May 2024 Investment & Economic Update

London city view

Our latest monthly investment update for May 2024 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 8,145.75, up 213.77 points or 2.7% during the month.

Confidence Steady

UK business confidence remained steady, with firms hopeful for interest rate cuts from the Bank of England later this year.

The Lloyds business barometer recorded overall confidence at 42% for the third consecutive month, indicating sustained positivity in the British economy.

Economic optimism climbed to its highest level in over two years at 39%, while wage growth expectations pulled back for a second month, though still above the long-term average. Lloyds noted that GDP data for January and February appears to support this, suggesting early-year economic growth.

Concerns about supply chain disruptions have lessened compared to previous months, with interest rates, inflation, and energy prices emerging as more pressing issues.

When asked about their own trading prospects, businesses remained positive, though slightly less so than before. Over half (55%) of firms surveyed expected stronger output over the next 12 months, while 10% foresaw weaker activity, leading to a net balance drop of four points to 45%.

QE Programme Losses

The Bank of England’s quantitative easing programme, which began during the global financial crisis, has led to losses totalling £85bn, according to recent estimates.

The £895bn bond-buying scheme, carried out between 2009 and 2021, was intended to support the economy during downturns caused by the Lehman Brothers collapse and the COVID-19 pandemic. While the programme helped reduce the Treasury’s deficit until 2022, higher interest rates have since reversed that impact.

The Bank of England is currently in the process of offloading the bonds, though £704bn of gilts remain. It’s estimated that quantitative easing will incur losses of around £20bn annually until the early 2030s, which equates to about a third of the defence budget.

Stagflation Dismissed

Federal Reserve chairman Jerome Powell has stated that the US is not experiencing “stagflation” and continues to grow well despite persistent inflation.

On Wednesday night, Mr. Powell dismissed concerns about an economic trap of stagnant growth and rampant inflation, emphasising that the US economy is performing strongly and that inflation is on track to fall to the Fed’s 2% target.

He also expressed that it is “unlikely” the Fed would need to raise interest rates further to address inflation, sparking optimism that borrowing costs may have peaked and could soon decrease.

Bitcoin Drops

Bitcoin (BTC-USD) has fallen below $58,000 (£46,339) following a record $563m spot Bitcoin ETF sell-off on Wednesday. This reflects a trend seen throughout April, marking the first month of net outflows from spot Bitcoin ETFs since their launch on 11 January.

According to Farside Investors, the Fidelity Wise Origin Bitcoin Fund (FBTC) led the outflows with over $191m. Grayscale’s Bitcoin Trust ETF (GBTC) followed, with over $167m in outflows; ARK 21Shares Bitcoin ETF (ARKB) had more than $98m; and BlackRock’s iShares Bitcoin Trust (IBIT) experienced nearly $40m in outflows.

UK Growth Downgrade

According to the Organisation for Economic Cooperation and Development (OECD), the UK is expected to be the worst-performing economy in the G7 next year, as high interest rates and the lingering impact of last year’s inflation surge weigh heavily on growth.

In its assessment, the Paris-based thinktank downgraded its UK growth forecast for this year from 0.7% to 0.4%. It also projects the UK’s growth will fall to 1% in 2025, placing it at the bottom of the G7, just behind Germany at 1.1%. The US and Canada are expected to be the fastest growing G7 economies next year, both at 1.8%.

The OECD attributes Britain’s sluggish growth to persistent price increases in the services sector and a shortage of skilled staff, which could delay expected interest rate cuts. The Bank of England’s first interest rate cut from 5.25% is now expected to be delayed until the autumn due to fears of price growth rebounding.

This assessment contrasts with a more optimistic outlook for the global economy, which the OECD believes is gaining strength despite potential threats from conflicts in Ukraine and the Middle East.

Global Focus Shift

Wealth management firm Coutts, a part of NatWest, is shifting £2bn away from the UK equity market in favour of a more global approach. This move departs from its previous home bias.

Known for serving the royal family since the time of George IV, Coutts is restructuring the asset allocation of its six Personal Portfolio funds by cutting investments in UK stocks and UK investment-grade bonds. It is also adopting a new benchmark: the MSCI All Countries World Index ESG Screened Select Index.

The change aims to boost diversification and long-term returns, but it will reduce the weight of UK equities from 33% to just 2%. Consequently, Coutts plans to sell £1.96bn worth of UK equities, which makes up 0.08% of the overall UK market. Despite the small percentage, investment bank Peel Hunt has warned that this is “very material” in the context of UK outflows.

Clean Energy Lag

Despite significant advancements, the UK is lagging in clean energy development and needs to more than double its current deployment rate to meet its climate goals. The legally binding target of net zero by 2050 demands urgent acceleration in clean energy initiatives. Yet, a lukewarm policy environment threatens this progress.

Decarbonization has been sluggish over the past decade, partly due to political hurdles such as former Prime Minister David Cameron’s de facto ban on new onshore wind projects and current Prime Minister Rishi Sunak’s measures to protect motorists, which include delaying the ban on new gas and diesel vehicle sales, halting plans to prohibit gas and oil boilers in new builds, and stalling efforts to improve energy efficiency in existing properties.

AtkinsRealis estimates that an average of 15.5GW of clean energy per year is needed for the UK to meet its targets. “For context, the UK has never added more than 6.5GW of new low-carbon capacity in a single year,” Edie reports, noting that this record was set in 2017.

Market Data

£1 buys $1.2536 or €1.1686. Gold is $2,288.85 an ounce, and UK natural gas futures are 75.40p/therm, up from 68.16p/therm at the start of April. The UK 10-year gilt yield is 4.291%, up from 3.941% at the start 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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