World Market Review July 2023

Assets rose across the board in July, as investors regained their risk appetite on optimism that inflation would continue dropping without throwing the world economy into a damaging recession. The pace of interest rate hikes among the major central banks is already slowing, with markets pricing in rates to top out over next winter. Risky assets like emerging market and small-cap stocks saw the largest gains, but almost every asset class rose.

There was relief at the Bank of England as UK inflation started to drop, following similar falls in the US and EU. While the news was positive for stocks, it is a double-edged sword for investors if the rate hikes tip the economy into recession. The bank cited sticky wages as it continued to hike rates into August. Our Amundi fund, which holds small and mid-cap UK stocks, beat the wider market to rise almost 5%.

The world’s largest economy posted robust growth figures, with preliminary Q2 GDP data showing a growth rate of 2.4%. Combined with headline inflation dropping faster than expected to 3.0%, the news buoyed market sentiment. It was particularly good for smaller companies, helping our Russell 2000 fund to deliver over 4% and beat the larger index.

The rating agency Fitch downgraded US government debt from its highest quality rating to its second-highest. Fitch cited high debt levels and “a steady deterioration in standards of governance over the last 20 years”. The downgrade had little impact on bond yields; US government debt is the world’s preeminent safe haven asset, and Fitch is more sending a message to Washington about the debt ceiling process and wide deficits.

“It’s a decisive maybe” is how European Central Bank president Christine Lagarde responded when asked if the bank would raise rates next month. The remarks were a great example of “Fedspeak” – central bankers’ technique of using wordy language to sound specific while remaining ambiguous – but it also shows how quickly the inflation situation is changing. Headline inflation dropped to 5.3% in the eurozone, though core inflation was unchanged at 5.5%.

China was the standout performer of the month. Unintuitively, this was partly down to weak economic performance, which has raised expectations that Beijing will unleash new stimulus to boost growth (or at least refrain from tightening policy or cracking down on profits). The Franklin China fund was our top performer of the month, rising 9%.

Oil exporting countries enjoyed a boost from higher oil prices. Crude has rebounded because investors hadn’t anticipated the extent to which OPEC countries would cut the oil supply since the spring, combined with hopes of a soft landing in the US keeping oil demand strong. Agricultural commodities also spiked after Russia cancelled on its Black Sea grain deal. Both factors helped our HSBC EM fund, which rose almost 5%, and our new Commodities basket, which rose a similar amount.

The Bank of Japan shied away from raising interest rates, but said it would be flexible on letting longer-term yields rise, in a break from its previous policy of pinning yields to the floor. While tame by Western standards, Japanese inflation has reached 3%; very high compared to what Japanese consumers are used to.

Hopes of a goldilocks scenario – where inflation drops back without further rate hikes or a recession – have helped markets recover from the falls we saw earlier in the year. Whilst early signs are promising, we believe investors must remain vigilant to the risks of recession, inflation, and stock market excess.