This month:
Expert investment views:
After years of low yields, a case is made for why ‘bonds are back’ as a source of diversification and return
One wealth manager warns that investors must search for the real value-add of AI to avoid disappointment
A cautiously positive note is sounded on the UK housing market and its trickle-down effect on the economy
Featuring this month’s experts:
1. Bonds are back
Insights from:
This year should see a weakening global economy with slower growth and moderating inflation, while remaining above central bank targets. The US is likely to decelerate, and we see a high probability of a shallow recession in the Eurozone and the UK.
With high interest rates feeding through and supply chains working better, inflation has steadily fallen over the past 12 months. However, as this process continues and further slows inflation, rate cuts in the West could come from mid-year.
The key question is not whether a slowdown or recession, depending on the region, will occur. Rather, it is to what extent that is expected by markets and, in turn, whether it is reflected in asset prices.
If an asset is attractively priced, then there’s an opportunity – as we see with high-quality bonds from government and corporate issuers. If an asset is overpriced based on the risk taken, it’s best to avoid, as is currently the case with riskier credit markets.
The key question is not whether a slowdown or recession, depending on the region, will occur. Rather, it is to what extent that is expected by markets and, in turn, whether it is reflected in asset prices
As with the other major Western central banks, the US Federal Reserve is at peak rates. To maintain downward pressure on inflation, we believe it will keep rates elevated for now before starting to reduce them over the next few months. Similarly, the European Central Bank and the Bank of England also look set to begin their rate-cutting cycle before long.
All this implies that, after years of low yields, bonds are finally returning to portfolios as a source of diversification and return. Now that interest rates have peaked, they are even more attractive. Quality bond yields tend to fall around peak rates (just before or at). This will push up the price of today’s higher yielding bonds.
In sum, we’ve recently increased our exposure to high-quality bonds as they provide a useful diversifier in the context of a weakening economy and at a time when most equity markets are either expensive or not cheap.
Daniele Antonucci
Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley)
2. Tougher times for Big Tech in 2024
Insights from:
The January 2024 earnings season had some surprises… in particular, there was a sign that the first stage of the artificial intelligence (AI) hype cycle is coming to an end.
Investors are demanding to see concrete plans that companies have to turn their AI ideas into actual growth. What does it mean for a turkey farm or a clothing supplier or a steel manufacturer to “include AI in their business”? It now seems that CEOs waving their hands and magically chanting “AI, AI, AI” isn’t good enough in a world where investors have other, safer homes for their money – cash accounts, bonds, etc.
And so we saw the first signs that investors are prepared to judge the big US tech companies a little more harshly than last year. Last year the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) enjoyed huge growth on the basis of the novelty and promise of AI. Whether it was for self-driving cars or a better chat-bot experience or simply selling the microchips required, there was a hook to hang an AI investment case on. That’s less true now.
When seven companies in the world are worth more than the UK, Japanese and French stock markets combined, there’s a LOT of room for concentrated disappointment
While Meta enjoyed strong earnings and a 20% share price boost with plans to grow augmented and virtual reality, Elon Musk’s claims that “[Tesla is] far ahead of any other company in the world in terms of AI inference efficiency” wasn’t enough to overcome a slowdown in production and missing revenue and profits expectations.
When seven companies in the world are worth more than the UK, Japanese and French stock markets combined, there’s a LOT of room for concentrated disappointment. It’s time to acknowledge that there are thousands of other profitable, exciting businesses across the world worth investigating.
Ben Kumar
Head of Equity Strategy at 7IM
Top Tip
Once again, our selected wealth management commentators for the month are treating us to insights on a very broad range of investment themes. As this Investment Bulletin illustrates, investors need to be on top of both individual stocks within the all-important technology sector and economic developments driven by interest rates, to name but two.
If you are thinking, ‘How can one person keep abreast of all of this?’ then you would be right, and that realisation is a key driver towards professional portfolio management. You may know one asset class or sector very well indeed, but can you say the same about all of those you may need exposure to? Why not explore having the professionals take the market monitoring strain? We can arrange no-obligation discussions with wealth managers who have all the expertise you need.
Lee Goggin
Co-Founder
3. UK housing and its trickle-down economic effect
Insights from:
So far, the BoE has kept interest rates unchanged, but expectations of rate cuts this year have driven mortgage rates lower. Mortgage rates, which rose sharply to above 6% in October 2022 under Liz Truss’s leadership, as well as in parts of 2023, have since fallen below 5% and are continuing to decline due to expected rate cuts.
As a result, house prices have seen a notable shift, halting their decline and showing signs of improvement. This positive shift in sentiment is evident in the latest data from Halifax and Nationwide, both of which closely monitor prices in the initial stages of the house-buying process. Their findings serve as reliable indicators for the overall trajectory of official house prices. Mortgage approval numbers are also ticking up, as financial conditions soften and cheaper mortgages become more available, spurring housing activity.
Why is this important? Following the swiftest rate hiking cycle in decades, market participants expected a sharp downturn in house prices in the UK. The job market remained buoyant, which meant transactions were subdued but most people were able to retain their houses. Now, because of rate cut expectations, this may well encourage more people into the property market, representing a good opportunity for first-time home buyers to get on the housing ladder. The material increase in rental costs has also made purchasing a home a more attractive proposition. As such, we could see a so-called soft-landing for the housing market.
The housing market is an important indicator for future economic activity. Lower mortgage rates alleviate pressure on disposable income and leads to an uptick in transactions. This then trickles through to other related sectors, which helps fuel growth
Rising housing activity will also have a positive trickle-down effect to other parts of the economy.
Moving house often involves the need for essentials such as moving supplies and transportation, as well as the possibility of needing to furnish and renovate a new home. Durable goods, expensive household furniture, and the construction industry are just some of the sectors likely to experience an uptick in activity. All this lifts growth and stimulates the overall economy. Additionally, lower interest rates and the opportunity to re-mortgage at more favourable rates will result in individuals having more disposable income over time. The BoE acknowledges this in its latest report, having revised its UK growth forecasts upwards to a cumulative 1% by 2026i.
It is important to stress this is not necessarily good news for all homeowners. Over 1 million UK households were due to reach the end of their fixed-rate terms in 2023ii and a further 1.5 million in 2024iii. The BoE forecast that for the average mortgage in 2023, monthly interest payments would increase by about £200 a month if their mortgage rates rose by 3%iv. This is typical for homeowners paying 1% to 2% on their fixed-rate mortgages, who are then forced to refinance with rates between 4% or 5%.
The housing market is an important indicator for future economic activity. Lower mortgage rates alleviate pressure on disposable income and leads to an uptick in transactions. This then trickles through to other related sectors, which helps fuel growth. Loosening financial conditions will help stimulate economic activity and should provide a welcome boost to the housing market. While interest rates remain historically high for the moment, one must remember it is always darkest before the dawn.
i Bank of England Monetary Policy Report, February 2024: https://www.bankofengland.co.uk/monetary-policy-report/2024/february-2024#report-february
ii Bank of England Monetary Policy Report, May 2023: https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2023/may/monetary-policy-report-may-2023.pdf
iii Bank of England Monetary Policy Report, May 2023: https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2023/may/monetary-policy-report-may-2023.pdf
iv Telegraph: https://www.telegraph.co.uk/money/property/mortgages/remortgaging-guide-interest-rates-calculator/
Jeremy Sterngold
Deputy Chief Investment Officer at LGT Wealth Management
Important information
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.
