Investment Commentary – June 2023

2 minute read

Markets continued to be relatively benign in May, following the trend seen in April. Stronger than anticipated economic performance was balanced by higher interest rate expectations and concerns over the US debt ceiling negotiations. The UK once again stood out, with more persistent inflation than others, causing gilts to underperform other government bonds. Equity markets now appear finely balanced and are susceptible to a fallback in sentiment. Index level gains are being helped by some strong large cap performances in the technology sector, with notable gains seen by Nvidia, the semiconductor company, rising over 20% in one day.

Domestically, the focus continues to be on inflation. The consumer price inflation data for April, released in the month, was a mixture of relief and concern. The figure of 8.7%, was a significant decline from the 10.1% seen the month before. However, this came in ahead of expectations of an 8.1% rise. Furthermore, the core elements of inflation continued to rise, leading to concerns over the “stickiness” of the current price rises. Resultingly, markets priced in a higher peak interest rate of 5.5%, and yields across the curve rose. Although globally government bond yields have risen over the last few weeks, gilts have notably underperformed.

The Bank of England has a challenging task, as alongside this persistent inflation is a deteriorating labour market. Although they are only early indicators, there are some signs that the very strong labour market is beginning to ease. Vacancy numbers have fallen and early HMRC payroll data suggests one of the largest recorded falls in employment during a single month in April. As inflation continues to fall, it may be the weakening jobs market that takes precedence. This could lead to aggressive market movements in government bonds and interest rate expectations, reversing recent trends.

In the US, daily developments in the debt ceiling negotiations were being followed by markets. However, as with previous episodes, these negotiations were concluded prior to any technical default on US debt, or a requirement to scale back government. Although this issue was attributed to many daily movements in the month, the successful conclusion did not lead to a notable market impact, suggesting that the risk was perhaps being overstated.

Equity returns were once again driven by a small subset of mega cap technology stocks in the US. Although Nvidia was the standout performer in the month, there were strong gains in other stocks that dominate global equity indices, including Microsoft, Alphabet, Amazon, Meta among others. Valuations for these are now once again at stretched levels with many share prices approaching or at all time highs. This is with the backdrop of an attractive alternative, 4-5% returns on cash and government bonds. These shares will need to persist with exceptional operational delivery to sustain such a run up in prices.