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Client Update - 20th October 2023

As we have spoken about with a lot of our clients, the majority of the US equity market return this year has come from just 7 key stocks (Amazon, Alphabet, Apple, Meta, Microsoft, Nvidia and Tesla), with the other 493 stocks in the S&P creating a negative return. So, it has been interesting to read this week that one of the big 7 – Nvidia – has taken a blow as President Biden’s US administration is tightening export controls for cutting-edge artificial intelligence chips. This is expected to severely limit the ability of Nvidia and other manufacturers to sell high-performance semiconductors to China. US Commerce secretary Gina Raimondo was reported to state that the goal of the update was to curb China’s access to advanced chips that “could fuel breakthroughs in artificial intelligence and sophisticated computers” that are critical for the Chinese military. Shares in Nvidia, which has previously said that as much as 25 per cent of its data centre chip revenues come from China, fell by more than 6 per cent in early trading after the news was announced. We remain comfortable with reducing our clients’ portfolios exposure to these high growth tech names over the summer as they were looking rather expensive.

Whilst Nvidia struggled, UK inflation proved annoyingly resilient this week. While it is best not to draw too many conclusions from a single inflation number, the latest CPI reading for the UK was a little disappointing. Policymakers would far rather have seen a steady downward trend for inflation, confirming their stance on interest rates was correct. Instead, inflation is proving stubborn.

Headline consumer price inflation unexpectedly held firm at 6.7 per cent in September, official data showed on Wednesday, while services inflation — a gauge of domestic pricing pressures closely followed by the Bank of England (BoE) — ticked higher. The figures followed separate data that showed UK wage growth remained close to record highs in the three months to August. Inflation is now above levels seen elsewhere in France, Germany and the United States. As we now know, the BoE’s plan for dealing with the UK’s persistent inflation is to hold interest rates at high levels until the inflation threat has passed. The bank’s chief economist Huw Pill has labelled the strategy “Table Mountain”, an allusion to the flat-topped landmark in South Africa. As Pill told his audience this week, the top of Table Mountain in South Africa is often “shrouded in cloud”, a reminder that the BoE does not have a clear view of developments in the economy. Any further shocks could easily throw its current strategy back off course.

The banks approach is intended to prime the UK public for a long period of high borrowing costs that would dampen inflation, rather than jolting the economy and potentially stoking up financial stability risks by sharply raising rates and then reversing course with steep cuts. The most recent UK output numbers paint a picture of a vulnerable economy that is struggling with higher mortgage rates, rising taxes and the depletion of household savings. GDP rose by just 0.2 per cent in August following a 0.6 per cent quarter-on-quarter fall in July. The figures mean it is unclear whether the country will see any growth in the third quarter, according to the National Institute for Economic and Social Research. A tough fiscal settlement in chancellor Jeremy Hunt’s November 22nd Autumn Statement is set to add to the headwinds facing the economy. Hunt is expected to squeeze spending further while resisting calls from some Conservatives to cut taxes. The UK, like other economies, faces further threats from the spectre of a widening conflict in the Middle East beyond Israel and Gaza, which would likely inflame oil and gas prices and could trigger a fresh supply-driven inflation shock while hitting confidence.

Israel’s intensifying war with the Palestinian militant group Hamas has prompted many US-allied Arab countries to worry about their own security. The blame game over the explosion at the Gaza hospital that left hundreds dead highlights the dilemma of those nations that have made peace with Israel or were in the process of doing so. Reports this week suggest they are struggling to balance international demands to condemn Hamas for its October 7th attack on Israel and killing of at least 1,400 people with a suggested sympathy among their citizens for the group regarded as a symbol of Palestinian resistance.

Arab states had hoped US President Joe Biden’s visit would have a calming effect. Instead, it became too great a liability for the region’s leaders to be seen with the US president after the hospital catastrophe. As widespread protests ensued, the leaders of Egypt, Jordan and the Palestinian Authority cancelled meetings with Biden in Jordan. The President risked inflaming the situation further by siding publicly with Israel’s assertion that a Palestinian militant group was responsible for the disaster. Rishi Sunak urged the public not to jump to conclusions on where the blame for the blast lay, as during his visit to Israel he vowed Britain’s support in Israel’s “darkest hour” whilst suggesting they should still take every precaution to avoid harming civilians in Gaza as they pursue Hamas.

As these terrible events continue to unfold, we continue to feel great sadness with the cost on human life, however our investment team are also monitoring events closely to see if anything needs to be done to the portfolios we manage. Currently they are proving robust. Keeping up with current geopolitics and subsequent market movements is certainly proving a demanding task. This is probably a similar sentiment to the way England rugby union forwards feel when they look across at the giant South African pack on Saturday night in their world cup semi-final. I wish both them, and yourselves, a productive weekend and hopefully next week will bring brighter news to report. Do look after yourselves.

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