Stock Take

‘Listless’ would best describe markets for most of last week. Investors sat on their hands awaiting imminent interest rate decisions by the Federal Reserve, European Central Bank, and Bank of Japan, and the latest data on pivotal US inflation.

After being distracted by the banking crises and the US debt ceiling issue over the last few months, markets are very much back to focusing on the macro factors driving central banks and where interest rates are going to end up. The challenge for policymakers is that inflation isn’t playing ball.

Investors were given a sharp reminder that the rise in global interest rates isn’t over yet, as the central banks of both Australia and Canada put a cat amongst the pigeons. The Bank of Canada caught markets off guard by hiking its interest rates to a 22-year high of 4.75% in the face of an overheating economy and stubbornly high inflation.

The move mirrored that of the Reserve Bank of Australia, which followed a rise in May with another 0.25% hike, after pausing its tightening cycle in April. This was despite heightened risks of a steep economic downturn, as data showed first-quarter GDP expanded at its weakest pace in 18 months.

The odds on the Federal Reserve holding interest rates lowered after the moves, but then rose again on Thursday as new claims for unemployment benefits in the US surged to the highest level in over 18 months. Wall Street climbed as investors gained confidence the Fed would take a step back and see if its medicine is working.

Signs it could be came in news that the US services sector barely grew in May, as the post-pandemic splurge on social activities such as dining out and travel continued to wane. With demand cooling, services inflation also slowed, which is good news for the Fed’s efforts to bring inflation down to its 2% target. The services sector accounts for more than two-thirds of the US economy.

Ahead of this week’s rate decision, European Central Bank president Christine Lagarde cemented expectations of more hikes by reaffirming that it was too early to call a peak in core inflation despite “signs of moderation”. Revisions to first-quarter GDP inferred that the eurozone economy fell into recession during the winter, recording two consecutive quarters of -0.1% growth.

“Data in Q2 has also been soft, though we think that it would be incorrect to be too pessimistic about the European economic outlook,” observed Mark Dowding of BlueBay Asset Management. “Labour demand remains robust, with unemployment at its lowest since the formation of the Monetary Union in 2000. Although there are pockets of weakness in the regional economy, there are also stronger spots as well and we see fiscal policy continuing to be growth supportive during 2023.”

In a sign that markets are shrugging off uncertainty for now, on Wednesday the VIX volatility index registered its lowest level since February 2020. However, each of this week’s policy announcements and the US inflation news have the capacity to drive volatility.

In the UK, retail sales grew at their slowest pace in six months in May, according to data from the British Retail Consortium, as soaring food prices saw shoppers rein in their spending elsewhere. Food was almost the only area where shoppers spent more last month, with sales rising 9.6%. However, food sales volumes were marginally negative, as shoppers were forced to spend more to buy fewer items. Total online sales fell 3% as consumers preferred to hunt for bargains instore.

In a further sign of British households feeling the pinch, UK Finance – the trade body for the banking sector – published data showing that total household savings shrank year-on-year for the first time in at least 15 years. The value of deposits in instant-access accounts fell by 4% to £867bn in March compared with £905bn a year earlier, as people dipped into savings pots to cover larger bills and daily living expenses.

Japan’s Nikkei index bounced around at the end of the week, jumping 2% on Friday on US rate-pause hopes after plunging from a 33-year high in the previous session. Expectations of a policy shift this week by the Bank of Japan remain muted, as it seems content to continue an ultra-accommodative monetary policy, for fear of moving prematurely.

Elsewhere in Asia, China’s exports shrank much faster than expected in May, while imports, especially from developed markets, extended declines. Exports slumped 7.5% year-on-year, against a forecast fall of 0.4%. The news underlined the need for China to rely on domestic demand as the global economy slows. Whilst further stimulus by Beijing may be forthcoming, its continued focus on long-term structural reform of the economy is likely to be a drag on near-term growth.

Wealth Check

When starting a business, you may hear about the importance of ‘telling your story in numbers’. This means understanding what drives your business by looking at its financial figures and communicating this effectively. This understanding is not just important to explain your financial position to lenders, investors, or other stakeholders. It’s critical for running the business successfully long term.

If you regularly gather figures about sales, costs, profit, and cash flow, and can analyse them, it will give you insights such as:

  • Which of your goods and services are profitable
  • How much those things cost to produce
  • Whether they are low or high margin
  • What levers you can adjust to boost growth, efficiency and cash flow for income and reinvestment
  • Where you, as the owner, can generate most value and which tasks to delegate or outsource.

Sound analysis of these figures should also enable you to prevent or quickly head off any financial problems. For example, if your forecasted profit margin is too low, should you cut costs, increase prices, or look for ways to increase productivity?

One reason some small businesses fail to tackle their financials is that owners are nervous or uncomfortable around numbers and numeracy. But spreadsheets can be a great help, and there are many other financial-software solutions available that can do the hard work for you.

They can also turn columns and rows into more digestible and visually interesting graphs and tables, to help you understand and communicate your numbers. These packages can also provide real-time analysis tools, to help you make quick, proactive decisions. It’s also relatively easy to outsource financial control and analysis to a third-party accountant, finance director or CFO – or recruit those roles in-house as you grow.

Finally, remember this formula for all successful businesses: good intelligence, plus good analysis, equals good decisions.

In The Picture

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The Last Word

“It looks like the competition this year, this final, was written in the stars.”

Manchester City Manager Pep Guardiola describes winning the Champions League over the weekend.

BlueBay Asset Management is a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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© S&P Dow Jones LLC 2023; all rights reserved

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

SJP Approved 12/06/2023

Sovereign Wealth Limited is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group’s wealth management products and services, more details of which are set out on the group’s website www.sjp.co.uk/products. Sovereign Wealth Limited is a Limited company registered in England and Wales, Number 07115386. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.