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April – June 2024

  • 2023

The second quarter of 2023, comprising April to June, produced some rather mixed investment returns with large variations suffered between regions. The S&P 500 gained +8.30%, rising from 4,109 to 4,450 after shrugging off the panic in March, which came in the aftermath of the regional banking crisis – and driven in large part by the performance of the seven largest tech-focused companies (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, Meta). The Nikkei 225 also continued its strong start to 2023 after it gained +18.36% from 28,041 to 33,189. It was a different story in Europe, however, with the S&P Euro Plus slightly positive after a return of +1.11% – though this was at least better than the FTSE All-Share’s return of -1.48%, driven mostly by the continued poor market sentiment clouding the FTSE 250 mid-cap index (-2.75%, falling from 18,928 to 18,417).

With the FTSE 250 the index most exposed to the state of the UK economy, it is perhaps not overly surprising that it has been a laggard this quarter. With the spectre of inflation having loomed large over Western economies for almost two years, there is now no doubt that it has become much ‘stickier’ in the UK when compared with other similar countries. Each of the three figures released for inflation during the second quarter came in at a higher level than expected – with the latest figure for the 12 months to May coming in at 8.7% despite a conservative consensus estimate of 8.4%. With GDP growth having all but stagnated, the chance of the country slipping into a state of ‘stagflation’ whereby high levels of inflation are combined with low or negative economic growth is appearing ever more likely, despite the likelihood of inflation falling from its elevated levels over the coming months.

In this regard, the UK stands in stark contrast to the US, which has now enjoyed 11 straight months of decreasing inflation reads – with the US Federal Reserve now likely hiking their base rate just once more from its current level of 5.25% before settling into a calmer period with potential interest rate cuts coming in 2024 to help fuel economic growth if economic data continues to reflect that inflation has broadly been brought back under control. The notoriously ‘tight’ labour market is also now beginning to show signs of softening after the unemployment rate came in at 3.7% for May, against a previous figure of 3.4% and expectations of 3.5%, meaning the US is now entering a ‘goldilocks’ scenario where different economic indicators are moving in directions to indicate that a sharp economic contraction may be avoided whilst inflation returns to a footing much closer to the Fed’s 2% target. Whether this will last is another question, and market participants will be closely observing comments from key policymakers on the Federal Open Markets Committee (FOMC) for the future direction of monetary policy.

In May, the United States faced yet another crisis related to its debt ceiling. On the 1st of the month, Treasury Secretary Janet Yellen warned that the government could exhaust its funds and default on its debt as early as June. Throughout the month, President Biden and House Speaker Kevin McCarthy engaged in a series of negotiations to find a viable solution. The potential consequences of not reaching an agreement were severe, including substantial job losses, a significant impact on productivity and GDP, a downgrade of the US’s credit rating, and global interest rate hikes. Thankfully, on May 27th, the impasse was resolved when the Fiscal Responsibility Act of 2023 was successfully passed by both the House of Representatives and the Senate. This act officially suspended the debt limit until January 2025 while also implementing spending restrictions for fiscal years 2024 and 2025.

Considering the disruptive impact of inflation on Western economies during the past 18 months, it is worth examining the situation in key Asian nations such as China and Japan. Beijing has adopted a seemingly neutral stance on the Russia-Ukraine conflict, which, along with its significant global supplier status, has shielded them from the supply shocks experienced by many Western countries. In contrast, Japan’s inflation story differs, as the country has long grappled with persistently low inflation levels. The Bank of Japan has implemented an ultra-loose monetary policy, including a negative interest rate of -0.1% since 2016. More recently, Japan’s economic conditions have improved, with its inflation rate exceeding the central bank’s 2% target for over a year. These conditions have led global investors to view the land of the rising sun more brightly, and asset prices have rallied over the past few months as sentiment for the Japanese market has improved. It, however, is still the early days of the potential economic Japanese transformation, but it is a nation whose recent economic developments are interesting to many investors – including ourselves.

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