At the halfway point of the year, some of the key themes which have influenced global markets through the early months of 2023 have continued to dominate. Charlie Buxton, our Head of Investment Management, spoke to Ian Hooper, Chief Investment Officer at Progeny, to explore some of the recent developments.
When it comes to global investment markets, two factors continue to play out. Firstly, strong returns are largely down to the performance of the leading technology stocks in the US. And secondly, inflation fears and rising interest rates across Western economies continue to be a cause for concern
What areas are the strongest – and most fragile?
Let’s take a look at the overall current picture. For growth assets, it’s clear that share prices have presented very differently between countries, with much higher performance seen in Japan and the US than in Europe, and particularly in the UK. One of the reasons for this is the different inflation backdrops seen in these countries and how monetary policy is responding.
Turning to the UK, it’s clear that there are far more signs of embedded inflation and a wage-price spiral than elsewhere. Particular events, or supply side shocks such as mounting energy prices and ongoing strike action, are taking their toll. Put bluntly, both the UK Government and the Bank of England have been unable to make much of an impact and need to get a real handle on these situations to help turn the tide.
The effect of interest rates
Interest rates in the UK are continuing to rise. In June, the Bank of England voted to increase rates to 5%, a level not seen since 2008. Whilst this was an unexpected move, the fact is that annual consumer price growth hasn’t slowed, rising instead for the fourth month in a row. Added to this is that core inflation in the UK (core inflation excludes the more volatile areas of food and energy prices) is at the highest rate since 1992 – standing at 7.1% year-on-year. Markets are clearly positioning themselves for the fact that interest rates will remain high for a while yet. The sad truth is that, the tightening in monetary policy will affect households, with consumer spending on non-essential items undoubtedly set to drop in the weeks and months ahead.
What other factors are at play?
June saw small-cap and value deliver strong performances, but looking at the first half of the year as a whole it was growth and quality that came out on top. When considering why this is, we can see value investing being affected by US regional banking problems, whilst growth investors were significantly boosted by a surge in new AI tech.
Sitting at the cornerstone of many investment portfolios are defensive assets, such as bonds, which aim to produce more stable returns. Over the last six months higher interest rates – as central banks endeavour to rein in inflation – have affected most major bond indices, resulting in even higher yields (lower prices) for the likes of 10yr US Treasuries and 10yr UK Gilts. However, this now provides a more attractive risk-adjusted return profile for the asset class, particularly when compared to the years preceding 2022.
Although volatility is likely to continue over the next few months, as central bankers continue in their efforts to curb inflation, the second half of the year potentially offers some good opportunities for investors. Notably, the current state of play in global markets is beginning to offer greater variation across regions, countries, styles and sectors. It is clear that being true to a philosophy based around good diversification across all these levels, is a sensible approach for investors over the coming months.