Nutmeg investor update: July 2023

How did global financial markets perform during June? 

June was a good month for equity markets and risk assets in general. We saw strong performance in Japanese equities, helped by a weak yen, and in the US for the third month in a row pushed higher by the technology stocks.  

Overall, most equity markets performed positively, including emerging and continental Europe. However, UK equities were an outlier, in particular mid-cap stocks performed negatively during the month.  

It is worth noticing some rather large movements on the currency front, partially explaining some of the outperformance or underperformance of regional equity markets. The euro and the pound performed strongly pushed higher by the action of the central banks and the dollar and the yen were generally weak for the month.   

Government bond markets were overall negative on both side of the Atlantic, with renewed concern on the inflation front and the action of central banks. Lastly corporate bonds performed strongly, in particular high-yield bonds. 

The Bank of England increased rate by 0.5% for the month while the Federal Reserve decided to pause. How do we interpret those changes?  

The difference in mood from British and American policy makers was quite striking. Clearly, recent UK inflation data is more problematic than what was seen in other countries.  

US core inflation came in at 4.6% on a year-on-year basis to May; the peak figure having been 5.4% which was reached in September 2022, nine months ago.  

In the UK, core inflation came out at 7.1% in the 12 months to May, the highest it’s been since the early ‘90s. Clearly, the Bank of England is having a much more difficult task with inflation than other regions. This is the reason why we have increased our holding of US treasuries where inflation seems slightly more under control. 

Is the latest macroeconomic data pointing toward an increased risk of recession? 

In a recent survey by Deutsche Bank, of among 400 investment professionals, 39% saw a risk of recession in 2023 in the US; the numbers from previous surveys were 64% in March and 77% at the end of December last year. This is clearly in line with what we are seeing on the macroeconomic front. The data has undeniably improved, in the US at least, compared to six months ago. 

However, the UK is in a slightly more difficult situation. The core price rises mentioned previously creates, indirectly, a larger risk of recession. While the Bank of England will do what it can to manage a soft landing, the task gets increasingly difficult if inflation remains stubbornly high.  

Further rates rise increases the risk of recession in the UK. So, not all regions are equal, and the US seems to be in a better situation at the moment with regards to future growth. 

Commodity prices have trended lower in 2023 so far, despite overall stubborn inflation. What’s the investment team’s take on this?  

Firstly, the commodity market is rather diversified. While often driven by common dynamics, each commodity is influenced by its own supply and demand factors. Nevertheless, in terms of global picture, commodities have trended lower compared to peak levels seen last year, and for some this change has been quite dramatic. 

Let’s start with oil. The price of Brent Crude, at the time of recording, sits around $75 per barrel. This is at a similar level to what was seen at the end of 2021, and largely below levels seen before the 2022 invasion of Ukraine, not even mentioning the peaks reached in the aftermath of the invasion. 

There can be a number of reasons for the lower price but the fact that Russia continues to export almost as much as before the war is an important factor. Also, China’s consumption remains weak, and combined as well with fears around global growth it helps to explain the negative trend on oil prices. 

The case of metals seems mostly due to the impact of China. The re-opening of that economy, which consumes 50% or more of many metals like iron and copper, has had a lower positive impact than anticipated, especially on external trading.  

Lastly, gas prices have gone down significantly in Europe and the UK since last summer, but still remain two or three times higher than before the Russian invasion. We also have to factor in that the US benefits from a strong comparative advantage in that it has no reliance upon Russian gas, unlike across Europe. 

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

About this update: This update was recorded on 4th July 2023. All figures, unless otherwise stated, relate to the month of June 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.