Latest Market Commentary
The latest market commentary shows markets have remained relatively sanguine. Even as the attack on Israel and heightened tensions within the Middle East have dominated news flow.
However, it must be said that the geopolitical tensions caused by the Israel-Hamas conflict pose a genuine risk to the broader global economy, which is already facing ongoing problems such as high inflation and high interest rates.
As always, let’s take a closer look at key markets across the globe to find out how they’ve been performing recently.
UK
In the latest market commentary, chancellor of the exchequer Jeremy Hunt delivered his Autumn Statement in November, announcing measures such as a cut in the primary rate of National Insurance and making full expensing for businesses permanent.
Mr Hunt’s speech was accompanied by forecasts from the independent Office for Budget Responsibility (OBR), which predicts the economy will grow by 0.6 per cent this year.
Although the UK managed to avoid a recession in 2023, growth remains sluggish, with the Office for National Statistics (ONS) confirming that gross domestic product failed to increase in the third quarter of the year.
Inflation is one factor that has put the brakes on growth over the last few years, and although it fell from 6.7% in September to 4.6% in October, it remains well above the Bank of England’s target of 2%. The OBR believes inflation will fall to 2.8% by the end of 2024 before reaching the Bank’s 2% target rate in 2025.
Read about if interest rates have finally peaked
Retail
A fall in retail sales will also have contributed to the poor economic growth figures, as ONS data shows the volume of products sold in October fell to their lowest level since February 2021, when much of the country was in lockdown.
Online fashion retailer Asos is one well-known brand that has struggled in this climate, as it announced a £300m loss before tax in the year leading up to the start of September. This led to its share price falling by more than 11%, and the company now expects to see a 15% fall in sales over the next year.
There are chinks of light to be found in the retail sector. Marks & Spencer, for example, reported that profit before tax rose by 56% to £326m in the six months to the end of September, thanks to a surge in food and clothing sales.
This was better than expected, as the company focused on revamping its brand.
Film Industry
The film industry has been one notable bright spot for the economy in recent years. Warner Bros states that its blockbuster movie Barbie has contributed more than £80m to the UK economy.
Energy
The energy sector has, unsurprisingly, also performed strongly, with oil and gas giant Shell reporting earnings of £5.1bn between July and September and BP posting profits of £2.7bn in the same quarter.
Financial Services
In the financial services sector, new rules allowing bankers to earn unlimited bonuses came into force, which UK Finance believes will help the country attract international professionals. However, the scrapping of the cap on bonuses was criticised by the TUC, which described it as “obscene”.
Meanwhile, trade union Unite has revealed that high street bank Barclays plans to cut 900 jobs in the UK to reduce costs. Barclays has not confirmed the scale of the job losses, which Unite says will be seen across back-office divisions such as finance, IT and compliance.
Elsewhere in the financial services industry, city firm Lloyd’s of London has apologised after an independent report found it had “significant connections to the transatlantic slave trade”, as “the insurance of ships, cargo and captured enslaved persons” facilitated its growth.
Europe & the latest market commentary
The European Commission has downgraded its growth forecast for both the EU and the eurozone in 2023 from 0.8% to 0.6%.
In its Autumn forecast, the commission said Europe’s economy has “lost momentum” this year due to high cost of living, rising interest rates and weak external demand. However, it is confident that economic activity will “gradually recover going forward”.
Germany looks set to drive much of this growth, as the International Monetary Fund believes the country will overtake Japan as the third-largest economy in the world before the end of 2023.
One issue that could affect growth in the coming months is a fall in wine production. The European Union is the world’s largest wine producer, consumer and exporter. Still, according to the International Organisation of Vine and Wine, wine production has fallen due to bad weather conditions, including drought and heavy rainfall.
US
The US government found itself on the brink of a shutdown for the second time this year. Still, Congress has passed a temporary funding measure that ensures federal agencies can keep operating until the new year.
This came amid fairly positive figures for the US economy, which grew by 4.9% between July and September, thanks partly to increased consumer spending. However, Deutsche Bank predicts the US could face a mild recession in the first half of 2024.
Meanwhile, the US Federal Reserve has held its key interest at 5.25%-5.5%, which means they remain at a 22-year high.
Economists at Goldman Sachs have predicted that the Fed will delay cutting rates until the final quarter of 2024, as the economy has so far managed to avoid recession. As David Mericle of Goldman Sachs says, the US economy has “made substantial progress toward a soft landing”.
Far East & the latest market commentary
As we noted earlier, diplomatic relations between China and the US have been frosty in recent years. However, we may have witnessed a slight thawing of tensions as Chinese President Xi Jinping met with his US counterpart, Joe Biden, in California.
The meeting on the sidelines of the Asia-Pacific Economic Co-operation summit marked the first time the two had met since November last year.
Mr Xi has also met with Australian Prime Minister Anthony Albanese in recent weeks, which again signals a potential improvement in diplomatic relations following disputes over issues such as security and trade.
According to official data, China recorded a deficit of £9.6bn in foreign investment between July and September, which indicates that many businesses are reinvesting their profits in other countries rather than China.
As Nick Marro from the Economist Intelligence Unit says: “Anxieties around geopolitical risk, domestic policy uncertainty and slower growth are pushing companies to think about alternative markets.”
Emerging Markets
Morgan Stanley’s forecast of a 6.5% increase in India’s gross domestic product (GDP) for 2024 and 2025 reinforces the country’s position as a rising economic powerhouse.
The organisation believes strong domestic fundamentals and the implementation of recent policy reforms are driving its strong performance.
Meanwhile, the IMF predicts that India will become the third-largest economy in the world by 2027, overtaking Japan.
Russia has been isolated by many Western nations following its invasion of Ukraine last year, prompting the government to seek to establish a coalition of allies to bolster its economy. These countries are Belarus, Brazil, China, India, Kazakhstan, Saudi Arabia and Turkey.
Market Sentiment & Portfolio Repositioning
The latest market commentary shows investors still need to proceed with caution in this environment. While seasonal factors typically favour equities in the latter part of the year, investors should remain vigilant and ready to respond in case of a significant market sell-off.
Evidence emerging of a slowdown of sufficient magnitude that the Fed would change its stance would see a rally in both bonds and equities. The caveat on this would be if economic activity nosedived. Would the Fed respond with market-friendly measures?
The ‘goldilocks’ type scenario would see lower bond yields and a reduced oil price, a retreat in the US$ and a corresponding rally in equities.
For a definite move into a new bull market phase, there needs to be clearer evidence that interest rates globally have peaked and inflationary pressures will continue to ease.
This will allow scope for rate cuts of a meaningful nature, especially if economic activity weakens, even if these do not occur until the end of 2024 or 2025.
According to the latest market commentary, investors remain confronted with an extensive range of potential outcomes. Therefore, this remains an environment where going all in on any one style or market carries high levels of risk.
Investors must acknowledge that market sentiment can shift more rapidly than they can adjust their portfolios.
Commentary from guest Graham O’Neill, Senior Investment Consultant, RSMR
