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In this month’s update, Nutmeg’s director of investment strategy, Brad Holland, answers questions on market performance, the risk-on sentiment in July, and how the global economy has so far managed to avoid recession.

What are the key takeaways for investors when looking at markets in July?

Equity markets had a good month, especially China which had languished since the start of the year. Markets there were helped by rumours that the Chinese Communist Party would introduce new measures to support the economy.

From a multi-asset perspective, most commodity prices also rose, and the dollar was weaker. Overall, you might characterise July as a risk-on month where risky assets did better than lower-risk ones.

In the UK we saw a big fall in bond yields after the latest inflation data showed a drop in domestic inflation. The consumer prices index (the CPI) came in below consensus estimates at 7.3% in the 12 months to June, while core inflation – that’s excluding food and energy – was 6.9% in the same period.

These numbers are still very high, especially considering the Bank of England’s target inflation rate of 2%. However, the latest numbers are well below the peak in CPI above 11% in October last year.

What’s behind the risk-on sentiment that defined markets in July?

Central banks in the UK and US are getting closer to the end of monetary policy tightening – the degree to which they raise interest rates. Often that is the time in the policy cycle that equity markets turn lower. However, we need to remember two things.

First, this is not an ordinary cycle, as it was caused by the Covid lockdowns rather than a more general economic imbalance. 

Secondly, global equity markets already weakened in 2022. A gradual recovery has been under way in the US since October last year.

The UK’s 2022 year-end performance was boosted by a fall in pound sterling after the period of economic panic during Liz Truss’ short time in power. However, UK markets have given some of that back during 2023 while other markets continued their gradual rise.

The UK market is comprised of fewer growth stocks than other markets. Growth stocks are of those companies considered to have the potential to outperform the overall market over time because of their future profit growth potential. Such stocks have had a strong year globally so far in 2023, particularly in the US which has benefited from the AI revolution becoming more mainstream.

Returning to the point about central bank interest rates, risky assets are responding to the gathering hope that inflation has peaked, showing that the price shock resulting from Covid, as well as Russia’s war in Ukraine, is passing through the system without a major recession. That’s good news for risk assets.

So, that is really our big question. Will the global economy pick up from its current low point or will it dive deeper into recession? July seemed to be a month where markets looked for the positives.

In particular, strong second quarter US GDP growth was reported in July, raising the stakes for a soft rather than hard landing.

How has the global economy so far avoided falling into recession?

It’s notable that we have so far stayed out of a significant global recession; an impressive achievement given the global cost-of-living crisis and rising interest rates.

Economies are still benefitting from the re-opening after the Covid lockdowns. And this desire to return to normal life has meant that services industries – travel and hospitality in particular – have continued to bounce despite the cost-of-living crisis.

In fact, as it has turned out, the three shocks in recent years – Covid, strained relations between the US and China, and the current war in Ukraine – have all led companies to rethink their supply chains.

Many are now looking at suppliers closer to home, rather than transporting goods and materials thousands of miles across the globe. That, along with clean energy production, requires significant investment which we are beginning to see, and which will support economic growth.

Another, longer term, factor supporting growth are housing and skills shortages which are keeping wages growth strong and house builders busy. So there have been a lot of pro-growth factors bubbling under the surface that served to somewhat offset the impact of tighter monetary policy and the higher cost of living.

The Nutmeg investor update is available as a podcast. Listen to this month’s update below.   

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About this update: This update was recorded on 8th August 2023. All figures, unless otherwise stated, relate to the month of July 2023. 

Source: MacroBond, Nutmeg and Bloomberg. 

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance.