Markets Weekly podcast – 24 April 2023

Henk Potts (HP): Hello. It’s Monday, 24th April and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets. 

My name is Henk Potts, Market Strategist with Barclays Private Bank. Each week I’ll be joined by guests to discuss both risks and opportunities for investors. 

Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the course of the past week, then consider how Barclays Private Bank supports clients wishing to become philanthropists and, finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.

Equity markets drifted higher last week, helped by consensus-beating earnings, robust first-quarter growth from China and improving activity in the US and Europe, although continued concerns over an extended rate-hiking cycle capped gains. 

European stocks continued to rebound from the banking crisis-induced sell-off, with stocks hitting their highest levels since February 2022 last week. The STOXX 600 rose four-tenths of 1% over the course of the week and is up 2.4% during the course of this month.

Over on Wall Street, the S&P 500 was unchanged last week and was up half of 1% since the start of April. Investors had braced themselves for a pretty dismal earnings season. So far, it’s actually not been as bad as feared, though both the number of companies reporting positive earnings per share surprises and the magnitude of the earnings surprises are still below their five-year averages, according to FactSet data. 

Eighteen percent of S&P 500 companies have now reported results for the first quarter. Of these, 76% have reported EPS above estimates, which is below the five-year average of 77%. Healthcare and financials have led the outperformance, whilst analysts have downgraded earnings estimates in the energy sector. 

Taking into account both actual and forecast results, S&P 500 first-quarter earnings now look set to decline by 6.2%, which is better than the 6.7% decline expected at the end of the March. For the full year, analysts are expecting flat global profit growth, followed by a good bounce back in 2024, with double-digit growth anticipated.

It’s another a big week, actually, for earnings with 180 S&P 500 companies reporting results, so, we should get a better view across corporate America by the time that we finish the trading week.

On the macro front, the Chinese economy grew at a faster-than-expected pace in the first three months of the year, as consumers returned to the shops and enjoyed recreational visits following the abandoning of restrictive COVID rules at the end of last year. 

First-quarter GDP grew at 4.5% year-on-year, better than the 4% expected by economists, and the strongest growth that we’ve seen in a year. The March data showed retail sales jumped 10.6%, albeit from a low base. Services PMI rose to 56.9, and construction PMI surged to 65.2. Corporate credit growth was robust, unemployment fell to 5.3% from 5.6% in February, and exports surged as manufacturers rushed to fulfil back orders. 

However, there are still some areas of concern. The housing market recovery continues to look lacklustre. We also know that industrial production and fixed-asset investment fell short of projections. Whilst the outlook remains positive, there are questions over the sustainability of the consumption recovery and continued pressure on external demand due to the weaker global backdrop.

Policymakers have vowed to step up support for the economy and maintain liquidity. This is expected to focus on further measures to encourage home sales, improving lending conditions to support infrastructure investment. So, 2023 looks set to be a strong year of recovery following the second-weakest growth in half a century during the course of last year.

In Europe, data pointed to an easing of price pressures improving consumer sentiment, with a pickup in activity. The final reading of euro area inflation confirmed that the headline rate decelerated to 6.9% in March, compared to 8.5% in February. We expect this moderation trend will continue into year-end with inflation set to print around 3.3% by the time that we get to December, helped by base effects and decelerating price momentum, although wage growth continues to offer upside surprise, driven by higher pay demands from powerful unions.

The euro area composite PMI printed at 54.4 in April. Regionally, the pickup was most pronounced in Germany, followed by France. However, the report highlighted a sharp divergence between services and manufacturing. Services rose to 56.6, helped by a healthy rise in new business. Consumer demand remains resilient to the tightening of financial conditions and benefits from lower energy prices. Meanwhile, manufacturing output slipped back into contraction territory, at 48.5, as the sector was impacted by industrial action, particularly in France. 

Overall, for 2023 we now expect that Europe will avoid a recession and grow at six-tenths of 1%. In terms of the UK, the combination of elevated price pressures, a tight labour market and rebound in services PMI suggests that the Bank of England’s rate-hiking cycle may have to be extended into June. Inflation decelerated in March, but it still remained in double-digit territory last month. Headline CPI came in at a higher-than-expected 10.1%, driven, of course, by higher food prices, which were offset by falling energy prices while goods and services inflation held steady.

Core inflation held steady at 6.2%. Whilst we can expect inflation prints in the UK to register substantial falls in the second half of the year, helped by base effects, it’s clear that inflationary pressures are proving to be far more persistent than the MPC would like.

In terms of labour markets, well, figures showed that unemployment edged up 3.8%, which, we should remember, is still pretty close to the lowest levels that we’ve seen since the 1970s. Wage growth in the quarter to February was above expectations, at 5.9%, and forecasts suggest pay gains will take longer to ease than previously expected. And finally, the supply of labour continues to be a real problem. Vacancy rates are still 30% higher than pre-COVID levels.

Meanwhile, the UK April flash composite PMI accelerated more sharply than expected, to 53.9, driven by a rise in services, suggesting a bounce back in consumer demand. So, the recent data, I think, cements the view that the MPC will raise interest rates by 25-basis points in May. We also think they’ll be forced into a further quarter-point increase in June, making the terminal bank rate for this cycle 4.75% in early summer.

So, that was the global economy and financial markets last week. In order to discuss how she educates, inspires and supports our clients wherever they are on their philanthropy journeys, I’m pleased to be joined by Isabelle Hayhoe, who’s a Senior Philanthropy Adviser with Barclays Private Bank.

Isabelle, great to have you with us today. It’s been a challenging time for the global economy and financial markets. Is discussing philanthropy really relevant in the current environment?

Isabelle Hayhoe (IH): Morning, Henk, and thanks for having me on the podcast today. Yeah, so it is really relevant. You know, the world has faced so many challenges over the past few years, we’ve had global pandemics, we’ve had disasters, conflicts, shocks to the economy, and philanthropy is this one way that individuals can provide tangible support to these initiatives in organisations addressing these issues. You know, philanthropy can take a strategic and a forward-thinking view, and it can address the underlying causes which result in lasting impact. Simply put, we just need more and better philanthropy.

HP: So, despite the turbulence, it’s great to hear that people are still thinking about giving. OK. So, what are the main trends that you’ve been seeing at the moment?

IH: In terms of the giving trends, unsurprisingly, we’re seeing a really strong focus on climate change, sustainability and global health initiatives. And many of the clients I speak to are also passionate about empowering women and girls. And we’re also seeing that younger philanthropists are typically more engaged than their parents on social issues, such as mental health and the role of social media in that. And these are the generations that have grown up with increased conversations on, you know, on these newer topics and they’re living through climate change in a way that older generations didn’t, so naturally they’re much more focused on that. And what really brings me delight is that we’re seeing a broader awareness of good practice in philanthropy. So, for example, early-stage philanthropists are increasingly aware of the need to involve charities and grantees in the decision-making process if they’re grant making. This is levelling the power balance between donor and grantee and also increasing the impact of philanthropy, as grantees are more able to bring their voices to the table.

HP: Isabelle, how does the intergenerational wealth transfer affect philanthropy? I suppose my real question is what is the next generation’s perspective on philanthropy, and is it different to those who originally made the money?

IH: Yeah, that’s an interesting observation. I mean, as we know, an awful lot of money is going to change hands. Although no-one can quite agree on the actual amount, it’s going to be significant and it will have a real impact on philanthropy, particularly as younger donors have a slightly different focus, as I mentioned earlier. 

So, alongside the sort of, you know, this wealth transfer, it’s estimated that by 2030 the richest 1% will hold about 64% of the world’s wealth and this is going to lead to further inequality and further social division. And there’s a movement we’re seeing amongst young philanthropists, I mean next-gen philanthropists, who are talking about responsible wealth stewardship and wealth distribution, and using a reparative approach to their philanthropy. 

I suspect we’re going to see an increased focus on donating and investing in projects owned and governed by marginalised communities, in an attempt to repair the harm caused to those communities by years of economic alienation and extraction of their wealth and their labour.

HP: We hear clients increasingly talking about donor-advised funds. What are they and how do they differ from foundations?

IH: So, a donor-advised fund, which you’ll often hear referred to as a DAF, is essentially an alternative to charitable foundations. In essence, it’s a philanthropic fund within an already established umbrella charity. So, the donor has all the benefits of running their own foundation, but without the added burden of administration costs and compliance. 

And so, just like a normal foundation, the funds can be donated to a DAF with immediate tax benefits and the funds generated from the donation can then be invested for long-term growth or used to make grants to charities of their choosing. And the funds that remain in the DAF will sit there until the donor decides how they want to use them, which can give them time to reflect or respond, in turn, to emergencies as and when they occur. But, in short, DAFs can just make philanthropy more effective and more convenient for donors.

HP: Isabelle, you’ve been working in this area for many years. I want you to finish off with one final piece of advice you give philanthropists starting out.

IH: So, we find that philanthropists tend to fall into one of two camps. Either they’re incredibly excited to get going and they want to make decisions right away and get stuck in, or they experience analysis paralysis, and they can’t quite work out how to start or where to start with their giving journey. And that’s understandable, considering there are 170,000 charities in the UK alone, so you can see why it’s overwhelming. 

So, I think in both these instances, where people are either trying to rush into it or they don’t know where to start, I’d really recommend beginning with a period of research and reflection. So, just to take the time to really think through what they’d like the impact of their philanthropy to be, to focus on learning as much as they can about the area or areas they’re interested in and establishing clear goals and really understand the landscape. 

So, in short, there’s just no rush. Philanthropy should be a rewarding and impactful experience and can bring great joy if you take the time to really understand it to start with.

HP: Well, thank you, Isabelle, for your insights today. In conversations that we have with clients around the world we know that using their wealth to help others and society is very high on their agenda, but they also want to make sure they’re doing it in a constructive, properly governed and well thought out framework, so it’s great to know you and the team are available to help with that process.

Let’s move on to the week ahead, where, in the US, on Tuesday we get housing data, durable goods numbers on Wednesday and GDP figures on Thursday. For the S&P CoreLogic Case-Shiller 20 City index, we expect a decline of nearly four-tenths of 1% month-on-month, 1.9% year-on-year in February. 

This comes after downward pressure in prior months as well as a housing market with diminishing demand, continuing the need for prices to decline and correct towards more affordable levels.

Following sharp declines in January and February, we expect overall durable goods orders to rebound 1.8% month-on-month, led by an upswing in the volatile non-defence aircraft category. Excluding transportation, we think that orders will most likely edge down two-tenths of 1% in March, given that available indicators from new orders coming from the PMIs.

We are pencilling in a 1.5% quarter-on-quarter increase in real GDP for the first three months of the year in the United States, following a 2.6% rise in the prior quarter. We expect growth to have been propelled by consumer spending, which we think increased 5% quarter-on-quarter. 

On Friday, we also get the Fed’s preferred inflation measure, the PCE price index. We estimate that headline PCE inflation rose one-tenth of 1% month-on-month, 4.1% year-on-year, while core PCE inflation maintained its three-tenths of 1% month-on-month pace from February, or 4.5% year-on-year.

In Europe, we expect in Sweden the Riksbank to hike by 50-basis points on Wednesday.

With that, I’d like to thank you once gain for joining us. I hope that you’ve found this update interesting. We will, of course, be back next week with our next instalment. But, for now, may I wish you every success in the trading week ahead.