Last week was a quiet one for most markets. Global equities were little changed and are around 1-2% below their recent highs. The modest correction seen over the last couple of weeks is far from unexpected given the size of the gains leading up to it.
The period of consolidation could well last a while longer, not least because May and June are typically the weakest two months of the year. The pause is allowing equities to consolidate their gains and valuations to fall back somewhat from their heady levels.
The forward-looking global price/earnings (P/E) ratio has declined from highs in recent months of over 20x to 18.4x as earnings gains worked their magic. In a period of earnings growth, the forward-looking P/E ratio will naturally fall over time if stock prices stay the same.
Earnings are growing strongly at the moment and are beating expectations substantially. Consensus forecasts for global earnings next year have been revised up by 5% in recent weeks on the back of the latest reporting season.
P/E ratios remain high by historical standards but are not as stretched as they were. This is reassuring as bond yields are no longer as low, and provide as much support, as they did at the start of the year.
Even if mainstream assets had a quiet week, the same cannot be true for bitcoin which had a turbulent time. Violent intra-day moves left the cryptocurrency down some 30% over the week and 50% from its high in mid-April.
Elon Musk has contributed to the turbulence with his enthusiasm for bitcoin changing by the week, if not the day. However, it was the regulators who were mainly to blame for the plunge. The authorities in China warned against using bitcoin for payments and launched a crackdown on bitcoin mining. There was also tougher talk from the US.
We do not hold bitcoin, or any other cryptocurrency, in our client portfolios and have no intention of doing so for the foreseeable future. Their excessively high volatility rules them out for now, regardless of their longer-term potential.
By contrast, we do hold gold, which has perked up again having come under pressure earlier in the year. The gold price dipped below $1700 but is back up to $1880, although remains some way off last summer’s peak of $2050.
Gold has recently most obviously benefited from rising inflation worries and a weaker dollar but the slump in bitcoin cannot have done it any harm. Bitcoin has many claims to fame according to its enthusiasts but one is as a digital version of gold.
We view gold as one of our sources of protection against a major rise in inflation and/or market sell-off and so plan to retain our holding. Unlike bitcoin, whose usefulness has in many ways yet to be proven, gold has a long history to draw on.
That said, we believe the economic backdrop currently remains positive for risk assets and that equities still have some further upside. Certainly, last week’s crop of data showed the global economic recovery gathering momentum. Business confidence rose further in May in the US, UK and Eurozone and is now at very high levels in both the US and UK.
Consumer confidence in the UK has also now regained its pandemic losses. Importantly, individuals are putting their money where their mouth is. Retail sales surged 9.2% in April and are now as much as 10% above their pre-pandemic level. Job vacancies, led by a sharp rebound in catering and hospitality, are also now above their levels of early last year.
As is already being seen in the US, this rebound in activity will accompany a significant pick-up in pricing pressures. Indeed, UK inflation rose in April from 0.7% to 1.5%.
Crucially however, just as with the US Fed, the UK MPC is focused on the medium term outlook, rather than the coming short term surge in growth and inflation which it believes will be largely temporary. As in the US, while quantitative easing looks set to draw to a close rather earlier, interest rates look unlikely to be raised in the UK before 2023.
Rupert Thompson
Chief Investment Officer