On the economic front, this week’s big news was US inflation figures coming in ahead of expectations. This knocked both equity and bond markets, and cast doubts on the prospect of any interest rate cut in June, as had been expected beforehand.
Sticky inflation
One reason why US inflation seems to be stickier than the US Federal Reserve (Fed) would like is that the US economy is still quite robust. While wage rises in the country have been moderating (running at 4.3% year-on-year in February 2024), the unemployment rate is fairly low at 3.8%, and the economy is adding jobs faster than expected, suggesting that the labour market is fairly tight.
The other is energy prices. As flagged in this month’s economic and political roundup, oil prices have been climbing this year. Higher petrol and diesel prices have a significant impact on US consumers. This is showing up in the figures for so-called ‘supercore’ inflation, which is said to be Fed chair Jerome Powell’s key measure of inflation.
This is somewhat depressing news given that rising interest rates have been weighing on NAVs in sectors such as property, renewable energy, and infrastructure, and have also been putting off investors in areas such as growth stocks and smaller companies. The hope had been that a rate cut in the US would kick start a recovery in those sectors. Now we may have to wait a bit longer.
Strong financials
Amid all the doom and gloom there are still some good news stories. One of these is Polar Capital Global Financials, where the NAV is hitting new all-time highs. If you do not hold it, you have not missed out entirely as the share price has not kept pace with the NAV recently and currently it can be bought on an 8% discount to NAV.
The rise in interest rates over 2022 and the early part of 2023 may have spelled bad news for many funds but was a boon for the banking sector. As interest rates rise, it gets easier for them to earn more attractive profit margins by widening the gap between what they pay on deposits and what they earn from lending money. However, financials stocks underperformed last year, in part because investors reasoned that the higher rates would also bring increased bad debts.
As 2024 began, Polar Capital Global Financials’ managers Nick Brind and George Barrow noted that the sector would be a significant beneficiary if the anticipated economic slowdown in 2024 was shallower than expected. That seems to be playing out as they had hoped, and so far there is no sign of a jump in defaults.
The trust entered 2024 with an overweight exposure to banks, with JPMorgan, Wells Fargo and Bank of America featuring amongst its 10-largest positions. The NAV return has been 8.8% year to date, and the share price return 11.0%, but this week’s news may help extend the sector’s good run and allow the trust to recover some of last year’s underperformance of its benchmark. The managers think that other parts of the financial sector such as reinsurance and payment services look attractive too. However, they are not completely gung ho on US banks as they have concerns about some lenders’ exposure to real estate.
Golden opportunity?
Higher than desired inflation in the US has also been feeding through into the gold price, which has been hitting new highs. Finally, this seems to be showing up in the NAV of Golden Prospect Precious Metals. I have been puzzled for a while why the trust’s NAV, which had tracked the gold price fairly well, decoupled from it. Even as the metal is hitting highs, the NAV (which ought to be a geared play on that) is only just getting back to levels of a year ago and there is still over 80% upside until we hit the highs of 2020.
Ironically, the main excuse for the poor ratings of the mining companies that Golden Prospect Precious Metals owns seems to be that their extraction costs have been impacted by inflation and this has constricted their margins. Nevertheless, with the gold price where it is, they should be much more profitable than they were. This may have further to run.