Not much news is good news| Weekly Market Update

21 June, 2024

There doesn’t feel like there is much uncertainty hanging over markets right now. I haven’t mentioned the upcoming UK election in my weekly notes yet because a larger Labour majority looks like a fait accompli. The difference between a centre left Kier Starmer to a centre right Rishi Sunak isn’t – from an investment perspective at least – a whole lot. One place where a surprise election has created more uncertainty, though, is France. The possible outcomes range from a continuation of a Macron-friendly parliament to one controlled by the right wing parties (which would create headaches for the running of the EU, if nothing else). It is a 2 stage election so inherently harder to predict and this extra uncertainty has undoubtedly been visible in markets.

One way to see this is to look at the extra the French have to pay over the Germans to borrow money. You can see the election related spike (for 10 year government bonds) in the chart below. French equities have also lost over 6% in the last couple of weeks. But, there hasn’t been much spill over to broader markets so far and generally, the playbook for most political risk is for markets to calm down and revert more or less to where they were once the initial shock has passed through. The first round of the French elections is on 30th June and the second round on 7th July. The bond markets (or bond vigilantes as they are sometimes more dramatically known) effectively put an end to Liz Truss’s government. We shall see how much impact they have in France.


the bond vigilantes are back

Away from politics, it is also worth adding that the inflation picture is currently much calmer than where it was 18 months ago. UK CPI came in at its exact 2% target this morning and US inflation surprised on the downside in May. Central banks may not be back on target globally yet but they do look to be back in control. And many of the measures that are driving higher service sector inflation rates (such as rising car insurance) are by their nature backwards looking. The impact of car insurance on so-called US super-core inflation is shown in the chart below for example.


The contribution of (backwards looking)

I would also argue that wages look to be reacting to backwards looking headline inflation numbers rather than being part of the problem that is driving inflation higher. This means that even if Inflation does stay above target for a while longer, we don’t see any signs today of re-acceleration risk. Low uncertainty plus a reasonably stable economy is normally a pretty good recipe for equity markets, which has proved to be the case so far this year. Also, as I mentioned last week, less fear has given room for some of the more unloved parts of the equity market to start catching up with the leaders in the US.


Diversification has paid off so far this year


At IPS we are positioned for the worst of the inflation surge to be over (and the last couple of weeks have been a better data-wise for that view) but away from that it looks hard for asset allocators such as me to find an edge. This is not that unusual: patience and the ability to wait for opportunities to emerge is a virtue for all investors. I also take comfort from some data I saw this week that even the greatest tennis players of all time win less than 55% of their points on average (see the table below). It is probably true that a small edge, combined with plenty of discipline, is what you need to succeed at my game as well.


Even the best tennis players win less than 55%


Chris Brown, CIO

The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.



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