Emma Wall, Chief Investment Strategist, Hargreaves Lansdown: “Luxury good companies LVMH and Hermes have announced results this week, revealing the stark impact of the Iran war on sales. Share prices for the sector have fallen on the news. At a starting price of £12,000 a pop, Hermes Birkin handbags may not be considered essential expenditure for the vast majority of the global population, but luxury goods sales are often a leading indicator of economic growth and so market watchers are paying attention.
Sales in the Middle East have, unsurprisingly, been most effected, but so too have sales in China – one of the luxury sector’s most important regions. Hermes also revealed sales in Paris are down, as fewer shoppers undertake international travel.
The macro data flow is similarly negative this week – with the International Monetary Fund (IMF) estimating that the war will hamper global growth by 0.2 percentage points this year, forecasting expansion of 3.1%. The UK is set to feel the brunt of the disruption with growth predicted at 0.8% for this year, downgraded from 1.3% in the January forecast. The IMF kept in place its forecast for 2027 however, suggesting resilience to the current headwinds.
The IMF shares our base case that the war does not escalate from here, nor become increasing protracted, disrupting energy markets and supply chains into next year. We consider Trump has little appetite for the impact on US stock markets, bond markets and opinion polls – and this week’s ceasefire has brought welcome respite, however fragile. In the event that the extreme scenario does play out however, with oil at $125 a barrel into 2027, the IMF warned that inflation would be stoked and growth would weaken.
Our house view has remained throughout the war that the Bank of England will hold rates while Iran war is ongoing but is unlikely to hike. Comparisons with the Russia-Ukraine war – the impact on inflation in 2022 and associated rate hikes – are not comparing apples with apples. Interest rates were near zero when Russia invaded Ukraine, and sit above neutral rate today, providing buffer to the impact of elevated prices. Gilts, fixed-term cash, and actively managed bond funds look attractive in this environment.
Markets currently are looking through the war – with the S&P 500 back to pre-conflict levels after a strong session yesterday. Europe also had a strong day yesterday, which has meant some softness on the open today, a mix of some company specific news and market dynamics. The FTSE 100 has opened flat.
Where do markets go from here? Expect continued volatility, and the recent rally may be a good opportunity to take gains and rebalance where needed ahead of earnings season.”
|
