Investors flock to equities

03 July 2023

Equities have made strong gains since the start of the year. Growing hopes of a soft landing for the global economy have buoyed riskier, growth-dependent assets. Global equities markets have returned almost 13% since January.

This is a reversal of the dominant trend of 2022 in which equities were dragged lower by worries about energy prices, rising interest rates, inflation and recession. Consumer discretionary stocks, such as travel, leisure and entertainment, were especially hard hit and lost 30% of their value in 2022. Tech stocks fell by almost a quarter, hammered by the prospect of sharply higher interest rates. Investor funds flowed out of equities and into the dollar, cash deposits, commodities and commodity-related stocks.

Optimism has returned this year on lower energy prices and hopes that the US and Europe will avoid recession. Once again, technology stocks are the stars, with the tech giants largely making up last year’s losses. Nvidia, a maker of semiconductors, has seen its share price almost triple this year on expectations of a coming boom in artificial intelligence. Auto stocks have surged by 50% as last year’s semiconductor shortages, which hit car makers, have unwound.

Perhaps surprisingly, consumer-related stocks have also done well. Across the main markets, travel and leisure and consumer discretionary stocks have risen by more than 20% this year. Although consumer confidence collapsed in Europe and the US last year, it has since picked up. Better-off consumers, especially those with savings accumulated in the pandemic, have continued to spend, with stocks including Sony Group, American Airlines and MGM Resorts outperforming their broad markets. Shares in two of the major cruise lines, Royal Caribbean and Carnival, have doubled since January.

Bank stocks have performed well in most countries, though less so in the US where the crisis in regional banks in April and May dragged down the broad index. Despite a slowdown in M&A activity, which is weighing on investment banking activity, shares in UK and Continental European banks have rallied strongly since last autumn’s lows.

Greek and Japanese equities have outperformed this year. Greece has come a long way from the turmoil that followed the euro crisis. Fiscal and bureaucratic reform, good growth and the re-election of the centre-right New Democracy party have helped power a 32% rise in Greek equities this year. Japanese equities have outperformed all other major country markets since January, with the benchmark Nikkei 225 rising 28% to reach the highest levels since the equity boom of the early 1990s. Equities have been supported by the resilience of the Japanese economy and the hope that an era of disinflation is coming to an end.

Gains in emerging market equities have generally lagged those in richer economies. After a surge in value on the reopening of the Chinese economy towards the end of last year, Chinese equities have fallen back and have returned just 1.0% since January. On average emerging markets have returned 5% this year, well below the 15% seen in the US and the euro area.

The UK has all but missed out on the global equity rally, with the broad index almost flat so far this year. Stubborn inflation and the absence of technology stocks in the UK index haven’t helped while a heavy weighting in oil and resource stocks has knocked UK equity performance as commodity prices have fallen back. The pound has also strengthened against the dollar this year, reducing the sterling value of repatriated US corporate earnings. The bright spots in the UK market have been retail, up 16% year to date, and travel and leisure, up 24%, helped by a strong performance from stocks including EasyJet, Next, Whitbread (owners of Premier Inn) and Games Workshop.

2022 was a bad year for government bonds, with soaring inflation leading to a 26% decline in UK bond values, an 18% decline for euro area bonds and a 12% decline for US bonds. US and euro area bonds have risen by 2%–3% this year while UK government bonds have continued to underperform due to high inflation, falling 4% since January.

Equity markets are back in fashion, something that feels rather at odds with slower growth and high interest rates. Perhaps that misses the point. Growth may not be strong, but it has proved more resilient than expected - and that has proved enough to drive equities higher.

For the latest charts and data on health and economics, visit our Economics Monitor:
https://www2.deloitte.com/uk/en/pages/finance/articles/covid-19-economics-monitor.html

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.9% at 7,531.

Economics

Data for US durable goods orders, consumer confidence, house prices and house sales all came in stronger than expected – as did revised data for first-quarter GDP growth – pointing to continued momentum in the world’s largest economy
A range of activity data for Germany, which is in recession, came in weaker than similar numbers for the euro area as a whole
Euro area inflation fell more than expected, at 5.5% in the 12 months to June, down from 6.1% the previous month
Core inflation rose from 5.3% to 5.4% however, suggesting continued inflationary pressures
German inflation rose from 6.3% to 6.8% in June. Inflation in Belgium and Spain is just 1.6%, highlighting the challenge faced by the ECB in setting appropriate policies across euro area economies in different situations
Euro area unemployment remained unchanged at 6.5% in May but rose in Germany from 5.6% to 5.7%
Euro area consumer confidence improved in May despite a fall in Germany
The closely followed Ifo survey of businesses in Germany showed a sharp fall in firms’ sentiment and expectations, raising fears of a deeper German recession
The UK Office for National Statistics reported higher than expected levels of business investment in the UK in the first quarter, possibly as businesses rushed to take advantage of the super-deduction tax break before it ended
UK households withdrew a record £4.6bn from banks in May, the highest total since records began in 1997, as they sought higher returns elsewhere. Households may also be using savings to support spending
UK chancellor Jeremy Hunt accused banks of being too slow to pass on higher interest rates to savers
The UK Climate Change Committee warned that the UK was missing climate targets on almost every front. Outgoing chair Lord Deben said that: “We’ve slipped behind, and other people have moved ahead”
The number of taxpayers in the UK paying the higher rate of income tax has risen 40% in three years as tax thresholds have not risen with inflation and earnings
Official estimates of manufacturing activity in China showed a third month of contraction in June, adding to concerns about stalling Chinese momentum
The European Commission unveiled plans for a digital euro that will allow people to hold up to €3,000 in wallets that can be used to make anonymous offline payments

Business

The chief investment officer of PIMCO, the world’s largest active bond fund manager, said markets were too optimistic about the ability of central banks to steer economies clear of recession
M&A fees were down 35% to $12.8bn in the first half of the year, the weakest first half since 2014, according to data from Refinitiv
Goldman Sachs president John Waldron said that the bank was preparing for a tougher environment by cutting staff numbers
The FT reported that Tesla delivered a record 466,000 vehicles in the second quarter, beating forecasts and suggesting that price cuts earlier this year have paid off
The developer of the mobile game Pokemon Go, Niantic, said that it will cut a quarter of its workforce as the gaming industry faces a post-pandemic slowdown in demand
The UK government is planning to double the number of training places for doctors and nurses in England by 2031
The UK National Audit Office said that approximately 700,000 children were being taught in ageing or unsafe school buildings
The UK government is reportedly preparing contingency plans for the failure of utility Thames Water after the unexpected departure of its chief executive. There are also concerns over the financial health of other companies in the sector
The UK energy regulator Ofgem accused energy generators of “taking advantage” of balancing rules to make excessive profits and announced a crackdown
The Bank of America, the second-largest US bank, has over $100bn in unrealised losses on investments in bonds, according to data from the Federal Deposit Insurance Corporation. The bank performed well in recent stress tests and is not facing liquidity issues
Over 150 businesses in Europe criticised EU plans to regulate artificial intelligence saying that “the draft legislation would jeopardise Europe’s competitiveness and technological sovereignty without effectively tackling the challenges we are and will be facing”
HSBC announced that it would close its flagship Canary Wharf office to move to a smaller, more central location in London
UK retailer Boots announced that it would close 300 stores

Global and political developments

The Ukrainian counter-offensive has recaptured 300 square kilometres from Russia. Defence minister Oleksii Reznikov said that the “main event” is yet to come
Russian army general Sergei Surovikin, who had links to Wagner leader Yevgeny Prigozhin, has been detained in Russia as the fallout from the aborted Wagner mutiny continues, the FT reports
China sought to rally emerging countries against a proposal supported by richer economies for a levy on shipping emissions levy
Hundreds of protestors were arrested in France during riots that followed the killing of a teenager by police at a traffic stop
Poland charged a Russian ice-hockey player with spying
The Netherlands announced restrictions on the export of semiconductor manufacturing equipment on national security grounds. China criticised the move

And finally… a cleaner who allegedly turned off a freezer to stop it bleeping destroyed over 25 years of research and $1m in scientific samples – a chilling tale

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