With major economies in reasonable shape, James Klempster explains in this short video why markets will focus even more on earnings as we enter the autumn, which started with Nvidia results this week.
Hello, it's Friday 30th August. I thought we'd pause for a few moments and reflect on what's been going on in markets this week. As we're coming to the end of August, we're also rapidly approaching the end of summer, and indeed, we're two thirds of the way through 2024 as well.
A volatile summer
How has the summer been? Well, it has been volatile in many ways. We certainly had a surprise at the start of August. If you go back to the start of May and look at what major markets have done between the start of May and now, most of them are up around about middle single digits in sterling terms, which is a pretty solid result over the summer. Those who believe in the 'sell in May and go away', wouldn't have been profitable yet. But they may have been feeling pretty smug at the start of August as we had that dramatic sell-off over a couple of days which clearly now has come out in the wash. We've seen a dramatic fall in stocks and a solid recovery. And as things stand, we're looking at roughly a plus middle single digit return in sterling terms for most major markets since the start of May, with Japan an exception, as it is still slightly under a cloud.
There has not been a great deal of news and data this week. This even includes Jackson Hole, where the main conclusion was Federal Reserve chairman Jay Powell's speech, where to paraphrase, he said ‘we're going to be starting to cut interest rates soon’ – something which won't be much of a surprise to anybody.
On the data side, we've had US quarter two GDP coming out. The second revision took place over the course of this week, and it was leaning a bit more positive. But again, just a reminder, when we talk about that sell-off in August it was caused by data coming out that was both surprising and underwhelming, and which implied that a different path was necessary for interest rates.
We said at the time, don't focus too much on the short-term data and backward-looking data. And these quarter two revisions, the second revision, is a case in point. These data do get revised frequently, sometimes up, sometimes down. Placing too much value on these short-term data points can be a fool's errand, because you can find yourself having that view unwound just by a review of the data.
Taking a step back, as we've said many times on these videos, and thinking about the more general trend out there, then economies seem in reasonable shape. Unemployment remains low and the employment picture remains robust. And inflation is certainly coming under control. It’s a reasonable picture, and certainly one that's constructive for most asset classes. For equity markets it's not a bad environment at all once you factor in the valuations and the prospects for businesses from here, things don't look too bad.
The valuations picture
However, clearly as markets grind up, if earnings don't keep up, they start to go from being undervalued through to fairly valued. And the valuations out there aren't quite as attractive as we sit here today as they were six months or so ago. But this does not mean they are bad. They are still attractive, with the exception of the US, which remains on the expensive side. Overall, things are looking fairly good, but perhaps not quite as compelling as they were a few months ago. So we need earnings to carry on in order to keep these markets at attractive levels.
Nvidia
On the subject of earnings, of course we have to talk about Nvidia. This really was the main story of the week. One headline in the Financial Times said that the Nvidia results are more important than US jobs data. Mohamed El-Erian, the ex Pimco grandee and highly respected columnist, said the old saying, 'don't fight the fed', well these days judging by the amount of information on this, you have to worry about not fighting the fed and not fighting Nvidia.
The Nvidia results were actually very good, it had revenue of $30 billion over the quarter. More than half of that is translated into profit margins. So by any objective measure, very strong results indeed. And Nvidia, of course, is very much in the zeitgeist at the moment. AI is the theme of the day, and it is the poster child for that, so unsurprisingly tons of money is rolling through the door. And yet the stock sold-off. Not a huge amount admittedly, but it did sell-off, and it's symptomatic of the old adage that happiness is reality minus expectations of reality.
Objectively Nvidia’s results were very, very good, but expectations were evidently even better. Expectations were a little bit unreasonably high, clearly, and that led to some disappointment albeit as I've said already, relatively muted disappointment in the grand scheme of things.
But it is a good reminder when looking at these incredible growth names, the Magnificent 7 and other high-profile names, that they don't go up in a straight line. It's not going to be wall-to-wall good news, there will be bumps on the way. And perhaps this week was just a reminder that things aren't always going to be super rosy, you're not going to compound incredibly impossible growth rates in perpetuity. At some point you need to see a maturing of what has been an extraordinary run of these stocks in the last year or so.
That's it from me. Have a good weekend when you get there, and we'll see you next time.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The Funds and Model Portfolios managed by the Multi-Asset Team may be exposed to the following risks:
Credit Risk: There is a risk that an investment will fail to make required payments and this may reduce the income paid to the fund, or its capital value. The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay; Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss; Liquidity Risk: If underlying funds suspend or defer the payment of redemption proceeds, the Fund's ability to meet redemption requests may also be affected; Interest Rate Risk: Fluctuations in interest rates may affect the value of the Fund and your investment. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; Derivatives Risk: Some of the underlying funds may invest in derivatives, which can, in some circumstances, create wider fluctuations in their prices over time; Emerging Markets: The Fund may invest in less economically developed markets (emerging markets) which can involve greater risks than well developed economies; Currency Risk: The Fund invests in overseas markets and the value of the Fund may fall or rise as a result of changes in exchange rates. Index Tracking Risk: The performance of any passive funds used may not exactly track that of their Indices. Any performance shown in respect of the Model Portfolios are periodically restructured and/or rebalanced. Actual returns may vary from the model returns.
The risks detailed above are reflective of the full range of Funds managed by the Multi-Asset Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
