Wesleyan’s Director of Investments, Martin Lawrence, talks about the continuing healthy gains seen in investment markets in May, why the UK’s early general election could benefit investors, and how our commercial property portfolio is supporting the NHS.
As our thoughts turn to warmer days ahead, the latest provisional figures from the Met Office show that May (and Spring overall) proved to be the warmest on record for the UK – albeit it was dull and wet for many.
In comparison, investment markets were themselves enjoying a warmer climate, as stock markets made further 'healthy' gains on those made earlier in the year - despite some shivers towards the end of the month.
This sunny disposition was also reflected in market indices in the UK and US, as they both experienced record-breaking highs during the month. In the UK, this was helped by an improving economy and a fall in inflation.
In the US, a further strengthening of its technology stocks, coupled with reassuring comments from Jerome Powell (Federal Reserve Chair), as he quickly quashed rumours that US interest rates may need to go up again, helped shares to continue moving higher.
In addition, weaker US job market data combined with more reassuring data on slower wage growth, also helped to ease concerns. However, the US has a potentially bigger concern - the longer its interest rates remain high (let alone go higher) the bigger its annual interest bill could be. The US government debt pile currently stands at more than $35 trillion, and rising!
The US is not alone though. Globally, government borrowing has been rising in recent years (and the UK is no exception). This is one of the reasons global bond markets have generally lagged behind stock markets in recent times.
Global elections, inflation, and market reactions
The global corporate results reporting season came to an end in May and investors’ attentions turned to the polls. India, for example, finished at the polls during the month with Prime Minister Narendra Modi hoping for a third win in-a-row at the country’s parliamentary elections.
Back in a wet and windy UK, Prime Minister, Rishi Sunak (minus his umbrella) took to his outdoor podium at No 10 to announce an early general election on 4 July – in a surprise move! Over in the States, the US also started gearing up for its presidential election - scheduled for 5 November.
Here in the UK, we're not expecting any major shifts in UK government policy (regardless of who triumphs on 4 July). Not least because the fiscal position (government revenue and expenditure) is already tight (note our reference to government debt earlier).
Any large unfunded tax cuts, additional spending on defence, schools or extra NHS funding may be popular with the electorate but could risk upsetting a still fragile bond market. Fresh in investors’ minds even today is the 2022 mini-budget debacle as the then-Chancellor Kwasi Kwarteng all but derailed bond markets with his September statement.
Onto UK inflation, where it fell to 2.3% in April (actually, slightly higher than we'd hoped) but there were no changes to UK interest rates in May (held steady at 5.25%). Interestingly, two members of the MPC (Monetary Policy Committee) did actually vote for a cut, as opposed to the previous meeting where there was only one.
Despite all the political noise happening across the globe, and at home, we are not anticipating any major disruption to investment markets in the coming months. There could even be some relief for UK investors due to the early general election - a quicker political result is helpful because we know that markets dislike uncertainty.
Future plans for our funds and how we’re supporting the NHS
Our expectation earlier in the year, that global interest rates had peaked, has led us towards buying longer-dated bonds in recent months - locking in those higher rates in order to help us generate good future returns for our customers.
For similar reasons, and as the outlook for the UK economy now appears somewhat brighter, we've been looking for additional commercial property opportunities of late to further enhance our commercial property portfolio (which makes up almost 10% of our flagship With Profits Fund).
As long-term investors, at the start of 2024, we laid out plans to acquire more than £100 million of commercial property over the course of the year, and this is progressing well.
As far as our existing portfolio is concerned, we have been working alongside the NHS – University Hospitals of North Midlands (UHNM) Trust – where a building we own at Hanley in Stoke-on-Trent, will be repositioned and transformed into a brand new £42.6 million NHS Community Diagnostic Centre (CDC). This is scheduled to open sometime in 2025, bringing an additional 15-year rental income for our portfolio.
This development is great news for the people of Stoke-on-Trent and the surrounding areas, and also great news for our customers invested in the Wesleyan With Profits Fund.