Monday Espresso Podcast - 8th July 2024

[00:00:00] Sheldon Macdonald: It's the 8th of July. It's been a long time since I've done one of these. Great to be back. It's been an exciting week, last week, and an exciting, well, start of the year. I think at this point in the year, halfway through the year, worthwhile just stopping for a second, taking stock of where we are right now, and looking back at the results.

[00:00:20] Sheldon Macdonald: Equities are back in favour. It's been a risk on market. If we look at the patchwork quilt that we speak of that, you know, that shows different asset classes and how they've performed from year to year to year. The top half of that at the moment is all equity markets led by US equities, as we know, are strongly led by the magnificent seven, but for all the top performing asset classes, all equities.

[00:00:41] Sheldon Macdonald: Now importantly, well ahead of cash. Obviously, cash is giving you a nice positive return at the moment, but equities doing better than that risk on assets in general. So high yield markets, despite some of the issues, infrastructure, commodities, all doing better than cash. What's lagging? What's bringing up the rear?

[00:00:59] Sheldon Macdonald: It's bond markets, bond markets have been declining this year, really in the face of those expectations for interest rate cuts, which have been declining in recent months. Those expectations declining, that is, even though we've had inflation still falling, it's not falling fast enough. It's still a bit sticky, central banks not really yet grasping the nettle, not really yet committing to interest rate cuts, certainly not the Fed and not yet here in the UK either.

[00:01:26] Sheldon Macdonald: On the other hand, in the face of those falling interest rate cut expectations, markets propped up by strong earnings. And as we've seen, as I mentioned, the magnificent seven in the US, those tech companies really driven by the massive wave of growth in artificial intelligence. The question will be, can they continue to deliver those earnings in the rest of the year at least, especially in the face of political uncertainty, which may create a bit of volatility in markets.

[00:01:51] Sheldon Macdonald: Will those earnings come through to give the market some direction? Now, speaking of political uncertainty, we had the elections in the UK last week. Well, it wasn't really uncertain. The result was it, Sarah?

[00:02:02] Sarah Todino: No. So, we had the elections in the UK, and throughout the six weeks since the election's been called, polls have been pointing towards Labour.

[00:02:10] Sarah Todino: The Conservatives have been at the helm for 14 years. Resulting in five prime ministers and of course, some political instability over the period. So the Labour Party in Keir Starmer has won 412 seats after needing 326 for a majority. And this is the most since Tony Blair's landslide victory in 1997.

[00:02:31] Sheldon Macdonald: Now, well, as you say, it was largely expected, the results that we got. Markets move because of surprises. No real surprise here and markets have pretty much taken it in their stride with nary a look back.

[00:02:43] Sarah Todino: Yeah, so from an asset perspective, given that both parties have similar fiscal and macro outcomes, there's limited implications for the gilt market, for the UK equity market, shorter term, share prices heavily exposed to the economy, could see a positive impact. Longer term, 80% of the FTSE 100 revenues are from overseas, so we wouldn't really expect to see an impact from the election there. But the FTSE 250 has more of a domestic focus, so may benefit if we see slightly higher fiscal spending by labour in the long term.

[00:03:18] Sarah Todino: And in portfolios, we have been adding down that market cap scale.

[00:03:22] Sheldon Macdonald: Yes. One of the potential outcomes from the strength of the Labour results is that they might expect to be able to be in power for some time, which might mean that they won't be in such a rush to enact any sort of dramatic policy shifts.

[00:03:35] Sheldon Macdonald: That's important again, from a stability perspective, markets won't be pushing any surprises through anytime soon. They'll have the time to be able to consider the potential implications of any policies that they want to bring through. So UK stability, elsewhere not so much. Certainly uncertainty on the political front in Europe and also in the US.

[00:03:56] Sheldon Macdonald: Given President Biden's push in the presidential debate, that at the margins seems to have increased the likelihood that we get a second term for Mr. Trump. Again, markets taking that in their stride, no real implications for markets yet, but obviously we keep monitoring in that situation. So, I mentioned earlier that markets might need to take some direction from earnings, and we do have the start of earnings season next week, so that's the second quarter earnings in the US.

[00:04:23] Sheldon Macdonald: As is traditional, some of the big banks will be delivering their earnings and we look forward to those. Elsewhere, of course, always data that comes through, the US inflation. We also have US PMIs, they're always a good one to watch, they give you the first indication of how the economy is doing. And of course, we've got Fed Chairman Powell providing testimony to Congress and that might give us some clues as to which way the Fed might be leaning in the next meeting.

[00:04:48] Sheldon Macdonald: As always, plenty going on, lots to talk about, lots to look forward to, and we look forward to speaking to you again next week.