WeeklyWatch – Tech boom helps markets thrive despite geopolitical uncertainties

30th January 2024

Stock Take

Tech booms on AI hopes

It was a positive week for the S&P 500, which soared to a record high, propelled by the continuing boom in valuations for large technology companies. Against a backdrop of geopolitical risks and uncertainties, the bullish outlook on AI technology has kept momentum.

What’s more, a belief that US interest rates have peaked was bolstered by figures released on Friday, showing US core Personal Consumption Expenditures (PCE) inflation was 2.9% in December, down from 3.2% in November.

PCE inflation uses a different set of data compared to the more traditional Consumer Price Index (CPI) inflation measurement. Although CPI tends to be more widely reported, PCE is the main source used by the Federal Reserve in deciding interest rates.

Despite this, it’s too early to get too excited about a potential interest rate cut, says Mark Dowding, Chief Investment Officer at BlueBay:

“Overall, we think a robust economy, coupled with favourable disinflation trends, means the Federal Open Market Committee (FOMC) can afford to be patient and bide its time in the monetary loosening process, and we expect [FOMC Chair] Jerome Powell to take a similar tone.”

Geopolitics playing on investors’ minds

The tech boom is contrasted by the backdrop of uncertainties facing markets this year. These include the 2024 presidential election, where the stage is almost set for a rematch between Joe Biden and Donald Trump. While this will likely have the biggest impact on the US, it’s worth noting that there are several elections due this year, including in the UK, India and Russia.

Geopolitical tensions are also escalating, evident in the ongoing conflict in Ukraine, events in Israel and Gaza, and persistent Houthi attacks on international shipping. Additionally, an Iran-backed Iraqi militia has claimed credit for killing three US servicemen and injuring many more injured at a military outpost on the Iraq–Jordan border over the weekend.

Economic recovery continues in China

Shifting focus to Asia, in what has become a somewhat rare occurrence recently, Chinese equities concluded last week in positive territory.

The Shanghai Composite saw a 2.8% rise in local currency terms, while Hong Kong’s Hang Seng Index performed even better with a 4.2% increase. This positive momentum followed the People’s Bank of China (PBOC) announcing a cut in the amount of cash that domestic banks must hold in reserve. The intention is to stimulate increased lending to both businesses and consumers, thereby supporting the country’s economic recovery.

Despite the market’s positive response to the PBOC’s move, a Hong Kong court ordered the liquidation of the real estate giant Evergrande over the weekend. This development underscores the fragility of the current Chinese financial landscape.

Inflation falling in Europe?

Positive developments emerged in Europe as European Central Bank (ECB) President Christine Lagarde noted the process of bringing inflation down was working, although it remains premature to consider rate cuts for the time being.

Her optimistic assessment appeared to rule out an imminent cut to rates, reassuring markets. As a result, the MSCI Europe ex UK experienced a notable 3.2% increase over the week.

Lagarde is just over halfway through her eight-year term – it’s worth noting that over half of ECB staff said they felt she was performing poorly or very poorly in a poll of 1,159 members of staff at the central bank released last week.

Energy sector boosts UK

The FTSE 100 rose last week, in good news for investors in UK companies. Unfortunately, some of this was down to a case of ‘bad news being good news’. Continuing worries of wider instability in the Middle East and recent attacks by Houthi rebels in Yemen have helped lift oil prices; this in turn has helped the performance of energy companies, which make up a large sector in the FTSE 100.

Wealth Check

Being in the position to pay off your mortgage can feel like a gift to yourself – after all, it usually takes up to 25 years to pay it off and own your home outright. After decades of setting aside income and calculating interest rates and mortgage deals, you’re effectively gaining hundreds of pounds a month that would otherwise have been earmarked for your mortgage lender.

There’s no two ways about it – your financial landscape is changing. Now’s the natural time to focus on what you want from life going forward…and fit your finances to achieve that.

While temptations for spending may abound – and there’s certainly no harm in treating yourself – be mindful that this increased disposable income is also a golden opportunity to reset and review your retirement plans.

On the other hand, those few extra hundred pounds every month can seem quite a modest amount and can easily be ‘absorbed’ into the household budget. However, that extra money can be surprisingly powerful if saved or invested over a longer period.

Even if you’re not thinking of stopping work just yet, it’s never too early to start thinking about your retirement. If, for example, you pay off your mortgage at 57 and work until you’re 67, you could invest the money you save on your mortgage repayments over those ten years. You’ll reap the benefit of compounding – essentially ‘growth on top of growth’ – which means your investment has the potential to enjoy a bumper couple of years by the time you’re ready to retire.

And if, like many of us, you’re planning on enjoying a long, leisurely retirement, these additional funds may be crucial. What’s more, many of us want our money to help others as well as ourselves – hopefully leaving a legacy that might mean your own children can pay off their mortgage early too.

With careful planning and personal financial advice, your money can make all those goals a reality.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.

The Last Word

“We will carry on their commitment to fight terrorism. And have no doubt – we will hold all those responsible to account at a time and in a manner our choosing.”

– US President Joe Biden responds after several American servicemen were killed in Iraq.

BlueBay is a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP approved 29/01/2024