David Hambidge, co-head of Multi Manager Funds, Premier Miton Investors provides a view of the potential for interest rate cuts, growth prospects for the US, UK and Japan and the asset performance the team is particularly enjoying at the moment.
While we maintain our view that interest rates in the US, UK and Eurozone have peaked, recent economic data and comments from central bankers suggest that markets got ahead of themselves in respect of both the timing and scale of cuts in 2024. However, this has not come as a surprise to us and vindicates our decision to maintain a decent allocation to alternative credit and floating rate debt. These assets have in the main produced excellent returns for our investors over the last twelve months and have also made a promising start to this year and we believe there is more to come.
We have long been of the view that central banks will be in no hurry to cut rates. Why? Because they have stated time and time again that inflation has to come down to target and have confidence that lower price rises are sustainable. At the moment there is no real evidence that this is happening. Yes, inflation has dropped substantially from its peak, but the last readings in the US, UK and Eurozone were all disappointing.
The other issue that central bankers have to deal with is the strength of the economy. This is particularly the case in the US where economic growth was particularly strong in the second half of last year, while the most recent jobs data was once again stronger than expected. Against this backdrop it is hardly surprising that Fed Chair Jerome Powell stated that a March rate cut was almost certainly off the table.
Here in the UK, it is a similar situation and while the economy is nothing like as strong as the US, growth has certainly been better (or less bad) than many forecast (including the Bank of England) a year or so back. In addition, our labour market has also been extremely robust as has been the growth in wages. With inflation having also ticked higher in the UK according to the latest data, this is not a recipe for rate cuts in the short term and bond markets have certainly taken this on board.
If history is any guide, one might expect the Fed to provide the lead in loosening monetary policy. However, my money is on the ECB although Christine Lagarde has also made it clear that any move remains data dependent.
In terms of the reaction of financial markets to the likely delay in rate cuts, I think it’s fair to describe this as mixed. Certainly, it has been a tough start to the year for the bond markets and interest rate sensitive assets like commercial property and infrastructure. However, let’s not forget that these areas performed very strongly in the latter part of 2023.
As far as equities are concerned, the US continues to lead the way albeit the market leadership seems to be getting narrower by the day. At the time of writing the S&P 500 Index is up nearly 6% in sterling terms while the Russell 2000 Index is down nearly 3%*!
Elsewhere, it has been a strong start to the year for Japanese equities which continue to benefit from structural reforms. However, weakness in China has had a negative impact on many Asian and Emerging Market funds.
Here in the UK, share prices are on balance slightly lower with mid cap stocks underperforming large cap. The UK stock market remains unloved, under owned and in our opinion undervalued and has a superior dividend yield to other major stock markets and in particular the US.
As far as the rest of this year is concerned, we remain reasonably constructive. We believe that the recent pull back in bond markets has provided the opportunity to add to the quality end of the market although we will continue to avoid vanilla high yield bond funds.
Meanwhile, despite a poor start to the year for many listed commercial property funds, we expect prices to recover during 2024 and are certainly encouraged by recent trading statements. In the meantime, we will continue to enjoy the high yields on offer for these assets as well as the dividend growth that many are providing.
*Source: FE Analytics, from 31.12.2023 to 07.02.2024, currency: Pounds Sterling.
This information should not be relied upon by retail clients or investment professionals. The views provided are those of the author at the time of writing and do not constitute advice. These views are subject to change and do not necessarily reflect the views of Premier Miton Investors. The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.
Reference to any particular investment does not constitute a recommendation to buy or sell the investment. Past performance is not a reliable indicator of future returns.
