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The Week In Markets – 12th August – 18th August 2023

It has been a tricky week in markets, with equities and bonds coming under pressure in developed markets, while data from China continues to indicate that the world’s second largest economy is weakening.

Last week’s confirmation of deflation in China was backed up this week by weaker than expected industrial production. There was also the surprise development that China will no longer be reporting on youth unemployment while they “optimise labour force survey statistics.” The last figure from June showed youth unemployment was 21.3%, and one questions whether China would have suspended youth unemployment data if the reading was a little more positive! In response to the continued weakening data there was surprise policy rate cuts for the second time in three months to try and stimulate the economy.

There was mixed data from the UK this week, with wage growth data coming in at the highest level since comparable records began in 2001. The figure of 8.2% (including bonuses) for the three months between April and June will make for uncomfortable reading for the Bank of England (BoE) and is likely to lead to further interest rate rises. Despite the acceleration in wage growth, unemployment nudged up to 4.2%. Wage data was followed by inflation data, with headline inflation continuing to fall, coming in at 6.8%. While it is pleasing that inflation continues to trend lower, core inflation (excludes food and energy) stayed at 6.9%, while services inflation increased to 7.4%. The impact of this was for bond markets to change expectations once again for peak UK interest rates, which have now moved out to 6%. 

On Wednesday we saw the yield on the US 10-year Treasury bond hit a 15-year high on the back of stronger than expected industrial production data and the release of the latest US Fed meeting minutes. The US economy continues to perform ahead of expectations which has led to a more consensual view that a US recession is less likely. This has led to inflation expectations over the longer-term increasing, pushing yields higher. UK government bonds also sold off this week, with the 10-year government bond yield breaching 4.7%, the highest level this year. Like the US, the UK economy is growing faster than economists had expected; the higher economic growth is expected to lead to more sticky inflation.

Much like 2022, higher bond yields have been a headwind for equities recently. The tech-heavy Nasdaq index, which had a very strong H1 2023, closed at a six-week low on Wednesday. There was some excitement in the IPO market, with Vietnamese electric car maker Vinfast listing this week. The share price more than doubled on open and at one point during its first trading day the share price had risen from $10 to $37! This valued the loss-making EV carmaker at more than Ford and BMW.

This was a tough week for most asset classes, continuing the weakness in August, after a strong July. The day-to-day noise can be uncomfortable and focusing on it too much can encourage short-term decision making, which we believe is often not in the best interest of returns. The bigger picture continues to point to economies proving resilient to higher interest rates, while inflation, in general has been trending lower from recent peaks over the last 12 months. This is accompanied by some of the highest yields available on bonds in 15 years and below average valuations for much of the equity market, all encouraging signs for future returns.

Andy Triggs, Head of Investments

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 5th August to 11th August 2023

For the football lovers, the Premier league is back this evening. Even better news for Arsenal fans, as Tottenham striker Harry Kane, who consistently scores in the North London derby, has seemingly agreed a deal to join German champions, Bayern Munich. The urge to win trophies and compete in the Champions league was greater than staying to eventually make history and break Alan Shearer’s premier league top scorer record. Tough decision!

Moving on from the exciting transfers news, US inflation data was released on Thursday.  Headline inflation for the month of July came in at 3.2%, a rise from the previous month’s 3% figure. Core inflation (excludes energy and food prices) was 4.7%, slightly below expectations of 4.8%. Housing costs were once again the leading contributor, which was up 7.7% year on year.  Inflation within the US has been on a steady decline from its peak of 9.1% in June 2022, however investors believe the “sticky” part of inflation is now kicking in and we can expect the US Fed to carefully consider if any additional rate hikes are required. With oil prices rising over recent months, it is no surprise to see headline inflation nudge up and this is likely to continue next month.

Last week, Fitch, an American credit rating agency surprised markets by downgrading US credit to AA+. This week, Moody’s, another established credit rating agency downgraded credit ratings of many mid-cap and small-cap US banks, with concerns that the banking sector will be tested by potential liquidity and profitability risks. This came off the back of weaker second quarter results for some smaller US banks, as the elevated interest rates have led to tighter credit standards and therefore lower loan demand from businesses and consumers.

UK GDP was announced this Friday morning and came as a surprise, as for the month of June (year-on-year) GDP increased by 0.9%, beating expectations of 0.5%. In the three months leading up to June, the GDP rate was 0.2% and the office of National Statistics claimed the additional bank holiday in May was a major factor for increased output in June. Sterling erased recent losses to rebound against the USD to 1.27. However, it seems that good news can lead to bad news as the solidified strength in the UK economy may cause the Bank of England (BoE) to continue further with interest rate hikes. The potential for higher rates weighed on the UK large cap index, which has fallen around 1% today. 

China’s post pandemic recovery has stuttered since the start of the year and inflation data this week came in negative, at -0.3%. Producer price index (PPI) is a measure of costs for manufacturers and was -4.4%, better than the -5.4% expected. This now puts China’s economy into the state of deflation – a decline in the price levels of goods and services with global demand for Chinese goods faltering. China’s central bank have pushed back against calls for further policy changes after measures such as the easing of property curbs have been implemented.

Markets continue to be choppy in August, after a strong July. While we monitor and review markets on a daily basis, we prefer to focus on the long-term (multi-years) when it comes to strategic decision making. Referring back to the start of the premier league, consistency within a season is the ultimate key to success and we will all be hoping our beloved clubs can break the Manchester City era of dominance.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Month In Markets – July 2023

The Month In Markets - July 2023

After a shaky start, the month of July proved to be very strong for equity markets, with select fixed income markets also joining the party. This year’s equity laggards – emerging markets, Asia and UK – all saw a resurgence. 

When we consider emerging markets and Asian equity indices, it’s worth remembering that the biggest constituent of both indices is China. The Chinese market was up approximately 9% (sterling terms) in July and was a key driver of returns for the indices.

So, what propelled Chinese equities in July? Well, it seems the old mantle of ‘bad news is good news’ was in play. China’s economy is stalling, and the re-opening boom has been short-lived. The country is on the brink of experiencing outright deflation, while the weakness in the global economy is negatively impacting China’s export market, which has been the economic heartbeat over the last 20 years. While this may all sound like ‘bad news’, it does, in fact, increase the likelihood of intervention and policy support to try and stimulate the economy going forward – this is the ‘good news’. It is likely that Chinese equities advanced in anticipation of government intervention. By the end of the month, China’s top policymakers had addressed the situation and pledged to step in and support domestic demand with stimulus and policy measures, that were to be implemented in a “precise and forceful manner”.

Inflation data for China made interesting reading, coming in at 0.0%, flirting with deflation. More worryingly was a 5.4% drop in producer prices compared to 12 months earlier. Producer price index (PPI) data is a good leading indicator of future inflation, and this data print points towards China tipping into deflation in the coming months. This will have an impact on the global economy as well, with China now effectively exporting deflation to the rest of the world through falling prices for many of its exports. This should be a benefit to the Western world which is continuing to grapple with inflation in their economies.

Both UK equity and bond markets were boosted by headline inflation coming in below expectations at 7.9%, a 15-month low. The past year has been characterised by UK inflation continually being higher than anticipated so it made for a refreshing change to receive some positive inflation news. The impact of the data led to a shift in market expectations that UK interest rates would peak at 6.5%, to a new peak rate of 5.75%. Lower interest rates should in theory benefit consumers and corporates alike, through lower borrowing and financing costs. As such equities caught a bid, with the mid-cap index the winner on the day, rising over 3%.

UK assets have been unloved and under-owned pretty much since the Brexit vote. Selling pressure has intensified recently as the UK has grappled with political issues alongside stubbornly high inflation. The news that the country may finally be getting a grip on inflation could help improve sentiment and potentially reverse these outflows from UK assets, which would be extremely powerful for valuations. There is clearly a long way to go, but July has offered some green shoots of hope.

Equities, in general, were buoyed by the market’s increased belief of a soft-landing scenario playing out – inflation falling close to target, without labour markets and economies cracking. US economic data backed up this narrative – their headline inflation fell to 3% and the labour market continued to exhibit strength. There are still risks to this thesis, and the full impact of aggressive interest rate hikes is still yet to be seen. However, economic growth and employment continues to highlight resilience, particularly in the US, which is the world’s largest economy.

Our approach of country diversification and focus on fundamental analysis meant portfolios had exposure to the cheaper, unloved areas of the equity markets which performed well in July. Markets are complex systems and ever-changing, so it makes sense to have an adaptable approach that recognises the world can and will look different in the future.

Appendix

5-year performance chart

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Andy Triggs

Head of Investments, Raymond James, Barbican

The Week In Markets – 29th July -4th August 2023

This week has ushered in a new month, and with it a change in market sentiment. After a very strong month of July, equity and bond markets have gotten off to a rocky start in August. It’s also been a tough week for UK Prime Minister Rishi Sunak, whose private home was draped in black fabric by Greenpeace protestors as they reacted to the news of Britain committing to hundreds of new North sea oil and gas licenses.

Staying with the UK, the Bank of England (BoE) met on Thursday and announced a further 25bps (0.25%) rise to interest rates. There was certainly more of a split decision with this vote as six of the nine members voted for the 25bps increase, two members voted for a stronger 50bps increase whereas Swati Dhingra, as usual, was the odd one out, voting for a pause in rates. UK rates are now at a 15-year high of 5.25% with extremely hawkish commentary coming from Governor Bailey. He held firm in a message that the UK population will not want to hear; the bank rate will remain “sufficiently restrictive” in order to reach the inflation target of 2%. The positive is that investors now believe the peak in interest rates will be 5.75%, a month earlier this expectation was at 6.5%. A further 0.25% rise is expected at the next meeting in September.

The housing market is interlinked with interest rates, and it was no surprise therefore to see UK house price data highlight falling property values. Nationwide, the UK leader in mortgage lending, reported average house prices was down 3.8% in July (year-on-year). Mortgage rates remain high which is impacting potential homebuyers. To put it into perspective, first time buyers on a 6% rate would see mortgage payments account for approximately 43% of disposable income.

Eurozone inflation for the month of July (year-on-year) fell to 5.3%, in line with expectations and below the previous month’s figure of 5.5%. Fabio Pancetta, a European Central Bank (ECB) member, spoke this week, making the case for a pause in interest rate hikes. The ECB is due to meet next month, and investors believe a pause in rates could be on the horizon as Pancetta argued sustaining rates at the current level would be enough to see inflation fall to the 2% target without “hurting the economy or jeopardising financial stability”.

The tough start to August was kicked off by the surprise downgrade of US debt by credit ratings agency Fitch. The downgrade from AAA to AA+ was driven by “a steady deterioration in standards of governance”. Investors have previously considered US government debt to be one of the best safe haven assets, so this downgrade could impact this, although we think this is unlikely. Further downside pressure was put on US bonds as it was announced the US was planning to ramp up issuance (increase supply) following the extension of the debt ceiling. There is a risk that funds will be pulled from equities to purchase the new issue of government bonds and as such we saw equity markets suffer.  The S&P 500 fell 1.4% on the day whilst the tech-heavy Nasdaq index fell 2% and this ripple effect crossed the waters as the FTSE 100 also closed down 1.38%. After a strong period in equities, it is natural to experience pullbacks and consolidation.

US Non-farm payrolls (NFP) were released this Friday afternoon with 187,000 jobs created, below market expectations of a 200k increase. The data release still signals a robust labour market however this is the second consecutive month that NFP has come in below expectations. The US Fed are likely to continue to measure the impact of the rate hikes on the economy, including the US inflation print next week. ahead of their September meeting. Until then, a pause or further increase in interest rates is anyone’s guess.

To round up the week, our key message is as important as ever. Maintaining a long-term investment mindset to markets best allows to take advantage of the short-term instability. We will continue to blend asset classes in portfolios and take advantage of new opportunities that arise.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

Great Expectations

July has proved a strong month for investors in the financial markets, particularly across the stock markets of Western developed economies. Returns were generated against a backdrop of economic resilience, especially in the United States where, despite the Federal Reserve having raised interest rates in excess of 5.00%-points in little over a year, growth has persisted and even exceeded expectations.

The Week In Markets – 22nd July to 28th July 2023

It has been a busy week in the sporting calendar with the FIFA Women’s World Cup underway in Australia and New Zealand as well as the fifth Ashes Test taking place at the Oval.   

Data releases have been quiet on the UK side this week; however, we did see results from some of the largest UK listed companies such as Lloyds Bank and Shell. Shell reported a 56% fall in profits to £3.9bn, a result of falling energy prices, leading to a slowdown of their share repurchase programme. Shell experienced record profits last year, benefitting from the then rise in energy prices after Russia invaded Ukraine leading to fears on supply shortages. The banking sector has been in the spotlight for much of this year, driven by the collapse of Silicon Valley Bank. It was pleasing to see Lloyds post a robust set of results which included an increase to their dividend. The bank did however set aside £660m as a provision for bad loans, highlighting that they do expect the economy to remain under pressure in the near term.

An event highly anticipated this week was the US Federal reserve meeting on Wednesday determining the next move of US interest rates. Rates were raised by 25bps as US Fed Chair Jerome Powell noted the economy “still needed to slow and the labour market needed to weaken” before we see a cut in interest rates. This is now the 11th rate hike in the last 12 meetings after we saw a pause in rates in June. Despite weaker than expected inflation data in July, the US Fed highlighted their determination to tackle inflation with this latest rise. The Fed may have felt vindicated with their decision on Thursday as both GDP data and unemployment claims data was much better than expected, highlighting the current resilience of the world’s largest economy. The belief that inflation will fall, employment will remain robust, and a recession will be avoided – the so called ‘soft-landing’ scenario – is increasing.

Following the US Fed decision, we saw the European Central Bank (ECB) also raise their benchmark interest rate by 25bps to 3.75%, the highest level seen over the last 20 years. ECB President Christine Lagarde usually follows the meeting with a hawkish tone and this meeting was no different. She claimed to want to “break the back of inflation and we will get there, come what may”. Eurozone inflation fell to 5.5% in the month of June, which was a positive sign, however the outlook for economic growth has begun to look challenging with countries such as Germany suffering slowing growth. Most recently Russia’s withdrawal from the Black Sea grain initiative could lead to a pickup in food prices, which would provide further inflationary pressures.

On Friday morning we saw the Bank of Japan (BoJ) hold interest rates at 0.1%, however they announced a loosening to their yield curve control policy. This is BoJ Governor, Kazuo Ueda’s, first major policy change since he took control in April this year and the effects saw the yields on the 10yr Japan government bonds rise to their highest levels since September 2014 (prices fall). Investors are now left to consider if this move is the beginning of more structural policy change and a potential tightening cycle.

After last week’s fireworks in markets, driven by lower-than-expected UK inflation data, this week has been relatively benign in markets. The latest rise in interest rates from the US could very well be their last, while it looks as though the ECB are towards the end of their hiking cycle as well. The key question as we head into the end of the year and beyond is whether the impact of the lagged effects of interest rate rises causes excessive economic damage. Time will tell, but we believe the best way to approach this is to include a range of assets in portfolios that can perform in a variety of market conditions and avoid being too concentrated in risks and exposures. 

Andy Triggs, Head of Investments & Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 15th July – 21st July 2023

It was Wimbledon finals weekend and we saw Carlos Alcaraz win an epic five-setter, claiming his first Wimbledon title. Carlos Alcaraz denied Novak Djokovic a fifth successive Wimbledon title and became the first champion outside of the “Big four” of Djokovic, Federer, Nadal and Murray to win the Wimbledon men’s final since 2002. With this win, history has been made and this could be a symbolic moment for the sport with the passing on of the crown.

It’s felt like a long time since we were able to report on better-than-expected UK data, but we are able to do that this week. UK inflation data was released on Wednesday and came in below consensus. Headline inflation fell to 7.9% in June from the previous month’s 8.7%, with core inflation (excluding food and energy prices) falling to 6.9%, below the 7.1% expected. The data had a profound impact on UK markets, with the large cap UK index rising close to 2% on the day, while the more domestically focused mid-cap index rose over 3%. We also witnessed a big re-pricing within bond markets. Prior to the data the expected terminal rate for UK interest rates was 6.5% – this fell to 5.75% on Wednesday. This should hopefully feed into mortgage rates over the coming weeks. Chancellor of the Exchequer, Jeremy Hunt, as ever doubled down that the government and Bank of England (BoE) have had to make tough decisions on inflation in recent months and there is still a way to go to reach the inflation target of 2%.

We have also seen the release of UK retail sales this week, another key measure on the health of the economy. Month-on-month, consumer spending was 0.7% greater in June, coming in ahead of expectations. There was a bounce up in food sales, department stores and furniture stores.

Tata group are an Indian conglomerate that own Jaguar Land Rover and this week they announced a deal to build an electric vehicle battery plant in Britain, a major boost for the UK car industry that currently lags the US and EU in the green space. It will become the first Tata gigafactory outside of India, potentially creating up to 4,000 jobs at a total investment of £4bn. The factory has plans to scaleup and provide almost half of the battery production needed in the UK by 2030, in line with Britain’s plans to ban the sales of new petrol and diesel cars from the same year.

US retail sales gave a different story this week as they rose 0.2% (month-on-month) in June, lower than the 0.5% expected. Sales at supermarkets and service stations fell and spending at restaurants and bars slowed. Online sales led the way and surged 1.9%, the most over the last six months, and we are likely to see further gains next month due to Amazon hosting their Prime day promotion – the biggest one to date. With retail sales still rising albeit not as strong as before, the US Fed is still likely to increase interest rates next week following on from a ‘skip’ at their last meeting.

Japan inflation was released this morning and will certainly catch investors eyes as core inflation came in at 3.3% for the month of June (year-on-year). This was in line with expectations, but it is now the 15th consecutive month core inflation has been above the 2% target. An increase in utility bills in addition to increases in food prices is diminishing households disposable income and this data will be closely analysed by the Bank of Japan (BoJ). Sustained inflation for such a period of time has investors debating whether the BoJ will phase out their controversial yield curve control. 

There has been further M&A activity this week in the UK market, with US private equity firm Searchlight Capital agreeing to buy the UK listed asset manager Gresham House in a £470m deal. Given the relative cheapness of UK assets currently it is no surprise to see firms swooping in and picking off UK businesses and we would expect this trend to continue if we don’t see a re-rate of UK equities.

It has been a positive week for portfolios, boosted by strong performance from UK assets, while sterling weakening has also been a driver of returns. US mega-cap growth stocks have seen big swings this week, with Microsoft reaching a new all-time high earlier in the week, although this was offset with large falls in Tesla, Netflix and Nvidia on Thursday.

To round up the weekly, I refer to Carlos Alcaraz’s historic performance again. Alcaraz was certainly the underdog heading into the final and underdogs can undoubtedly be overlooked in the investment world. We maintain the message that it is important to have diversification within portfolios and certainly include underdogs, such as UK equities, alongside the fan-favourites, such as US technology.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 8th July – 14th July 2023

Last week we entered the month of July but seemed to miss the opportunity to mention a famous fact about the month. July was renamed in honour of Julius Caesar, who was born in July, changing it from the previous name Quintilis. The historic facts keep coming as we are just days away from the 54th anniversary of Apollo 11, the first spaceflight to land on the moon.

The UK unemployment rate for the month of May was released on Tuesday, coming in at 4%. This was a rise from the month before (3.8%) and if we were analysing this data alone we would assume that the UK labour market has begun to weaken. However, strong wage growth put things into perspective as we have seen a 7.3% (excluding bonuses) jump in wages in the three months to May. This is the highest release since the report began in 2001 and could be enough to convince the Bank of England (BoE) to further raise interest rates as they fear a wage-price inflation spiral could ensue. Yields on the two-year government bond initially rose at the start of the week on the back of this strong wage data.

On a more positive note, US inflation has continued to descend with headline inflation down to 3% (year-on-year) and core inflation (excludes food and energy prices) falling to 4.8%. Both the fall in headline and core inflation were greater than consensus expectations. A significant drop in inflation was a result of the fall in energy prices which rose in 2022 after Russia’s invasion of Ukraine but has since dropped 16.7% over the last year. The US Fed’s decision to pause rates at the last meeting was a calculated decision in order to determine the impact the rate rises had on the economy to date. Although there are signs that the economy has responded to the significant interest rate hikes, the US are still shy of the 2% target, and we could see the Fed raise rates further in order to get over that line.

US Producer Prices Index (PPI) rose 0.1% in the month of June and were also up 0.1% on a year-on-year basis, further encouraging signs that inflation in the US could continue to fall. PPI measures the costs of goods for manufacturers; if their input costs are not increasing there is little need for the manufacturers to increase the price of finished goods. The PPI increase was the smallest year-on-year rise since August 2020.

The better-than-expected US inflation and US PPI data acted as a boost to both equities and bonds, and the impact was felt across the pond with UK assets also joining the party. This week we have seen Morgan Stanley release a note stating that UK equities and credit are the cheapest in the world. They suggested that falling inflation in the second half of the year could act as a catalyst for a re-rate of UK assets.

The risk-on nature of markets, coupled with an expected imminent end to the US Fed hiking cycle led to the US Dollar weakening against most major currencies, including sterling. We have seen the rate reach new 15-month highs of $1.31. A firmer UK currency is normally associated with stronger domestic equity performance. It’s worth noting as well that import prices should come down as the currency appreciates, which would help the battle with UK inflation.

China’s post pandemic recovery is quickly losing steam and the central bank have been called upon to use policy tools such as medium-term lending facilities in order to weather the storm. China’s exports fell at their fastest pace, down 12.4% in June as the global demand for goods falls. Exports to the US are the top destination for Chinese goods however they have fallen significantly, and domestic consumption is sluggish. The Chinese government set a GDP growth target of 5% this year after falling short in 2022, however, expectations for the economy heading into Q3 2023 are being revised downward. China year-on-year PPI data came in at -5.4% this week. The fall in factory gate prices could see China effectively exporting deflation to the rest of the world as the prices of their goods falls.

Rounding up the weekly, we have certainly had more positive news this week, particularly around US inflation, resulting in a bounce back in markets. As always we maintain the necessity for diversification within portfolios in order to benefit from market moves, while also aiming to protect portfolios from heightened volatility.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment

The Month In Markets – June 2023

The Month In Markets - June 2023

June’s monthly note could very easily read “See May monthly note”. The key themes of elevated UK inflation and excitement around artificial intelligence (AI) that were discussed in May have dominated markets in June as well.

As can be seen from the chart it was generally a good month for equities, and a bad month for anything non-equity. It appears the equity market is taking the glass half full approach, shrugging off higher interest rates, instead focusing on the prospect of the global economy avoiding a recession and companies being able to deliver strong earnings growth over the coming years. This is most evident within the US equity market, which, after a weak 2022 has rebounded very strongly in both the month of June, and 2023 more generally. Non-equity assets had a more disappointing June, and fixed income assets have had a lackluster 2023. They have adopted a more glass half empty mantra, with persistent inflation and higher interest rates plaguing the asset class in 2023.

Let’s dig a little deeper into the US equity market, which continued to rally in June. We have written about the strength of the AI focused stocks in recent notes, which have almost single handedly propelled the US equity market higher. Although not covered in the charts, it was pleasing to see increased breadth in the US market – the equal weighted S&P 500 index actually outperformed the S&P 500 index (market cap weighted) in June. Over the course of 2023 the equal weighted index is still lagging by circa. 10%, despite the recent rally. Stronger economic data coming out of the US in June was likely a driver for the broader rally. We witnessed Q1 GDP come in at 2%, a big rise from the 1.3% estimate, showing the US economy is still growing at moderate levels, despite many commentators expecting a recession to be upon us already.

The theme of AI has certainly not retreated, and we have seen companies such as Nvidia and Apple continue to do well. In May, Nvidia’s market cap hit $1 trillion on the back of a huge AI driven rally. Not to be outdone, Apple closed on 30th June with a market cap of $3 trillion, a new closing-high for the stock.

The technology sector, and Nasdaq index more broadly, were hit hard in 2022, with higher rates negatively impacting valuations. Many commentators had suggested that high valuations were valid in a world of ultra-low interest rates, however, with higher rates, lower valuations were appropriate – we witnessed a de-rating of valuations in 2022. Interestingly, this year we have seen interest rates and bond yields (at the short-end of the curve) continue to rise – if the playbook of 2022 was in play, one would expect the technology sector to have continued to struggle this year. The opposite has been the case, and we have seen technology and other growth stocks re-rate (become more expensive) in spite of rising interest rates. It will be interesting to see if this strength can continue.

The UK equity market was the weakest developed market during the month (in sterling terms). As noted at the beginning of the article, elevated inflation has been a burden for the UK and June was no different. Headline inflation was reported at 8.7% once again, when it was expected to fall, while wage growth and core inflation for the month of May (reported in June) were both higher than expected. The result of this saw the Bank of England (BoE) raise interest rates by 0.5%, taking the rate to 5%, it’s highest level in 15 years. It’s worth noting that the US Fed did not raise interest rates at their previous meeting, while the BoE in fact increased their pace of hikes from 0.25% to 0.5%, highlighting the UK’s continued fight against inflation. With the market now pricing in peak UK rates at around 6%, there has been increased scrutiny on the UK economy, and question marks over whether the economy can handle that level of rate without a recession ensuing. The UK mid-cap index, which is seen as more domestically exposed, has significantly underperformed the UK large cap index, which has more international exposure, by revenue. The gap was around 2.5% in June, however if we look back over the last 18 months when inflation expectations began to increase, the gap is around 30%!

The UK equity market is now trading on a discount to its own history and a significant discount to the rest of the world. While the outlook is indeed challenging, and not being made easier by higher interest rates, the economy at present is performing ahead of where most CEOs and economists expected. We’ve seen consistent upgrades to economic growth forecasts throughout the year and in the month of June saw profits upgrades from key retailers Next and ABF (Primark owner), not something one typically associates with a troubled consumer. The market is clearly pricing in much tougher days ahead for consumers, but right now, the consumer is standing strong. One of the reasons for this is likely to be the delayed response to higher interest rates – indeed many people have enjoyed significant wage increases, but are yet to see debt payments, such as mortgage costs increase yet. Savers are also benefitting from greater returns on their savings, and this is propelling the ability to spend.

And so to bond markets (fixed income). US and UK government bonds and high-quality corporate bonds fell in price during the month. This was largely driven by increasing interest rate expectations in both countries. Typically, bonds have an inverse relationship to interest rates. While US inflation was reported at 4% during the month, the US Fed struck a hawkish tone at the press conference, highlighting their willingness to resume interest rate hikes to tackle inflation. As touched upon already, the UK BoE didn’t’ just talk tough, they acted, by raising rates by 0.5%. We have seen yields on UK government bonds with short maturity (1-3 years) rise to above 5%. With inflation expected to fall towards 5% by the end of the year, government bonds are starting to offer positive real returns once more.

Emerging markets and Asia continued their struggles, once again partly driven by China. During the month, China cut interest rates on short-term borrowing in an effort to help kickstart the economy. With an inflation rate of just 0.2%, there is little concern that reducing interest rates will lead to problematic inflation levels.

The end of the month also brings an end to the first half of the year. Within equity markets last year’s losers (US growth stocks) have become this year’s winners, while the winners of 2022 (such as banks and oil) have become this year’s laggards. Developed market government bonds are yet to catch a bid, and have continued to suffer, albeit to a much lesser extent than 2022. We do believe these bonds are offering a lot of value on a forward-looking basis, while also likely providing good diversification benefit to equities. The short-term outlook for the global economy has a high degree of uncertainty at present, however most equity markets have discounted some of this uncertainty into prices. With such uncertainty and much of the interest rate pain yet to be felt, we do think one needs to tread a more cautious path. With high expected nominal returns on assets such as cash and government bonds investors can now be compensated without taking excess equity risk at this stage in the cycle.

Appendix

5-year performance chart

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Andy Triggs

Head of Investments, Raymond James, Barbican

The Week In Markets – 1st July – 7th July 2023

This week we entered the seventh month of a year that has certainly been full of surprises. We haven’t been bombarded with a multitude of data releases like previous weeks, however, we’ve seen markets respond significantly to the data, creating a challenging week for both equities and bonds.

This week saw the high street lender Halifax release housing data which showed UK house prices fell 2.6% on a year-on-year basis. This is the biggest annual decline since June 2011 and with continued elevated interest rates we could see further weakness in the housing market. In reaction to the Bank of England (BoE) raising interest rates to 5%, banks will have to adjust mortgage rates to reflect this. The average five-year fixed rate mortgage has now risen to above 6% – we last saw these levels in November 2022 following the reaction to then Prime Minister Liz Truss’ “mini” budget. High street bank bosses, just like investors, are expecting further interest rate hikes by the BoE this year in an effort to tackle inflation, with concerns that fixed rate mortgages could reach 7% by the end of summer. While this may not be an immediate problem, given the high proportion of households on either a fixed-mortgage, or no mortgage at all, if rates are held at these high levels for an extended period of time, more and more consumers will be negatively impacted. It is estimated there are around 2.4 million fixed mortgages that will need to be refinanced between now and the end of 2024.  

Staying within Europe, Germany, which is Europe’s largest economy, recently fell into a technical recession. This week we saw the release of the nation’s manufacturing Purchasing Managers Index (PMI), an index that calculates the expansion or contraction in the manufacturing sector. For the month of June, we saw the Manufacturing PMI revised down to 40.6, down from 43.2 the previous month. A PMI figure below 50 highlights a contraction, with Germany’s PMI now contracting at its fastest pace in over three years. There was better news for Germany’s services sectors, which continues to expand, albeit at a slowing pace. The data came in at 54.1, down from 57.2 for May.

On Wednesday the latest US Fed meeting minutes were released, as well as a press conference from the US Fed member John Williams. Both the meeting minutes and Williams’s comments were seen as hawkish with the Fed member stating “we still have more work to do”. US government bonds sold off on the news, with further interest rate hikes now expected this year.

Bond markets continued to weaken on Thursday following the release of very strong private payrolls data, which pointed to 497,000 private payrolls added in the month of June. This was considerably ahead of expectations and highlights the strength of the private labour market. It wasn’t just US government bonds which sold off, UK and European bonds resumed their recent slump as a ‘higher-for-longer’ mantra was adopted by investors. We are now witnessing higher yields in the UK than compared to the aftermath of the mini-budget last year. 

Staying with US labour data, this afternoon has seen the release of the closely watched US Non-Farm Payrolls data. For the first time this year, the data came in slightly lower than consensus, with 209k jobs added against an expected 230k. However, the data still points to a healthy labour market, while wages grew at 4.4% year-on-year, which is now real wage growth in the US given inflation is at 4% currently. The data has re-affirmed the belief that there will be further interest rate hikes from the US Fed.

It has been a difficult week in markets with positive correlations between equities and bonds resuming, driven by concerns around inflation and further interest rate hikes. With yields at the highest levels since the financial crisis and valuations in most equity markets trading at discounts to history, it feels as though patience and time are two characteristics that investors need to focus on.    

Andy Triggs, Head of Investments & Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

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