Wesleyan’s Director of Investments, Martin Lawrence, looks at the prospect of sustained lower inflation, and how February saw ‘stock market highs’ for some regions across the world.
In the month of February, a milestone none of us wished for was the second anniversary of Russia's invasion of Ukraine, with the war showing no signs of ending. Additionally, the Middle East conflict in Gaza persisted, while an undercurrent of civil unrest here in the UK dominated the headlines throughout the month.
Such uncertainty tends to feed continuously into financial markets, but investments can often rise ‘despite’ these events, as opposed to falling 'because’ of them. Political events do also bring another layer of ‘potential’ uncertainty for investment markets. This year, we will see many of the world’s populations heading to the polls. Notably, here in the UK (although a date has yet to be set) there is an expectation of a general election in the Autumn, and, over in the US, they are busy campaigning for a November presidential election.
Could ‘sustained lower inflation’ be on the horizon?
Regardless of the turmoil happening around the world, there are still things that we can be encouraged by - inflation being an obvious one. UK investors were relieved that inflation didn’t start rising again in January as the CPI (Consumer Price Index) remained at 4.0%.
The good news is that big monthly inflation increases that took place between February and May 2023, will soon start to drop out of the annual comparison for 2024 – mechanically bringing down headline inflation – so long as prices do not start to rise again sharply anytime soon.
Further reasons for optimism, which we can all relate to, is that Ofgem (the Office of Gas and Electricity Markets) announced at the end of February, that the Energy Price cap will fall in April this year. In addition, UK food price inflation continued to drift downwards, to a ‘more palatable’ 5% in February (according to the British Retail Consortium’s data).
Taking all that has been said here into consideration, we should hopefully, be able to look forward to lower UK inflation readings in the months ahead- closer to the 2% inflation target set by the government.
Interest rate cuts: good for some, but not for all
What will be more noticeable when we reach a lower inflation environment, is the impact it will have on savings rates for cash deposit accounts as central banks start to cut interest rates – likely to be later this year.
What could be bad news for savers, is potentially good news for investors as interest-rate sensitive stock markets, such as the UK, are likely to receive a boost. This is because for some investors ‘seeing really is believing.’ Lest we forget the erroneous ‘transitory inflation’ statements made by central banks back in 2021 (during the pandemic). At the time, they alluded to a ‘temporary situation’ when talking about inflation – leaving many investors scarred from the experience.
A global markets’ outlook
When investment markets rallied at the end of 2023, our funds were boosted, in particular, by the performance of our UK shares held within various funds (including our flagship With Profits Fund).
This gave us the opportunity to further diversify our funds into overseas investments, where appropriate, by selling some of those strongly performing UK shares. If the UK stock market outperforms again, as we expect it to, then we will use the opportunity to make further UK sales.
Looking globally, financial headlines towards the end of February have been reporting that stock markets in many regions have been hitting new ‘all-time highs’ – with UK shares being left out in the cold for now.
Japan has (notably) returned to stock market highs not reached since 1989 - showing that their ‘lost decade’ (regarding economic stagnation) lasted almost 30 years. Elsewhere, markets like Europe and the US have risen back to their, more recent, stock market peaks.
Taking a closer look at the US market, some shares have performed better than others. A popular topic for financial journalists in 2023, was writing about the "Magnificent 7" in reference to Apple, Amazon, Alphabet (Google‘s parent company), Meta (better known as Facebook), Microsoft, Nvidia (microchips) and Tesla.
In 2023, the US market produced a return around 20% for UK investors (adjusted for currency movements) – with the ‘super seven’ being solely responsible for around half of the entire gain. Without the rise in those shares, US stock market returns would have been much lower.
Within our funds, we do hold shares in some of these companies, though not all of them. In 2024, we’ve been closely monitoring their performance and have already witnessed a small change in direction for some of them.
Whilst four of them continue to be the ‘best performers’ in 2024 (notably Nvidia with very impressive results announced in February), two of them have actually been amongst the ‘worst performing’ US shares this year. Tesla, for example, fell nearly 20% in the first two months of this year, as competition in the electric car market has intensified.
Managed funds invested with a long-term view
At Wesleyan, we are careful not to get swept along in the ‘furore’ of popular short-term trends. Missing out on some (though not all) of those gains mentioned earlier, was a mild headwind for us.
What this does demonstrate, however, is the need to be cautious in our investment selections, which is why we have an in-house award-winning Investments Team providing due diligence on the companies we look to invest in.
We may not get it right every time, and there will be times when the investment tide is against us, but we firmly believe that this is how we can safely navigate complex and changeable markets over time.
Uncertainty is a part of investing, and is here to stay, but remaining invested for the long term can reap good rewards - as markets at ‘all-time highs’ amply demonstrate.