GSB Ireland

Market Update – July 2023

2023 has had some chaotic months, such as March when Silicon Valley Bank and Credit Suisse imploded and June when the US Debt ceiling negotiations ran dangerously close to the deadline and a potential subsequent US default before a last-minute deal was successfully brokered.

In comparison, July proved to be a much quieter month with less turbulence as we entered the third quarter of the year in a positive year thus far.

July was a positive month for equities, with marginal gains across most of the world’s major market indices. The best performance was once again in the United States of America, with the S&P500 up over 2% and the NASDAQ Index increasing by over 3%, continuing the impressive momentum they have displayed thus far this year. With its heavy tech focus, the NASDAQ has delivered unbelievable performance year-to-date of over 35%, powered by a handful of mega-cap technology stocks such as Apple, Meta, Microsoft and Nvidia.

Similarly, there were gains of over 2% seen in the FTSE100 and STOXX 600 indexes representing the UK and Eurozone respectively. UK equity performance has been rather sluggish when compared to some of the stronger performers this year, but Eurozone equities have performed strongly with the STOXX 600 up over 9% year-to-date. There is some evidence to suggest UK equities may be about to turn the corner, however with encouraging inflation data released this month leading to the FTSE’s largest weekly gain of the year.

Japanese equities have been one of the best performers of 2023 alongside US equities after an extended period of muted performance. The Nikkei 225 Index was down just over 1% in July, however for the year, the index has climbed an astonishing 27% with foreign investors piling into Japanese equities to participate in the rally, though any gains for foreign investors are dampened slightly by the weakness of the Japanese Yen.

Chinese equities have struggled this year despite optimism around the shift away from pandemic lockdowns and restrictions implemented by the government, but the SSE Composite Index did post gains in July of just over 2% with even stronger performance seen in Hong Kong by the Hang Seng Index.

As has been the case since last year, inflation remains a key topic for investors to keep an eye on due to its impact on multiple facets of the economy and, in particular, the central bank’s decisions on interest rates. The Federal Reserve has successfully gotten US inflation close to the targeted level of 2% with 12 months of consecutive inflation decline.

The inflation rate in the US for July was reported at 3%, a strong decline of 1.1% from June’s figures of 4.1%. Similarly in the Eurozone inflation has been on a steady decline throughout the year and this continued in July with inflation standing at 5.5%, a decline of 0.6% from the previous month despite very little change in the situation in Ukraine which has been a source of a lot of the pressures on prices of goods since the Russian invasion in 2022.

Compared to the US and Eurozone, the UK has struggled a lot to get a grip on inflation but there was an encouraging sign this month with inflation dropping from 8.7% to 7.9% beating consensus expectations of 8.2% after a 4-month streak of UK inflation coming in higher than had been forecast.

The Federal Reserve opted to freeze interest rates in June at 5.25% but this month opted for another 0.25% hike to 5.5% underlining their commitment to stamp out inflation and prevent a rebound upwards, despite fears of the impact high interest rates will have on the economy. Jerome Powell has been consistent in stating that he will do whatever is necessary to curb inflation, however with inflation now at 3% we would anticipate further freezes moving forward.

The European Central Bank has continued to hike rates with a 0.25% hike in July, bringing interest rates to 4.25%, levels not seen for 15 years. With the progress made on inflation, the European Central Bank should have some flexibility in interest rate decisions later this year, allowing them to reduce some of the pressure on the economies of the Eurozone with key economies such as Germany struggling to avoid recession.

The Bank of England will announce its interest rate decision on the 3rd of August, and with the elevated levels of inflation, a hike is all but guaranteed, with some economists split between whether we will see a 0.25% or a repeat of June’s 0.5% hike. The UK’s interest rate currently stands at 5% after 13 consecutive increases.

An impact of the interest rate hikes we are seeing globally is that fixed income is coming back into favour after a turgid 2022, which saw the asset class pummelled alongside equities despite hopes of diversification coming into effect. The interest rate hikes mean that the returns offered by bonds are the highest in over a decade and investors have responded by flocking into the asset class to take advantage. According to the Financial Times, global bond exchange-traded funds crossed $2tn in assets this week, double their total just three years ago with BlackRock forecasting further inflows to come. Given the risk profile attached to fixed income, particularly developed economy government debt, it presents an exciting opportunity for investors to lock in healthy yields without the risk of significant downside.

Overall, July should be viewed as a positive but quiet month for the financial markets, with gains in the equity markets, fixed-income yields continuing to rise and further progress on tackling inflation. 2023 has been a good year for investors, and we hope to see this continue throughout the year’s second half.

Our July Blogs Focus

In this month’s newsletter, we cover a range of subjects, from getting retirement ready, responsible asset selection to building a diversified portfolio. You can find these articles by clicking on the links below.

Getting Retirement Ready
Responsible Asset Selection
Building a Diversified Portfolio

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