July provided a contrasting month to what many investors have experienced so far this year. Despite the backdrop of high inflation and slowing growth, many major stock markets delivered strong positive returns as investors look through the short-term noise and into 2023.
In the UK, Prime Minister Boris Johnson resigned after losing the support of his party. The Conservative party leadership contest was narrowed down to Rishi Sunak, former Chancellor of the Exchequer and Liz Truss, the current foreign secretary. The winner will be decided by around 200,000 Conservative party members on the 5th of September. While this remains an important part of UK politics, it should have little impact on global markets, as all eyes will be on global central banks, inflation data and the ongoing Russia and Ukraine conflict.
UK data for June, released in July, continued to show a robust labour market with unemployment staying at 3.8%. The manufacturing sector also grew, however, the pace has slowed from the previous month and was marginally down on the estimated figures. The service sector continued to grow and gathered pace to beat estimates. Inflation ticked higher, increasing from 9.3% to 9.4% year on year (yoy).
Elsewhere, data released in July for the US showed June’s inflation figures rising from 8.8% to 9.1% yoy, whilst in the Eurozone, inflation remained at 8.6% yoy for the second month in a row.
The U.S. Fed raised policy rates by 75bps, as expected, in its July Federal Open Market Committee (FOMC) meeting. Controlling the runaway inflation figures continues to be the number one priority for Central Banks across the world. Jerome Powell, Chair of the Federal Reserve, hinted at a slowing of future interest rate increases to assess their impact.[1]
Consumer spending and production in the US has softened in recent months, and the growth data confirmed this as the US experienced two consecutive quarters of negative growth, resulting in a ‘technical’ recession – where it meets the textbook definition but hasn’t been officially classified as a recession by the National Bureau of Economic Research (NBER), a US non-profit organisation who officially categorises recessions in the US. Two negative GDP readings was not enough for them to do so, instead the economists at the NBER are looking for a more substantial decline in activity over a sustained period. Global markets have not been phased by the announcement of a technical recession, as strong labour markets across many developed nations continues to be the shining beacon that casts some doubt over the negative sentiment.
Both manufacturing and services sectors in the US and Eurozone improved, albeit at a greater pace in the US. Unemployment in the US also remained unchanged at 3.6%, however unemployment in the Eurozone improved from 6.8% to 6.6%, beating economist estimates who expected this figure to remain unchanged. This places even more importance on the labour market when Central Banks are deliberating changes.
Markets
Stock markets bounced back in July, with the rally led by the US (+9.1%). Tech giants, including Amazon and Apple, published better-than-expected earnings despite fears of inflationary effects slowing consumer spending. Markets have started to expect interest rate cuts from the Federal Reserve in 2023 which has provided some longer-term optimism, and as a result, markets reacted positively for now.
Elsewhere, we saw a similar story with both the FTSE-250 (+8.0%) and FTSE-100 (+3.6%) Rebounding. We also saw share markets in Europe (+7.6%) and Japan (+5.3%) recover most of June’s negative performance.
Emerging markets (-0.7%) and Asia-Pacific (-0.4%) ended the month marginally negative, mainly due to China’s property weakness and further lockdowns caused by Covid-19 outbreaks.
Currency
Sterling performance against major currencies was mixed over the course of July, driven by interest rate expectations.
The US dollar remained relatively flat against the pound (-0.06%). The first half of the month saw the dollar strengthen as demand persisted for the safe haven currency, however softer inflation expectations mid-month nudged the dollar back down. A notable milestone occurred in July when the euro and dollar reached parity, or $1 = 1€, which was the first time this has happened since 2002.
Sterling strengthened against the euro (+2.5%) but weakened against the yen (-1.9%). The weakness in euro was driven by soaring inflation in the euro area, with the expectation of interest rates needing to rise to combat the rising inflation through monetary policy.
For most of the month, sterling was quite stable against the yen. However, it fell following the release of the US quarterly growth figures at the end of the month which led to a technical recession. This is because the yen is historically perceived to be a safe haven currency which has strengthened significantly against all other G10 currencies.
Investment type performance breakdown
Our Original Plans delivered strong returns, particularly in the higher risk investments due to the improved outlook for interest rates in 2023, and positive earnings results from the big tech names. Shares (+6.8%) and property (+7.9%) were the biggest drivers of positive returns, while bonds (+1.5%) contributed to the overall performance.
We saw a similar performance in our Ethical Plans in July, with shares (+9.3%) and bonds (+1.6%) both having positive returns. Our Ethical Plans have a tilt towards growth companies which are particularly sensitive to interest rates. The objective of growth companies is to grow and to use their retained earnings and debt to finance their expansion. As the expectations for interest rates shifted from increasing to falling after Q1 2023, companies benefitting from cheap financing were positively affected by this change in sentiment.
Summary with Plan details
All our Investment Plans in both Original and Ethical themes performed positively in July, with Plans with higher levels of shares and property performing better than the Plans with more bonds.
Our Investment Team continues to actively monitor the financial markets and their impact on your Plan, and as always, we are ready to act in your best interests to events as they unfold. We are continually evaluating new market information and the key drivers in markets to ensure your Plan stays on track.
While this month has been positive, the markets remain uncertain, and there are many factors currently in play. Our goal is to stay the course while seeking diversification to weather the worst volatility while taking advantage of the short-term to set your Plan up for long term success.
As always, we continue to look for opportunities to position your investments with the goal of protecting your money and achieving your long-term objectives.
Please remember the value of your investments can go down as well as up, and you could get back less than invested. Past performance is not a reliable indicator of future results.
1. https://www.bloomberg.com/news/articles/2022-06-22/powell-sees-ongoing-rate-hikes-needed-to-tame-hot-inflation
