Global equities have experienced a turbulent start to July, mirroring the volatility seen throughout the year. One week brings positive gains, only to be followed by broad market declines the next. The primary catalyst behind these sharp fluctuations remains the interest rates function in response to sticky inflation. While major central banks have not made any rate adjustments, as discussed in last month’s market update, investor concerns have heightened due to expectations of rate increases and the uncertainty surrounding the duration of elevated rates.
Recent gains in the US market have been driven by robust economic data, demonstrating surprising resilience. This, coupled with the positive data for AI-related tech stocks, has resulted in better-than-expected performance for US equities this year. However, dismissing the recession forecasts highlighted by most leading indicators is premature. There is growing concern about the dominance of a handful of growthy tech stocks in the Nasdaq, hence the extraordinary rebalancing exercise that is taking place.
The UK economy has also shown unexpected resilience. However, the full impact of the significant interest rate hikes is yet to materialise as we await the effects of the proverbial ‘long and variable lags’.
In summary, significant questions are still looming over the markets, whether pertaining to bonds or equities, and these issues remain unresolved. In navigating these current complex market conditions, it is essential to maintain a well-diversified portfolio. By staying vigilant and making well-informed investment decisions, we believe we are well-placed to seize opportunities while managing risks effectively.
In the sections below, we provide an overview of the key areas influencing portfolio performance and share our latest insights.
China
China’s recovery from the pandemic has been uneven, but market participants anticipate further stimulus measures in the upcoming weeks. Such support is expected to benefit both the economy and the stock market. Notably, this contrasts with the world’s largest economy, which is still raising rates. Furthermore, it appears that the tech crackdown in China has concluded following the imposition of the last fines.
Inflation and Interest Rates
Inflation remains persistent in developed countries, with considerable disagreement regarding its root causes. Nevertheless, it has surpassed central banks’ initial projections. While interest rates are anticipated to decrease in the coming months, the era of 1% inflation and associated interest rates is behind us. As a result, we can expect a return to more “normal” asset price volatility, creating opportunities for skilled active managers.
Geographical Allocation and Currency
Geographical asset allocation and currency fluctuations are two key factors that can significantly impact investor portfolios. Strategic bets on geographical allocations will be crucial for asset allocation decisions in the emerging new world order. At the same time, currencies will continue to play a significant role in determining investor returns. Understanding how macroeconomic factors drive currency fluctuations is a job we leave to the fund managers with greater knowledge and expertise in this area. Still, by hedging some of our currency exposure, we can help minimise losses and maximise returns within our portfolios.
Japan
Changes in Japan’s central bank policy regarding the termination of yield curve control could potentially send tremors through global markets and risk assets. However, Japanese stocks remain attractive due to evolving corporate governance practices and an increased emphasis on shareholder value.
Japan has repeatedly failed to deliver on promises to reform, but it is showing signs of real change for the first time in over 14 years and is a subject we wrote at length about in last month’s ‘Investment Team Insight’ blog.
This communication is designed for professional financial advisers only and is not approved for direct marketing with individual clients. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Investments are intended to be held over a medium to long term timescale, taking into account the minimum period of time designated by the risk rating of the particular fund or portfolio, although this does not provide any guarantee that your objectives will be met. Please note that the content is based on the author’s opinion and is not intended as investment advice. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the OEIC fund or discretionary fund management model portfolio is suitable and appropriate for their customer.
Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.
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