April was a mild month in capital markets. While most developed world equity indices gained in sterling terms, the rises were very slight.
When including emerging markets, it was very close to flat at -0.2% in MSCI’s All-Country World index. Middling is not such a bad thing though, especially considering some of the positive returns in previous months. April’s sideways trading effectively meant that global equity investors held on to gains from earlier in the year, with global stocks gaining 5% in sterling terms year-to-date. Particular standouts year-to-date have been the NASDAQ Composite, climbing 12.1%, and Europe ex-UK rising 11.2%%. The table below shows British investors’ April returns across key regions and asset classes.
Asset class returns as at 30th April 2023
As you can see, on the month itself, the major standout was the UK. We are dealing with relatively small figures across the board, so it would be a stretch to call this a grand vote of investor confidence. But it is notable that gains were even among Britain’s large and small cap businesses, as well as some improvement in sterling-denominated corporate bonds. This suggests that sentiment is improving around the UK economy, after a prolonged period of pessimism. House prices also rose unexpectedly last month after an easing of borrowing costs, and consumer confidence figures were the highest in more than a year. We should not get ahead of ourselves in terms of Britain’s economic prospects, but these are undoubtedly encouraging signs.
Elsewhere, there was very little to note in terms of headline market moves. This itself is quite significant given the context, though. In March, the collapse of several regional US banks led to some panic among investors. With the underlying economy already weakening and central banks tightening policy aggressively, many were concerned about a potential financial crisis, bringing further falls in confidence and liquidity. Financial conditions certainly have tightened to some extent, with banks more cautious about lending to smaller businesses.
The relative calm of April assuaged some of the deeper fears, however. Global bond yields fell, albeit only slightly, while even corporate borrowing costs eased. Average market volatility was lower in April than in any month since 2021, and investor flows into fixed income bonds remained solid. Fears could well flare up again – evidenced by the recent bankruptcy of US retailer Bed Bath and Beyond and renewed pressure on smaller regional US banks – but the overall mood has been resilient. This is ultimately backed up by the belief that central banks will finally loosen their grips this year, motivated by a decline in inflation rather than financial instability.
Growth indicators are still surprisingly strong, relative to weakened expectations. Last month saw the start of an important corporate earnings season, with companies revealing their results for the first three months of the year. There were positive surprises for the first time in a while, as well as upward revisions in future earnings forecasts. Despite the month’s fall in the NASDAQ, technology stock earnings fared well, though this was concentrated among the older and larger players rather than the small start-ups. Cost-cutting, which has been much publicised following some high-profile job losses, was a factor – but so too were better than expected revenues. This gave companies plenty of support, in terms of both equity and credit.
European businesses had some notable positive surprises, helping to back up the sense that Europe’s economy is over the worst of its problems. Investors see the European outlook as now even more favourable than the US, where labour markets are still too tight for the Federal Reserve’s comfort – despite it having nominally lower inflation numbers. Throughout April, the US dollar slid in value against the euro, continuing a trend from the previous month. In fact, the euro is now at its highest dollar value since April 2022, when the war in Ukraine was hammering the continent’s outlook. This helped support European stock valuations in sterling terms.
The only notable fall came from emerging market stocks, which slid -2.7% in sterling terms throughout April. This was largely to do with a mid-month sell-off for Chinese equities, as investors seemed to doubt the nation’s growth prospects. Previously, confidence in China’s post-pandemic bounce had been extremely high, with both domestic and foreign investors buying into Beijing’s promises of opening up, stimulus and economic boom.
The change of heart might have had something to do with the news that Guizhou, one of China’s poorest and most indebted regions, is close to bankruptcy, and could need significant help from the central government. This is less to do with Guizhou itself, which is a relatively small part of the country’s overall economy, but as a signal of the financial health of China’s regional governments. The province has since signed an agreement with China’s top state-owned distressed debt manager, a sign that Beijing wants to squash any problems before they begin.
Curiously, the stock market sell-off came immediately after the release of official GDP figures for the first quarter of the year. These figures were much more positive than expected, showing the world’s second largest economy expanded 4.5% in annualised terms. But investors fear that these results will remove the policy impetus behind China’s growth spurt – evidenced by a People’s Bank of China briefing which seemed to suggest interest rates would not be cut.
This backs up a trend of overseas investors losing their appetite for Chinese stocks. Inflows were huge at the start of the year, but there is an increasing belief that the party has already ended. We do not quite share this assessment. This particular Chinese growth spurt is certainly unlike the ones before it, with less of a focus on commodity-intensive building, but that does not mean it will be less powerful. Beijing is likely to continue its policy support, but with a focus on consumer demand. This seems to have been effective so far, and has even benefitted China’s major trading partners (such as European luxury goods makers).
China is perhaps the only major economy where growth looks unreservedly strong. Developed western markets continue to chug along, in some cases much slower than before. The key question going forward is whether this lethargy will be enough to justify a new interest rate cycle.
The text is taken from The Tatton Weekly and is provided by Tatton Investment Management. The information in this document does not constitute investment advice or a recommendation for any product and investment decisions should not be made on the basis of it.
Tatton is a trading style of Tatton Investment Management Limited, which is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 733471. Tatton Investment Management Limited is registered in England and Wales No. 08219008. Registered address: Paradigm House, Brooke Court, Wilmslow, Cheshire, SK9 3ND.