In contrast to the first half of 2022, July provided gains in developed markets as a more optimistic outlook on interest rate cuts emerged. Underlying data, however, provides a stark reminder that there is a long way to go in the continued battle against inflation.


The UK political scene dominated domestic headlines in July. Liz Truss and Rishi Sunak have emerged as the final contenders for the Conservative leadership in the wake of Boris Johnson’s resignation. Despite the backdrop of heightened political uncertainty, UK equities performed strongly in July. Our LF SDL Free Spirit Fund particularly caught the eye with returns of 10% over the month. Data announcements reinforced the month’s economic strength with GDP growing by 0.5% in May in contrast to the contraction of 0.2% in April.


US equities rallied in July with the S&P 500 returning a monthly gain of 9.11% marking the best monthly performance since November 2020. The rally stemmed from better-than-feared earnings and was boosted by a newly adopted optimism following Fed Chairman Powell’s comments towards the latter stages of the month. We were able to capitalise on the strong monthly performance through our exposure to US equities via the Fidelity US Index and the LF Montanaro Better World Fund which was our top performer for the month benefitting from its Mid-Cap Growth style optimizing returns.

Inflation remains the primary focus of the Fed, which raised interest rates by 0.75% in line with expectations. Dovish comments from Chairman Powell suggesting that interest rate hikes may slow down for the remainder of the year surprised the market with markets now pricing in increases of 0.5%, and two lots of 0.25% for September, November, and December respectively. The Fed also swapped tact in fighting inflation, favouring a more data-driven approach over forward guidance to better balance the task of battling inflation whilst avoiding a Fed-induced recession.

Despite optimism returning to the market, this may be short-lived. Inflation, as measured by CPI, hit 40-year high levels of 9.1%, providing a stark reminder that there may still be a long way to go before inflation is contained. US GDP also contracted for the second consecutive quarter meaning the US has entered a technical recession, however it is unlikely that the National Bureau of Economic Research will announce a US recession due to the strength of the labour market with the unemployment rate remaining low at 3.6%.


The European Central Bank succumbed to high inflation and raised interest rates for the first time since 2011. The 0.5% hike exceeded market expectations and concluded the prolonged period of negative rates.

The Russian invasion of Ukraine continues to plague European economies with Russia flexing its grip over Europe’s natural gas supply. The key Nordstream 1 pipeline reopened following scheduled maintenance initially delivering flows at 35% of 2020/2021 levels, this was quickly reduced to 20% with Russia citing that a turbine required repairs. Although this reduction is a lot better than the alternative (a complete cut-off), it instilled renewed fears about Europe’s dwindling gas supply leading to a rise in gas prices. The European Commission put forward plans to reduce consumption by 15% across the continent in the hopes that levels can be reinforced going into the winter months.

Russia relaxed the blockade in the Black Sea enabling grain shipments to begin leaving Ukraine, this should help to ease the inflationary pressures on food. Although a positive signal, an end to the conflict still feels distant.


Unlike their developed counterparts, Emerging Markets did not experience the same bounce in July. China retraced the gains made in June with fresh concerns over its property sector and the sustained zero-Covid policy causing sporadic lockdowns in response to the spread of Omicron. A strong dollar also provides headwinds for Emerging Markets, as borrowing becomes more expensive and capital flows back to the relative safety of the US.


Japan’s core inflation rate rose to 2.2% in June and as expected the Bank of Japan continued their ultraloose monetary policy widening the interest rate differential with the US. Despite this, the Japanese Yen was able to reclaim lost ground to the US Dollar helping to boost the steady gains made by Japanese stocks. Our position in the FTF Martin Currie Japan Equity Fund was able to outperform the wider Japanese market significantly in July returning gains of nearly 12%.


Although July provided positive market returns, it does not paint a complete picture with inflation still a major concern. In times like this, a well-diversified portfolio is essential to capitalise on market upswings whilst also protecting against potential downward moves.