Ellen Ward

The World In A Week - Record-Breaking Rotations

Written by Cormac Nevin

Equity markets were broadly down across the globe last week, with the MSCI All Country World Index of global shares retreating -1.6% in GBP. While each of the major markets we track were negative, there was a wide degree of dispersion in returns, with the Chinese market down -4.3%, as measured by the MSCI China, the US market down -1.4%, as measured by the S&P 500, and the Japanese market down -0.6%, as measured by the MSCI Japan, all in GBP terms.

Under the surface of the headline market return, we have witnessed an extraordinary change in the type of stocks which have been driving returns versus those which have been retreating. Market leadership has shifted very abruptly from mega-cap US technology giants (often referred to as the “magnificent seven”) which have dominated returns in recent years, to previously neglected small-cap names which tend to be more sensitive to interest rates and economic growth. Over the 10 days to 19^th July 2024, the Russell 2000 Index of smaller U.S. companies outperformed the NASDAQ 100 Index of large-cap tech titans by over +12%. This was the largest such movement between the two types of stocks we have seen since the bursting of the tech bubble in the early 2000s.

A number of plausible catalysts were given by market commentators for this rotation of market winners. Inflation data in the US and globally has continued to come in weaker than anticipated, while economic strength has also undershot expectations. This is viewed as giving central banks a green light to begin cutting interest rates, which is more beneficial for relatively highly indebted small-cap companies vs their cash-rich larger peers. The sharp increase in market probabilities of Donald Trump becoming the new US President is also another potential driver. He has floated the idea of taking US corporate tax rates down to 15%, which again would benefit more domestically-oriented small-caps vs larger companies who can use aggressive international tax planning to shift the burden overseas.

Whatever the future holds, the events of recent weeks have nicely illustrated the benefit of maintaining a highly diverse set of exposures to benefit from changes in leadership, rather than solely relying on index exposures which will naturally be concentrated on past winners.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.  

The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.   

The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.  

All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 22nd July 2024. 

 © 2024 YOU Asset Management. All rights reserved. 

by Ellen Ward

The World In A Week - Downside Surprise

Written by Ashwin Gurung

Downside surprise in US inflation sees US small-cap stocks outshine US large-cap stocks.

In June, US headline inflation, as measured by the Consumer Price Index (CPI), fell by -0.1% month-over-month, lower than the expected increase of +0.1%. While the rate of inflation has been gradually declining since the end of 2022, this marks the first instance of deflation, where prices fell, with the last decline occurring in May 2020. Similarly, core inflation, which excludes the most volatile components of the index such as food and energy costs, came in below expectations of +0.2%, rising by +0.1%.

In contrast, Friday’s Producer Price Index (PPI) data, which measures changes in prices received by producers, rose by +0.2% month-over-month in June, exceeding expectations of +0.1%. Despite this upside surprise, the market showed little reaction, likely due to its minimal impact alongside surprising deflation numbers. While a rising PPI alongside a falling CPI could mean businesses are absorbing costs, prolonged differences might signal potential future inflation if producer costs are eventually passed on to consumers. Having said that, it is important to look at other economic indicators to understand the broader picture.

Nonetheless, the US small-cap stocks cheered the downside surprise in US inflation, as the cooling increased expectations that the Fed might begin cutting interest rates in September. The Russell 2000 Index, which measures the performance of approximately 2000 of the smallest publicly traded companies in the Russell Index, gained +4.4% in GBP terms last week, significantly outperforming the tech-biased Nasdaq 100 which fell -1.8% in GBP terms over the week.

This is a significant shift from the past few years, during which small-cap stocks have struggled due to high interest rates and borrowing costs, while strong US equity index returns have mainly been driven by large AI-focused tech stocks. This rally suggests that returns may be broadening across different market caps, and a possible shift towards small-cap stocks could be on the horizon. Regardless of the market trends, we maintain diversification across various asset classes and market caps, enabling us to capture opportunities while managing risk effectively.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.  

The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.  

The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments. 

All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 15^th July 2024.

© 2024 YOU Asset Management. All rights reserved. 

by Ellen Ward

The World In A Week - Labour’s Landslide

Written by Dominic Williams

Labour wins big, as markets remain calm, but challenges lie on the road ahead.

The predictions of Labour’s landslide victory materialised in the early hours of Friday morning, with the party winning 412 seats out of 650 in the House of Commons. The victory did not come as a shock, given that polls in the run-up to the election had predicted this outcome. Although Labour’s national vote share has barely changed since the 2019 election, increased support from Scotland boosted their seat count, as Labour took seats from the SNP. This victory gives Labour a strong mandate to move forward with their pledges. It is expected that they will remain fiscally disciplined, initially adopting the Conservatives' fiscal rules to reduce debt in the medium term, with a focus on growth to boost GDP. There may be a need for the new government to borrow for some of their plans, however markets may be more favourable to them than to the Tories, given the expected increased stability of the government remaining intact.

The expected win has been welcomed by markets, with the more domestically focused FTSE 250 increasing by +0.9% over the day on Friday. The broader FTSE All Share index rounded off the week rising by +0.8%. Government borrowing costs did not move much on Friday after the results, with 10-year gilt yields slightly dropping from 4.18% to 4.14%. Early gains from the election result were seen in housebuilding stocks, as it is expected that Labour will use their strong political capital in their first few days in power to announce planning reforms. The first true test for the new Chancellor, Rachel Reeves, will be her first budget, which will be presented in early autumn. This will show markets where her commitments lie, whether there will be an increase in taxes not mentioned in the manifesto, and if there are plans for further government borrowing or public sector cuts.

France’s first round of parliamentary elections concluded with Marine Le Pen’s right-wing party, Rassemblement National (RN), declaring victory. This left the country’s left-wing and centrist parties rallying together to try to prevent RN from gaining power by withdrawing candidates to favour those more likely to succeed against their RN opponents in the second round of voting. Markets reacted positively to these moves, with the MSCI Europe ex UK index returning +0.8% over the week, in GBP terms. The tactic appears to have worked, although the situation has left no single party with a majority, resulting in a hung parliament. This result is expected to cause a period of uncertainty.

US stocks continued their positive streak, with the S&P 500 finishing the week up +0.7%, in GBP terms. On Friday, data showed that the US labour market was beginning to show signs of cooling. The unemployment rate rose to 4.1% in June, surprising market expectations which had forecast the rate to remain unchanged from the month before at 4%. The Federal Reserve (the Fed) will be monitoring these numbers closely. As inflation slows down and unemployment begins to rise, these trends pave the way for the Fed to begin cutting rates.

Japan’s corporate governance reforms are benefiting Japanese companies, as the Topix, a broad-based Japanese index, hit a record high on Thursday. The index peaked at 2898.47, finishing the week up +1.3%, in GBP terms. Additionally, investors are betting on the artificial intelligence boom and the benefits it may bring to high-end Japanese manufacturers.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.  

The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.  

The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.  

All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 7^th July 2024. 

© 2024 YOU Asset Management. All rights reserved. 

by Ellen Ward

The World In A Week - French Uncertainty vs US Optimism

Written by Dominic Williams

The snap election in France continues to cause fear in markets.

The week ended with modest gains for US stocks, with small caps performing best, as evidenced by the Russell 2000, an index composed of 2000 small cap companies, gaining +1.6%, in GBP terms. Additionally, the Technology sector continued to perform strongly, and growth stocks outperformed their value counterparts. The technology-heavy Nasdaq index finished the week up +0.2%.

The US Core Personal Consumption Expenditures Price Index (PCE Index) showed that prices paid by consumers, excluding food and energy, rose by +0.1% in May. This is a deceleration from April’s upwardly revised figure of +0.3%. The Core PCE is the Federal Reserve’s preferred measure of inflation, and this deceleration suggests a potential path towards an interest rate cut in September.

Political uncertainty persists in France following Emmanuel Macron's snap election call. Both the far-right and far-left are in the lead in the polls, proposing policies to reverse Macron’s fiscal reforms, some of which include populist ideas conflicting with EU fiscal rules. Despite Le Pen's party scaling back on costly proposals such as delaying the reversal of Macron’s pension reforms, many unfunded policies remain, raising concerns over fiscal responsibility. A parliament dominated by extreme parties could lead to political gridlock, intensifying uncertainty and instability. Markets responded negatively, with the MSCI Europe ex-UK falling by -0.7% in GBP terms over the week.

In Japan, markets rose over the week. The MSCI Japan Index rose by +0.5% in GBP terms. The continued weakness of the yen supported export-heavy industries. While there were expectations of official intervention to stabilise the yen, only verbal reassurances were provided. Finance Minister Shunichi Suzuki stated that authorities were “deeply concerned” about the impacts of “rapid and one-sided” currency movements. Suzuki affirmed the view that excessive volatility in the currency market is undesirable and that authorities would respond appropriately.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.  

The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.  

The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.  

All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 1^st July 2024.

© 2024 YOU Asset Management. All rights reserved.

by Ellen Ward

The World In A Week - A broken record on market concentration

Written by Cormac Nevin

While we run the risk of sounding like a broken record by highlighting the extreme concentration on display in U.S and Global Equity indices, we think that the consequences are too profound for investors to ignore.

Last week witnessed Nvidia, the current darling of U.S equity markets benefiting from the AI infrastructure build-out, surge to become the world’s most valuable listed company. Nvidia’s market capitalisation (the value of all its outstanding shares) briefly eclipsed that of Microsoft on Wednesday before retreating on Thursday. Since 31^st December 2022, Nvidia’s market cap has risen by $2.77 trillion (for context, the size of the UK economy is $2.74 trillion). The top five stocks in the S&P 500 Index by weight now constitute a record 27.1% of the Index as of May 2024. For context, this was 16% in August 2018 and only reached 18% at the height of the 2000s dot.com mania. Stock market indices are demonstrating radically reduced levels of diversification.

Such extraordinary share price moves are increasingly consequential in the context of markets now dominated by “passive” investors who only seek to replicate an index and will automatically buy more and more of a given stock as its market cap increases, creating a self-reinforcing dynamic which propels it higher. Over the last month, the largest purchasers of Nvidia stock have been index-tracking marketing participants in the form of Vanguard and BlackRock/iShares, while insiders such as the CEO, Jensen Huang, have been sellers.

The phenomenon of market capitalisation-weighted indices becoming dominated by fewer and fewer stocks is not just limited to the U.S markets. It can also be observed in global equity markets such as the MSCI World Index, which in turn have become dominated by the large U.S names which reduce geographic and sector diversification. For the year to date, the market cap-weighted MSCI World Index has outperformed its Equal Weighted equivalent by +12.9% vs +3.9%. As we have highlighted in the past, the MSCI World Momentum Index is now up a stunning +26.9% as the past winners keep winning!

Under these conditions of extreme concentration and momentum, we think it is exceptionally important to participate in the upside while maintaining our approach of diversification across geographies, across the market cap spectrum and with actively controlled allocations. These sorts of dynamics have a habit of reversing very violently after the last dollar of FOMO flows has been spent.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.  

The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.  

The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.  

All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 24^th June 2024. 

© 2024 YOU Asset Management. All rights reserved. 

by Ellen Ward

The World In A Week - Surprises on the Downside, Right Side, and Left Side

Written by Ilaria Massei

Last week was generally positive for Fixed Income and Equities in the US, with the Bloomberg U.S. Treasury 20+ Years Index delivering +3.4%, while the tech-heavy NASDAQ 100 Index returned +3.5%, in US dollar terms. This was partly due to the annual inflation rate, released last Wednesday, which surprised on the downside at 3.3%, raising hopes of an imminent interest rate cut from the Federal Reserve (Fed). The annual core inflation rate, which excludes food and energy prices, also surprised on the downside, easing to 3.4%. Although the Fed maintained the interest rate unchanged at this June’s meeting, comments from Fed President Jerome Powell have reiterated that a first cut in September remains possible, should data over the summer continue to moderate. However, the dot plot graphic, which presents Fed officials' expectations for interest rates, has shown that expectations have shifted from three rate cuts this year to just one.

In both Europe and the UK, electoral turmoil has been a drag last week on Equities with the MSCI Europe Ex-UK falling by -3.5% and the FTSE All Share returning -1.3%, in GBP terms. Last weekend’s EU elections signalled a shift in preferences towards right-wing parties, and a major political shock came from French President Emmanuel Macron, who decided to call a snap election three years earlier than expected, following his party's defeat by Le Pen’s National Rally.  This gamble was not well received by markets and French equities endured a particularly tough week.

In China, the annual inflation rate released last Wednesday came in below expectations at 0.3%, slightly below forecasts and the annual Producer Price Index, a leading indicator of inflation, printed at -1.4%. These numbers reiterate that consumer confidence is still weak and slow to recover, despite numerous measures from Beijing to support the economy and markets over the past year. The government has sent a clear signal of its aim to stabilise and support the property sector, a significant component of China’s economy. However, such initiatives can be challenging to implement and will likely take time to materialise.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.  

The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.  

The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.  

All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 17th June 2024. 

© 2024 YOU Asset Management. All rights reserved. 

by Ellen Ward