Winds of change, Percy Bysshe Shelley said...
The trumpet of a prophecy! O Wind, If Winter comes, can Spring be far behind?
My wife was surprised to see a video this week on her Instagram feed depicting Rahul Gandhi, the Leader of the Opposition in the Indian Parliament, in a positive light. This marked a stark contrast to his previous portrayal as 'Pappu' (an imbecile) in the past decade during which Prime Minister Modi’s political star had been on the ascendant.
Meanwhile, in the UK, the winds of change ushered the Labour Party back to power after 15 years. These shifts reminded me of Shelley's famous lines: 'The trumpet of a prophecy! O Wind, If Winter comes, can Spring be far behind?'
Indeed, these are not isolated incidents but indicators of change sweeping across the globe."
Japanese markets experienced a positive week, breaking from recent trends. This upturn may be attributed to the strengthening currency and the Topix index reaching its 1987 all-time high. The Topix is in line with modern indices and as a result, these developments could signal improved future returns.
US market performance was an outlier, with AI stocks cooling. Nvidia's 1.04% gain in the last 5 days was the lowest among the Mag 7. Excluding Tesla's 26% surge over the past 5 days, all the other 5 outperformed Nvidia.
Weak employment figures, such as downward revisions to previous ones, fueled hopes for earlier rate cuts, thus boosting returns this week. However, the weaker dollar offset these gains for international investors.
Sterling has strengthened significantly, becoming the best-performing G10 (a group of 10 developed countries) currency this year. The USD's weakness and GBP's strength turned a 1.18% S&P500 return for UK investors into -2.4%. This trend may continue as the UK is seen as a safe haven amid European turmoil. The Labour Party's large majority promises policy stability. With AI cooling, exceptional US equity returns for UK investors may be ending.
The Labour Party's election victory was the UK's top news. While the FTSE100 remained stable, the mid-cap index of UK-focused companies rose 2.7%, its best week since October/November 2023. Housebuilders contributed significantly to this performance.
UK equities continued attracting overseas investors. Cevian Capital, a European activist investor, acquired shares in the large corporate - Smith and Nephew - boosting its stock by 6%.
Crest Nicholson, another UK housebuilder, drew foreign interest with Jeff Fairburn, ex-CEO of Persimmon but now leading a US hedge fund backed housebuilder, challenging Bellway's bid.
Hard commodities performed well, with rising iron ore and copper prices. Blackrock World Mining investment trust (BRWM) and Glencore benefited, the latter receiving Canadian approval for Teck's coal asset acquisition, enabling a potential spinoff of its coal assets.
In news from India - Indian bonds were included in the key JP Morgan index this week, potentially bringing $10bn+ into India's fixed income markets. Indian markets appeared to be in a need for further liquidity - HDFC Bank's shrinking loan book impacted its share price by 3%, with results pending. Other tepid news: M&A deal value hit a low since 2017 in H1 2024 Link, and new project announcements in H2 2024 were the lowest on record. Link
Despite having a population exceeding 1 billion, India appears to be facing a shortage of skilled labor. The Chairman of L&T, a leading engineering firm, expressed concern over the severe lack of qualified workers, spanning both manual laborers and IT professionals Link
On a more positive note, the challenges faced by small-cap stocks appear to be receding. Kotak Mahindra, a prominent financial institution, has eased restrictions on large investments in one of its small-cap funds, signaling renewed confidence in this market segment. Link
In China, investors continue favoring non-Chinese assets. US ETFs traded at significant premiums to their fair value, resembling UK investment trusts rather than typical ETFs with minimal tracking errors. Investment managers like Invesco issued warnings to investors about this unusual situation. Link
Key events to watch:
French election outcome: A far-right loss could boost French and European equities.
China's 3rd plenum (July 15-18): New economic policies may catalyze Chinese equities.
US PCE release: This is the Fed’s favoured inflation metric. Investors expect further weakening, following recent employment figures.
US politics: Despite speculation, Biden reaffirms his candidacy.
US earnings season: Major banks such as JP Morgan Chase, Citibank and Wells Fargo report on July 12.
These events could significantly impact global markets and political landscapes.
As a final note, I attended another excellent Signet meeting this week. The wisdom shared by the nine other participants was invaluable. Such engagement is crucial for the health of financial markets, benefiting investors beyond just the industry. Consider joining these meetings, held at various times and locations. For details, check their website. link.