The latest headline US inflation report saw the CPI data down to 3%. That is just a third of where it peaked a year ago. So on the other side of the Atlantic, at least, inflation is slowing across a growing number of categories, reducing the pressure on the Fed to continue with its tightening policy. In fact, it is at its lowest in more than two years – June saw the 12th consecutive month of improvement since its peak at 9.1%. And excluding food and energy, the CPI rose 4.8% from a year ago. That is the slowest since October 2021, but still significantly above the Fed’s target.
It is looking increasingly as though the Federal Reserve Bank has reached a watershed moment that will shape its next few monetary policy decisions. Once again, housing (or shelter) was the largest contributor to the increase in core CPI. But the monthly rise in June was the smallest since the end of 2021. Proof that the current strategy is slowly starting to bear fruit? The Fed will continue to focus on important issues – such as used-vehicle prices, further easing in housing costs, and strong wage growth – as it sets its course for the remainder of 2023.
In the UK, inflation dropped to 7.9% in the year to June, down from 8.7% in May – marginally better than expected. Nevertheless, wage growth according to the Bank of England has still been faster-than-expected: it has now hit a record high, which is likely to mean yet another interest rate hike next month, adding further pressure to already-stretched households.
The day before this data was released, BoE Governor Andrew Bailey and Chancellor of the Exchequer Jeremy Hunt jointly called for wage constraint: high pay settlements will only hamper their fight against inflation.
Meanwhile, UK short-term fixed mortgage rates have risen to levels last seen in autumn 2022 in the wake of the Truss government's chaotic mini-budget, and the 2008 financial crisis before that. According to Moneyfacts, the average two-year fixed residential mortgage rate now stands at 6.66%.
The labour market, on the other hand, is starting to show some signs of weakness. This should help to cool wage growth over time. Furthermore, data for May suggests that the economy has only marginally contracted. And a warm June encouraged consumers to spend a little more time and money on leisure and shopping expeditions. According to the British Retail Consortium, sales increased by 4.9% year-on-year – that's above the annual average growth rate.
Admittedly, much of the increase can be attributed to higher inflation, pushing up the overall value of spending and concealing the drop in sales volumes. But this news was still better than expected.
Meanwhile, the Chinese economy continues to be dogged by bad news. Deflationary pressures have conspired to push down the country's producer prices at their fastest rate in over seven years. Consumer prices, meanwhile, are teetering on the edge of a fall, coming in at 0% in June. The likelihood is that China’s consumer prices will decline over July. Deputy Governor of the People's Bank of China Lui Guoqiang has indicated that Beijing will soon launch a further raft of stimulus measures in a bid to kickstart demand and the economy.
In the US, the stock market overall has been kinder to investors and less volatile. Much has been written about the 2023 recovery. But many commentators are now suggesting that this has been somewhat exaggerated (given the narrowness of the actual recovery). Most of the rally has been driven by Wall Street and all the excitement around AI, spearheaded by the “magnificent seven” (Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia and Tesla).
Data published by Bloomberg at the start of this month shows that the combined weight of these companies accounts for well over 50% of the NASDAQ 100 index. NASDAQ wants to pare back the influence of these companies, reducing it to 40%. A special rebalancing will therefore seek to address overconcentration so that the portion represented by the index's biggest members no longer exceeds a certain preset threshold. This will not mean the removal or addition of any securities.
We are now more than halfway through the year, and the world is still a place of uncertainty and change. Indeed, this is a period of transition for individual sectors, the financial markets and the global economy more widely. What has thus far been a binary market – a market that was “either / or”– is now more balanced. After years of cash not being considered a viable asset class due to its zero returns, it is now seen as an option. Similarly, global bonds now constitute an alternative and are being used for what they were intended: lower risk and yield.
There was a time when you could focus on a handful of large Internet-related companies and pretty much disregard everything else. And you could borrow money at nearly 0%, and not worry about the consequences of free money: the threat of inflation was negligible, and the likelihood that central banks might raise interest rates was vanishingly slim. But in a very short space of time, things have changed dramatically. The result is anxiety and a wave of emotional reactions on the part of both investors and clients.
And yet… from an investor’s point of view, this is good news. Opportunities now include both US and international companies, growth and value stocks… and numerous global sectors – not just technology. Furthermore, short-term and long-term bonds are on offer, not forgetting cash (with higher deposit rates). We are living in a world that brings with it both cyclical and secular opportunities. Needless to say, you still need to do your homework in order to asset-allocate wisely.
There are risks. Not just in the market and in the economy, but geopolitically as well. Where does the US stand in relation to China? Where does China stand in relation to Taiwan? And what about Russia and Ukraine? How might regulators respond if a crisis in confidence were to hit the banking sector? These are all to be considered when we evaluate and fine-tune our investment strategies.
As global investors in the active and passive space, we seek opportunities where active fund managers have identified great companies that were sold off in 2022. These are businesses which remain quality assets on sale at cheaper prices, with the potential for share price recovery, earnings upgrades and increased dividend flows. This year, for example, we’ve seen companies in the technology and consumer sectors demonstrate their true potential for recovery.
Nobody is denying that 2022 was not anything other than a car crash for financial markets. But we have been there before, and we must be willing to embrace some short-term discomfort to reap the long-term benefits.
The reality is that now is an opportune time to be an active and passive investor. Now, more than ever before, we need to be on the lookout for those quality opportunities globally. At the same time, we need to keep an eye open for growing risks in the markets, the economy and the rest of the world. Finally, there is a lot of cash sitting on the sidelines, being rewarded with deposit rates of nearly 5%. And there are short-dated government bonds with similar yields. However, when rates begin to fall, the appeal of the global equity markets is likely to increase as this current bull market becomes more established.
