Bonds had a storming end to 2023, a cold dose of reality since has seen US ten-year yields back up to 4.3% from 3.9% and UK ten-year up to 4% from 3.5% at the end of December.  As ever, this move has been felt most at the longer end of the bond markets with US and UK Treasuries down around 7.5%.  Central bank base rates are unchanged while markets play a game of guess when the first cut comes, now likely delayed again by some (relatively) poor US inflation figures.  We are rapidly approaching the longest ever period of inverted yield curve in America (thirty-year Treasury yield at 4.5%, Fed Funds at 5.5%), our view is that this corrects with a fall in short rates over the course of the year.

The leading equity markets did struggle a bit with these shifts in bond yields during January but have moved on again in February.  Once more, the ‘Magnificent Seven’ US leading tech stocks have led the move though performance of the seven companies has been distinctly mixed: Meta Platforms (Facebook) have gained 30% over the year to date and Amazon.com 11%, both after reporting good figures, while Tesla has slumped by 26% after poor fourth quarter results that highlighted a strategy of aggressive price cuts and poor guidance from Elon Musk.  Last year’s mooted ‘cage fight’ between Mark Zuckerburg and Elon Musk looks to be heading Zuckerburg’s way.  Notable also was a first dividend from Meta, quite a change of heart for a big tech.  Meanwhile, Nvidia Corp, saw a further astonishing gain of 45% taking it to a similar scale to Amazon and Alphabet and bigger than Meta.  

Japanese stocks continued with their strong run; the Topix Index is making new thirty-year highs (it has still not quite reached the dizzy – crazy - heights of December 1989) hoping for an imminent end to the ZIRP (zero interest rate policy).  But Chinese stocks have slipped again with the Hang Seng Index down another 7% this year and the Shanghai Composite by 4%, still dogged by falling growth rates and their property slump.  Attempts to spark some life into the Chinese economy have so far appeared anaemic at best.  The UK is another laggard with the FTSE All-Share 3% off, led by weakness in the miners, worrying about a slowing Chinese economy: Anglo American are down 12% and Glencore 18%.  But here the banks have also been a weak feature along with property and utility companies (those rising bond yields).

Japanese banks provided the only bright spot in that sector, Mitsubishi UFJ gaining 16% and Sumitomo Mitsui 12%, but in Europe Société Générale have fallen 10% as have ING Groep while in the US, Morgan Stanley was a weak feature, also down around 10%, after fourth quarter figures disappointed, James Gorman has stepped down as CEO and will only remain as Chairman until the end of the year.

The European and Japanese car manufacturers provided a contrast to Tesla as Volkswagen gained around 13% and Toyota Motor jumped 30%, their strategy of focusing on hybrid vehicles looks to be paying off.  The other impressive showing among the consumer discretionary companies was the luxury goods stocks, which had been under a cloud, worrying about Chinese spending.  LVMH Moët Hennessy Louis Vuitton reversed falls of around 12% in January to showing gains of around 9% over the year after reassuring figures, Kering (Gucci et al) also reversed early falls to show a gain, the best (as so often) was Hermès.

It is hard to get away from the feeling that some of the tech stocks are getting a bit carried away at this stage, though it is not clear what stops their momentum at the moment, maybe we will just continue to climb the ‘wall of worry’.  The majority of the earnings season is now done and corporate America has beaten expectations again, so analysts will now be revisiting their 2024 forecasts…  Without those Magnificent Seven leaders, stocks don’t appear too pricey…
 

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.