Market review
Following a difficult first half to the year, global equity and bond markets rebounded strongly in July.
During the month, investor attention shifted from rising inflation and interest rates towards the potential impact this will have on economic growth. Investors started to worry that rising interest rates may trigger a downturn in economic activity. This led to speculation that the US Federal Reserve (Fed) would cut rates next year, the prospect of which was a huge boost to equity and bond markets.
In July, the Fed delivered its second consecutive 0.75% interest-rate increase, while the European Central Bank (ECB) surprised the market with a 0.5% rate rise.
In the US, equity markets shrugged off the interest-rate rise and enjoyed their best month for two years to be the top-performing regional market in July. The MSCI USA Index was up 9.1% thanks to the outperformance of technology and consumer discretionary (companies that sell goods and services that are considered non-essential by consumers) stocks, sectors which are especially well represented in US indices.
This was part of a notable change compared with the first half of the year as investors moved away from ‘value’ stocks, companies whose share price is low relative to their value, and into ‘growth’ stocks, companies that get their value from the rate at which they are expected to grow their profits in the future. Consequently, the MSCI World Growth Index jumped more than 11.3% in July with the MSCI World Value Index gaining 4.4%.
European equities also performed well with the MSCI Europe ex UK Index returning 5.2%. While shares in energy companies declined in June as oil and gas prices fell, they resumed their upward trajectory in July. The increase in energy prices, driven by the ongoing conflict in Ukraine, has impacted Europe’s economic prospects. Indeed, the region’s reliance on Russian energy imports caused the euro to US dollar exchange rate to be one for one in July.
Elsewhere, UK equity markets were also positive in July. The FTSE All-Share Index, representing nearly all the UK stock market, returned 4.4%. Meanwhile, the FTSE 250 Index, made up of the 101st to the 350th largest companies, was up 8.3% as small and mid-cap stocks benefitted from investors moving from value to growth stocks and being willing to take more risk.
Emerging markets saw a modest decline, largely due to the debt problems of China’s property sector. In July, reports emerged that Chinese property owners were refusing to pay mortgages on unfinished homes that were already declining in value. These factors contributed to the MSCI China Index decreasing by 9.6%. This also impacted the MSCI Emerging Market Index which, despite some robust gains from other index constituents, declined 0.4%.
In fixed-income markets, riskier assets outperformed with high-yield bonds (issued by companies with lower credit ratings) outpacing investment-grade corporate bonds (issued by companies with higher credit ratings). It was also a positive month for government bonds, as hopes that the Fed might reduce interest rates in 2023 buoyed investors, despite the further interest-rate increases expected in the near term.
(All figures in pounds sterling unless otherwise stated.)
July was a great illustration of the old adage: ’the market is not the economy’, as US stocks enjoyed their best month for two years even while the US economy struggled. Indeed, the declining economic backdrop led investors to start expecting interest-rate cuts from the Fed next year, which boosted both equities and bonds.
