April 2023
INVESTMENT MARKET UPDATE
Welcome to our latest global investment market update
Hello and welcome to our latest investment update. Today, we’re providing a round-up of the latest news that affects the investment market. We’re grateful to our friends at Charles Stanley for their input into this content. Hopefully, you have time to make your way through this, but if time is very much of the essence, the big highlights are as follows.
Inflation in the UK eased last month but not as far as expected. Red-hot food inflation is running at an annual rate of 19.1%. This resulted in an increase in expectations of UK peak interest rates later this year to 5% - but this is at odds with the Bank of England’s own messaging that it is close to the end of its hiking cycle. It is possible that there will be just one more interest rate rise in the current cycle.
Janet Yellen said that a US decoupling from China would be “disastrous”. The US Treasury Secretary called for a “constructive and fair” economic relationship, as Washington moved to repair its fractious relationship with Beijing.
UKRAINE
A classified document suggests Beijing did not respond to Russian paramilitary group Wagner’s request for weapons in early 2023, the Financial Times reported. It said Representatives from Wagner, which is controlled by close Putin ally Yevgeny Prigozhin, “sought munitions and equipment” from China in early 2023. However, as of early January, China “had not sent [Wagner] any weapons, not even for testing, and had no contact with [Wagner] regarding weapons deliveries”, according to the report.
Oil prices slid to their lowest level since late March, dragged lower by fears a possible recession could dent fuel demand and after a rise in US gasoline inventories. Oil majors have also started investing in new refineries and upgrading old facilities at a rate not seen for some time, which is keeping a lid on longer-term price expectations.
ECONOMICS
Increases in bread, cereal and chocolate prices resulted in the UK cost of living rising more than expected in March. Hopes were that inflation would fall to 9.8% last month, but the data showed an annual rate of 10.1% from 10.4% in February. Food inflation hit 19.1%, its highest in 45 years. As a result, market expectations of the UK peak interest rate later this year moved higher and a further 75 basis-point increase to 5% could well happen, with the expectation boosting shares in banks such as HSBC and Barclays.
UK private sector wage growth slowed, a move that should please the Bank of England in its inflation fight. Average wages in private companies were 6.9% higher in the three months to February, down from 7.3% in the final quarter of 2022. The bank is trying to tame runaway inflation, with large wage rises potentially acting to embed price rises into the system.
The number of people looking for work in the UK has risen as job vacancies fall. About 220,000 more people were seeking work between December and February than in the prior three-month period. Unemployment rose slightly – and job vacancies fell for the ninth time in a row.
Federal Reserve Bank of New York President John Williams said on Wednesday that inflation is still at problematic levels and the US central bank will act to lower it. Mr Williams, who also serves as vice-chairman of the rate setting Federal Open Market Committee, did not comment on his personal view of what’s next for monetary policy, but he did note that central bank forecasts released recently flagged the prospect of more monetary policy tightening to help lower inflation. The Federal Reserve is expected increase interest rates by 25 basis points at its May meeting.
The US housing market is cooling significantly. The number of building permits issued to allow new houses to be built fell by 8.8% month-on-month in March, to an annual rate of 1,413,000. That’s almost 25% lower than a year ago. New housing starts dipped as well to 1,420,000. That’s 0.8% less than in February, or 17.2% lower than March 2022.
China’s economy rebounded more than expected following its reopening from harsh Covid-19 restrictions in December. Gross domestic product (GDP) expanded 4.5% year-on-year in the first quarter, boosted by exports, infrastructure investment and a rebound in consumer activity. Analysts had expected growth of 4%, although still below Beijing’s full-year target of 5% for 2023. The news boosted the mining sector, which is heavily exposed to China.
GEOPOLITICS
The US Federal Bureau of Investigation (FBI) arrested two men accused of running a covert station for China’s police force in New York. They are accused of using it as a base to track Chinese dissidents living in America. The station, in Manhattan’s Chinatown, was allegedly set up in February 2022 and operated by Beijing’s ministry of public security as part of a campaign of transnational repression against Chinese pro-democracy activists and other political opponents around the world.
US authorities imposed a $300m penalty on technology group Seagate for allegedly violating export controls of hard disk drives to China's Huawei. The group shipped more than $1.1bn worth of goods to Huawei after export controls were introduced in 2020, the Department of Commerce said.
Michael Dell, founder and chief executive of one the world’s biggest computing groups, said his company is “intently focused” on buying components from outside China due to concerns about supply chain issues. The head of Dell said it was doing this at the request of its customers.
Chinese surveillance technology giant Hikvision denied it is illegally disguising its products sold to the US government to enable Chinese espionage. However, the group did not answer questions on whether it partners with Chinese intelligence agencies. The company is the world's largest surveillance camera maker and has close links to the Chinese state.
India will overtake China as the world's most populous nation this year, with almost 3 million more people than its neighbour by the middle of 2023, according to the United Nations in its State of World Population Report.
CRYPTOCURRENCY
Cryptocurrency groups have been left scrambling to find banking partners after the collapse of three crypto-friendly lenders in the US last month, creating a risk their business will become concentrated in smaller financial institutions.
This “concentration risk” concerns US regulators, which have expressed doubt about the safety and soundness of bank business models that are highly focused on cryptocurrency clients after Silvergate Capital, Signature Bank and Silicon Valley Bank imploded.
COMPANY NEWS
HSBC is subject of a shareholder tussle ahead of its AGM on 5 May. The UK-listed bank has "fundamentally failed to address key business model challenges", according to Chinese insurer Ping An – its biggest shareholder. Ping An thinks HSBC should separate its Asia business into a Hong Kong-listed entity, but shareholder advisory group Glass Lewis has urged investors to vote against proposals calling for a strategic review and dividend policy revamp.
GSK is buying Canadian biotech group Bellus Health in a £1.6bn deal, its largest acquisition since spinning off its consumer healthcare business last year. The group has a treatment for a debilitating and persistent cough – camplipixant – that is in late-stage trials.
Short-haul airline easyJet said “strong” bookings had continued into its summer season, as it gave a bullish assessment of its full-year prospects. Management expect full-year pre-tax profits of more than £260m – ahead of current market expectations. The airline narrowed losses in the six months to the end of March to £415m from £545m, as the revenues generated by each seat rose 40%.
Homeware retailer Dunelm reiterated its full-year guidance to the City as it posted a 6% jump in third-quarter sales amid “strong demand”.
French car maker Renault said revenues had grown by 30% in the first quarter thanks to a rebound in sales and higher prices. Boosted by the launch of several premium models, including the electric version of Megane, Arkana and Austral, the group posted a 14.1% increase in sales volumes over the period to 535,000 units, after four consecutive years of declines.
Sweden's AB Volvo lifted its outlook for key heavy-duty truck markets in Europe and North America this year, as it reported a 32% year-on-year rise in order intake during the first quarter.
Dutch group ASML Holding, which makes equipment essential in the manufacturing of semiconductors, beat first-quarter earnings expectations on continued strong demand. However, management noted some signs of caution among customers. This followed news that Samsung will cut production of memory chips due to waning demand and SK Hynix and Micron cut their spending plans.
Goldman Sachs shares fell after the investment banking giant posted a disappointing first-quarter earnings report. Profits fell 19% year-on-year as dealmaking and bond trading slumped in the first quarter, while losses from the sale of some loans from its consumer unit also weighed. Wall Street's investment banks have suffered the most from a downturn in mergers and acquisitions as investors grew more cautious about volatile markets and rapidly rising interest rates. Initial public offerings reached a virtual standstill as start-ups put off market debuts until investor sentiment improves.
Morgan Stanley's profit beat expectations as wealth management revenue climbed in the first quarter, offsetting slumps in investment banking and trading. The Wall Street bank set aside $234m to cover bad loans, rising from $57m a year ago, as it braced for a recession and weakness in the commercial real estate market.
Nasdaq reported first-quarter profits that beat Wall Street estimates as demand for its anti-financial crime software helped mitigate a hit to the exchange operator's indexing business and a slump in initial public offerings.
Apple Chief Executive Tim Cook launched the company's first retail store in India in its financial capital Mumbai. The iPhone maker is trying to deepen its retail push in India, the world's second largest smartphone market. The iPhone is still an aspirational product in this price-sensitive country, where more than 95% of smartphones run on Google's Android platform.
Tesla shares fell after chief executive Elon Musk said the group will put sales growth ahead of profit. The electric vehicle maker doubled down on the price war he started at the end of last year, despite posting its lowest quarterly gross margin in two years in the first quarter, missing market estimates.
Fox News settled a defamation lawsuit from the voting machine company Dominion, over its reporting of the 2020 presidential election. In a last-minute settlement before trial, the network agreed to pay $787.5m (£634m) – about half of the $1.6bn initially sought by the US voting machine producer. Dominion argued its business was harmed by Fox spreading false claims the vote had been rigged against Donald Trump.