These days, markets are constantly on edge, hungrily anticipating the next piece of information – be it the latest release on inflation or earnings, or news relating to AI or central bank statements and speeches – and waiting to see if restraint or retaliation will win out in the Middle East. Nerves and hope alike have been sending share prices on an erratic journey. Even the most unruffled among investors find it difficult to look away.
Last month, to no one’s surprise, the S&P 500 hit an all-time high. This month, to everyone’s surprise, it slumped and, possibly to greater astonishment, it was the turn of the FTSE 100 to break records. It confidently sailed past 8,000 (touching 8,092), ratcheting up new intraday and closing highs on consecutive days.
The drivers in both markets were the same, albeit inverted. Positive news flow (on inflation and earnings among other things) has driven up London’s oversold shares; while US mega caps took a thrashing ahead of a flurry of big tech Q1 updates and disappointing news on inflation. More than $1tn was wiped off their valuations at one point as investors feared reports from Tesla, Microsoft, Meta and Alphabet would relay grim news (in Tesla’s case) or worryingly weaker numbers. Nvidia has also been affected, although it’s not reporting until late May.
The groundwork for a chunk of this pessimism had been laid by the problems besetting Elon Musk’s electric vehicle maker and a steep drop in customer orders at Netherlands chip-machine maker ASML. On top of this, it’s getting harder for the US market to ignore the repeated stalling of disinflation and expected rate cuts being kicked even further into the future.
In London the mood is remarkably different. Inflation is steadily trending downwards and is expected to fall below 2 per cent this month. Capital Economics thinks it will fall further still – to below 1 per cent – later this year. Even weakness in March retail sales is being seen as a positive – it adds to the case for a cut.
Exceptionally solid results from the likes of Associated British Foods went down well too, while other retailers – including M&S – are benefiting from optimism about consumer spending. Dollar strength (now that Fed cuts have been pushed back again) also fed into FTSE gains, as this means higher profits for Britain’s big overseas earners. Share buybacks, coupled with renewed interest in the defence sector in a fractious world as well as rising commodity prices propelled the index along too.
Even long-unloved banks, in the spotlight this week as they report Q1s, have come in from the cold in recent months. Despite expected dips in profits and pressure on net interest margins being pencilled in across the board – Lloyds Bank duly delivered on both counts as it kicked off the updates – most analysts remain positive on the sector, with an economic revival and increased borrower resilience stemming from lower rates identified as tailwinds around the corner.
Shore Capital’s view is that base rate reductions to a level of 3 to 4 per cent could create a ‘Goldilocks’ environment where rates are “high enough to allow banks to earn an adequate net interest margin, but not too high to crimp demand for credit and raise concerns around credit quality”. Peel Hunt is also positive on the sector: in the short term shareholder returns are supported by capital distributions and medium term there is the potential for an upside rerating.
Suddenly, there are signs of life for London shares. While the deep-rooted problems that have led to depressed valuations (and a high number of exits and takeovers as a result) remain, this week’s performance has shown that London at its core has steel-like strength. It may well continue to be overshadowed by New York. And, ultimately, a stronger British economy is needed to restore faith in UK equities. Nevertheless, the current turnaround – however long it lasts – emphasises the key lesson that despite the negativity and structural problems pressing down on valuations, this is a market with enormous strength and huge rerating potential.
