Stock Take

“We’re closer, or maybe even there.” After raising its policy interest rate at a rapid pace since March 2022, Federal Reserve (Fed) Chairman Jerome Powell last week suggested the central bank may have reached the end point of its rate rises.

Yet in confirming the widely anticipated hike of 0.25%, Powell stressed that inflation remains a chief concern and markets were therefore wrong in expecting rate cuts before the end of the year. Powell also expressed optimism that a US recession would be avoided, citing recent jobs and earnings data supporting the case for a soft landing for the US economy.

“The Fed has turned off autopilot on rate hikes and it looks like policy will become more data-driven and event-dependent,” commented Keith Wade, Chief Economist at Schroders. “Whether cruising altitude has been reached will depend on the growth and inflation figures, particularly the latter.”

A first test of the Fed’s plan to pause came at the end of the week with confirmation that the US jobs market remained hot, adding 253,000 jobs in April. This confounded economists’ predictions yet again and disappointed investors hoping slower economic data would give the central bank space to cut rates.

Earlier in the week, it was reported that the US services sector maintained a steady pace of growth in April, while manufacturing contracted for the sixth straight month amid higher borrowing costs and tighter credit. A further tightening in financial conditions is one risk of the continuing turmoil in the US banking sector. On Thursday, PacWest became the latest regional lender to seek a financial lifeline. Shares in Western Alliance and First Horizon also tumbled as investors looked for the next domino to fall, despite reassurances from the Fed and bank management.

In a sign that the US crisis is beginning to impact UK banks, Bank of England data showed households pulled a record amount of deposits from lenders in March.

The European Central Bank (ECB) followed the Fed in raising its deposit rate by 0.25% to 3.25%. This came after news that Eurozone inflation accelerated last month to 7.0% from 6.9% a month earlier. However, core inflation – which excludes volatile food and fuel prices – unexpectedly eased, adding weight to the argument for the smaller rate hike.

Unlike her Fed counterpart, ECB President Christine Lagarde made it clear more tightening was on the cards, saying, “We are not pausing. We know that we have more ground to cover.” Lagarde added that interest rates were not yet “sufficiently restrictive” to get inflation down to the ECB’s 2% target.

“Broadly speaking, the European economy remains in a relatively healthy position,” observed Mark Dowding of BlueBay Asset Management. “Eurozone unemployment data shows an all-time low since the creation of the Monetary Union. Business confidence is robust. Wage growth is elevated and inflation is well above the ECB target. We continue to see rates at 3.75% this summer.”

Key market indices logged weekly declines as the woes in the US banking sector fanned recession fears and took the shine off upbeat earnings and hopes of a pause in rate hikes. Apple continued the trend of better-than-expected results for the big technology stocks, bolstered by strong iPhone sales and notable inroads in India and other newer markets. The stock is up 28% year-to-date. The S&P 500 has risen 8% so far in 2023, but 80% of the gain has been driven by just seven companies, with Apple and Microsoft accounting for half of that.

The disparity between the share performance of the tech giants and the wider market has prompted concerns about the sustainability of the rally, although commentators also pointed out that such extreme readings are more often a sign the market is reaching the bottom of its current cycle.

In the UK, attention was focused on the England council elections and the coronation of King Charles III. The election results gave The Conservative Party no reasons to cheer; but there were hopes the coronation celebrations and a roaring trade for pubs, restaurants and retailers would give the UK economy a much-needed lift. The Centre for Retail Research expected consumers to add more than £1.4 billion to the economy over the bank holiday weekend.

Wealth Check

As you approach a business sale, strong metrics are essential to prove the health and potential of your company to buyers.

Potential buyers of a Small or Medium-Sized Enterprise (SME) always want to see as much data as possible to support their decision and potential offer. This starts with metrics such as regular growth in revenue and profit, to show your firm has a compelling and sustainable proposition. Some SME acquirers even refuse to look at firms that don’t meet certain eligibility criteria – such as £1 million revenue and 15% profit.

To make sense, the data must be benchmarked against firms of a similar size and sector. For example, some industries, such as grocery sales, might operate on very tight margins, while others, service as service-based businesses, might expect a higher margin. Good growth at a manufacturer might be 10% to 15% a year. But in a dynamic young tech company, it might be much more.

Once you’ve attracted a buyer’s attention, they’ll look at more detailed metrics, such as working capital and cash-flow forecasts. If you have recurring revenue, especially with customers on contracts, that helps make your firm attractive. For example, if you have monthly contracts that require notice to end, the acquirer can see that income is reliable.

Other important metrics include low customer and staff churn, which show you have happy customers and employees.

Purchasers also need to look at retained profit as a percentage, year-on-year. For example, if you have 100 customers each paying £1,000 a year, but the next year you have 95 customers paying £1,250, that suggests your product has become more valuable. Losing a few customers isn’t necessarily a problem in that context – if your costs remain the same, your revenue and profits will still be higher.

Other information you could show potential acquirers includes a good record on environmental, social and governance (ESG) factors; a good credit history; and low or no complaints, court judgements, tribunals or regulatory fines.

In The Picture

Assets perform differently over time and come with varying levels of risk. Without regular reviews, your mix of assets can become out of balance, and you can find yourself taking more or less risk than you intended. Watch this video on the benefits of automatic rebalancing and how it’s used in our latest investment solutions.


The Last Word

My wife and I just wanted to share our most sincere and heartfelt thanks to all those who have helped to make this such a special occasion.

King Charles III thanks everyone involved in the Coronation held over the weekend.

Schroders and BlueBay Asset Management are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

© S&P Dow Jones LLC 2023; all rights reserved

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

SJP Approved 09/05/2023

Sovereign Wealth Hong Kong is a Partner Practice of St. James’s Place (Hong Kong) Limited

The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.

Members of the St. James’s Place Partnership in Hong Kong represent St. James’s Place (Hong Kong) Limited, which is an insurance broker company licensed with the Insurance Authority (Licence No. FB1075), a licensed corporation with the Securities and Futures Commission (CE No. AAV439) and registered as an MPF Intermediary (Registration No. IC000852).