4th July 2023
Global equities finish the quarter on a high note
Both the S&P 500 and the NASDAQ ended the week up more than 2%. The NASDAQ in particular has performed well this year, helped by its technology-heavy portfolio – it rose by 32% over the first half of 2023, its best first six months in four decades.
The rise in confidence around AI technologies has helped spur rapid growth among tech companies. Chipmaker Nvidia, for example, saw its market cap break $1 trillion this year as confidence in its AI capabilities pushed its valuation even above the levels of the 2021 tech bubble.
Wider economic data has also proved encouraging for investors – a key part of this has been the reduction in inflation, which peaked in the US last year. While it’s still above the Federal Reserve’s (Fed) 2% target, it’s been coming down consistently this year, fuelling hopes that we’ll soon hit peak interest rates. The Fed itself has said it will likely further increase interest rates this year, but the scale of these increases is expected to be smaller.
A more complex picture in Europe
The FTSE ended the week up slightly, but has generally struggled this year against stubborn inflation. Markets are betting on the Bank of England (BoE) further increasing rates as the year goes on, with many expecting it to reach above 6% at its peak this year.
A major difficulty for the BoE in making these decisions is the increasingly apparent lag in house price behaviour. Most residential properties in the UK either have no mortgage or are on a fixed-rate mortgage, which means the BoE’s rising rates aren’t being felt in the housing market immediately. More and more headlines are warning of the pressure house prices are coming under – pressure that will increase as more fixed-rate mortgages end their terms.
In the eurozone, shares were lifted by another drop in inflation. Last week, headline inflation figures for May were reported, now at 5.5%.
BlueBay’s Mark Dowding thinks that increases in interest rates across the Western World will continue to affect wider economic performance throughout the year. He notes:
“What this means is that the impact of past policy action will continue to tighten financial conditions further, even in the absence of additional policy action. From this point of view, we continue to expect growth to slow to a standstill in the second half of the year, with the outlook in 2024 also looking downbeat. Interest rates have risen substantially in this cycle and some additional tightening may yet be ahead of us. In light of this, a mild recession remains likely, as a baseline assessment.”
Strong performance in Japan
Last week, the Nikkei 225 finished up 1.24%, leaving it up over 18% for the quarter – more than even the NASDAQ. It’s a good reminder of the importance of diversifying your investments; adding exposure to different markets helps to offer different opportunities, as well as mitigate the losses of any single market.
For example, while Japanese shares have performed extremely well this year, Pantheon Macro Economics notes:
“Consumption, business investment and inventories all rebounded in Q1. Automakers and semiconductor equipment makers ramped up work-in-progress inventories, suggesting budding optimism about the outlook. But Japan’s reopening recovery has been a stop-start affair; the past nine quarters have seen four declines and five increases in GDP. We think Japan is slowly moving towards a self-sustaining growth cycle, but it probably will not get there in H2 2023, given the likely export drag.”