Global equities gained 1.4% in local currency terms last week, reversing the bulk of their decline the previous week. UK investors fared even better due to a further weakening in the pound with markets up 2.2% in sterling terms.
The pound is now back down to $1.25 from its September high of $1.34. However, the bulk of this retreat is down to renewed dollar strength as the pound recently touched €1.21 against a weak euro, its highest level since the start of 2022.
The dollar looks likely to remain well supported by firm US growth, the inflationary impact of Trump’s tariff proposals and the reduced prospects for US rate cuts. That said, much of the upward reappraisal of the path for US rates should now be behind us, limiting any further upward move in the currency.
US equities outperformed last week with a rise of 3.0% in sterling terms versus 1.1% elsewhere. The superior performance was driven in part by the latest business optimism numbers for November. These showed the US economy faring distinctly better than the UK and Eurozone economies and a widening of the gap. Unlike US confidence, which remained firmly in expansion mode, confidence in the Eurozone disappointed and fell into recession territory.
Sentiment in the UK was also more downbeat than expected, although not as weak as in the Eurozone. Rather than boosting confidence as had been the hope, the Budget seems to have dented it due to the large rise in employer national insurance contributions.
Adding to the gloom was a larger than expected fall in retail sales in October although a pick-up in consumer confidence in November suggests this weakness should prove short-lived. At least for consumers, the Budget was not as painful as had been feared.
The latest UK inflation numbers, however, were a bit worse than forecast. The headline rate rose to 2.3% from 1.7%, on the back of the 10% rise in the energy price cap, while the core rate edged up to 3.3% from 3.2%. These numbers reaffirmed expectations that the next rate cut will have to wait until February despite the recent slowdown in growth.
UK large cap stocks have been outperforming small cap just recently, with the FTSE 100 up 2.5% last week versus a 0.2% gain in small cap. This is partly a result of the fall in the pound which favours large cap as more of their earnings come from overseas and a lower pound boosts the value of these earnings in sterling terms.
It is also partly down to the increased gloom on the UK economy following the faster than expected recovery earlier in the year which fuelled a burst of small cap outperformance. Still, small cap remain slightly ahead of large cap year-to-date and we continue to favour this area, both because the current gloom should prove somewhat overdone and their valuations remain particularly cheap.
Returning to the US, the big event of the week for markets at least – even if not for the Earth with the COP 29 climate summit – had been billed as Nvidia’s results. In the event, they proved uneventful with its share price seeing a move of precisely 0.0% over the week. Revenues nearly doubled from a year ago while forward guidance was broadly in line with expectations.
Alphabet, however, was down 5% over the week, hit by news that the US Department of Justice was calling for it to divest its Chrome browser. Tesla, by contrast, gained another 10% and is now up as much as 45% since Trump’s victory and no longer the serial underperformer of the Magnificent Seven.
The other really big Trump winner has been bitcoin which also rose close to 10% last week and is up 45% since his victory. Just as single stocks aren’t natural subjects for a macro commentary, so too Bitcoin but this latest surge does seem to merit a mention.
Although Bitcoin is nowadays less of a niche investment than it once was, we still do not view it as an appropriate investment for a mainstream portfolio. The primary reason here is its extreme volatility with price moves being driven by pure speculation rather than any notion of underlying value. This is far from a forecast, but it should not be forgotten that its sharp moves higher in 2021 and 2022 were both followed by falls of around 40% over the space of a month or two.
Gold, by contrast, we do believe merits a place in an investment portfolio. Like Bitcoin, it too has no firm basis for valuing it. But crucially it is much less volatile and there is a much longer history to see how it behaves in different environments. It is also benefiting currently from a much more secure source of demand, namely the central banks. Gold was up 6% in sterling terms over the week and we intend to retain our allocation as it retains the attraction of being a potential source of return unrelated to both bonds and equities.
The coming week is relatively quiet on the data front with the US and Eurozone inflation numbers likely to be the highlights.
Rupert Thompson – Chief Economist