- 3rd July 2023
- Posted by: Celticfp
- Category: Investment Committee
Half-Year Review: A Balancing Act
The second quarter witnessed a favourable trend towards global risk assets, despite UK assets falling behind, marking a stark contrast to the gloomy situation back in March during the US regional bank crisis. Encouraging earnings reports from analysts have bolstered the markets, with the most significant shift being the reaction to valuations. Indices of developed economies have surged, fuelled by both rising profit expectations and higher price-to-earnings ratios, signalling a potential shift from pessimism to optimism. This is also likely attributed to the reassurance of central bank support after the US banking crisis.
However, in contrast, there are signals of a looming recession from manufacturing sectors, especially evident in Europe despite the relief from energy price pressures. June’s purchasing managers’ index (PMI) data shows the economy’s service side gradually becoming less positive and manufacturing more negative. Particularly noteworthy was Europe’s widespread decline and an expected drop in China’s June PMI to around 52.8, implying a global composite PMI of about 52.7.
At last week’s European Central Bank (ECB) annual symposium in Singa, Portugal, top central bankers from around the globe voiced their opinions. The views ranged from cautious to sternly assertive, prompting markets to anticipate more imminent interest rate hikes. Bond yields responded and surged, whereas equities seemed indifferent. This could be due to a belief that inflation impacts might be less damaging than initially feared, a sentiment perhaps shared by central banks.
Another point of interest from the last quarter was the minimal corporate bankruptcies and defaults. In the US, post the downfall of Silicon Valley Bank, investors were vigilant for default signs. While a few were spotted, it didn’t trigger a crisis. A similar situation played out in the UK, until the recent news about Thames Water. The Thames Water scenario, although unlikely to incite a crisis, highlights the need to closely watch large debtors and traditionally considered secure infrastructure investments.
The warm June is expected to cool off in Europe in July. Hopefully, the relative peace experienced by equity markets in June will continue, irrespective of weather changes.
Investors Not Moved by Wagner Rebellion
Yevgeny Prigozhin’s quickly withdrawn Wagner rebellion did not impact global stocks and bonds. Even the biggest geopolitical event since the onset of the Ukraine war didn’t cause a stir among investors. Russian assets were excluded from western investments following Putin’s invasion, and the existing trade ties were largely severed. Surprisingly, oil and gas markets also remained unaffected.
This is starkly different from a year ago, when Russian political and military actions significantly influenced global, especially European, energy prices. Despite the market’s dislike for instability and the potential for a Russian civil war to disrupt energy supplies, Europe is less dependent on Russian gas now, but not entirely unaffected. Russian oil and gas have been diverted to Asia, impacting other imports.
Saudi Arabia recently signalled a cut in oil production due to low global demand, likely triggered by Russian overproduction to secure needed funding. With the ongoing global economic slowdown and potential recessions in many regions, reduced demand rather than supply is now the primary factor impacting energy markets, putting major suppliers like Russia in a weakened position.
While Putin’s authority may seem undermined following the failed rebellion and peace discussions with various developing nations, including China, it doesn’t necessarily imply his desire to conquer Ukraine has dwindled. However, Russia’s limited resources for continuing the fight and Ukraine’s diminishing counterattack increase the likelihood of a ceasefire in the medium term.
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This article is for information purposes only – should not be perceived as financial advice. We recommend you should always speak to a financial adviser before making any investment decisions.
Please note, past performance is not a reliable indicator to future returns. Your investment may fall as well as rise, and you may not get back what you put in.