Wesleyan’s Director of Investments, Martin Lawrence shares his thoughts on which region will be the ‘first’ to cut interest rates, and his hopes for a UK stock market rally in the months ahead.
By March, it looked like the UK housing market was starting to bloom again, with Nationwide, Halifax and Rightmove all reporting year-on-year house price growth. Such price rises often trigger a ‘feel good factor’ which helps to generate housing market activity. It’s good news also for the wider economy as it often sends a ripple effect through other sectors such as a boost in sales for DIY stores, and increased demand for trades people, and so on.
With continuing wage growth, tax cuts (courtesy of the Government) and falls in inflation, there may be more money in people's pockets (for some at least) for those much-needed DIY jobs. Increased consumer spending could help to drag the UK out of its (mild) recessionary slumber. Official numbers (provisional readings) show that the UK economy was in a 'technical' recession at the end of 2023 (which is defined as two consecutive quarters of economic decline). However, slightly more encouraging data for the month of January showed that the economy grew 0.3% and could be a sign of better times ahead.
Inflation thaws, caution remains
As we leave winter behind, it was pleasing to see inflation ‘thawing’ further to (a more reasonable) 3.4% (for the month of February). In spite of this news, the Bank of England wasn’t quite feeling enough of a ‘glow’ and left interest rates unchanged in March at 5.25%. This marks the fifth meeting in a row that they have been held steady with the bank’s Monetary Policy Committee (MPC) voting by a majority of 8-1.
Whilst only one member voted for a cut, this was a different story to the previous month, when two members had actually voted for interest rates to go higher – all of which suggests a softening of the mood at the bank in favour of cuts in the months ahead.
That said, the bank’s Governor, Andrew Bailey remained in a cautious mood, and could not yet endorse the much anticipated two or three falls in rates for 2024, that financial markets predicted at New Year. He instead, alluded to ‘cuts being on the way’. Furthermore, the bank suggested that base rates would still be considered restrictive (high) even if borrowing costs were reduced – suggesting further interest rate cuts in the coming months.
Sadly, the conflict in the Middle East endures to the detriment of many thousands of people caught up in the fighting. One of the knock-on effects is that the world’s busiest shipping lane continues to be hampered by Houthi attacks in the Red Sea. This could have further implications for all of us as the flow of goods from Asia to Europe (such as electrical items and clothing) may take longer to reach their destinations.
This once again may push up prices in the shops and increase the cost of filling up your car (if the price of a barrel of oil rises again). This could potentially offset any good news on inflation and put further pressure on the pound in our pockets.
The race is on
Talking of the pound, it certainly reacted to the latest news on inflation, as it fell against the dollar in March, reflecting a change in opinion on when the UK will lower interest rates. But could the UK move first on rates before the US and the Eurozone? Possibly not. Although not technically an EU country, Switzerland announced an unexpected cut to its interest rates in March.
The European Central Bank, on the other hand, is highly likely to cut interest rates in early June (if economists’ predictions in a recent Reuters poll prove correct). The race could be a close one, and it looks like the UK could be edging closer than the US on this - as evidenced by US Federal Reserve Board of Governors member, Christopher Waller. He recently suggested that there was no rush (for the US) to cut interest rates – preferring instead to see a couple of months of better US inflation data before deciding.
A blessing and a curse, maybe? US economic data has shown a healthy picture in recent months - as evidenced by an upgrade to their fourth quarter GDP growth run-rate to 3.4%. But a stronger economy, coupled with slightly higher than expected inflation readings, will make it harder for the Federal Reserve to justify cutting interest rates any time soon.
Hopes of a UK stock market rally
The prospect of even lower UK inflation readings in the months ahead and possible cuts to interest rates, is just one of the reasons we’ve held on to more of the UK equity holdings within our funds. We anticipate good returns as investors’ moods start to change towards the UK stock market over the coming months.
The UK market has been somewhat lagging behind it peers of late given the strong rises seen in other markets since October 2023. We know that the US, Japan, and Europe, for example, have been recording ‘all- time’ market highs since the beginning of 2024, whilst the UK has not quite regained the peaks seen in early 2023.
We are hopeful, however, for a period of ‘catch up’ that will allow us to harvest good returns from those UK shares that we still hold, with a view to moving the proceeds into overseas markets (where appropriate).
We know that nothing is ever plain sailing and are mindful of the risks (including political) of investing overseas. Many countries across the world head into election season in the months ahead, which can impact stock markets.
In the US, we’ve seen Donald Trump see off Nikki Haley (in March) and Joe Biden win the Democratic Nomination to take on Mr Trump at November’s Presidential Election. The stage is set for an interesting re-run of the last US Presidential Election in 2020, where Biden triumphed over Trump. The outcome of the 2024 election will certainly have repercussions for the whole world if the next president imposes harsher trade tariffs.
Investment markets can be unpredictable and that is certain, but the recent highs we have seen so far this year, are very encouraging. They do bring home one fact: it is better to be ‘in the market’ than trying to ‘time the market’. The majority of our funds have recently benefitted from this ‘turn in the tide’ – which is good news for our funds and investors alike.