Welcome to the Quarterly Investment Review for Q2 2023.
Our Investment team have put together a range of resources to update you on what has happened in markets across the second quarter of 2023. Here you will find:
- High-level, global equity performance analysis
- Soundbites from our team of investment experts
- A written summary covering the quarter's main market events
Global Equity Performance Analysis:
The graph below shows global equity performance across the quarter and plots world events along the performance line to indicate their impact on markets.
Hear from our Team - Investment Soundbites
Hear from our team of investment specialists as they each explore an investment theme or the performance of an individual asset:
James Penn, Head of Equity: Are Things Looking Up For Rolls Royce?
James Fitzpatrick, Head of Funds: Creating More From Less - How a 'Cobot' is Boosting Efficiency
Matthew Seaward, Investment Analyst: Artificial Intelligence - Is The Hype Justified?
Summary & Outlook - Q2 2023:
Global equities achieved moderate gains in Sterling terms during the second quarter with US & Japanese equities outperforming and China & Hong Kong underperforming. Year-to-date US equity market returns have been driven by just seven companies, namely Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Tesla and Meta (Facebook). The prospects for artificial intelligence have been a key driver in the performance of these stocks. Exclude them and US equity market returns have been flat.
Global bonds returned -3.9% as central banks maintained course in their attempts to quash inflation. This was particularly acute in the UK where the Bank of England surprised in June with a larger 0.50% interest rate hike in June. While headline inflation has rolled over, core inflation, which better highlights the impact of wages and the services sector, is proving sticky in the US & Europe while still high and rising in the UK. Sterling bonds have performed poorly as a result and the added pressure on the UK economy has held back the equity market. The silver lining is that Sterling has begun to strengthen and that could assist in bringing down inflation.
The impact of higher rates is yet to ease a tight labour market with US unemployment reaching its joint lowest since 1969 and UK wages on the rise. That could be about to change with signs of weakness in property markets as house prices are now falling across the UK, Europe and the US. As the cost of servicing mortgage debt increases, consumers are forced to tighten their belts and the UK is now expected to tip into a shallow recession, despite the IMF’s upgraded growth forecast in May.
The US regional banking crisis has simmered down with First Republic sold to JP Morgan and the FDIC to impose higher fees on the largest US banks to cover the cost of uninsured depositors. The US debt ceiling was raised and government spending curbed by the Fiscal Responsibility Act of 2023, ending a short period of volatility for short-dated US dollar lending.
China’s economy rebounded with a positive surprise of 4.5% GDP growth in the first quarter, but this was largely driven by domestic consumption and PMIs have since highlighted that Chinese manufacturing has shifted from expansion to contraction. This has cast doubt over the scope of the recovery as the country emerges from its zero-covid policy and the People’s Bank of China has now embarked on another monetary easing cycle in response. Manufacturing also remains a weak spot in Europe with the divergence between service and manufacturing PMIs at its widest in over a decade and Germany has tipped into recession as a result.
There were signs of political instability In Russia, as an important military mercenary group marched towards Moscow to remove the commanders blamed for botching the war in Ukraine. While political instability could ultimately be a route out of the conflict, it also increases the potential for tail risk events.
Capital markets have had to climb a wall of worry this year but with a few key risks behind us we can refocus on the key dynamic: core inflation remains above target in developed economies, central banks are therefore continuing to tighten, thus bonds are underperforming equities. Sentiment has been largely driven by expectations of a pivot from the Federal Reserve, but Jerome Powell has been cautious to signal such an event to avoid creating a bubble as the economy heads towards potential recession.
We have been increasing the amount of fixed income assets in portfolios as they now provide a much more attractive yield, but we are reluctant to give up too much equity which better protects capital through inflationary cycles as has proven to be the case thus far. If the global economy manages a soft landing, the pandemic legacy may be behind us.
Disclaimer: The views, thoughts and opinions expressed within this article / videos are those of the authors / speakers and not those of any company within the Capital International (CIG) and as such are neither given nor endorsed by CIG. Information in this article / video does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
