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9th June 2023

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From Steven Lloyd, Investment Director, Ascot Lloyd

Shakespeare’s May might have been “full of spirit”, but apart from US technology stocks, over the month investment markets were calm yet largely uninspiring.

Last month I suggested that resolution of the US debt ceiling was a potential issue for May; fortunately, politicians stopped playing ‘chicken’ and finally behaved like grown-ups, approving a budget that saw concessions from both Democrat and Republican sides. That has removed at least one negative influence on sentiment, and frankly much of what drives stock markets in the short-term is sentiment; fundamentals like ‘value’ tend to come to the fore in the longer-term. This is certainly evident in the recent behaviour of US equities.

The major US index of the largest 500 companies rose almost 2% in sterling terms, and for the year would have gained 12% so far were it not for a weaker dollar that has reduced that by around 4%. However, this performance of US equities is almost entirely attributable to the largest 10 of those 500 companies. For example, Nvidia Corporation, a manufacturer of specialised computer chips, saw its share price rise 40% over the month – over 30% in 3 days – and 170% higher than at the start of the year. This is an astonishing rise based on assumptions about the importance of its products for the rise of Artificial Intelligence (AI). The share price multiple is now 206-times current earnings, discounting decades of double-digit growth. For comparison, Apple is trading at 30 times earnings. Nvidia is now one of only four companies to hold a $1 trillion valuation tag. Suffice to say, this rapture with AI has echoes of the ‘dot com’ boom of the late 1990s, where wild predictions (in terms of time horizon) for the importance of the internet meant many stocks purporting to be beneficiaries ballooned in price, subsequently failed and a 3-year bear market ensued as prices returned to more realistic levels.

Elsewhere, the UK and European central banks raised rates to 4.5% and 3.25% respectively, and despite those rises being well-flagged, their equity markets responded accordingly, falling by a little over 4%. China weakened a little as industrial production data was disappointing at less than 6% year-on-year.

As for bonds, index-linked issues bore the brunt of falls yet again as real yields continue to climb. With a record issue of gilts due to reach the UK market this year (to fulfil Chancellor Jeremy Hunt’s economic growth plans), finding demand for over £1trn of new issues over the next 5 years (according to estimates from the Office of Budget Responsibility) will not be an easy task. Pension funds are less likely to buy as their funding positions are much healthier, and the Bank of England is now selling gilts, rather than mopping them up via Quantitative Easing.

One bright spot has been the performance of Japanese equities, in Yen terms up over 3% for the month and almost 19% year-to-date. However, the Yen’s relative weakness has depressed those gains for UK investors to around half. The Japanese market has surpassed its previous high, set an astonishing 33 years ago following the now infamous asset-price bubble of the 1980s. While the West is working hard to reduce inflation, Japan has had the opposite problem – deflation – for decades. Inflation there is now rising at its fastest rate for 40 years, reaching the heady heights of 3.5% - a level we’d presumably be delighted with. Furthermore, the Japanese central bank has kept its inflation rate below zero, and the resulting weak Yen means Japanese exports are cheaper. Finally, to help revitalise the economy the Tokyo Stock Exchange has been urging companies to boost their price-to-book (P/B) ratios, i.e., the firm’s share price relative to its net assets. Companies in the West tend to want to boost their share prices, e.g., by paying rising dividends and buying back shares, but this has not been the Japanese approach for decades; consequently, many listed companies have a P/B ratio of less than 1. This would normally represent a bargain but given this ratio has been stuck at that level for 20 years, investors have had little incentive to buy something they don’t believe can be sold at a higher price later. Now however, 2022 saw record dividend payouts, and share buybacks so far in 2023, with more companies yet to report.

Steven Lloyd

Investment Director

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