October 2023
INVESTMENT MARKET UPDATE
Welcome to our latest global investment market update
A warm welcome to our latest update. In this month’s edition we are taking a look at the global economy and what recent news means for investments. We are grateful to our friends at Charles Stanley for their input into this update.
Highlights at a glance
Equities fell last week as concerns about the heightening tensions in the Israel-Hamas war boosted the oil price and added to the growing list of geopolitical concerns.
The Biden administration unveiled plans to further reduce the type of microchips US companies can sell to China with the focus on artificial intelligence chips. The impact of these bans was seen this week in the third-quarter results from leading Dutch chip equipment maker, ASML. It issued a profit warning as it is unlikely to be allowed to sell its latest products into one of its largest markets. This followed pressure from Washington on the Dutch government.
Over last week, the blue-chip FTSE 100 index was down 2.1% by mid-session on Friday, with the more UK-focused FTSE 250 trading 1.9% lower.
As always, we hope you find the information both insightful and interesting. If you would like to discuss anything we talk about then please do not hesitate to get in touch.
ECONOMICS
The International Monetary Fund (IMF) and World Bank recently held their annual meeting. The two organisations reported the damage done to economies and markets by inflation, wars and trade disruption. They anticipated slower growth ahead with 2.9% for the world in 2024.
September’s UK inflation figures underscored the problems facing the Bank of England (BoE) in its task of getting inflation back to its 2% target. The UK consumer price index (CPI) was expected to fall to 6.6% from 6.7% in August but held steady at 6.7%. The “higher-for-longer” Federal Reserve mantra looks likely to be applicable on this side of the Atlantic too. Core inflation, which strips out more volatile food and energy prices, fell to 6.1% year-on-year last month, down from 6.2% in August. However, this was higher than expected. Food prices saw their first monthly fall in two years in September, but fuel prices rose sharply.
Average UK houses are stagnating, but the price to rent a home is soaring. UK house prices are rising at the slowest rate for this time of year since the 2008 financial crash, according to Rightmove. The average new asking price rose by 0.5% in the month to 7 October to £368,231, but it was the smallest post-summer bump since the 2008 financial crisis. House prices dropped by 0.8% in the 12 months to early October as higher mortgage rates caused lower activity. The number of agreed house sales fell by 17% annually compared with a year earlier. However, the September inflation figures, released this week, showed that rents rose 5.7% year-on-year – the fastest annual rate since records began seven years ago. Underscoring the different pressures in the purchase and rental sectors, housebuilder Bellway Homes said it expected completions to fall 31% in the current year, sending its shares lower.
Federal Reserve Chairman Jerome Powell paved the way for the central bank to keep interest rates unchanged at its November meeting. “Given the uncertainties and risks, and how far we have come, the committee is proceeding carefully,” Mr Powell said. “We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.”
Strong US economic data in the face of a large series of interest rate rises demonstrated why the Fed is guiding markets to the conclusion that US interest rates will be “higher for longer”. The US consumer continues to power its economy, with retail sales volumes rising 0.7% month-on-month in September, compared with economists’ expectations of 0.3%. US industrial production also beat expectations on the back of increased volume in manufacturing and mining. In September, total industrial output grew by 0.3% month-on-month compared with a consensus view for a marginal contraction of 0.1%.
Eurozone inflation fell to lowest level since October 2021 in September – 4.3% according to official figures from Eurostat. The annual rate was 5.2% in August. Core inflation, which excludes volatile fuel and food prices, fell more than analysts expected — to 4.5% from 5.3%. However, it’s still at more than twice the level of the European Central Bank’s target.
There was some good news from the Chinese economy after its headline growth rate came in better than expected, but the country’s stock market fell as geopolitical concerns, including the new restrictions on semiconductors announced by Washington, dominated.
Third-quarter gross domestic product (GDP) regained momentum, growing at an annual rate of 4.9% compared with a consensus view for a rise of 4.4%. Beijing has in recent months tried to stabilise the property and banking sectors and shore up support for the country’s stock market. However, Beijing still may not hit its target of 5% GDP growth as the property sector continues to unwind its substantial debts. China’s property investment in the first nine months of the year was down 9.1%, reflecting sector-wide debt defaults by developers and weak apartment sales. Indeed, Country Garden, China’s largest property developer by sales, reportedly missed its final deadline for an interest payment on a dollar bond, putting it at risk of default.
GEOPOLITICS
The US House of Representatives remained leaderless after Jim Jordan lost his second bid to be Speaker and a plan to empower an interim speaker collapsed. Without a Speaker, the lower chamber of Congress is unable to pass any bills or approve White House requests for emergency aid. That includes potential help for Israel amid its war with Hamas.
Intelligence chiefs from the “Five Eyes” alliance of the US, UK, Canada, Australia and New Zealand accused China of intellectual property theft and using artificial intelligence for hacking and spying against their nations. This followed a meeting with private companies in Silicon Valley. Christopher Wray, director of the Federal Bureau of Investigation (FBI) said the "unprecedented" joint call was meant to confront the "unprecedented threat" China poses to innovation across the world. China was accused of stealing corporate secrets in areas including quantum technology, robotics, biotechnology and artificial intelligence. Ken McCallum, the head of MI5, said that more than 20,000 people in the UK have now been approached covertly online by Chinese spies. Despite the unprecedented Five Eye move, it was also confirmed that China was planning to attend the UK’s summit on AI at Bletchley Park next month.
Prime minister Rishi Sunak wants to use the AI summit as an opportunity to gather global policymakers and tech executives to set out an international approach to governance of the fast-emerging technology. The invitation and its acceptance were confirmed by officials in London and Beijing.
CRYPTOCURRENCY
Cryptocurrencies now play an “endemic role” in organised crime, according to the Metropolitan Police, which has set up a dedicated team to combat growing illicit activity in the digital assets sector. “Crypto was once considered a niche within criminal enterprises, but there has been growing evidence that is no longer the case,” according to Detective Inspector Geoff Donoghue of the Met’s crypto investigation team, the Financial Times reported.
Nishad Singh, a former head of engineering at collapsed crypto exchange FTX, said he “learned of a hole” in the company’s finances in September 2022. Although he noticed around $8bn missing from the company, he still approved transactions that he “implicitly” knew had to have come from user deposits. Mr Singh was testifying at the trial of company founder Sam Bankman-Fried. Mr Singh has already pleaded guilty to charges filed against him.
COMPANY NEWS
Rentokil Initial saw its shares fall by almost a fifth after the company revealed it expects its biggest market, North America, to record full-year performance slightly below previous guidance due to softer consumer demand for its pest control and hygiene services. In 2022, the Rentokil bought US rival Terminix, propelling it to the leading pest control business in North America.
Shares in China’s largest electric vehicle maker BYD jumped after the major rival to Elon Musk’s Tesla forecasted strong growth in its third-quarter earnings, boosted by robust car sales and increased market share. Tesla’s third-quarter earnings was poorly received as price cuts caused the figures to come in below Wall Street expectations, sending its shares down by almost 10%
Shares in Just Eat soared after the online takeaway food group raised its core profit and cashflow guidance after returning to growth in Northern Europe, Britain and Ireland. However, some investors used the opportunity to take profits after a weak underperformance from companies across the global sector following the end of the COVID-19 pandemic online food ordering boom.
Third-quarter earnings from Netflix were well received after its crackdown on password sharing shows signs of working. The streaming service added 9 million subscribers in the third quarter — well above forecasts of around 6 million.
Goldman Sachs reported a 36% drop in third-quarter profits – its eighth consecutive quarter of falling earnings – as hit by losses following its pullback from retail banking and write-downs on its property investments.
Growth at BT Group has been pedestrian for some time following the commodification of telecom services, but it is now looking to the “Internet of Things” (IoT) to get profits back on track. Through its EE operation, the group will start selling kitchen appliances such as smart fridges, kettles and coffee machines in addition to products such as laptops, cameras and smart TVs that it already sells to tap into a more connected world.