Weekly Investment Update (06/23/2023)

U.S. Secretary of State’s Trip to China Helps Stabilize Volatile Geopolitical Relationship

While U.S. Secretary of State Antony Blinken’s visit to China yielded no significant breakthroughs, the trip was still largely seen as a success. The resumption of high-level dialogue and President Xi’s willingness to meet with Secretary Blinken are a sign that the Chinese leadership seeks to stabilize the U.S.-China relationship. Secretary Blinken’s China visit resumes communication between the two superpowers after talks were halted following the February’s Chinese spy-balloon incident. With both sides describing the visit and ensuing conversations in a positive light, the meeting likely establishes a near-term floor under the relationship, decreasing the likelihood that a misunderstanding between the two nuclear powers could escalate out of control. Secretary Blinken's Chinese counterpart accepted an invitation to visit the U.S. to continue talks, a move that could pave the way for a Biden-Xi meeting later this year.

As China’s economic recovery stalls, the leadership has shown an interest in renewed dialogue with the U.S. government and business community. Secretary Blinken's trip follows a string of visits to China by current and former chief executives of some of the largest American corporations including Tim Cook, Bill Gates, Jamie Dimon, and Elon Musk. China has sent mixed economic messages as of late, hosting top American businesspeople while also increasing scrutiny of American businesses operating in China with moves such as raiding the Shanghai offices of consulting firm Bain & Company. We continue to monitor developments around the U.S.-China relationship, particularly as it pertains to Bessemer-managed portfolio holdings. 

Bank of England Surprises With 50 Basis Point Rate Hike

The Bank of England (BoE) Monetary Policy Committee voted 7-2 on Thursday to increase U.K. policy rates by 0.5%. The larger-than-expected hike, taking the lending rate to 5%, came hot on the heels of stronger-than-forecasted inflation data earlier in the week. Both headline Consumer Price Index (CPI) and core CPI surprised to the upside for the fourth consecutive month. In stark contrast to most Western countries, which have witnessed inflation fall back toward target levels, the U.K. saw its inflation rate accelerate. Headline CPI rose 8.7% (vs. 8.4% expected) and core CPI, which excludes volatile items such as food and energy, hit a 31-year high of 7.1% (vs. 6.8% expected). The U.K. now has the unenviable status of having the highest inflation rate in the G7 (Italy has the next highest rate at 7.6%).

Britain has struggled more than other countries in its inflation fight as the country’s weak currency has resulted in higher imported food costs, a shortage of workers since Brexit has pushed up wages, and aftereffects from last year’s energy-price increases are still being felt. Andrew Bailey, the BoE governor, was stern on the Monetary Policy Committee’s view of inflation, stating, “if we don’t raise rates now, it could be worse later. We are committed to returning inflation to the 2 percent target and will make the decisions necessary to achieve that.”  The BoE hopes that by raising rates to the highest levels since 2008, it can start, finally, to win the battle against inflation.

The action by the BoE stands in sharp contrast to the Federal Reserve, which left U.S. interest rates unchanged at its June meeting. Separately the Swiss, Norwegian, and Turkish central banks also raised policy rates on Thursday, with each bank hinting of further rate rises to come later in the year. Inflation battles in some countries are going well, but the war, globally, is far from over.

U.S. Homebuilder Data Remain Resilient Amid Macroeconomic Headwinds

The combination of tight supply along with a still-strong labor market appears to be supporting new home construction, though high mortgage rates, tighter credit conditions, and low housing affordability remain headwinds. U.S. housing starts unexpectedly rose above consensus expectations in May, increasing 21.7% month-over-month relative to the estimated decline of -0.1%. Notably, the NAHB home builders’ sentiment index jumped to an 11-month high as a limited supply of homes continued to generate interest in new construction.

The number of actively listed homes for sale in the U.S. remains near record lows. Many current homeowners have mortgage rates fixed below 6% and are choosing not to move, since buying a new home would mean taking on a higher mortgage rate.  Housing inventory had been declining for years following the 2008 financial crisis, and record low mortgage rates in 2020 and 2021 incentivized home buying, further widening the supply-demand gap. Record low listings benefit homebuilders, as prospective buyers look to buy newly constructed homes. While homebuilder data have improved due to constrained inventory and a resilient consumer, we remain mindful that headwinds, including tighter credit, softening economic conditions, and higher mortgage rates, may cause weakness ahead. Bessemer’s All Equity Model portfolio remains underweight the real estate sector relative to its benchmark.