The sunny month of June brought the feel-good factor back to capital markets. Global stocks climbed 3.1% higher over the course of the month in sterling terms, and UK investors saw most major equity indices finish the month in the black. These returns helped to round off the quarter and indeed the first half of 2023. In the last six months, global equities have added 7.8% in sterling terms. Every major index that we track – barring MSCI’s Emerging Market index – has made gains since the start of the year. As has been the theme of recent years, the US once again outperformed across each of those time periods. A resilient economy and improved monetary expectations have helped US companies, none more than BjgTech. In the first half of the year, the tech-heavy Nasdaq index gained an incredible 25.2%. The table below shows June’s results in full.
Asset class returns as at 30th June 2023
In terms of market movements, June continued and solidified some of the same trends we started to observe in May. Volatility in particular, continues to fade, as markets seem no longer driven by fears about less liquidity. This sense of ease, previously confined to large cap stocks (hence the overwhelming outperformance of US tech) now seems to be more broad based, with smaller companies now also benefitting from the turnaround in investor confidence. Trade data from June seemed to confirm this trend suggesting the global economy is more resilient than had been feared. This is unlike previous growth signals – which have usually been treated as inflationary and, therefore, a concern for stability. Instead, we are seeing signs of the proverbial ‘soft landing’, and markets are all too happy to jump on this good news.
Investor confidence even managed to provide some assistance to the beleaguered UK stock market, which gained 1.4% in June. The last three months have been bruising for British companies, thanks to stubbornly high inflation and the Bank of England’s steely determination to crush it. But despite a worsening of inflation data and some aggressive signalling from the BoE, the FTSE 100 managed to finish the second quarter of the year down just 0.3%. Year-to-date returns are a healthy 3.2%. Even the looming collapse of Thames Water did not spook investors, although so far July’s performance is proving less auspicious.
As global growth slows and central banks tighten – at the fastest rate in a generation – tougher financing conditions and more corporate defaults seem inevitable. We saw this steady increase in credit stress over the last few months. June was no different, but this has not induced the sense of panic that had seemed possible in March. In fact, while aggregate corporate bond yields rose somewhat over the last month, this was entirely down to a corresponding rise in the government yields against which private debt is priced. Credit spreads – the difference between corporate and government bond yields, and therefore the most immediate credit stress indication – actually came down in June.
This is a curious sign. It suggests that investors see equities (or relatedly, their debt) as a better inflation protection than bonds. Since input prices are now firmly on a downward trend, growth and inflationary pressures from now on should feed through into higher profits. That has the dual effect of generally easing financial conditions and ending the stark bifurcation which had developed in stock markets. Whereas before it seemed only the biggest companies (and mainly those in the US) could weather the storm, there is now a sense of more of widespread resilience.
Further evidence which backs up this trend has been the increase in real disposable incomes – though admittedly not by much. The lowering of inflationary pressures has bolstered consumer spending power. At the same time, savings rates – which had been coming down after being built up during the pandemic – seem to be holding stable. That has allowed savings to flow into capital markets, particularly equities.
To the extent that recent market positivity is being built on this soft-landing scenario, though, we should remain cautious. Inflation coming down to more manageable levels, without destroying demand more than it has been already, relies on supply side pressures continuing to abate. Nothing yet suggests to the contrary, but shocks are always possible. And if markets can be easily disrupted by external shocks, that in itself is a cause for concern.
On the topic of input prices, we note that commodities are stabilising after months of decline the price of Brent crude oil gained 1.3% in sterling terms, while Goldman Sachs’ wider commodity index returned 1.8% in July. This again is largely down to changes in the supply side, though there is some evidence of increased Chinese demand. The world’s second largest economy has been by far the biggest disappointment of recent months, failing to live up to hopes of a post-covid boom. Chinese growth is not actually weak in absolute terms – it so rarely is – but weaker than expected returns are hurting markets and revealing further weaknesses. In particular, there are now concerns over land prices (further fallout from the property woes) which could spiral into concerns about China’s wider financial stability.
Yet, markets remain calm. For Chinese equities, weakness has been offset by supportive policy changes – in particular from the People’s Bank of China. In other assets, like real estate, previous weakness seems to have been offset by opportunistic buying activity. It bodes well that markets are in a positive mood, climbing on good news and taking the bad in their stride. We hope for more, but as ever, remain wary of overconfidence.
Important Information
The text is taken from The Tatton Weekly and is provided by Tatton Investment Management. The information in this document does not constitute investment advice or a recommendation for any product and investment decisions should not be made on the basis of it.
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