What is happening in the financial markets? April review with Luminor investment management portfolio manager Justus Daujotas

Justas Daujotas, portfolio manager of Luminor investment valdymas, comments

109 days. Such a series of growth without 3%, which was interrupted at the beginning of April. corrections were achieved by the MSCI global stock index. Positive sentiment changed in line with solid US employment data and higher-than-expected inflation in the country. The dynamics of a steadily growing economy and “sticky” prices allow the US central bank to keep interest rates high, which negatively affected both stock and bond markets in April.

April also showed a greater divide between the US and the Eurozone, where price growth was slower and positively surprising. At the same time, the stagnant economy of the European region expanded faster than expected in April, especially in the industrial sector. The likelihood that the European Central Bank will cut interest rates before the US Federal Reserve continued to grow. That combined has led to the biggest premium on US government bonds this year compared to yields on European government debt.

Luminor investment management pension funds, despite the turmoil in the markets, maintained a strategic investment allocation and continued to invest both in the main world stock markets and in longer-term bonds of European Governments and high-yield companies.

Artificial intelligence and quarterly corporate results

At the halfway mark of the S&P 500’s quarterly earnings season, companies are leapfrogging investor expectations. Fixed income is beating expectations by more than the average of the last 10 years and is just below the average of the last 5 years. However, when looking at the main companies, the divide is significant, especially in the development of artificial intelligence.

One of the companies that received positive market reactions was Microsoft. The cloud computing segment leader beat both revenue and profit expectations. Company executives said current demand for AI is outstripping technical supply. Microsoft’s revenue from Azure cloud computing services grew 31 percent year-over-year, and 7 percent year-on-year. growth was related to AI services. Also, the company said that Copilot’s AI assistant is already 60 percent used. Fortune 500 companies continue to expand. The company said that the company’s capital spending on AI will expand significantly in 2025, although it was already growing by 20 percent this quarter.

Shares of Alphabet, which owns Google, rose nearly 10 percent after the results were announced. The company is aggressively expanding into AI, doubling capital expenditures for this area this year. Market analysts say Alphabet is already making effective use of AI in its search engine, where it provides AI suggestions to users. The company’s profit grew by 57% during the year, and the perspective of a bright future is provided by various opportunities to monetize AI search, the YouTube platform, and cloud computing.

Among the losers from rising AI spending is Meta Platforms, which operates Facebook, Instagram and Whatsapp social networks. Investors’ expectations were extremely high, bearing in mind that the share price had grown by more than 40 percent this year before the results were announced. The disappointment was caused by a lower projection of financial results for the coming year and possible falling margins. Meta Platforms has warned investors that it will be years before the company invests in AI without tangible financial returns. Bearing in mind that from 2020 virtual reality segment burned $45 billion, additional capital investment in another service with a long payback is pessimistic.

Rotation of leading markets

After a steady five-month rally in global stock markets, the small drop in April wasn’t too surprising. However, in the last month, looking at individual regions, more interesting themes have emerged. For example, the stock markets of the United Kingdom and China, which have lagged behind for several years, recorded one of the highest returns in April.

In a global context, cyclical “value” corporate sectors such as energy, commodities and financials have outperformed the rest of the market. It is companies in these sectors that hold a significant share in the UK stock indices. A weaker pound and better corporate financial performance contributed to the positive trends. Analysts at UBS Bank predict that UK corporate earnings per share growth should pick up from 4 percent. this year up to 7 percent. next year. Also, inflation in the country is consistently decreasing, which gives more certainty that the Central Bank of England will start reducing interest rates in the summer.

In April, China was happy with economic growth figures. Manufacturing is growing at its fastest rate in the past six months, according to the S&P Purchasing Managers’ Index. Chinese stocks also remain historically extremely cheap relative to other markets. The price-to-earnings ratio of the MSCI China index remains double that of the MSCI USA.

Chinese investors bought more shares of local companies listed in Hong Kong to hedge against the risk of a rising yuan. At the same time, foreign funds increased their allocation to Chinese stocks for the third month in a row. The positive tone of the Politburo and reforms to support the stock market could also have encouraged the growing investment flows.

From global markets to local markets

The season of quarterly results is accelerating in the Baltic market as well. Šiaulių bankas, one of our pension fund issuers, has published its financial results. In the first quarter, the bank grew its profit by 17 percent during the year. up to 22.5 million EUR, but the return on equity decreased minimally (from 17.8% last year to 17.6% this year)

Even more important for bond investors were the bank’s capital and liquidity indicators. The capital adequacy ratio, which shows how much the Reserve Bank has to absorb potential losses, improved by nearly 300 basis points year-on-year to 21.1 percent. and remained well above regulatory requirements.

Market assessment

This market overview is only a small part of our overall assessment of market development. During the month of April, we maintained a minimally neutral level of risk in relation to stocks. The Luminor investment management team’s approach to central bank policy and technical market indicators has become more negative. Although market participants’ expectations for interest rates have become somewhat more conservative, US inflation trends and a strong economy may dictate continued tight policy for the rest of the year. Technical market indicators, such as the persistence of stock indices above moving averages or the involvement of individual stocks, fell significantly during the month.

It’s important to note that the current fall in stock markets looks “healthy” in the longer term. Too long stock market growth without 5%. the decline historically leads to significantly larger corrections. The quarterly results of the companies also do not yet indicate further significant risks for the stock markets. In the bond market, the mosaic is somewhat more fragmented, and in the short term European debt looks somewhat better.

Important: When saving in pension funds, you experience investment risk, which means that the value of the investment can go up or down, and there is a possibility of getting back less than you invested. “Luminor investment valdymas” UAB does not guarantee investment returns, profitability of pension funds or annuity payments. Past performance of pension funds is no guarantee of future performance. Before making a decision to accumulate an additional pension in Luminor pension funds, familiarize yourself with the pension fund rules, applicable deductions, investment strategy and risk factors. Pension funds are managed by “Luminor investment investment valdymas” UAB, k. 226299280.