CleverAdviser
Written by Anthony Walters, Clever’s Head of ESG, this monthly market review offers insights into the most notable and impactful events in global financial markets over the last month.
- Markets are resilient despite mixed economic messages
- Interest rate rises: not finished yet
- US inflation drives lower
The Balanced portfolio benchmark was flat this month, returning 0.05%. Broader markets fared well although Fixed Income components were challenged by continued suggestion from central banks that interest rate rises are, by no means, confined to the past.
Inflation and Interest Rates.
Bank of England Governor, Andrew Bailey has hinted that interest rates may stay high for longer than expected, expressing recently that he has “always been interested that markets think that the peak will be short-lived in a world where we’re dealing with more persistent inflation”. He points to stickier Core inflation, which excludes volatile factors such as energy, food, alcohol and tobacco. His comments were echoed by European Central Bank President Christine Lagarde who said that the bank will not “stand idly by” if there is a simultaneous increase in profits and wages, given persistently high inflation in the region. Lagarde said it was important to know whether companies plan to reduce their margins, “which is what has normally happened during previous high inflation episodes”. By contrast, the US was content to hold interest rates at their current level of 5.25%.
US inflation has fallen sharply from a peak of 9% down to 4%, largely due to favourable base effects from oil prices, which peaked last June and have come down significantly since. Although the US largely has inflation under control, the Federal Reserve have sought to remind people that although inflation is much reduced, it is still some way from the target rate of 2% per annum. It is that suggestion that leaves a further two interest rate rises on the table for the US, forecast by many to happen before the year end. Although the US has tamed inflation, 24% of owners reported that inflation was the single most important problem in operating their business, down 1 point from last month.
Almost half of inflation in the EU is now said to be caused by corporate profits. Rising corporate margins accounted for 45% of inflation in Europe since the start of 2022, a report released by the International Monetary Fund (IMF) has said. The report provides credibility to criticisms made in certain quarters of ‘greedflation’, or the phenomenon of businesses using the cost of living crisis to generate record profits. In essence, some corporations are accused of not lowering prices now that input costs have reduced, leaving an already stretched consumer to foot the bill.
Economic indicators.
US Manufacturing and Services continue to diverge with the S&P Global US Manufacturing PMI at a six-month low of 46.3 in June of 2023, pointing to a second successive monthly decline in the health of the manufacturing sector. This is amid a renewed fall in output and a sharp downturn in new orders, dragged down by suppressed demand due to inflationary pressure and higher interest rates. Conversely, the S&P Global US Services PMI was revised slightly higher to 54.4 in June of 2023 from a preliminary of 54.1, continuing to point to a robust services performance. Output continued to rise at a solid pace as the demand environment improved, spurring a strong upturn in new orders.
Domestic and foreign client demand supported new business growth, as new export orders rose for a second month running.
In the UK, average weekly earnings, including bonuses, rose by 6.9% year-on-year in the three months to May of 2023, the highest increase since the three months to August 2021, and above market forecasts of 6.8%.
Economic paradox.
The environment today leaves market participants with a paradox:
- Good economic news = Stronger economy = Higher inflation = Interest rate rises to curb inflation
- Bad economic news = Weaker economy = Lower inflation = Interest rate pauses or cuts = Greater support from central banks
So, perversely, bad news can be good news for markets, with the hopes of ‘dovish’ central banking support not too far away. Ultimately, an economy needs to be self-sustaining and cannot rely on central bank intervention forever. But for now, investors can be assured of the ‘fed safety net’ should times become further challenged.
Market performance.
Italy led developed markets this month with an 8.26% gain. In fact, 4 out of the top 5 performers were European nations:
The USA index gained a very healthy 3.95% whilst the UK posted a moderate rise of 1.25%.
In Emerging Markets, Brazil gained 13.04% for the month, closely followed by Poland (11.33%) and Colombia (10.69%). Turkey, Thailand and Malaysia featured as the bottom performers, with each returning -6.72%, -4.48% and -4.38% respectively.
Sector performance.
Latin America was the leader for the month, gaining 6.19%. This was closely followed by North American Smaller Companies (4.75%) and India/Indian Subcontinent with 3.48%.
At the other end of the scale, Infrastructure, UK Smaller Companies and Sterling Corporate Bonds had a tougher time, each correcting by 1.54%, 1.40% and 1.06% respectively.
Source:FE FundInfo, 11/07/23
Summary.
Despite mixed economic messages, markets don’t seem to care and are continuing to climb the ‘wall of worry’. Once again, this illustrates the power of long-term investment and portfolio diversification. As difficult as they are to endure, every major event will, at some point, be confined to history and reduced only to a tiny blip on a chart of human progress.
