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June 2024

INVESTMENT MARKET UPDATE

Welcome to our latest global investment market update

A warm welcome to the latest look at the global economy and what recent news means for investments. We are grateful to our friends at Charles Stanley for their input into this update.

 

The highlights

In a move that didn't surprise many, the Bank of England decided to keep interest rates steady at 5.25%. This decision comes despite recent data showing that UK inflation, measured by the consumer price index (CPI), has finally hit the central bank’s 2% target earlier this week. This development suggests that we might see an interest rate cut this summer, although the higher-than-expected services inflation at 5.7% could complicate matters.

 

The S&P 500 and Nasdaq Composite reached new record highs, driven by strong performances in the technology sector. Nvidia briefly claimed the title of the world’s most valuable company after its share price soared to an all-time high, surpassing Microsoft and Apple. However, Nvidia's shares dipped later in the week due to profit-taking, allowing Microsoft to reclaim the top spot. Nvidia’s success is largely due to its production of computer chips essential for artificial intelligence (AI) software.

 

Last week saw the FTSE 100 index increase by 0.6% by mid-session on Friday, while the more UK-focused FTSE 250 index was up by 1.2%. This indicates a positive trend for UK equities, reflecting investor confidence and favourable market conditions.

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UK GENERAL ELECTION

The Conservative Party is facing tough times as they continue to poll poorly ahead of the upcoming general election on July 4th. Predictions are surfacing that Rishi Sunak could become the first sitting prime minister to lose his seat. 

 

According to analysis by Savanta and Electoral Calculus for The Telegraph, the Conservatives might be reduced to just 53 seats, which is only slightly more than the Liberal Democrats, who are expected to secure 50 seats. The analysis further predicts a sweeping victory for Labour, with an estimated 516 seats.

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ECONOMICS

On Thursday, the Bank of England voted to hold interest rates at 5.25%, a widely expected move. This was despite data showing UK inflation, as measured by the consumer price index (CPI), had finally come back to the central bank’s 2% target earlier in the week. This means a summer interest rate cut is now likely, although services inflation was higher than expected at 5.7%. Nevertheless, the central bank indicated it may consider cutting interest rates soon – which would be the first fall in UK borrowing costs in more than four years.

 

Although the Bank of England may look at reducing interest rates in the next two months, data released on Friday could give them pause for thought. UK retail sales in May were very strong, rising 2.9% month on month, compared with expectations for a 1.5% jump. This followed a 1.8% decline in April, which was revised from a 2.3% fall previously reported. Sales volumes rose across most sectors, with clothing retailers and furniture stores rebounding following poor weather in April.

 

UK grocery-price inflation stood at 2.1% in the four weeks to 9 June, marking the sixteenth consecutive month of slowing, according to market researcher Kantar. This is the lowest grocery inflation since October 2021. However, wet weather caused a slowdown in grocery sales, which increased just 1% in the four-week period.

 

Investment in the UK has trailed other G7 countries including the US and Germany since the mid-1990s, according to a report from the Institute for Public Policy Research (IPPR) thinktank. The reported urged the winner of the 4 July election to reverse planned cuts to investment or risk long-term damage to economic growth. They found that the UK was bottom of the G7 league for investment in 24 out of the last 30 years, using figures from the Organisation for Economic Co-operation and Development (OECD).

 

Government borrowing in May hit the highest level since the Covid-19 pandemic but was lower than the UK's fiscal watchdog had forecast. Borrowing reached £15bn last month, £800m higher than in May 2023. It is the third highest figure for May since records began in 1993, surpassed only by the pandemic years.

 

The Federal Reserve is likely to cut its benchmark interest rate just once this year, according to Philadelphia Fed President Patrick Harker. Inflation by the Fed's preferred measure was running at a 2.7% annual rate in April.

 

French President Emmanuel Macron faces poor opinion polls and European Union (EU) criticism of his borrowing levels.

 

Bank of Japan Governor Kazuo Ueda said the central bank could raise interest rates next month, underscoring its resolve to steadily push up borrowing costs from current near-zero levels. Any move, however, will be data dependent.

 

China’s industrial output grew less than expected last month. Industrial production rose 5.6% year on year in May, data from the National Bureau of Statistics showed, down from 6.7% in April. Consensus expectations stood at 6%.

 

Advanced economies’ central banks expect gold’s share of global reserves to rise at the expense of the US dollar. Almost 60% of rich countries’ central banks believe that gold’s share of global reserves will rise in the next five years, up from 38% of respondents last year, according to an annual survey conducted by the World Gold Council.

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GEOPOLITICS

Chinese car companies have called on Beijing to hit European Union rivals with import taxes of up to 25% on petrol-driven engines if the trading bloc imposes tariffs on electric vehicles (EVs) from China.

 

The demand was reportedly made at a closed-door meeting organised by China's Ministry of Commerce, which was also attended by representatives of European car groups. China has also opened an anti-dumping investigation into imported pork and its by-products from the European Union, a step that appears mainly aimed at Spain, the Netherlands and Denmark, in response to curbs on its electric vehicle exports. The investigation will focus on pork intended for human consumption, such as fresh, cold and frozen whole cuts, as well as pig intestines, bladders and stomachs and started on 17 June.

 

Nasdaq-listed Critical Metals signed an agreement to acquire a controlling interest in the Tanbreez project in Greenland, the largest rare-earth metal deposit in the world. Currently, China has a near monopoly on the processing of rare-earth metals, which are critical in some important technologies. Tanbreez hosts 28.2 million tonnes of total rare earth oxides (TREO) in 4.7 billion tonnes of material, according to internal company estimates. The asset is expected to contain more than 27% heavy rare earth elements.

 

A consortium of Nato allies has confirmed the first tranche of companies awarded funding as part of the group’s €1bn innovation fund. The alliance unveiled the fund in the summer of 2022, months after the Russian invasion of Ukraine, promising to invest in technologies that would enhance its defences. The fund is backed by 24 of Nato’s 32 member states, including Finland and Sweden, which joined the alliance earlier this year.

 

Russian President Vladimir Putin said plans by Western countries to provide Ukraine with loans using interest from Russian assets frozen abroad was “theft” and would not go “unpunished”. Mr Putin also promised to build trade and security systems with North Korea that are not controlled by the West as he visited Pyongyang for the first time in 24 years. Mr Putin is seeking partners to boost Russia's military in its war against Ukraine. He then visited Vietnam to sign a strategic partnership and boost ties.

 

Italy shaped the agenda at the G7 summit after Prime Minister Giorgia Meloni was able to celebrate her party’s victory in the European elections as host in Apulia.

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COMPANY NEWS

Britvic has rejected two takeover approaches from Carlsberg. The soft-drinks maker has turned down an offer of £12.50 a share this week, which would value it at £3.1bn, having already rejected an initial proposal of £12.00 from the Danish brewer earlier this month. Management said the offers significantly “undervalued the company and its current and future prospects”.

 

Management at events group Informa said it was on track to deliver annual earnings at the upper end of guidance as revenues grew by 10.1% in the year to date. Sales hit £1.4bn in the period, with a further £1bn of subscriptions/exhibitor revenue committed and visible in 2024, and strong events rebooking into 2025, the company said.

 

UK housebuilder Berkeley lifted its earnings outlook by 5% for the current financial year arguing that the current market outlook was improving with inflation falling and a cut in interest rates expected later in the year. Berkeley, which focuses on building high-end homes in London, said it expected 2025 pre-tax profit to be £525m as it reported an 8% fall in pre-tax profit for the year to April 30 to £557.3m, but above forecasts of £549.5m.

 

Precision instrument group Spectris warned that full-year profits will miss current market forecasts because of weaker-than-expected demand at its lab equipment division in the first half of the year.

 

J Sainsbury has agreed to sell its banking business to NatWest. The agreement could see NatWest take on around one million customer accounts, as well as £1.4bn of unsecured personal loans, £1.1bn of credit card balances and £2.6bn of customer deposits. The deal is expected to be completed in the first half of 2025.

 

Premier Inn owner Whitbread said trading had improved as the first quarter progressed and management remained “confident in the full-year outlook” after sales grew 1%. In the UK, sales growth was flat (0%) year-on-year in the UK for the 13 weeks to 30 May, although it did grow by 15% in Germany.

 

Equipment-hire group Ashtead reported lower revenue growth than expected and a drop in annual profit due to higher interest payments on debts. Rental revenue in the year ending 30 April grew 10%, below the lower bound of the 11-13% guidance range. Adjusted profit fell 2% to $2.2bn, as interest payments increased as borrowing costs rose and average debt levels increased. Management also predicted a slowdown in the current year, with guidance for group rental revenue growth of 5-8%, with US growth expected to slow to 4-7%.

 

Shell agreed to buy Singaporean liquefied natural gas (LNG) trader Pavilion Energy from investment group Temasek. Management is betting that LNG demand will grow in coming years as China and developing economies rely on it as a transition fuel, given it is comparatively cleaner than other fossil fuels.

 

Shares in Adidas fell sharply after the German sports kit manufacturer said it was investigating allegations of bribery in China. Adidas is reportedly looking into a whistleblower complaint by employees in China that accused senior staff of embezzling “millions of euro” through kickbacks from external suppliers commissioned by the company.

 

US EV maker Fisker filed for Chapter 11 protection from bankruptcy. The company seeks to sell its assets and restructure its debt, after succumbing to rapid cash burn to deliver its "Ocean" SUVs in the US and Europe. The hyper-competitive EV market has seen several companies – including Proterra, Lordstown and Electric Last Mile Solutions –file for bankruptcy protection in the past two years as they grappled with weakening demand, fundraising hurdles and operational challenges from global supply chain issues.

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