We are nearly halfway through 2023. The rate of inflation has indeed started to fall, but significantly less so than the central banks had predicted (given the highly aggressive monetary tightening policies in place since the start of the year).
Stubbornly high inflation persists worldwide, despite the weakening economic growth rate. In the US, the Federal Reserve Bank has implemented its fastest interest-rate hike campaign since the 1980s. And yet… its labour market remains tight. Indeed, recent data suggests that further hikes remain an option for bringing inflation nearer to the 2% target rate. That said, a pause in the current trajectory is not out of the question.
Elsewhere, Germany is now officially in recession (despite the smaller-than-feared energy shock). Annual Eurozone inflation, meanwhile, slowed to 6.1% in May – down from 7% in April. But ECB President Christine Lagarde has indicated that there is still no clear evidence that core inflation has peaked: further interest rate rises cannot be ruled out.
Both the European Central Bank and the Bank of England are therefore likely to raise interest rates again. Unfortunately, taming inflation comes at a cost: and that cost is growth. Andrew Bailey is being blamed for the havoc that this dearth of growth is wreaking across lower-earning households as the cost of living continues to rise.
The more welcome news, however, is that the Bank of England no longer expects the UK to enter a recession. The economy is even predicted to grow slightly, with trend growth rates returning towards the end of the year. Investors have welcomed the IMF's U-turn on its predictions for the UK. City forecasters, however, remain divided on the outlook, with many believing that everything hinges on what happens next with interest-rate hikes. The bond market, for example, is now pricing in a distressing peak of 5.5%, up from its current level of 4.5%.
The markets have remained surprisingly resilient in the face of this surfeit of gloomy economic news. In Japan, strong foreign investor interest has pushed the Japanese equity market to a fresh 33-year high: governance changes, strong domestic earnings and a weaker yen have all given bullish impetus to the market.
In the US, trouble – even economic collapse – was averted in the nick of time last week when President Biden managed to secure bipartisan support and sign the debt ceiling bill, raising the US borrowing limit. His success further boosted positive sentiment on the other side of the Atlantic.
The US stock market continues to thrill investors. It delivered another solid gain last week, with the S&P 500 Index hitting its highest intraday level since mid-August 2022. The tech-heavy NASDAQ Composite Index, meanwhile, notched up its six consecutive weekly gain, hitting its best level since mid-April 2022. There's been good news on the NASDAQ 100 Index as well: it has skyrocketed since the end of the bear market last October. It's worth remembering that the NASDAQ 100 Exchange Traded Fund plummeted by a staggering 37% during the nearly year-long bear market. And many high-quality tech stocks declined by 50 to 70% and more during the worst of the rout. Since then, excitement over AI and the huge potential it has to transform our lives have catalysed a rally the likes of which has not been seen since the beginning of this century.
The picture is not so rosy in China, though. Recent economic data suggests that its economic recovery is already weakening.
Cast your minds back to the start of the year, when the main themes in the tech sector were layoffs and cost cuts. Some of the biggest names in the industry were busy slashing workforces following a dismal 2022. Senior management boards across the sector were committed to “doing more with less” – a theme which resonates with Wall Street traders and analysts.
Now that these companies are finally in a position to reveal real-world applications for AI, investors have shifted their focus towards it. Following the release of ChatGPT last year, OpenAI has exploded onto the scene. And its biggest investor – Microsoft – is embedding the core technology in as many products as it can. Other MegaCap companies (Google and Meta...) are also switching their allegiance towards AI and away from the costly Metaverse.
Then there is chipmaker Nvidia. It is a leader in its field (chipsets for video games) and has seen its share price climb sharply over recent weeks based on the promise of innovations that are just around the corner. CEO Jensen Huang says Nvidia is seeing “surging demand” for its data centre products. And Internet companies are buying up GPU chips and using the processors to train and deploy generative AI applications like ChatGPT.
Investors have spent much of the past three years obsessing over the Fed, inflation and job numbers. Inflation rates may not be falling quite so quickly as central banks would like them to, but they are falling, and so we are nearing the end of this monetary tightening cycle. The result is that stock prices for many quality growth stocks are finally beginning to rally following last year's correction.
As far as the tech sector is concerned, it is entirely possible that this recent rally has got a little ahead of itself. Be sure to take advantage of any weaknesses in the future and buy great tech companies for the long term. We find ourselves at the cusp of a new AI-catalysed tech innovation wave that will create a plethora of successful US businesses. Indeed, Nvidia’s market capitalisation has risen to nearly one trillion dollars, making it the sixth-largest company in the world.
Wall Street is once again dominant, with US equity indices hitting a nine-month high. The FTSE 100 Index, meanwhile, has hit a two-month low, dragged down by the oil majors and miners as concerns over China's economic growth prospects start to mount. While Wall Street’s recent good health can mainly be attributed to the tech sector, the wider market has focused on growth stocks.
We remain optimistic regarding equity market ownership. That said, it is fair to say that in 2023, market leadership has been relatively narrow, with the US, Japan and Europe (excluding the UK) proving the most popular with investors. In other asset classes, commodities have fared poorly (the “China problem”, once again…), while bond markets continue to be buffeted by certainties over inflation and the future of interest-rate hikes.
