From the desk of CIO Simon Fentham-Fletcher

After the footballing equivalent of a run of draws (flat returns), the funds posted a decent week of gains at around +1.2% and brings the month to a decent 1%+ and now year to date to around +7.5% to +8%.

Given that markets were up around the same amount if not a tad more, I didn’t get too excited as we did roughly what I would expect. Even though it was a relatively “light” data release week, I did get more excited about some of the macro data which you will read about below.

A cartoon of a person looking at a red fox

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Enlightenment can give cause for “hope” in some circumstances In the Simpsons episode that the gify above refers to Homer finds “enlightenment” in a desert in Mexico.  The problem is that his awakening does not last long.  That is all too often an issue with many of us – we can see an issue and we are conscious of what we should do, but many of us stop pushing forward with improvements.  Many stale and stagnate as a result.  We should all fight this to see how we can approach things, better not because something is broken… quite the opposite, but when things are going well, that is when we should force ourselves to look at how we can be even better.

The confidence to surprise – Part V

So, with only 5% of the S&P left to report we are settling into about a +6.5% earnings and +2.6% of sales surprises. That is a very good result people as everyone was expecting disappointments – of course expect them to go silent and then repeat the negativity. Eventually they will be right. As Adrian says, “eminent economists have predicted ten of the last two recessions”.

So, it has been six quarters since earning and sales numbers surprised by this amount.  A quick reminder… markets were up significantly when they were.

Again, I think it important to note that the dispersion of good numbers cover all sectors with only 1 of 22 numbers disappointing. That is quite the robust signal.

Macro Data & news

As I said above, there were few data releases this week. Those released were (again) broadly positive which in turn is another buttress to the pro growth pro equity stance of the portfolios.

So, let’s look at some of the positives in different regions:

  • April industrial production rose +0.5% on the month (mom), with manufacturing production rising +1%, but both rises owe some to a downward revision to the index for Feb and March. Autos rose +9.3% mom, computer & electronics +2.1%.
  • May NAHB housing market index rose 5pts to 50, the best since July 2022. Current sales rose 5pts to 56, 6m expected sales also rose 7pts to 57, and buyers’ traffic up 2pts to 33. That is still not as good as a while ago but is recovering.
  • Philadelphia Fed manufacturing index for April rose 21 pts to 104, with new orders up +14.
  • China’s Jan-Apr urban fixed investment rose +4.7% year to date, though private investment rose only 0.4%. the growth came mainly from domestic companies at +4.9% ytd and foreign investment +5.3%.
  • Japan 1Q nominal GDP rose 1.7% qoq, with private domestic demand up 1.4%, public domestic demand +0.8%.
  • Thailand 1Q GDP rose 2.7% yoy, with a quarterly rise which was way above historic seasonal trends. Private consumption rose 5.4% yoy, and gross fixed capital formation rose 3.1%.
  • Eurozone 1Q employment rose 0.6% qoq and +1.7% yoy. That’s good for Europe.
  • Eurozone March trade balance rose to EUR25.6bn with exports rising +7.5% yoy, this is above trend.  Combine that with imports falling 10% yoy and there you have the improvement.

There was bad news also.

  • Eurozone May Zew survey of expectations dropped 15.4pts to minus 9.4, the first negative result since Dec 2022. Current conditions rose 2.7pts to minus 27.5.
  • Eurozone March industrial production fell 4.1% mom, with the index falling to the lowest since Nov 2021. Capital goods fell 15.4% mom, intermediates fell 1.8% and consumer non-durables fell 0.8%. Germany fell 3.1% mom, France fell 1.1%, Italy fell 0.6% and Spain +1.4%.

I know that is quite the laundry list… but you sense what I am saying and have been saying.  The undercurrent is supportive, excepting perhaps currently Europe which is starting to feel like the Ukraine war really is putting it into a funk.  Added to the above, we have the corporate data which is obviously also supportive.

All that said, what are the icebergs that I am thinking about…obviously we are all looking at Ukraine and how that could escalate. I think that escalation talk is probably overblown, but let’s be honest if it does “expand” that cannot end well.

Looking forward, it is all G7 vs China that poses the next existential threat.  That is well written about. But it will get more and more column inches in the future.

Then there is the debt ceiling stand-off which continues to rumble on.  This iceberg, I think, will go to the wire as both parties involved need to play to their base before common sense takes hold.  But expect some volatility with this story as the highs and lows – it is more the volatility that is annoying here rather than the Fed stopping writing cheques.

The world regions in three charts – US bounces, Asia steadies while Europe …well)))

Ukraine update – Day 459 of Putin’s 3-day war

Forget the fact that Ukraine might win this war on the battlefield, there is more danger of infighting being the prime reason for a Russian military defeat.  The knives are out now that the “invincible” (Mr P’s words not mine) hypersonic weapons deciding to be not so incredible and get themselves shot down before they reached their intended targets.  At the same time, several litters of puppies are being had in the Kremlin at the thought of Ukraine getting a plane whose design is 50 years old.

Is there an “Eastern Europe” nowadays?

Do we even think of East and West anymore, or have we moved totally to a world where the splits are defined as authoritarian or not.  I think the answer must be yes. This is a developing investment theme and is linked into the “decoupling story”.  The G7 alluded to something like this over the weekend, but was reinforced for me by the Japan/UK chip discussions.  Long live trade… as a Libertarian you just know I love this idea.

And it isn’t just me that is seeing the cracks appearing … our friend Vlad Vexler has chimed in on the matter as you can see in this video.

Global Macro view in one chart – “again… what goes up”.

And finally…

I must give you an Aston Villa anecdote.  This weekend I watched an amazing match against Liverpool; we eventually drew but the battle, spirit, and heart they showed reminded me of why sports is such a life lesson.  European qualification is in their own hands again, win and it is secured. Which performance will Villa give us from their repertoire…I have hope.  The problem, as we all know, is that it is the hope that kills you.

As always, thank you for the trust and confidence you place in me.

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