Setting the scene
First-half (‘H1) global market performance diverged widely, with varied expectations for the latter part of the year. H1 saw a rapid shift in sentiment and heightened macro volatility, ushering in a new era of increased market unpredictability.
July sustained positive sentiment, propelled by lowered developed market inflation and resilient GDP figures. Market sentiment, reflected in CNN’s Fear & Greed Index, embraced “Extreme Greed,” while the investor fear gauge (VIX index) remained low throughout. Optimism for a soft landing fuelled a sweeping rally across assets and regions.
Performance divergence was evident globally in H1 across asset classes (equity vs. high-yield), geography (developed vs. emerging markets), equity size (large cap vs. small cap) and style (growth vs. value), sectors (cyclicals vs. defensives), and across stocks.
After a mixed performance in June, July was a strong month for risk assets. Global equities delivered 3.39 per cent over the month with US equities outperforming their EU equivalent 3.25 per cent to 2.16 per cent for the month of July. Global equity markets delivered a positive performance across all sectors with Energy (+7.46 per cent), Communications (+7.24 per cent) and Financials (+6.43 per cent) leading the line. The S&P 500 was up for a 5th month in a row delivering 3.27 per cent in July, as the Nasdaq advanced by 3.91 per cent while the Dow Jones delivered 3.49 per cent to round-up a 13-day winning streak.
Following strong AI inspired equity performance in H1, market leadership broadened recently, favouring economically sensitive sectors. Within equities, developed markets delivered 3.4 per cent in July, but it was the riskiest sectors and regions that were the top performers as small cap and emerging markets added 4.9 per cent and 6.3 per cent respectively. This shift was also pronounced as the global growth marginally lagged its value counterpart.
As bears capitulate and soft landing is quickly becoming consensus, stocks may take a breather post a strong rally. Absent a negative catalyst to alter the goldilocks narrative, risk assets may persist favored by a monetary pause especially as earnings proved resilient. Elevated rates and ample valuations could constrain certain opportunities in developed market equities, prompting exploration of diverse asset classes.
Fixed income also recorded positive returns overall, with global bonds rallying 0.7 per cent over the month led by emerging markets benefitting from spread compression. Yet, US Treasuries and European government bonds slightly receded due to robust Q2 GDP data, while corporate bond spreads remained stable. High yield debt rallied strongly over the month, widening its’ out performance over investment grade credit over the course of 2023.
Commodity prices rebounded, with the Bloomberg Commodity Index registering a 6.3 per cent rise during July. Oil, driven by global growth, China stimulus, and supply concerns, experienced its best month since January 2022. Agricultural commodities gained due to Russia’s Black Sea grain export deal cancellation, while European natural gas prices fell with rising storage inventories. A weaker USD further supported commodities.
Monetary policy’s evolution shifted from synchronized sprinting in 2022 to diverse adjustments by central banks based on distinct growth and inflation trajectories. Amidst stubborn inflation and modest growth, the global disinflation trend persists yet major central banks tread cautiously due to substantial tail risks. This course extended by the “higher for longer” approach is set to culminate in a divergent marathon finale.
July saw the Fed deliver a quarter-point rate hike, propelling rates to a 22-year peak. Notably, officials adopt a “meeting by meeting” approach. Though aligned with headline CPI, rates surpass the Fed’s preferred inflation metric, the PCE index, sparking speculations of nearing tightening completion. Buoyant data may however prolong existing rates.
The ECB also raised rates by 25 basis points in line with guidance. ECB President Christine Lagarde noted a potential pause in September but warned against interpreting flat rates as the tightening peak. This dovish shift followed waning eurozone inflation and subdued activity prior to the July meeting. Interestingly, robust inflation led the BoJ to finally adjust its yield curve control framework.
Fitch Ratings’ recent decision to downgrade the U.S. government’s AAA credit rating underscores ongoing fiscal challenges as the U.S. spending as a per cent of GDP reaches levels comparable to World War 2. Federal Reserve Chair Powell acknowledged the unsustainable fiscal path in June, although the downgrade isn’t anticipated to significantly impact the U.S. Treasury market. However, the increased debt outlook underscores the limits on interest rate hikes by central banks, possibly leading to a coexistence with some inflation.
The trade-off between growth and inflation policy remains sharp and intricate as Central banks navigate the balance as regional variations and divergent strategies shape the global economic landscape. Their uncertain impacts have left many investors sitting idly by as opportunities in risk assets feel few and far between. This is demonstrated by legendary investor Buffett’s Berkshire Hathaway’s cash pile nearing all-time high at $147bn.
Global economies have displayed resilience under restrictive conditions relative to past cycles as services remain strong while the manufacturing sector continues to struggle. This resilience can be partly attributed to stable private sector finances and deleveraged households giving confidence to the spending trajectory.
The ongoing Quarter 2 (‘Q2’) earnings season reveals robust corporate performance in the US and EU, while Q2 results indicate positive surprises in sales (US: 2.1 per cent; EU: 0.7 per cent) and earnings (US: 7.6 per cent; EU: 5.8 per cent). Delving into sector-specific dynamics, the US market showcases consistent positive outcomes in key sectors such as Consumer Discretionary, Materials, and Utilities. In the EU, however, the story is more mixed. While sectors like Materials, Financials, and Utilities provide positive surprises, challenges arise in sectors like Consumer Staples, Communication Services, and Real Estate.
However, market reactions to beats for S&P500 firms have shifted, with modest one-day gains of 0.27 per cent, compared to historical 1.58 per cent. Companies missing estimates experience sharper drops, 3.54 per cent versus 3.34 per cent average.
This mixed performance underscores the complexity inherent in sectoral variations across geographies, emphasizing the importance of a granular approach when assessing investment opportunities. Given the rotation in performance across exposures, active and agile portfolio management is essential for capitalising on opportunities and adapting to evolving market dynamics.
View expressed reflect those of the author exclusively. The author has obtained the information contained in this article from sources he believes to be reliable, but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The author makes no guarantees, representations, or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this article.
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