May 2023 Investment & Economic Update

Our latest monthly investment update for May 2023 examines how the global investment markets, economy, and commodities are performing.

The FTSE 100 index of leading UK company shares closed at the end of April at 7,831.58 points, up 211.15 points or 2.77% during the month.

The FTSE 100 enjoyed a good April, rising 3.1% and bringing its total gain for 2023 to 5.6%. This means the UK blue-chip index outperformed the US S&P 500 (+1.5%) for the month. However, the US index has risen by 8.6% in 2023, primarily driven by mega-tech stocks that have soared.

While the FTSE 100 rose overall in April, not all its members followed suit. With such a wide variety of stocks in the index, it is unsurprising that only 82 of its 100 shares saw gains this month. These gains ranged from 0.1% to 19.7%, with an average increase of 6.1%.

At the other end of the scale, 18 FTSE 100 losers saw declines ranging from 0.1% to 17.1%, with the average fall being 4%.

US economy

Economists are warning that the US economy is already in a recession following the publication of official figures revealing that economic activity slowed sharply at the beginning of the year. This is a blow to President Joe Biden's recently announced re-election campaign.

The US Bureau of Economic Analysis reported that the world's largest economy grew at an annualised pace of 1.1% in Q1 2023. This compares with growth of 2.6% in Q4 2022 and is below economists' expectations for 2% growth.

While the increase in gross domestic product (GDP) was driven by strong consumer spending, it also suggests that the Federal Reserve's nine consecutive interest rate rises are beginning to drag on growth.

President Biden has announced his intention to run for re-election in 2024, highlighting his efforts to revive the American economy after the pandemic. However, economists have cautioned that the boost to activity at the start of the year was driven by one-off factors, such as warmer weather and an 8.7% one-off cost of living adjustment to benefits.

They predict that a sharp slowdown in business activity in the coming months will hit the economy and that slower hiring will likely make people nervous and put a brake on spending.

Chinese manufacturing

Official data released at the end of April showed that China's manufacturing activity unexpectedly shrank in April, increasing pressure on policymakers seeking to boost an economy struggling for a post-COVID lift-off amid subdued global demand and persistent property weakness.

The official manufacturing purchasing managers' index (PMI) declined to 49.2 from 51.9 in March, according to data from the National Bureau of Statistics, falling below the 50-point mark that separates expansion and contraction in activity on a monthly basis. This was below the 51.4 forecast by economists in a Reuters poll and marked the first contraction since December.

While China's economy grew faster than expected in Q1, thanks to robust services consumption, factory output has lagged due to weak global growth.

The current improvement in demand was cautioned by the Politburo, a top decision-making body of the ruling Communist Party, which stressed that restoring and expanding demand is the key to a durable recovery. The body noted that the current improvement has weak momentum and insufficient demand.

Inflation concern

According to recent Reuters polls of economists, persistently high inflation is the biggest economic concern this year, even as most central banks are at or near the end-game for rate rises. Although most major economies are expected to escape an outright recession or get away with a shallow one, policymakers have their work cut out in taming inflation.

The survey, which covered 45 economies, upgraded median forecasts for a majority of them from the January poll, with global growth predicted to reach 2.5% for the year, up from 2.1% expected three months ago but still below the International Monetary Fund's 2.8% view.

The economists also upgraded their inflation outlook, with median forecasts raised for over two-thirds of the economies polled. They said they were bracing for inflation to exceed their predictions, not fall short of them.

In response to an additional question, more than three-quarters of the economists, 207 out of 268, said the bigger risk to their 2023 inflation view was for it to be higher than they expected, while just 61 thought it could be lower than forecast.

Swiss banking

The Swiss National Bank (SNB) is facing criticism for the concentration of power in the hands of its chairman, Thomas Jordan, and for lacking transparency.

The SNB played a significant role in the state-sponsored rescue of Credit Suisse, making 250 billion Swiss francs ($280 billion) of liquidity available to facilitate its takeover by UBS. Its monetary policy has led to a balance sheet of almost 900 billion Swiss francs, equivalent to 113% of Swiss economic output.

These developments have raised concerns about the concentration of power in the SNB's three-person governing board overseen by Jordan, which is smaller than the policy-making teams of other major central banks and retains a high level of discretion over its decision-making process.

Jordan has been in charge since 2012, and his leadership has seen the central bank upend currency markets by scrapping the Swiss franc's peg and introducing the world's lowest interest rates before joining other central banks in tightening policy as inflationary pressures grew.

BoJ review

The Bank of Japan (BOJ) has kept ultra-low interest rates steady and pledged to conduct a review of its past monetary policy. The move lays the groundwork for new Governor Kazuo Ueda to phase out his predecessor's massive stimulus programme gradually, but maintains a commitment to "patiently" keep policy accommodative.

The central bank removed a pledge from its guidance for interest rates to stay at "current or lower levels," which gives it more leeway for a future policy tweak.

Ueda's cautious start signals to markets that he is in no rush to change. He stressed the need to wait for more evidence to conclude whether inflation will sustainably achieve the BOJ's 2% target, despite trend inflation gradually heightening.

Bank bail out?

US regulators are seeking a buyer for First Republic Bank in a deal that could be announced imminently. The Federal Deposit Insurance Corporation (FDIC) asks six banks to bid for the struggling lender.

Last week, First Republic saw shares plummet after admitting customers had withdrawn $100bn in deposits in March. The demise of competitor, Silicon Valley Bank, was followed by another US lender, Signature Bank, leading to concerns of a wider banking crisis.

It is unknown which banks have been approached, although reports suggest JP Morgan Chase and Bank of America may be among them.

Debt time-bomb

Citizens Advice has raised concerns over a "debt time-bomb," saying increasing households face a "wild west" when seeking help. The charity reports assisting more people who lack sufficient income to cover essential expenses.

According to Director of Policy Matt Upton, 51% of those with debt issues seen by the charity now have negative budgets, compared with 36% before the pandemic, and there are no signs of the figure coming down. Upton warns that if the trend is mirrored across the UK's population, it will result in a debt crisis.

Upton added that clients' use of unsecured credit is at its highest level in four years.

Oil earnings

Oil prices mostly increased by more than 2% at the end of April due to positive earnings from energy firms and a decline in crude output in the US coupled with growing fuel demand.

Brent futures for June delivery rose by 1.5% to settle at $79.54 a barrel on its last day as the front-month, while the more actively traded July contract jumped 2.7% to settle at $80.33.

Meanwhile, US West Texas Intermediate (WTI) crude rose 2.7% to settle at $76.78.

Market data

On 30th April, £1 buys $1.2568 or €1.1290. Gold is $1,982.55 an ounce, and UK natural gas futures are 87.75p/therm, down from 114.77p/therm at the start of April. The UK 10-year gilt yield is 3.178%, down from 3.492% at the beginning of April.

Kellands will continue to keep you updated on market developments on a regular basis. However, if you have any questions or need some financial advice in the meantime, please do not hesitate to get in touch.

 

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