Hello, and welcome to your June investor update.
I’m James McManus, chief investment officer here at Nutmeg.
I’ll be answering questions on the global inflationary outlook, the latest economic
data from China, as well as giving an update on the performance of equity and bond markets
in May.
At a headline level, global equity markets appear to have moved little in May, but that
doesn’t tell the whole story given the disparity in performance between regions – while the
US and Japanese equity markets posted positive returns, UK, European and emerging markets
saw losses.
Now, the Bank of England, the US Federal Reserve, and the European Central Bank all increased
interest rates by a further +0.25% during the month, though markets remain fixated on
inflation numbers and signs of how effective these policy moves are in slowing price rises.
Government bond markets as always are particularly sensitive to increases in interest rates and
inflation data, with both UK and US ten-year bonds trading at higher yields during the
month, meaning their values also fell.
The ten-year UK gilt yield, the amount the UK government pays to borrow money for ten
years, has climbed above 4%, to levels we haven’t seen since last summer's UK Budget
drama and now higher than the US Treasury equivalent.
That suggests investors are particularly nervous about the Bank of England’s next move.
Central bank policymakers continue to hold sway over the mood of bond investors, but
it is the inflationary picture, and what that means for monetary policy in terms of the
direction of travel for interest rates, that remains top of the agenda.
In the UK, the Bank of England surprised investors in May by significantly revising up its economic
growth forecast, meaning it no longer expects the UK to enter into a recession this year.
GDP is now expected to be flat over the first half of this year, growing to around 0.9%
by the middle of 2024 and 0.7% by mid-2025.
The Bank's governor, Andrew Bailey, insisted in May that inflation has “turned the corner”,
despite huge rises in the price of food this year and broad inflation levels far above
the Bank’s target.
But against that better economic growth forecast, recent inflation data has continued to unnerve
bond market investors.
While headline CPI fell from 10.1% in March to 8.7% in April, UK core price inflation,
that’s removing from the effects from food and energy, climbed from 6.2% to 6.8%.
In a bid to slow price rises, markets now expect that the Bank of England will have
to raise its interest rates to between 5.25% to 5.5%, from the current level of 4.5%, before
the end of this year.
Mainland Europe may be slightly ahead of us on the curve, with the pace of inflation there
having slowed to a level not seen since before the conflict in Ukraine.
The Consumer Prices Index for the eurozone countries came in around 6.1% in May, easing
from 7% in April.
Core inflation in the eurozone slowed to 5.3% — a four-month low.
In the US, we are also seeing broad measures of inflation fall, CPI coming in at 4.9% in
April, with the annual CPI rate having now fallen consistently since hitting its 40-year
high at a level of 9.1% last June.
The chair of the Federal Reserve, Jerome Powell, has stressed that although the central bank
may soon begin to pause interest rate increases, if inflation data continues to show progress,
interest rates are likely to remain high as long as inflation remains at elevated levels.
It's important to remember than despite a fall in these figures, prices are still rising
at a pace above that of central banks’ targets.
Late last year, we spoke about how the easing of strict Covid restrictions had the potential
to boost the prospects for the Chinese economy, and emerging markets more broadly this year
given the important role that China plays in global and emerging market trade.
That economic reopening was always going to take time after three years of restrictions,
and so far this year we’ve seen some positive green shoots in some areas of the economy,
particularly in the services sector.
One way for investors to measure economic activity in a country is through what’s
called a purchasing managers’ index (or PMI), that collates the views of key business
leaders on how confident they are about growth.
Services PMI’s in China remain in expansion mode, as consumers slowly return to their
pre-lockdown consumption behaviours.
But the latest results from April and May from the Chinese PMI’s show a different
story for the manufacturing sector – there are signs there that Chinese factory activity
is actually contracting, against a slowing global trade environment.
That picture also reflects what we see in western economies, where manufacturing is
weak and services sectors strong; but unlike the US and UK, China’s dependence on exports
means this is a greater challenge for economic growth in China.
Where does that leave us?
Well, resilient western economies and falling global inflation should still help support
trade but we will be watching the Chinese economy very closely as the reopening progresses.
We still think the opportunity for a global economic boost from the region remains however,
with the IMF recently stating it expects Asia Pacific nations to contribute around 65% of
global economic growth in 2023.
As always, thanks for watching.
We will continue to keep you updated via regular blogs, the monthly investor update, as well
as the view from the investment desk videos.
If you have any questions or suggestions for a topic you’d like us to discuss in next
month’s investor update, you can contact us via social media, email or in the comments
section below this video.