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Capital Markets Update: July 2022

Octopus2 August 2022

Market updates from July

In a Nutshell

Global markets generally saw a very welcome positive uptick in July. Developed markets gained as investors digested the potential reduction in pace of interest rate rises, as economies show signs of slowing. Emerging markets underperformed developed markets, with growth concerns continuing with China. However, bonds markets also saw prices begin to rise this month due to falling yields coming from the potential of more muted rate rises.

Developed markets see a rebound

Shares in developed markets generally rebounded in July.

Over in the US, an interest rate hike of 75 basis points came as was anticipated, however comments from the Fed were that the pace of further interest rate increases may start to slow. This is even on the back of comments that “the labour market is extremely tight and inflation much too high”. This led to positive returns for most equity sectors, with tech and consumer discretionary companies leading the charge.

Likewise across Europe, shares in tech and consumer discretionary companies helped drive healthy gains for investors. Economic data also came through in Europe showing unemployment rates falling, whilst the job markets more globally look relatively strong, even if this is partly due to labour supply constraints.

Changing of the guard

Back here in the UK, the recovery in stocks was also helped upwards by consumer discretionary companies just as we saw in other developed markets. These shares have so far struggled under the cloud of the cost of living crisis that’s been gaining momentum. As expectations for interest rises are being tampered downwards, this also helped valuations of high growth companies, although hampered many financial stocks that can profit from these.

The big news in the UK this month however was that of Boris Johnson stepping down, leading to a leadership contest within the Conservative Party for the next PM. This will be important to resolve quickly, as the added uncertainty on direction of the country and economy aren’t helping market sentiment.

There are big decisions for the next PM, such as how to tackle the cost of living crisis with rapidly rising energy bills, along with how to kick start a slowing economy without risking increasing inflation further. With that said, there was positive economic data that came through from May, which showed the UK economy grew 0.5% after shrinking the month before.

China still a concern

Whilst developed markets saw a healthy recovery, emerging markets saw negative returns in July - in fact this month has been the most they have underperformed global stocks since July 2015. This was predominantly due to the poor performance of Chinese stocks, as the majority of the other emerging markets finished the month in positive territory.

The latest economic data released in July showed the Chinese economy expanded at its slowest rate since the beginning of 2020. Added to this, China are still in a battle against Covid and the Omicron variant with lockdown measures continuing to be imposed, whilst the property market is continuing to suffer - all of which has driven market sentiment downwards.

Bonds on the rise

Bonds have suffered in the first half of this year, with interest rates ticking upwards which in turn pushes down prices. One of the biggest news items for bond markets this month was the European Central Bank (ECB) raising its interest rates for the first time in 11 years. This ended an era of negative rates which date back to the Greek debt crisis of 2012.

However, with data from the US and other economies showing a slowing of economic growth, investors started to digest the likely outcome of more moderate interest rate rises into the future. This led to bond yields falling in July, which naturally means that bond prices likewise rose and provided welcome positive returns for many bond investors.

Looking Ahead

Whilst positive returns across most asset classes are a welcome change from the first half of the year, it’s important that short term volatility, whether positive or negative, is taken with a long term view.

As we make our way through this period of heightened inflation and volatility, it is worth remembering that a diversified portfolio with a range of assets is one of the best ways of limiting the impact.

Investing should always be thought of as a long term process, with shorter term volatility a good part in why investors are rewarded with attractive long term returns. Remaining invested through periods of volatility is key in meeting one’s financial goals.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.

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