The period May – July 2023 saw mixed investment returns across asset classes and regions, with the S&P 500 leading the way after an increase of +10.06% from 4,169 to 4,589. The MSCI Emerging Markets index, comprising countries such as China, India, and Taiwan, also rose +5.90%. At the other end of the spectrum, the S&P Euro Plus rose a relatively modest +1.43% from 2,285 to 2,317, though it was at least still positive. The same could not be said for the FTSE All-Share, which fell -2.00% from 4,283 to 4,198 against a backdrop of economic uncertainty relative to the rest of the developed world. Fixed income markets also suffered over the period, driven by increases in interest rate expectations – with the Markit iBoxx GBP Corporates index falling -1.07%.
Market sentiment over the last 3 months was again largely governed by the release of inflation prints and subsequent interest rate expectations. Looking at the US, it is now clear that the battle against inflation has been mostly won, with the latest figure having come in at 3% for the 12 months to June - still above the official 2% target but a far cry from peaks of 9.1% seen in the June 2022 reading. Since then, the figure has fallen in each consecutive month, and analyst expectations were beaten in each of the last 4 released prints. In response, the messaging and policymaking decisions from the US Federal Reserve have started to become gradually more dovish – with many forecasters now predicting that July’s rate rise of 25bps to 5.5% will be the final of this cycle and opening up the opportunity for rate decreases in 2024. Such an increasingly benign macro-economic background has allowed market participants to focus on other themes – namely, the advance of Artificial Intelligence and the companies which stand to benefit the most from it, with the largest 7 tech-focused companies in the US all enjoying stellar returns.
These ‘Magnificent 7’ companies had been the main reason the market-cap weighted S&P 500 significantly outperformed for the first 5 months of the year. However, June and July saw an equal-weighted basket of S&P 500 shares gain +11.11% after having been relatively flat up until now. Such an occurrence is undoubtedly a healthy sign and a signal to investors that increased exposure to the US could prove to be a prudent asset allocation decision for the medium term.
In contrast, the UK has endured a much more turbulent time, with inflation prints throughout the last 12 months consistently proving to be ‘stickier’ than expected. In particular, the April and May readings were both released at 8.7%, despite increasingly conservative expectations they would come in at 8.2% and 8.4%, respectively. However, there was a glimmer of hope in the June reading (released in July) after the inflation figure was released at 7.9% against expectations of 8.2%. Indeed, the market reaction was immediate and overwhelmingly positive, with the FTSE 250 rising +3.78% in one day and 5-year interest rate swaps (the basis for which fixed-rate mortgages are sold at) falling -4.03%. Unfortunately, this momentum was not maintained through to the end of the month, with market participants no doubt wishing to see multiple, preferably consecutive, positive inflation prints before meaningful share price appreciation can occur within the mid-cap dominated FTSE 250. There is no doubt that all eyes will be keenly focused on relevant economic prints for any further hints that inflation is starting to get under meaningful control.
With the focus of investors understandably locked to the UK and the US, it is also worth examining in further detail the performance and economic backdrop of Asian heavyweight Japan. The Japanese Nikkei 225 rose +14.96% over the last 3 months, driven chiefly by the continued ultra-loose monetary policy stance the Bank of Japan has maintained since January 2016 in the form of a negative interest rate of -0.1%. Such a stance was brought about by an environment of persistently low inflation, with this phenomenon having the ability to be a headwind to economic growth just as much as high levels of inflation can be. This current path seems to be working, however, with Japanese inflation at 3.3% for the June reading, after falling from a much more manageable peak of 4.3% in January – with policymakers content for the time being to let inflation run hot to maintain a longer-term average figure of 2% and help stimulate economic growth. However, it should be noted that negative interest rates do incur some potentially damaging effects if not managed correctly – specifically in the form of a devaluation of currency (in this case, the Yen). Over the last 3 months, when both the Bank of England and the US Federal Reserve have continued to raise their own interest rates, the Yen depreciated -6.25% vs Pound Sterling and -4.15% vs the US Dollar. This, aside from making imports more expensive, also serves to dim the returns of foreign investors in domestic Japanese shares and assets.