Tom Stevenson, investment director, Fidelity International comments on what’s driving investments this week.
After a month of falling share prices, investors have had an easier week. After four consecutive weeks of declines, global shares ended the third week of March week pretty much where they started it.
Standing further back, investors might wonder what all the fuss has been about. The MSCI World index is back where it stood six months ago, just before November’s US Presidential election.
Those six months have been a great advertisement for two things.
First, they have shown the risks of trying to time the market. When the narrative changes as dramatically and quickly as it has since the election, it is very easy to be expensively behind the curve.
Second, it has made the case for a well-diversified portfolio. That’s because this market correction has been all about the US. The rest of the world has done pretty well from Trump 2.0. The MSCI All Country World Index, excluding the US is close to its all-time high.
Europe and China lead the way
The European story has a couple of angles. First, there’s a new fiscal narrative that sees a newly unified region pulling together to face off its neighbour to the east and live without its newly unreliable ally across the Atlantic. Investors are excited about big defence and infrastructure spending plans, particularly in Germany.
Second, Europe has started from a very low base. When investors have been so determined to avoid a region completely, it does not take much of an improvement in sentiment to make a big difference to valuations and prices.
China is a similar story in some ways. This is a country that has been described as ‘uninvestable’ recently and again, it has not taken much in the way of stimulus promises – a modest property revival, confidence that China really can still compete with the US in tech, and especially AI, and more support from Beijing – to shift the dial for investors. The market’s price-earnings ratio has risen from 9 to 14, still not expensive but out of the bargain basement.
Patching up the public finances
Meanwhile, here in the UK, the focus is less on the markets and more on the economy and the public finances. Rachel Reeves, the Chancellor, will stand up on Wednesday to give one of her more difficult speeches. Her first Spring Statement is a follow up to last autumn’s unpopular tax-raising first Budget.
Six months ago, she left herself almost no wriggle room to hit her self-imposed fiscal rule limiting public spending to the amount the government raises from taxes by the 2029/30 tax year.
She had a £10bn buffer but sluggish growth, lower tax revenues and higher borrowing costs have wiped that out. The Office for Budget Responsibility will estimate this week that she is £4bn short of what she will need in four years’ time. To plug that gap and rebuild the cushion she will need to find £15bn. And because she has vowed not to raise taxes again, just half a year after the last tax bombshell, she will have to do that through spending cuts.
The government has already announced £5bn of welfare spending cuts, so Wednesday will see her outline the other £10bn. Some will come from redirecting overseas aid to capital spending on defence, which falls out of remit of the current spending rule. Better tax compliance will find another billion or so. But that will still leave around £7bn of cuts to Whitehall departments, including thousands of civil service job losses. It won’t be called austerity, but it will certainly feel like it.
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