Chief Investment Officer, Ian Hooper, provides the latest market insight:
We have seen some mixed performances from financial markets over the month of April. Starting with growth assets, the recent rally in markets has been concentrated around a basket of large technology stocks whist the rest of the market has moved sideways over the period.
The rally on Wall Street has seen US valuations up at the top end of their range, which is between 15 and 18 times expected earnings for the past year. This means the first quarter earnings season will be closely watched, and a host of big tech names will be reporting. Meta, Facebook and Instagram’s parent firm, has just reported a profit of $5.7bn (£4.6bn) for the first quarter of this year, beating expectations for a period in which many jobs were cut. Interestingly in the UK, profit warnings in the first quarter were at the highest rate at any time since before the Covid pandemic.
One of the key factors around corporate profitability is the direction of interest rates. The consensus is that the next round of central bank meetings in May will probably lead to one more quarter point hike in interest rates and that will signal the end of the tightening cycle. It’s worth remembering, the Federal Reserve has raised rates by nearly five percentage points since last year in an effort to control inflation.
This phase of tightening rates has showed in the latest the US GDP numbers released in April. It showed the economy expanded at an annualised rate of 1.1% in the first quarter of 2023. This was below expectations and was due to weakness in business investment and housing, both of which are heavily influenced by interest rates.
Turning to inflation, UK inflation was higher than expected this month, with the headline CPI number remaining in double digits at 10.1% year on year in March. This leaves concerns about how sticky inflation will be in the UK, particularly core inflation which excludes the more volatile food and energy prices.
Looking at factor performance through April, Small-Cap and Growth were the relative laggards. Over the month, Momentum was the best performer. Turning to defensive assets, UK government bond prices fell in April as worries over the global banking crisis had subsided over the month. The 10-year yield reflects that interest rates are still on the rise for now at least.
In summary, financial markets are likely to remain to trade in the near term with some volatility as they continue to look for signs that inflation is under control. We are at a peak of the interest rate cycle and companies can continue to operate profitability in this new era of higher interest rates.