Welcome to your May monthly market outlook from atomos
Rising tensions on the global stage have created a challenging environment for investors. With geopolitical instability comes market uncertainty and, of course, we should not downplay the humanitarian impact of conflict.
We can see how investors are reacting to current events, such as the recent missile strike by Iran on Israel, by looking at the VIX Index. The VIX measures the expected volatility of the S&P 500, an index of the largest stocks in the US, over the next 30 days. It is widely considered a ‘fear gauge’ which indicates whether investor sentiment is positive or negative.
The VIX spiked from 13 to 19 in April, its highest level since the start of the Israel-Hamas conflict in October 2023, but has since been falling again.
Source: WTW (Willis Towers Watson)
The price of oil can also act as a bellwether of investor sentiment. Brent crude, the global oil benchmark, is trading close to where it stood prior to the recent escalation in military conflict risks. We think this makes sense given Iran’s limited share of global oil supply.
Unless tensions in the Middle East spill over into other areas - most importantly a blocking of the Strait of Hormuz, which is the channel for most oil shipping - the likelihood of material oil supply disruption looks low. For example, if Iranian oil supply were disrupted and the oil price rose, we would expect Saudia Arabia and the US to increase their supply in response.
We haven’t made any changes to portfolios based on these heightened geopolitical risks because we had already done the work on portfolio composition and we remain confident in our positioning. We will keep a close eye on the situation from here.
UK election: Key policies
The UK is expected to hold a general election in the second half of the year. Although the date has not yet been announced, it must happen before 28 January 2025.*
Election manifestos have not yet been published, and we should remember that plan and policies can change. However, there are some expected measures on tax, spending and borrowing from the two major parties which we summarise below.
While we don’t make investment decisions based on politics, we will we watching closely to assess the impact of any policies on economic growth and financial markets.
Companies’ access to finance
New figures on business insolvencies in the UK have just been released which give us an indication of the health of economy and whether companies are able to secure the borrowing they need.
There were 1,815 insolvencies by registered companies in England and Wales in March 2024, 17% lower than in February 2024. However, numbers of company insolvencies remained much higher than those seen both during the pandemic and between 2014 and 2019.
Looking across recent UK credit and solvency conditions, we see a picture that is consistent with the overall UK economy over the past two years – stagnant to weak growth, with some early signs of a gradual pick-up.
In the business sector, the most recent lending measures to UK companies, which cover both loans and securities, show annual lending growth roughly flat, after contracting for most of 2023. The credit conditions facing large and smaller companies are markedly different, with loans to large companies growing by 1.3% over the last year, while loans to small and medium enterprises continue to contract significantly by -4.9%.
In the household sector, the story is the same. The net flow of credit secured on housing – the difference between how much secured lending is extended by banks in the month and how much is repaid by households – has ticked up into positive territory in the last couple of months after falling for most of 2023. The number of new loans approved by banks, mainly for house purchases or remortgaging, has also been rising over the past five months, hinting at improving economic conditions.
Sector in focus: Energy
Energy stocks delivered the strongest return of any sector during March. Price changes have been driven mainly by changes in valuation, reflecting expected profit increases given rising energy spot prices. (Spot prices are used in commodities trading to show the price you would pay for energy with immediate delivery.)
As you would expect, the performance of listed energy companies is strongly linked to the price of energy commodities. A substantial portion of the top six supermajors – Exxon, Chevron, Shell, TotalEnergies, ConocoPhillips and BP – generate their revenues from upstream (the early stages of production) and downstream (refining and distributing to consumers) oil and gas activities. 2022 was one of the best years for these companies as the post-pandemic demand recovery and the conflict in Ukraine pushed prices higher. In contrast, the price of crude oil fell over 2023. The recovery over 2024 is beginning to improve expectations of profits in the sector.
The oil price has experienced only moderate volatility over the last few weeks. Our view is that the global supply and demand for oil is broadly balanced. We think this means that an actual material disruption to oil supply is required to significantly shock the oil price upwards, rather than a rising risk of escalating conflict.
Conclusion
It’s impossible to foresee and hedge against every risk in the investing landscape. Our strategy is to make investment decisions based on careful research, and to remain well diversified across a range of asset classes to reduce our exposure to risks in the wider environment.
If you would like to discuss any of the topics covered in this month’s outlook, our door is always open. Contact us
*Source: General election timetables 2024, House of Commons Library https://commonslibrary.parliament.uk/research-briefings/cbp-9921/
Content edited on 17th May 2024
All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.