WeeklyWatch – Inflation hits BoE target, but uncertainty lingers

25th June 2024

Stock Take

UK looking up…on the surface

Things looked up for the UK this week as stocks began to climb last week, and inflation returned to the Bank of England’s (BoE) target 2% rate target – the first time in nearly three years.

The May bulletin released by the Office for National Statistics (ONS) revealed that the 2% figure had come down from 2.3% in April and was significantly down from the 8.7% noted back in May 2023.

A monthly drop in food and non-alcoholic beverages contributed to falling inflation. Additionally, there was stabilisation in the prices of furniture and household goods.

Even though this news has been welcomed and is encouraging, policymakers are not ignorant of the prevailing issues that are causing concern. One such area of concern is services inflation, which is still above 5%, and the cost of eating out is also increasing at a worrying rate.

Inflation has been a consistent thorn in the government’s side as they prepare for the impending election. The Monetary Policy Committee (MPC) met in the previous week, and there was little surprise when, subsequently, the BoE made the decision to keep interests at 5.25%.

The Head of Economic Research at St James’s Place, Hetal Mehta, commented:

“Today’s meeting was – thanks to the snap election – a ‘get out of jail’ card for the BoE. With no speeches or public statements during this period, it made sense for the MPC members to keep votes unchanged and avoid a communication gap. Moreover, recent strong wage data and still hot services inflation was not consistent with the dovish direction of travel. With GDP showing positive momentum – notable that the BoE revised up its Q2 forecast – inflation pressures will be slow to fade. Despite this, there seem to be some MPC members who voted for no change that are close to voting for cuts. We think any interest rate cuts in the coming months should be seen as a policy normalisation rather than a marked easing cycle.”

When the MPC conducts their next meeting regarding interest rates, the UK will have fresh inflation and jobs data – and if the current polls are to be believed, a new government.

France on edge

It’s not just the Brits who’ll be heading down to the polling stations soon, the French are also facing a fast-approaching election, but with a great deal more uncertainty. The right-wing party, the National Rally, are still ahead in the polls, but newly formed left-wing alliances are starting to sway more voters. All these changes in momentum are leaving more centralist powers like President Macron’s party a little left behind…

Even the US politicians are battling it out

The growing trend of uncertainty also extends across the pond where President Joe Biden and former President Donald Trump have been engaging in political tussles in the run-up to the elections. However, the impact of their actions didn’t prevent the S&P 500 from crossing the 5,500 mark on Thursday last week, before having a slight retreat.

To give context to these figures, the S&P 500 only crossed the 5,000 market earlier in the year and was below 4,000 at the start of 2023, showcasing its impressive gains.

The AI revolution marches on

Artificial intelligence (AI) has been noted as one of the biggest driving forces for these gains, especially Nvidia, along with a handful of large companies that are leading and ‘winning’ the AI race. As a result, forecasters are wondering whether the market is currently in some kind of ‘AI bubble’.

The Portfolio Manager at Sands Capital, Thomas Trentman, said that AI could constitute a paradigm shift and added that we’re only at the start of its journey.

He went on to note:

“Looking forward – and again, based on what we’re deploying in the infrastructure phase… That’s a lot of exponential change. It’s hard for us to envision as humans, but that’s what unlocks all these use cases that are going to be the DoorDashes or the Ubers of the AI world. And that’s really exciting. But again, they haven’t deployed that yet. They aren’t here yet. And so that’s why we’re in the infrastructure phase, and that’s why money is going to be spent on this infrastructure phase, in order to produce these use cases.”

Sands Capital is a fund manager for St. James’s Place.

Wealth Check

Current UK stocks – financial opportunity or a freak fluctuation?

UK stock markets are currently at an interesting point and are creating some intriguing opportunities for value investors to explore.

Companies are being more heavily discounted than similar competitors in different global markets like the US. This discount has wavered between 15% and 25% on average, but currently, it stands at around 45%–50%. On one hand, this could be viewed as market pricing in a macroeconomic and structural headwind for the country, but on the other hand, it can also hint at a disconnect between perception and real value.

This existing disconnect creates a promising foundation for active, value-oriented fund managers. People in this position look ahead of short-term sentiment and make company evaluations that are based on solid data and thus often find opportunities that the market may have neglected.

Partner and Fund Manager of Redwheel Nick Purves noted:

“Neglect is good. We want neglect because it suggests there isn’t a fundamental problem with the business. When investor attitudes change, there’s the potential for a lot of these UK-listed businesses to do really well in share price terms.”

Does all this mean that UK companies will resurge?

There are indications that companies around the world are realising that good UK business can be bought for a fraction of what they’re worth. In the past decade alone, the UK has seen approximately 40 company takeovers every year. In 2023, these figures jumped to 64, and takeover numbers are growing across the course of 2024.

Boards of companies are also starting to become aware of the latent potential within UK businesses and have begun to buy back their own shares (a method that can provide value to shareholders). Share buybacks reduce the number of outstanding shares on the market, potentially increasing the value of the remaining shares and boosting earnings per share.

Within the MSCI UK Index, over half the companies have bought back shares in the last 12 months, which is the highest percentage of any market in the world – another strong sign that UK stocks may be undervalued.

Nick Purves continued, saying:

“UK companies have woken up to the fact they’re not going to wait around for other investors to come in and drive their shares up. They’re basically going to try to realise some of that value themselves.”

With consistent negative views surrounding UK equities, there remains a large gap between market price and intrinsic value, evident by the way that UK stocks trade at a noticeable discount. Our fund managers are positioned to find opportunities in this dislocation, identifying undervalued assets positioned for appreciation when market sentiment realigns with long-term potential. Ultimately, disciplined and patient investment strategies will continue to be essential for realising value opportunities within the UK market or elsewhere.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

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

The Last Word

“It’s absolutely heartbreaking. It was such a great game, we looked really strong. At the end we were dead on our feet.”

Lyndon Dykes, Scotland striker, speaking after a late goal from Hungary eliminated Scotland from Euro 2024.

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: 24/06/2024