Contrary to what some might think, we research folk are normal people. That means that when spring has sprung, we too enjoy the days getting longer and the extra pep in people’s steps. But there is another reason we think summer is indeed more lovely and more temperate. After the glut of news that comes with the darling buds of May, June brings some relative respite on the corporate results front.
The snap election would, one might think, ruffle a few feathers. It certainly would have done if the previous Labour leader was still heading things up. Now, in the type of U-turn perhaps only politics can bring, Labour has ditched Corbyn’s radical approach and adopted more centrist policies. It has even spent a lot of time talking about how it will seek to ‘reinvigorate’ the UK’s capital markets.
This would be welcome. London has fallen out of favour with both domestic and international investors, to the point we think many UK businesses are fundamentally undervalued. Valuations are still languishing at lowly levels, and this has prompted a wave of opportunistic takeover activity this year.
Labour’s new approach means the market thinks its policies may even be good news for sterling, and for UK asset prices generally. The proof will be in the pudding, but as it stands, this means there are not many worrying about the election result.
In any case, our investment horizons are far longer than the average political cycle, so we do not let politics dominate our decisions. That’s just as well when one considers that more than half the world’s population live in countries with an election happening this year!
So let us return to what we see as the bigger themes of the day. In order to get a grip on these, I have always thought it is best to listen to what businesses are saying. I have used this article to summarise recent corporate results before, so I shall not go into depth. However, it is worth reiterating that in the main, they have been on the fairer side. The strong majority of US businesses have been beating forecasts, and growth has been particularly good in the semiconductor and AI spaces.
Insight from FactSet shows that 199 large US businesses cited the term ‘AI’ during their first quarter earnings call. This number is well above recent averages, and ahead of the previous record of 182, in Q2 2023. And these are not just passing mentions. Microsoft detailed how its quarterly capex (currently $14bn) will increase materially again thanks to cloud and AI investments. Meta is increasing spending too. Having previously anticipated something like $33.75bn, it now expects to spend $35-40bn this year. These are just two examples.
This extra spend will surely prove profitable for the chip makers and designers. But if we look past the direct beneficiaries, it’s no exaggeration to say AI has potential to change the game for the whole economy. Think what a 10% increase in productivity could do for GDP, and the advancement of society generally.
While potentially transformational AI is getting more airtime, inflation is getting significantly less. FactSet data shows it was brought up in 219 S&P 500 calls, vs 410 this two years ago. The simple reason for that is that it has dropped to manageable levels on both sides of the Atlantic. That’s already prompted a rate cut in Europe, and the Fed and Bank of England are likely to follow suit later in the year.
For now, rates, and thus yields on short-term government debt, remain higher than inflation in many places. For example, the Bank of England’s forecasts for the next three years has inflation averaging at least 2 percentage points less than the yield gilts with that same timeframe currently on offer. That differential is something we have not seen since before the financial crisis.
We think that with inflation abating, corporate profitability proving robust and exciting technological advances coming through, there are reasons to be positive from here. That said, we remain watchful, and mindful conditions could change.
George Salmon – Senior Investment Analyst
FPC24160
All charts and data sourced from FactSet
Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of George Salmon, Senior Investment Analyst. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments.
