Brown Shipley & Co. Limited
Brown Shipley & Co. Limited
04/29/2024 | News release | Distributed by Public on 04/29/2024 03:28
Markets & Investment Update
This note contains an overview of our market views, what we are watching, and our portfolio strategy. These developments may not mean changes to your portfolio so please contact your Client Advisor for the latest update on your portfolio.
At a glance
Fewer interest rate cuts on the cards in the US
Thursday's US GDP growth print revealed more inflationary pressures in the first quarter than expected. As such, the market now only expects the US Federal Reserve (Fed) to cut interest rates once or twice, in September and/or December. Although the rise in prices was stronger than expected, this wasn't entirely a surprise given that we had three consecutive inflation numbers, from January to March, that exceeded expectations. The volatility in interest rate expectations is nothing new either. At the end of last year, markets were expecting six to seven rate cuts with inflation at the same level as currently - now it's only one-to-two cuts. We've been expecting this uneven inflation path. Our view is that the easing in inflation has been delayed, with inflation likely stabilising above the central bank's 2% target, as discussed in our 2024 investment outlook. Since then, though, we've revised our Fed view and expect the central bank to cut rates twice in 2024, acknowledging the strength of the economic and job data, plus the slower decline in inflation. It will likely take several softer inflation and job market (Friday) reports for the Fed, and markets, to have more certainty on the path to lower rates. Investors will dissect the tone of the Fed at this week's monetary policy meeting (Wednesday), where we expect the central bank to leave interest rates unchanged. In the meantime, government bond, but also equity, prices could remain volatile.
US growth slowed in the first quarter, but domestic demand and corporate earnings look stronger
The US economy continued to grow in Q1 2024, albeit at a slower rate than the consensus had expected (1.6% vs 2.5%). This was driven largely by a big swing in exports net of imports, which weighed on the overall growth number (the growth in imports was much stronger than export growth in Q1 this year). Overall, import growth looks robust, which underpins sustained domestic demand growth. The labour market is still strong and supports consumer spending, which will likely continue to do the heavy lifting for growth in the coming months. While the weaker-than-expected growth number and sticky inflation initially caused equity markets to fall, they quickly rebounded after strong earnings by tech giants Microsoft and Google. Both companies showed investors that significant investment in artificial intelligence (AI) can pay off with rising revenue, allaying concerns raised by Meta, which said its expensive foray into AI was not immediately paying off. The S&P 500 and Nasdaq Composite equity indices ended last week 2.6 and 4% higher, bolstered by these earnings and a still robust underlying domestic spending narrative.
The Eurozone (and UK) economy gets better and interest rates are likely to come down
The April data show that the Eurozone economy is gearing up for an acceleration after 18 months of broad stagnation. Like in the US, the services sector is playing the main role in leading this tentative recovery. But, unlike in the US, where manufacturing activity seems more resilient, the Eurozone manufacturing sector continues to be in recessionary conditions, although there are some signs of bottoming out. The ailing Chinese economy has weighed on export-dependent countries, such as Germany, which has somewhat offset the improvement in domestic real wages. This week, we expect GDP growth (out Tuesday) to confirm that the Eurozone economy has nearly stagnated in the first quarter. Unlike the Fed, we think the European Central Bank (ECB) will start cutting interest rates in June as inflation (Tuesday) is now lower than in the US. However, there are risks: if the Fed was to decide that it's not yet ready to cut this year, then the ECB (and the Bank of England) would likely cuts less than expected to prevent a depreciation of the euro (pound sterling), which would raise inflation again. Overall, the expectation of improving growth and incoming rates cuts in the Eurozone, and the UK too, have supported equities. The pan-European STOXX 600 rose 1.7% and the FTSE 100 reached a record high level of 8,140 (+3.1%).
How we're positioned in flagship portfolios
A well-diversified approach
We are staying balanced for equities and bonds, mirroring our long-term strategy. Recently, we brought our US equity exposure back to neutral, given the strength of the US economy, while keeping a lower Eurozone equity allocation and a higher allocation to smaller companies (global small-caps). We also own more high-quality European corporate bonds, and less government bonds and riskier credit.
Important Information
Information correct as of 29 April 2024.
This document is designed as marketing material. This document has been composed by Brown Shipley & Co Ltd ("Brown Shipley"). Brown Shipley is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales No. 398426. Registered Office: 2 Moorgate, London, EC2R 6AG.
This document is for information purposes only, does not constitute individual (investment or tax) advice and investment decisions must not be based merely on this document. Whenever this document mentions a product, service or advice, it should be considered only as an indication or summary and cannot be seen as complete or fully accurate. All (investment or tax) decisions based on this information are for your own expense and for your own risk. You should (have) assess(ed) whether the product or service is suitable for your situation. Brown Shipley and its employees cannot be held liable for any loss or damage arising out of the use of (any part of) this document.
The contents of this document are based on publicly available information and/or sources which we deem trustworthy. Although reasonable care has been employed to publish data and information as truthfully and correctly as possible, we cannot accept any liability for the contents of this document, as far as it is based on those sources.
Investing involves risks and the value of investments may go up or down. Past performance is no indication of future performance. Currency fluctuations may influence your returns.
The information included is subject to change and Brown Shipley has no obligation after the date of publication of the text to update or amend the information accordingly. Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it.
This is non-independent research and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
All copyrights and trademarks regarding this document are held by Brown Shipley, unless expressly stated otherwise. You are not allowed to copy, duplicate in any form or redistribute or use in any way the contents of this document, completely or partially, without the prior explicit and written approval of Brown Shipley. Notwithstanding anything herein to the contrary, and except as required to enable compliance with applicable securities law. See the privacy notice on our website for how your personal data is used: https://brownshipley.com/en-gb/privacy-and-cookie-policy
© Brown Shipley 2024
At a glance
Fewer interest rate cuts on the cards in the US
Thursday's US GDP growth print revealed more inflationary pressures in the first quarter than expected. As such, the market now only expects the US Federal Reserve (Fed) to cut interest rates once or twice, in September and/or December. Although the rise in prices was stronger than expected, this wasn't entirely a surprise given that we had three consecutive inflation numbers, from January to March, that exceeded expectations. The volatility in interest rate expectations is nothing new either. At the end of last year, markets were expecting six to seven rate cuts with inflation at the same level as currently - now it's only one-to-two cuts. We've been expecting this uneven inflation path. Our view is that the easing in inflation has been delayed, with inflation likely stabilising above the central bank's 2% target, as discussed in our 2024 investment outlook. Since then, though, we've revised our Fed view and expect the central bank to cut rates twice in 2024, acknowledging the strength of the economic and job data, plus the slower decline in inflation. It will likely take several softer inflation and job market (Friday) reports for the Fed, and markets, to have more certainty on the path to lower rates. Investors will dissect the tone of the Fed at this week's monetary policy meeting (Wednesday), where we expect the central bank to leave interest rates unchanged. In the meantime, government bond, but also equity, prices could remain volatile.
US growth slowed in the first quarter, but domestic demand and corporate earnings look stronger
The US economy continued to grow in Q1 2024, albeit at a slower rate than the consensus had expected (1.6% vs 2.5%). This was driven largely by a big swing in exports net of imports, which weighed on the overall growth number (the growth in imports was much stronger than export growth in Q1 this year). Overall, import growth looks robust, which underpins sustained domestic demand growth. The labour market is still strong and supports consumer spending, which will likely continue to do the heavy lifting for growth in the coming months. While the weaker-than-expected growth number and sticky inflation initially caused equity markets to fall, they quickly rebounded after strong earnings by tech giants Microsoft and Google. Both companies showed investors that significant investment in artificial intelligence (AI) can pay off with rising revenue, allaying concerns raised by Meta, which said its expensive foray into AI was not immediately paying off. The S&P 500 and Nasdaq Composite equity indices ended last week 2.6 and 4% higher, bolstered by these earnings and a still robust underlying domestic spending narrative.
The Eurozone (and UK) economy gets better and interest rates are likely to come down
The April data show that the Eurozone economy is gearing up for an acceleration after 18 months of broad stagnation. Like in the US, the services sector is playing the main role in leading this tentative recovery. But, unlike in the US, where manufacturing activity seems more resilient, the Eurozone manufacturing sector continues to be in recessionary conditions, although there are some signs of bottoming out. The ailing Chinese economy has weighed on export-dependent countries, such as Germany, which has somewhat offset the improvement in domestic real wages. This week, we expect GDP growth (out Tuesday) to confirm that the Eurozone economy has nearly stagnated in the first quarter. Unlike the Fed, we think the European Central Bank (ECB) will start cutting interest rates in June as inflation (Tuesday) is now lower than in the US. However, there are risks: if the Fed was to decide that it's not yet ready to cut this year, then the ECB (and the Bank of England) would likely cuts less than expected to prevent a depreciation of the euro (pound sterling), which would raise inflation again. Overall, the expectation of improving growth and incoming rates cuts in the Eurozone, and the UK too, have supported equities. The pan-European STOXX 600 rose 1.7% and the FTSE 100 reached a record high level of 8,140 (+3.1%).
How we're positioned in flagship portfolios
A well-diversified approach
We are staying balanced for equities and bonds, mirroring our long-term strategy. Recently, we brought our US equity exposure back to neutral, given the strength of the US economy, while keeping a lower Eurozone equity allocation and a higher allocation to smaller companies (global small-caps). We also own more high-quality European corporate bonds, and less government bonds and riskier credit.
Important Information
Information correct as of 29 April 2024.
This document is designed as marketing material. This document has been composed by Brown Shipley & Co Ltd ("Brown Shipley"). Brown Shipley is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales No. 398426. Registered Office: 2 Moorgate, London, EC2R 6AG.
This document is for information purposes only, does not constitute individual (investment or tax) advice and investment decisions must not be based merely on this document. Whenever this document mentions a product, service or advice, it should be considered only as an indication or summary and cannot be seen as complete or fully accurate. All (investment or tax) decisions based on this information are for your own expense and for your own risk. You should (have) assess(ed) whether the product or service is suitable for your situation. Brown Shipley and its employees cannot be held liable for any loss or damage arising out of the use of (any part of) this document.
The contents of this document are based on publicly available information and/or sources which we deem trustworthy. Although reasonable care has been employed to publish data and information as truthfully and correctly as possible, we cannot accept any liability for the contents of this document, as far as it is based on those sources.
Investing involves risks and the value of investments may go up or down. Past performance is no indication of future performance. Currency fluctuations may influence your returns.
The information included is subject to change and Brown Shipley has no obligation after the date of publication of the text to update or amend the information accordingly. Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it.
This is non-independent research and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
All copyrights and trademarks regarding this document are held by Brown Shipley, unless expressly stated otherwise. You are not allowed to copy, duplicate in any form or redistribute or use in any way the contents of this document, completely or partially, without the prior explicit and written approval of Brown Shipley. Notwithstanding anything herein to the contrary, and except as required to enable compliance with applicable securities law. See the privacy notice on our website for how your personal data is used: https://brownshipley.com/en-gb/privacy-and-cookie-policy
© Brown Shipley 2024