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28 June 2023

Debt ceiling stand-off and growth runways

In this article, we give an overview of the May 2023 issue of Market Insight, in which we explore these topics above in greater depth.
 
As we progress towards the halfway point of 2023, financial markets look to have calmed somewhat following a volatile first quarter. Inflation remains a key topic with the UK figures heightened despite previous expectations of a fast reversal towards the 2% target figure. Western central banks continued their interest rate increases, the latest of which are expected to be the last in both the UK and US, and recent economic data remains robust with the UK avoiding a recession. Issues within the banking sector remain, as we will explore later, while corporate profitability is yet to slide in a broad sense.
 
Having settled somewhat in the wake of the Silicon Valley Bank (SVB) collapse, the US banking sector experienced further turmoil as First Republic became the latest victim, taken over by JP Morgan following the flight of nearly US$100bn of deposits. Jamie Dimon, CEO of JP Morgan, recently declared this part of the US banking crisis over and that everyone can relax for breath. Potentially calming words from an industry leader, but we must remember that First Republic is the third bank to be taken over by US regulators since March. Larger banks coming in to rescue their smaller counterparts indicates stability within the banking system, but in the longer run it could spell issues with a handful of names in a dominant position.
 
Away from the banking sector, currency markets are being watched with interest as the US Dollar continues its slide downwards against its peers. Having risen sharply in the last two years, the Dollar’s recent weakness is partly linked to concerns surrounding the US debt ceiling, the maximum amount the US Government can borrow to meet its liabilities. Decided by Congress, an agreement to raise the current ceiling level from US$31.4tn remains unachieved.
 
European equities have been one of the strongest performing markets in the year-to-date, easily surpassing other major developed and emerging markets. Some of this comes from the low base at the back end of 2022 which caused energy concerns, but it’s easily forgotten that continental Europe plays host to some of the finest companies on the planet with significant exposures to the global economy, particularly Asia. Meeting a European equity fund manager without Novo Nordisk as a top position is fast becoming a rarity. This is not just in relation to its core insulin business, but also due to the development of its Wegovy weight management product which is becoming difficult to ignore as we outline in the Stock Focus article of the May 2023 issue of Market Insight.
 
Another interesting growth story flying under the radar comes from the frontier market of Vietnam, Asia’s emerging economic champion. Now the 15th largest country by population, its economy continues to advance with GDP growth of 6.5% projected by the Asian Development Bank for 2023. From a high level, the future is extremely positive with the country having an average age of 32.5 years and a population with high levels of literacy and internet use alongside a rapidly increasing urbanisation rate. Buying directly into this growth is challenging with nuances such as ownership limits for foreign investors, but access is enabled through a number of Vietnam-focused investment trusts such as Vietnam Holding Ltd or Vietnam Enterprise Investment Ltd.
 
This article was taken from the May 2023 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
 
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance.
 
Debt ceiling stand-off and growth runways

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