GDP
GDP is short for Gross Domestic Product, a measure of an economy’s output and the most watched in many cases – more on that later. It could also be an acronym for gigantic data processing and an important component of the artificial intelligence (AI) story that some have highlighted as the fourth industrial revolution.
The power generation required to support these substantial data centres should not be underestimated and represents a key sub-theme within the AI theme itself.
Schneider Electric and Eaton, French and US companies but global in revenue streams, are just two of the beneficiaries in the energy procurement needed for increasing large and numerate data centres. Schneider Electric continues to be one of our multi-manger funds’ larger stock positions on look-through.
The more common GDP, relating to a nation’s economic performance, showed an expected slowdown in the US and slightly better, but nothing to get excited about, numbers from the UK and Europe. China remains sluggish and the rest of Asia is doing OK, including Japan.
Rate Fixation
April feels like it has been dominated by debates about official rate projections and what the central banks of the US, UK and Euro Zone would or would not do in 2024.
The following chart illustrates the change in futures markets’ expectations from the start of the year through to the end of April. All three regions have seen optimism on rate cuts diluted with the largest shift occurring in the US:
Latest PCE price data
Source: ManGLG
Despite this significant moderation in what would normally be a key support for risk assets, equity markets, in general, enjoyed an uplifting first quarter.
April was predominantly about a pause for breath and some indigestion allied to the disappointment of fewer rate cuts and declining interest rate support. The valuation metric of bond yields provided a hurdle for risk assets as government bond yields rose to reflect the changing interest rate environment. This was particularly the case in the US where large-scale US Treasury issuance added to upward yield pressure. US Federal Reserve (Fed) Governor, Jerome Powell’s more hawkish tone mid-month, led to further indigestion for risk assets (although he countered that in his 1 May comments post the Fed’s Open Market Committee meeting).
While inflation may might not be where western central banks would like it to be, inflation rates are both lower and headed lower still. British non-food prices fell 0.6% in the first week of April, the first time this category was deflationary for more than two years, the British Retail Consortium said. Inflation pressures eased in the services sector, a separate CBI survey showed.
Importantly in the tighter labour markets of the US and UK, signs are that both employment markets are loosening which, in turn, should take pressure of wages.
Divorce
The European Central Bank (ECB) distanced itself, and rightly so, from the path of US interest rate setting, leaving the door open for a reduction at the June ECB meeting. The Bank of England echoed similar thoughts although its first cut in base rates may take longer.
Wars
The escalation of the conflict between Israel and Iran after direct strikes on each other, provided further angst for financial markets although some temporary relief for US Treasuries as a flight-to-safety trade. Understandably, gold was a beneficiary, enabling the yellow metal to continue its recent uptrend. Rumours of a ceasefire between the two warring nations and Iran’s calmer rhetoric provided some relief for risk assets.
Another war of a different kind is in currencies. The Japanese yen has been the funding currency of choice and has rewarded those borrowing in yen to invest in higher interest rate currencies. Consequently, the yen has been on a consistent downtrend, notably against a strong US currency benefitting from its loose fiscal/tight monetary stance. With no change in Japanese monetary policy announced on 26 April, it became open season to sell yen. The Bank of Japan finally came to the rescue of its currency on 29 April (a Japanese bank holiday) by intervening in size (rumoured to be between $35 to $50 billion) to sell US dollars and buy yen, thereby halting/reversing the yen’s slide.
Yearnings
After a strong first quarter for equity indices, heavily influenced by multiple expansion, there was much anticipation as to whether earnings could deliver to support current valuations. Inevitably, the spotlight was on US earnings releases. In truth, it has been a mixed bag so far but importantly, three large yardsticks – Microsoft, Alphabet (Google) and Amazon have delivered. Interestingly, all three reported increased (AI related) demand for their cloud services.
Markets
Equities – UK plc for sale
We, like others, have highlighted the relative cheapness of UK equities where many well-run, cash generative, strong balance sheet companies can be found. While domestic and international institutional investors have chosen to overlook them in favour of global franchises, it is inevitable that investors such as ourselves are joined in appreciating these UK companies by acquisitive companies from overseas. Additionally, UK companies themselves see an opportunity to buy back their own, attractively valued stock. Consequently, a number of acquisitions took place in April such as Spirent Communications, Darktrace and Tyman. BHP attempted to purchase Anglo American although that was more about securing copper assets.
This may mean a shrinkage of the UK equity market combined with a number of companies continuing to eye a change of listing to New York to benefit from wider investor interest, higher multiples and with it higher remuneration. It was pleasing to see the UK’s FTSE All Share post a positive 2.5% outcome in April, leading the regional outcomes which were largely in negative territory, albeit having recovered somewhat from their lows in the last week or so of April. Only the Asia ex-Japan region posted a similar positive return, up 1.9% aided by the continued bounce from Chinese equities. The FTSE All World posted a negative return of 2.3%.
Japan’s Topix and the US S&P 500 indices were the equity indices that suffered the most having sparkled in Q1. Both were over 3% lower in April despite a late recovery.
Bonds
Debt markets struggled with the prospect of higher for longer official interest rates and stickier than anticipated inflation albeit within a declining trend. While spreads on corporate bonds remained tight, the rising yields of their government counterparts led to a capital depreciation in April. The higher carry yield from high yield bonds contributed to a least negative bond outcome. While US and UK government yields have risen and are therefore more attractive, they have yet to attain levels that we feel compensates investors.
Commodities
Copper was the star metal in April as scarcity of future supply helped it appreciate by 15% in the month. The search for copper supply story was magnified by BHP’s initial bid for Anglo American, mentioned earlier.
Gold had another good month, up 4.5%. Central banks have been consistent buyers and the People’s Bank of China (PBOC) has been a leading purchaser. However, it’s not only the Chinese central bank that has boosted the gold price, Chinese individuals have been keen acquirers of gold as the following chart sourced from Marquee Finance shows:
Oil trended higher on Middle East concerns but was actually lower on the month.
Easter fell in April and for chocolate lovers, March’s tripling of the cocoa price was understandably a concern. Late April’s one day fall of 15% may have provided some comfort but also showed the volatility of this illiquid commodity.
Currency
The US dollar continues to benefit from its interest rate differential with other leading countries’ currencies. Allied to that is the US’s tighter monetary/looser fiscal mix which tends be supportive for a currency. The key sufferer continues to be the Japanese yen the base for speculative shorts that were squeezed by Bank of Japan currency intervention on the penultimate day of April. Sterling was relatively stable against a stronger US currency.