Q2 2023 Market Commentary

19/07/2023

Global Markets

Note: All quoted equity performance figures are in GBP terms.

Global equities had another positive quarter in Q2, as the MSCI ACWI gained 3.3%. Developed Markets outperformed Emerging Markets, with AI and Technology stocks driving much of the market moves. In the US, cooling inflation data and an agreement to lift the debt ceiling meant that the S&P 500 was able to post strong returns of 5.8% over the quarter.

UK equities underperformed other Developed Markets over Q2, as core inflation has remained higher than previously anticipated and the economic outlook appears uncertain. A strengthening pound meant that much of the FTSE 100’s earnings derived from overseas were translated back into sterling at lower levels – the index finished the quarter with a decline of 0.3%. European equities also posted positive returns in Q2, driven mostly by IT and Financials stocks.

Japanese equities continued their strong YTD performance over Q2. The region is the strongest performing market this year, and has been boosted by the Tokyo Stock Exchange calling on companies to enhance corporate value and achieve sustainable growth. The two main indices in the region, the TOPIX and the Nikkei, both reached their highest levels since 1989 in Q2. A weakening Yen has meant that these strong returns have been muted for unhedged overseas investors, with the TOPIX only rising 2.2% in GBP terms.

Emerging Markets experienced a more muted quarter in comparison, with the MSCI Emerging Markets index falling by 1.9%. Chinese equities had a particularly weak quarter, with the MSCI China All-Shares index falling 9.9% as optimism over the economy’s reopening has somewhat faded and its recovery being weaker than expected so far.

Equity Styles

Quality was the strongest performing equity style factor over Q2 gaining 6.3%, as investors came into the quarter anticipating a recession and the robust fundamentals of Quality companies make them attractive in this type of environment.

The Momentum factor underperformed broader global markets over the quarter, and was down 1.6% through the end of May. However, during May the MSCI index review took place meaning the indices were rebalanced. For the Momentum index, this lowered the weightings to Healthcare and Energy sectors, and is now more heavily weighted towards Technology companies. The strong performance of Tech stocks meant the Momentum index finished the quarter up 1.1%.

Inflation

Continuing to diverge from other markets, inflation data in the UK is yet to show signs of meaningful cooling. Year-on-year inflation came in at 8.7% in both April and May, leading to the Bank of England to raise rates by 25bps in May, and a further 50bps in June. The stubborn inflation data has been reflected in poor equity and fixed income returns over the period.

In the US, inflation is coming down considerably faster. May’s CPI reading came in at 4%, down from 4.9% in April. This allowed the Fed to pause rate hikes in June, following May’s 25bps increase, and give themselves more time to assess the impact of their changes in monetary policy. Despite pausing, the Fed have made it clear that they are willing to increase rates further to curtail high inflation.

European inflation is also showing signs of cooling, with consecutive 25bps rate hikes in May and June. May’s CPI print came in lower than expected at 6.1%, but the ECB has signalled they ‘are not thinking about pausing’.

Fixed Income

Note: All quoted fixed income performance figures are in GBP-hedged terms.

Corporate bonds experienced a mixed quarter. High Yield outperformed Investment Grade, posting returns of 1.3% and -0.2% respectively. The positive performance in High Yield came as fears of an imminent recession have reduced, following improved economic data in the US.

Rising interest rates over the quarter meant that Government Bonds broadly fell in price, with yields increasing across markets. As the worst performing major bond market in the first half of 2022, UK Gilt yields have soared this year as inflation has remained significantly more elevated than previously expected.