Investment Comment
7th July 2023
Normal summer
After the hottest June on record, rain beckons the start of Wimbledon. And normality appears to be the order of the day with Australia leading the Ashes. Equities have made strong gains since the start of the year but have stumbled at the beginning of July. Growing hopes of a soft landing for the global economy have buoyed riskier, growth-dependent assets. Global equities markets have returned almost 10% since January, led higher by the US mega-cap technology giants.
This is a reversal of the dominant trend of 2022 in which technology equities fell by almost a quarter. Likewise, UK equities which had enjoyed a robust 2022, have lagged global equities in 2023. Stubborn inflation and the absence of technology stocks in the UK index haven’t helped, while a heavy weighting in oil and resource stocks has knocked UK equity performance as commodity prices have fallen back. The pound has also strengthened against the dollar this year, reducing the sterling value of returns from overseas equities owned by sterling investors.
UK and Emerging equities have lagged the upbeat move in equities, whilst UK bonds continue to lose value in the first half of 2023
Source: Artorius, Bloomberg
Gains in emerging market equities have generally lagged those in richer economies. After a surge in value on the reopening of the Chinese economy towards the end of last year, Chinese equities have fallen back and have returned just 1.0% since January.
2022 was a bad year for government bonds, with soaring inflation leading to a 26% decline in UK bond values, an 18% decline for euro area bonds and a 12% decline for US bonds. US and euro area bonds have risen by 2% - 3% this year while UK government bonds have continued to underperform due to stubbornly high inflation, falling 4% since January. The pressure on UK gilts reflects both heightened inflationary pressure (which appears to be easing in other economies), and the continued elevated level of government borrowing.
Equity markets are back in fashion, something that feels rather at odds with slower growth and high interest rates. Optimism has returned this year on lower energy prices and hopes that the US and Europe will avoid recession. Whilst the market has been led higher by technology stocks, there has been a somewhat surprising recovery in consumer names. Travel companies and even retail stocks have recovered, possibly reflecting the relief that lower commodity prices are easing cost-of-living pressures.
Economic growth may not be strong, but it has proved more resilient than expected. Whilst Europe has endured a recession, the fall in energy prices do appear to be fuelling a more optimistic outlook. The US economy continues to avoid a widely predicted recession. The contrast between economic surveys, which appear to be in recessionary type levels, and the ‘actual’ hard economic data that shows the US economy avoiding a recession is striking. Interest rates continue to rise to curtail inflationary pressure with wage inflation replacing commodity prices as the apparent driver of inflation.
Towards the end of 2022, expectations around corporate profits were very downbeat. These appear to have stabilised and, in some cases, are nudging higher. Whilst equity valuations remain elevated, especially in the US, the more upbeat corporate profit backdrop has encouraged investors to buy equities. How far and how hard interest rates go up may determine the duration of the optimism surrounding equities in the second half of 2023.
Gerard Lane Chief Investment Officer
* Any feedback provided is anonymous
All expressions of opinion reflect the judgment of Artorius at 7th July 2023 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
FP20230707001