Investment Commentary – July 2023

2 minute read

Positive equity market momentum that began at the end of May carried through much of June, although some weakness was seen towards the end of the month. The positive sentiment was propelled by a continued enthusiasm for Artificial Intelligence (AI) and those companies that were perceived to be major beneficiaries. In particular, this was concentrated in the largest US technology companies. With the largest 7 of these companies making up over 18% of global equities, such trends are increasingly influential in driving overall market movements.


In the UK, the major news of the month was the surprise 0.5% rise in interest rates by the Bank of England. Although markets were pricing in the possibility of a 0.5% rise, the consensus was for a smaller 0.25% move. The change takes the headline interest rate to 5%, the highest level since 2008. The majority of the committee felt that the recent stubbornness of the inflation and employment data warranted a more aggressive tightening in monetary policy. However, a minority of 2 (out of 9) members favoured no change. Resultingly, while the market was surprised by the magnitude of the move at this meeting, some comfort was taken that future changes may be less than previously anticipated. Nevertheless, the current high levels of interest rates are already impacting more rate sensitive areas of the economy, notably housing. Unfortunately, much of the impact of higher rates is yet to be felt.


The hike by the Bank of England was in contrast to the no change decision by the Federal Reserve in the US. While US inflation is still high, consistent falls have meant that monetary policy setters at the Federal reserve are more comfortable. This divergence in decisions at this meeting means that the headline interest rate in both countries is now similar. Furthermore, the market forecasts that the rate in the UK will exceed that in the US over the coming year. Such divergences have the potential to cause volatility between regions, particularly within fixed income and currency markets.


Geopolitical uncertainty remains as we were reminded towards the end of June, following the attempted coup by the Wagner mercenary group in Russia. While unsuccessful, the episode illustrated how fragile the situation is within the Russian regime. There is no guarantee that any replacement of Putin would be favourable. Furthermore, an increase in activity in Ukraine has the potential to lead to escalations, which can happen rapidly. A loss of ground by the Russian forces may lead to a violent response, increasing tensions and involvement from the West. The conflict has become normalised for the market, although it still has the potential for surprises.


Buoyed by tech stocks, the equity market looks increasingly stretched, particularly when compared to fixed income alternatives. The Nasdaq 100 index of technology focused companies has rallied nearly 40% since the start of the year and is most at risk of a pullback. Valuations of many of the component companies are now priced for perfection with exceptional levels of earnings growth expected. While not unfeasible, a remarkably good outturn would be required to make the current valuations justified. The remainder of the equity market has performed more modestly and many stock remain attractively valued.