Market Update – May 2024
May has been a significant month in UK politics and the economy. The next general election was announced, new inflation and GDP figures arrived (showing some encouraging signs), and stock markets set new records in both the UK and the USA. Meanwhile, commodity prices seem to be stabilising, and hopes are rising for interest rate cuts later in 2024.
The Implications of the UK Election
Prime Minister Sunak surprised many analysts on 22 May by announcing the UK’s next general election, confirmed for 4 July 2024. Parties have started campaigning, and voters are discussing how their finances may be affected after the ballots are counted.
One key question is whether taxes will change. Currently, the UK population faces its highest tax burden since World War II (36.3% of GDP). Labour has been quick to promise no rises to Income Tax or National Insurance (NI) if they gain power. Chancellor Jeremy Hunt, for the Conservatives, wants to cut NI even further.
Whoever wins power will likely inherit a difficult economic situation. The IFS has warned that the UK’s finances are “parlous” and will “hang over the [election] campaign like a dark cloud”. The national debt currently stands at 100% of GDP, and debt servicing costs are expected to reach £89.0 billion in 2024-25 (more than the UK defence budget).
Is There Finally Good News for Inflation?
The Government was given a boost by recent inflation figures, showing the Consumer Price Index (CPI) falling to 2.3% in the 12 months leading up to April 2024. This may partly explain the Prime Minister’s decision to call the election since GDP growth figures for Quarter 1 (2024) also saw an improvement at 0.6% (compared to 0.1% for 2023 as a whole).
The CPI figures show that the UK is now close to the Bank of England’s 2% inflation target. However, analysts are still pointing to issues “under the hood” in the economy.
Core inflation (which strips out food, energy, alcohol and tobacco from the CPI) stood at 4.2% in March 2024. Moreover, inflation for services (which comprises the bulk of UK employment and output) stood at 5.9% in the year to April 2024.
Naturally, consumers will be happy that prices are not rising as quickly as before. Yet the Bank has not responded yet with swift interest rate cuts. Markets expect a high likelihood of a rate cut in June 2024, possibly to 5% (from the present 5.25%).
Commodity prices have been a major source of cost-push inflation for the UK over the last three years. Encouragingly, prices seem to be stabilising in May 2024. However, the Bank will be watching carefully for signs of price volatility for wheat, natural gas, metals (e.g. copper) and other key commodities. Harsh weather and geopolitical tensions could be destabilising factors.
The UK Market
British stocks enjoyed a strong rally in May. Both the FTSE 100 and Morningstar UK index hit record highs, driven by a stronger economy, falling inflation and accelerating mergers and acquisitions (M&As).
Global sentiment might be shifting in favour of the UK after years of widespread neglect. This may be partly due to where we are in the economic cycle, with industrial and domestic cyclicals providing buoyancy to the whole UK market.
Rising optimism about domestic consumer confidence is also boosting investor sentiment. The IMF expects GDP growth to be 1.5% in 2025 as real household incomes improve (e.g. due to lower expected inflation).
However, investors should manage expectations and avoid the temptation to try to “time the UK market.” While the FTSE 100 is trading at record highs, more modestly sized companies are not matching this performance. At the time of writing, the FTSE 250, for instance, is 14% below its peak in September 2021.
The Global Outlook
The US stock market has performed strongly in May 2024. The NASDAQ closed at an all-time high of 17,000 on 29 May, taking a significant boost from gains by Nvidia (chip maker).
New US inflation figures are expected soon, and these are likely to influence the Federal Reserve (the “Fed”) regarding interest rate cuts.
Developments in the economy could have key implications for the US stock market. Notably, President Biden introduced a new set of tariffs in May 2024, targeted at China. These include a 100% duty on Chinese-made electric vehicles (EVs) and a 50% duty on solar cells.
Whilst the intention appears to be to protect US jobs (and raise political support as the 2024 Presidential Election approaches on 5 November), there are fears that this move could raise inflation as US consumers face higher prices.
European shares have enjoyed a record-breaking run in May 2024, partly due to falling inflation and less restrictive monetary policy. The European Central Bank (RCB) could even cut rates across the Eurozone before the Fed in the coming months.
The Asia Pacific region has seen impressive growth so far in 2024, fuelled by a 4.3% rise in industrial profits in China. A modest dip in Australian inflation is expected in the coming weeks, and India’s main stock indexes have recently hit intraday record highs. However, challenges remain, including recent volatility in the Japanese Yen and uncertainty over how Chinese trade may be affected by new US tariffs on Chinese exports.
Please don’t hesitate to contact a member of the team for more information on any of the topics covered.
