Equities power ahead

Equities power ahead

The rally in global equities that started in late 2022 has gathered pace this year. A brighter economic outlook and the expectation of rate cuts to come have boosted equities around the world.

• On average global equity markets are up 9% this year. The US market has so far returned 14%, continuing a long trend of outperforming global markets. Among developed markets, the star performer has been Japan, long the Cinderella of the global equity market.

• After Japan’s stock market crash in 1990, Japanese equities declined for more than two decades. You get a sense of the deflationary pressures at work from the fact that Japanese residential land prices are less than one-third of the peak reached in 1990. But since the start of 2023, the Japanese equity market has shaken off its torpor and risen by 50%, faster than the US. Reforms to Japan’s system of corporate governance, decent growth and the weakening of deflationary pressures have all helped.

• In Europe, Spanish equities have outperformed, in part reflecting the resilience of the Spanish economy amid the euro area slowdown. Dutch equities have also done well, buoyed by a 38% increase in the value of technology stocks (ASML, which makes machines that produce semiconductors, is now by some margin the largest company by market value on the Dutch stock exchange. ASML has a market capitalisation which is roughly twenty times as much as that of the Dutch electronic and technology company Philips). French equities have lost 7% of their value since the breakthrough of the right-wing National Rally in the European elections earlier this month and president Macron’s announcement of parliamentary elections.

• Chinese equities did badly in 2023 on fears about weak growth and deflation but have risen by 9% this year. The Chinese market has been boosted by better-than-expected growth and a concerted attempt by the government to support equities through buying shares and restricting the number of new companies listing. Low valuations have also tempted foreign investors back into the Chinese market. Meanwhile Indian equities, whose valuations are roughly three times Chinese levels, have continued their winning streak, rising 19% this year.

• The rise in global equities this year has once again been driven by the technology sector. Investors are in love with tech stocks, particularly those, such as America’s Nvidia, Taiwan’s TSMC and ASML of the Netherlands, which are involved in semiconductors and generative AI. Banking stocks, especially in Europe, have also had a good year so far. Banks’ loan losses are running at low levels while improving economic activity and the likelihood that interest rates will stay higher for longer is positive for margins.

• At the opposite end of the spectrum sits commercial real estate. The sector has had a difficult few years. The pandemic, high interest rates and the shift to home working have weighed on the value of office property. Last week, the Bank of England warned of challenges for US commercial real estate borrowers who need to refinance debt.

• Equity investors remain bullish. According to a recent Bank of America survey, global fund managers are cutting holdings of cash to increase their exposure to riskier assets, including equities. Investors think that the global economy is on the mend and that the equity rally has further to run.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.9% at 8,164.

Economics

• US inflation dipped slightly to 2.6% in May, from 2.7% in April. Core inflation, which excludes fuel and food prices, also edged lower. Financial markets still anticipate that the Federal Reserve will cut interest rates by roughly 50bps by the end of the year
• UK tax authority HMRC estimates that the number of individuals paying the top income tax rate of 45% will exceed 1m this year having been at 520,000 in 2021–22, prior to the freeze in thresholds
• The Bank of England warned that around 30% of UK mortgagors are still likely to see mortgage costs rise by over £100 a month by the end of 2026
• The Bank also warned of global financial stability risks stemming from US commercial real estate and that “the widespread use of leverage within [private equity] firms and their portfolio companies makes them particularly exposed to tighter financing conditions” amid rising defaults on high-risk corporate loans
• The Bank for International Settlements warned that central banks should avoid cutting interest rates too soon as “a premature easing could reignite inflationary pressures and force a costly policy reversal – all the costlier because credibility would be undermined” 
• The UK Office for National Statistics revised up its estimate for already strong first quarter GDP growth from 0.6% to 0.7%
• The number of foreign direct investment projects in the UK fell to the second-lowest level in 12 years amid competition from generous investment incentives in the US and euro area
• Provisional additional tariffs of up to 38.1% on imports of Chinese electric vehicles into the EU are set to kick in on Thursday as talks continue
• Global mergers and acquisition activity rose to $1.5tn in the first half of this year, up 22% from the same period last year, according to data from the London Stock Exchange Group
• Sunny Verghese, chief executive of agriculture business Olam Agri, warned that countries’ attempts to safeguard domestic food supplies through trade restrictions were driving up food inflation

Business

• Troubled UK utility Thames Water warned that £19bn of its assets are in poor or failed condition and pose risks to public health, continuity of supply and the environment
• The US Supreme Court struck down a provision in the bankruptcy of Purdue Pharma, makers of opioid OxyContin, that shielded members of the founding Sackler family from future civil liability in return for a $6bn contribution
• Tata Steel threatened to close its two blast furnaces in Port Talbot, Wales, early if a planned indefinite strike beginning 8 July went ahead
• UK retailer Halfords warned of continuing weakness in the bicycle market as consumers put off discretionary purchases amid a still high cost of living
• German carmaker Volkswagen announced a $5bn investment in US electric vehicle manufacturer Rivian
• Carmaker Stellantis, owner of Vauxhall, Citroen and Peugeot, said it may cease production in the UK unless there is greater government support for purchasers of electric vehicles

Global and political developments

• Marine Le Pen’s far-right National Rally party is predicted to have won 34% of the vote in the first round of France’s snap parliamentary election, according to exit polls. The polls put the New Popular Front, a left-wing alliance, in second place with 28% of the vote and president Macron’s party on roughly 20%
• It is unclear whether the National Rally party will win an outright majority in the National Assembly in the second round of voting on 7 July, with some politicians calling for tactical voting to deny them
• Senior Democrats in the US called for president Joe Biden to abandon his re-election bid following an unconvincing debate performance against Donald Trump
• EU leaders voted to keep European Commission president Ursula von der Leyen in post for a second five-year term
• An average of UK polls conducted over the last week put the Conservatives on 20%, Labour on 40%, the Liberal Democrats on 12%, the SNP on 3% and Reform on 16%. If such a result is replicated on Thursday’s general election a Labour majority is all but assured
• Philippines president Ferdinand Marcos Jr. said that his country needed to “do more” than diplomatic protests following clashes with China in disputed waters in the South China Sea
• Wikileaks founder Julian Assange was released from prison in the UK and has returned to Australia following a plea deal with US authorities
• Outgoing Dutch prime minister Mark Rutte was formally confirmed to replace Jens Stoltenberg as secretary-general of NATO when Mr Stoltenberg stands down in October

And finally… scientists at Tokyo University have found a way to attach living skin to robots to produce more realistic facial expressions. The artificial skin is made in a laboratory, using living cells. The breakthrough may also be useful in research into skin ageing and cosmetics - Robotox