Wesleyan’s Director of Investments, Martin Lawrence talks about the welcome rally in UK stock markets in April, the potential dilemma ahead for the Bank of England on interest rate cuts, and how, during the corporate reporting season, there are gains to be made.
It’s not often that we can say 'we told you so' when it comes to predicting how markets will react. But on this occasion, we can. The expectation that we mentioned in our update last month of a UK stock market rally in the months ahead, started to come to fruition in April. It was pleasing to see UK companies listed on the London Stock Exchange joining the ranks alongside global investment markets, many of whom have been posting 'new record all-time highs' in recent months. This turn of events benefitted many of our funds which currently have a higher weighting in UK equities.
Meanwhile, the UK economy continued to breathe a sigh of relief over inflation as the official CPI measure softened again in March to an annual rate of 3.2%. Furthermore, price rises in the shops in the month of April were also much more subdued (according to the British Retail Consortium), as food inflation eased back to 3.4%, and non-food declined. The prices of general merchandise (such as clothing and footwear) actually fell slightly compared to the same month in 2023.
Perhaps not unconnected, we've observed UK retail sales 'volumes' (the number of items people buy) steadily increasing over the past 18 months - suggesting that slower price rises, when combined with wage growth of around 6%, are allowing people to place more items in their baskets. This is helping to keep overall retail spending (in pound note terms) growing at an annual rate of around 3%.
On the flip side, those higher wages will play a pivotal role in how quickly the Bank of England can cut interest rates in the months ahead. Current wage growth (mentioned above) could be a step too far for members of the Bank of England’s Monetary Policy Committee (MPC) when considering when and by how much to cut rates. They will first want to feel comforted that inflation is truly under control before deciding.
Let’s also not forget the impact that lowering rates will have on the remaining estimated 1.5 million worried homeowners whose fixed-rate mortgage deals end this year. With an election looming (predicted to be late 2024), it could be in the Government’s interests to see a drop in mortgage rates before year end in order to secure more votes. Ever hopeful, investment markets are predicting that the first interest rate cuts will now begin around late summer - only time will tell.
We expect inflation will fall further over the next few months but are mindful it could start to rise again later in the year if the economy continues to improve and higher employment costs bed in for businesses. It is something that we have already observed in other countries, notably America.
Previous delight over strong US economic growth and falling inflation turned into concern during April that the tables have turned for both of these measures. Fuelling this change in mood included the publication of March’s US inflation (which rose back up to 3.5%) and reported economic growth for Q1 2024 which was estimated at just 0.4% - half the growth rate recorded for the previous quarter. Weaker consumer sentiment readings in April and rising employment costs added further gloom.
In Europe, it’s a brighter outlook as inflation looks more under control (below 3% and falling) and the European Central Bank remains on track to be able to start reducing rates anytime from June.
Further afield, Japan’s central bank had a different focus in April. Continued weakness in the Japanese Yen (notably against the US dollar) triggered the bank to ‘intervene’ in the currency markets – effectively selling billions of US dollars in an attempt to boost the value of their own currency. A falling currency can inflict reputational damage on a country – so their concern is understandable. But to overseas investors, paying with a stronger currency (including the pound), Japanese investments may now look more attractive.
April saw tensions in the Middle East rise and then fall, as Iran retaliated to an earlier Israeli attack on its consulate in Syria. But as the month drew to a close investment markets became more reassured that further escalation looked unlikely. Nevertheless, those rising tensions initially pushed up the price of oil and ignited fears of another round of inflation. With the impact of what happened to global prices when Russia first invaded Ukraine still fresh in people’s mind, it is just another example of why the global inflation story may not quite be finished yet.
Finally, our Investments Team spends a lot of time analysing companies and we find ourselves right in the middle of the corporate reporting season. Such announcements can cause big short-term swings in share prices – in both directions, particularly if markets are caught by surprise. Companies with expensive price tags that don’t deliver suitably good news can see their share prices penalised. Far from being concerned, we take advantage of such opportunities because of our long-term investing strategy. In addition, company announcements themselves are a rich source of information for us, as active investment managers, and help us to map out the health of the world economy.