A P R I L 2 0 2 3 • I S S U E 2 9

April Markets

In April the global economy showed resilience with the continued headwinds of high interest rates and trouble in the banking sector. The positive economic data during the month translated into positive performance for risk assets with developed market equities posting slight gains. Global investment grade credit also performed well, finishing in the green with a modest gain.

In the US, investors received positive news on inflation in April. The inflation figure came in at 5% year-on-year (YoY) for March, down from 6% a month previously and lower than the 5.2% expected. This is the lowest figure in about two years and positive news for The US Federal Reserve (Fed). However, this means a challenging time has arrived for the Fed with some economists predicting this is when inflation will start becoming ‘sticky’ on the way to their 2% target. There were some indications of the Labour market cooling, even as the unemployment rate fell to 3.5% (March), wage growth softened to 4.2% year on year.

The US equity market also performed well in April with both the S&P 500 and the Dow Jones Industrial Average having increased. The market embraced the idea that an expected 25 basis point hike by the Fed in May would be the end of the current cycle of rate hikes. A key factor to watch going forward is the narrative as to when the Fed will start cutting interest rates, with some believing that before year-end is still a possibility. Issues surrounding the debt ceiling will also be prevalent with the market awaiting news on whether Congress will approve an increase to the ceiling, which is currently expected, hence allowing the US government to avoid a default.

In the UK, inflation fell from 10.5% to 10.1% YoY, remaining at significantly higher levels than in other developed regions. In addition to energy, food prices are also remaining a large inflationary pressure, with food spending for households 19.6% higher, per month, on average, as compared to a year ago. A breakdown of the major contributing sectors to the region’s high inflation is shown below.

The Pinnacle April 2023 — Source: LONDON DATASTORE

All eyes will be on the Bank of England (BoE) on the 11th of May when it will be seen if they will stay on course with the 25-basis point hike expected. The stock market performed well in April, with the FTSE All-Share reporting one of the better performances amongst the developed countries. This came due to domestic resilience as well as the market’s exposure to global value stocks which performed well.

In the Eurozone, a larger decline in inflation was felt, as YoY inflation came in at 6.9% for March compared to 8.5% a month earlier. Just as in the UK, food inflation continues to be a major concern in the region, with YoY food, alcohol, and tobacco inflation coming in at 15.4% for March. The Eurozone economy grew by 0.1% in the first quarter with 0.2% expected. This growth, while small, indicates resilience in a time of rising interest rates and high inflation.

In China, positive data came out in April, confirming both the strength and pace of the country’s economic rebound after lifting their zero-covid restrictions. China’s economy grew by 4.5% annually for the first quarter of 2023. However, Chinese equities did not follow the upward trend of developed economies and were down during April. This came partly as a result of geopolitical tensions which continue to affect market performance in the region. The International Monetary Fund (IMF) has predicted the Asia-Pacific region will experience growth of 4.6% in 2023, pointing to India’s resilient growth as a major contributor alongside China’s economic recovery.

April was another better-than-expected month for major economies across the world. The next few months will tell us a lot regarding whether or not these economies will experience a recession and whether or not central banks will manage to avoid hard landings. Narratives from both sides will certainly impact asset prices as we go forward in 2023.

Artificial Intelligence: Key Trends and Growth

Artificial intelligence (AI) has become one of the most transformative technologies of the 21st century, and it is changing the way we live, work and do business. With its ability to analyse vast amounts of data and automate complex tasks, AI, as a main driver in the fifth industrial revolution, its transforming industries ranging from healthcare to finance.

If you are an investor looking to capitalise on the potential of AI, it is important to stay up to date with the latest trends and predictions. Here are some key insights from recent reports and articles that can help you make informed investment decisions.

AI technologies can be integrated into a variety of sectors. According to the BofA Global Research U.S. Software Technology team, they predict that significant tech firms' stock performance would be correlated with the advancement of AI, and they estimate capex investments in AI/ML (machine learning) to surpass USD$40 billion. By boosting revenue, this investment will help the global AI industry grow to $900 billion by 2026 with an expected 19% CAGR.

The report also highlights some of the key industries that are expected to see significant AI investments in the coming years. These include healthcare, where AI is being used to develop new drugs, improve diagnosis and treatment, and enhance patient outcomes; finance, where AI is being used to improve risk management, fraud detection, and customer experience; and aerospace, where AI is being used to improve fuel efficiency and therefore reduce fuel consumption.

Productivity improvements and new products generally result in increased GDP (gross domestic product). Gains in the services sector, which include recreation, public services, health care, and education, may boost GDP by 21% by 2030. This is mostly attributable to the healthcare industry, financial and professional services, as well as transportation and logistics, are expected to have 10% GDP benefits each as a result of AI.

Big Data and AI have the potential to boost long term global productivity growth by 0.8%–1.4% and double developed market gross value added (GVA) growth rates by 2035E. According to PwC, AI could add up to US$15.7 trillion to the global economy by 2030, while open data, which anyone can access, use, and share, has the potential to generate US$3.2 trillion to US$5.4 trillion in economic value every year by, among other things, lowering emissions, boosting productivity, and enhancing healthcare (McKinsey).

Finally, the World Economic Forum's Key AI Predictions for 2023 and beyond provides insights into the future of AI and its impact on society. The report predicts that AI will continue to transform industries, with new applications emerging in areas such as retail, education, and entertainment. It also highlights the need for responsible AI development and deployment, and the importance of ethical considerations when investing in AI-related companies as well as the need for increased regulatory framework. Increased regulation of AI will ultimately be welcomed by the sector, according to the 81% of tech CEOs who agreed. In the US, the Blueprint for an AI Bill of Rights, which outlines five principles and related policies to safeguard the rights of the American public has recently been released. Other nations, agencies and industries have reported that they are also working on regulatory frameworks. While there will be benefits to the adoption of such policies, there may also be drawbacks and costs associated with its implementation to be mindful of.

In conclusion, investing in AI can provide an opportunity for investors, but it requires a deep understanding of the key trends and predictions shaping the industry. By staying up to date with the latest reports and articles, investors can make informed decisions about where to invest their money and how to capitalise on the potential of this transformative technology as it develops.

Earnings Season Underway

The month following a quarter means the start of earnings releases for companies listed on stock exchanges around the world. These are key events for investors as they give insight into how companies have performed in particular market environments which will inevitably impact investment decisions going forward. April of this year is no different and it is important to look into earnings and their possible implications.

As of the 5th of May 2023, 85% of companies that form part of the S&P 500 index have released actual earnings results. So far, a -2.2% decline in earnings for the 1st quarter of 2021 is estimated (resulting from a combination of the actual results for companies that have reported and estimated results for companies that have yet to report). However, these companies have so far recorded their best performance in relation to analysts’ expectations since the 4th quarter of 2021. This shows that companies have performed better than expected in the current high inflation and interest rate rising environment.

A trend that has been picked up is that US companies with more regional exposure outside of the US have performed worse during the quarter compared to companies with more domestic exposure. This trend is emphasised when splitting the S&P 500 into two groups, one group of companies that generate more than 50% of their sales within the US, and another group that generates more than 50% of their sales outside the US. For the first group, an average of 2.7% growth in revenue is estimated (blended between actual results and results that are still expected to be released). For the second group, an average 10.2% decline in revenue is estimated (blended between actual results and results that are still expected to be released). This is surprising as the weaker US dollar in recent months should mean companies that export or earn revenue outside of the US should benefit in US Dollar terms.

As of the 21st of April, European shares were up over 2% for the month. This rise is attributed to fears of a banking crisis abating but also investors looking ahead to earnings season. The week ending on Friday the 14th of April saw the STOXX 600 index experiencing gains for four consecutive days. This was on the back of JPMorgan, Citi Group, and Wells Fargo beating their expected earnings. European markets will likely be especially sensitive to news coming out of the banking sector over the coming period considering last month’s events involving Credit Suisse.

It is important to look at both what earnings have been released and what releases still to come tell us about the state of the economy. In terms of the Banking Sector, investors are expected to pay a large amount of attention to the level of deposits at major banks. This comes in the wake of the ongoing banking crisis, as some customers may fear for the safety of their deposits. Additionally, interest rates on savings that have failed to rise significantly, could entice some investors to move their funds from banks into money market funds in order to gain higher returns.

Large-cap technology companies have performed better in the first part of 2023 after their slump in 2022. Investors will watch closely in order to see if this has translated positively into earnings. Meta reported first-quarter revenue of $28.10 Billion, surpassing analysts’ expectations of $27.66 Billion, with YoY revenue growth of 3%. Whether or not this is a positive indication for the performance of the technology sector going forward remains to be seen.

With the earnings season not complete, many trends are still yet to emerge. Earnings can be expected to play a big role in the narrative that plays out in the market in the coming months, along with other key economic events such as central bank policy and inflation numbers.