Logic Monday Espresso Podcast

Monday Espresso Podcast - 18th December 2023

[00:00:00] Nathan Sweeney: Good morning everybody, it is Monday, the 18th of December.

[00:00:04] Nathan Sweeney: Today, I'm joined by Ben Jones, our EM and Asia fund analyst. Good morning, Ben.

[00:00:09] Ben Jones: Morning, Nathan.

[00:00:10] Nathan Sweeney: We will get some insight from Ben in a second, firstly, let's quickly recap on what was driving markets last week, as always, there's quite a lot happening, so let's dive straight in.

[00:00:20] Nathan Sweeney: So the focus last week was definitely on central bankers, and they brought some Christmas cheer to markets last week, as they signaled the potential for interest rate cuts next year. This helped to extend the rally that we've seen in both equity and bond markets over the last two months.

[00:00:36] Nathan Sweeney: Interestingly, smaller companies enjoyed a particularly strong week, for example, smaller companies in the UK were up over 4% for the week.

[00:00:47] Nathan Sweeney: So Ben, let's take a look at inflation, as we know, we had some inflation figures out in the US last week. So what were they telling us?

[00:00:55] Ben Jones: Yes, so inflation has continued to soften, which is good news for consumers. So if you look at last week, the US annual inflation rate fell to 3.1% in November, so that was a drop from October's reading of 3.2%, this move down was largely driven by a drop in energy inflation.

[00:01:12] Ben Jones: If we look at core inflation, which excludes volatile food and energy sectors, That rose 0.3% on a monthly basis and annual core CPI inflation held steady at 4% as forecasted.

[00:01:24] Ben Jones: So, that's just the US, but inflation is falling everywhere and that's a good thing for markets.

[00:01:30] Nathan Sweeney: Okay, that really is good news and so, I suppose if inflation does come down, then central banks don't have to keep interest rates as high as they have been, do they?

[00:01:39] Ben Jones: No, they don't and the market got a pleasant surprise last week. So, first we had the Bank of England holding rates at 5.25% for the third meeting in a row, and separately, we also had the ECB keeping rates on hold at 4% following their meeting.

[00:01:54] Ben Jones: But that's all pretty unsurprising really because they're expected to keep rates on hold, I think the exciting news came from the US Central Bank meeting.

[00:02:02] Ben Jones: So the US fed held rates at 5.5 % for the third consecutive time, but the big news was that they signaled that 2024 could bring three interest rate cuts. So the Fed chair, Jerome Powell, gave an indication that we've likely seen the end of rising interest rates because inflation has fallen faster than expected.

[00:02:19] Nathan Sweeney: Okay, that really is positive news, so some good developments there. I suppose for our listeners, if you're wondering, you know, why that is important, then, you know, here's why.

[00:02:28] Nathan Sweeney: Everything we've heard to date is about keeping interest rates high to tackle inflation, now we have central bankers talking about cutting interest rates next year. So that's a real change in direction.

[00:02:39] Nathan Sweeney: So basically, central banks are signaling or saying, look, we think we have inflation under control and inflation is less of a problem, and therefore we're happy to reduce interest rates. So that is positive for both equity and bond markets and it's one of the reasons why we've seen such a strong rally over the course of the last seven weeks.

[00:02:58] Nathan Sweeney: But it's actually a problem for cash savers because Interest on accounts next year is likely to fall, and you know, so as those interest rate cuts start coming through, then that interest you get on cash looks less and less attractive.

[00:03:11] Nathan Sweeney: So Ben, I think one of the things that we picked up on was the fact that smaller companies are rallying, so what's behind that move?

[00:03:18] Ben Jones: Well, when interest rates fall, it becomes cheaper for companies to borrow money, and this can lead to increased investment in these companies, which can drive up the stock price.

[00:03:27] Ben Jones: Smaller companies are often more dependent on borrowing to finance their operations than larger companies, so they tend to benefit more from lower rates.

[00:03:35] Ben Jones: This is one of the reasons why we recently added smaller UK companies to our portfolios.

[00:03:39] Nathan Sweeney: Okay, that is interesting. So I think one of the things we've picked up on is the fact that, you know, we're starting to see a broadening out in the rally. So there's been a lot of talk about the fact that the market has been narrowly led, so what does that mean?

[00:03:53] Nathan Sweeney: Ultimately, we have a number of very big companies in the US who were responsible for a lot of the returns this year that we've seen in the US.

[00:04:02] Nathan Sweeney: But the other 493 companies in the market, they're starting to perform a lot better as we're seeing expectations of interest rates falling and it's great to see that broader participation because it means we don't have to rely on those big seven companies or the Magnificent seven as they've been known as to drive markets.

[00:04:22] Nathan Sweeney: We can actually rely on lots of other companies to do the heavy lifting and we're seeing signs of that Which is really good news.

[00:04:29] Nathan Sweeney: So thank you Ben, that was actually quite insightful and I'm sure our listeners will agree on that, but before we round up, I'll just take a quick look at the week ahead.

[00:04:38] Nathan Sweeney: So we do have inflation data out this week. We've got actually inflation figures in the UK. where it's expected to slow to 4.4%, we've also got inflation figures in Europe, where it's expected to fall to 2.4%.

[00:04:53] Nathan Sweeney: We have got a central bank meeting in Japan, where interest rates are expected to remain unchanged, but clearly, you know, there will be that focus on inflation. And what's happening with inflation, because if inflation does continue to come down, it does mean that those interest rate cuts will come through.

[00:05:08] Nathan Sweeney: Lastly, I think if anybody out there has any questions that they'd like to submit into the podcast, we'd really like to bring those up in the show. So if you do have any, please do submit them.

[00:05:17] Nathan Sweeney: And then lastly, I would just like to thank all of our listeners for tuning in this year. It's really been great to share our views with as many people as possible and we would just like to wish you a Merry Christmas from the whole team.

[00:05:30] Nathan Sweeney: The podcast will be back with you in the new year. Thank you.