bonds and equities. All said and done, we continue to believe gold or gold-related equities merit a small allocation in an investment portfolio.
In a further move away from our normal macro focus, we will finish with the observation that references to the so-called Magnificent Seven are beginning to look rather passé. They led last week’s fall in the US market with Tesla falling a further 13% and now down as much as 30% this year. But Apple too has fallen out of favour and is down 11% year-to-date. Both stocks have fallen from grace in part because of the increasing challenges in China which accounts for around 20% of their sales.
This coming week, the big macro event will be the US consumer price numbers on Tuesday which are forecast to show core inflation easing a bit further in February to 3.7% from 3.9%.
Rupert Thompson – Chief Economist