Market Opinion - July 2023

Market Opinion - July 2023

In July, global equity markets, especially in Asia, saw broad advances. As inflation began to stabilize in regions like the UK, US, and Europe, emerging markets consistently surpassed their developed counterparts. China reported robust returns, spurred by government policy relaxation and potential further market incentives. The UK experienced its lowest inflation rate in over a year, and after two quarters of downturn, the eurozone saw a 0.3% growth in Q2. Notably, European stocks thrived in July with especially strong showings in the consumer discretionary and energy sectors, while utilities and IT trailed. Inflation in the eurozone decreased to 5.3%, partly due to price drops in food, energy, tobacco, and alcohol. The European Central Bank (ECB) raised interest rates to curb inflation. France and Spain saw market growth, but Germany remained stagnant, and Italy contracted.

The UK market closed July on a high note, fuelled by encouraging inflation numbers and positive corporate earnings reports. Inflation there decreased to 7.9% in June, its lowest since March 2022. The Bank of England made a moderate interest rate hike of 25 basis points in August. Additionally, a contraction of 0.1% in the UK's economy in May was less than anticipated.

In the US, stock indices like the S&P 500, NASDAQ, and Dow Jones concluded July positively. Reduced inflation revived hopes for the end of interest rate escalations. The Federal Reserve raised the interest rate by 25 basis points in July, its highest in over two decades. Though the headline inflation was at 3%, markets were optimistic about the US economic prospects.

Asian stock markets saw notable returns, spearheaded by China due to government policies and growing market optimism. Favorable inflation updates from developed markets boosted the MSCI Asia ex Japan index. While markets in India and Indonesia experienced growth, Japanese stocks fell behind. A significant development was the Bank of Japan's decision to allow more flexibility in yield rise, thereby relaxing its yield curve control.

Emerging markets outpaced developed ones in July, with gains seen across all regions. Performance was especially strong in emerging Europe, Asia, and the Middle East, with notable growth in Turkey, China, and South Africa, respectively. Latin American markets, including Brazil, Chile, Mexico, and Argentina, also finished positively. Turkish stocks rebounded in July as the central bank adopted a new economic approach, including a significant interest rate hike. Poland, Greece, and the Czech Republic's equity markets also ended the month on a high.

In Europe, government bonds faced challenges. German bunds saw a return of -0.35% after the ECB increased its deposit rate. On the brighter side, corporate bond markets prospered in July. The ICE BofA Sterling Corporate Index led with a 2.38% return. The Euro Corporate Index and the US Corporate Index followed with gains of 1% and 0.43%, respectively. Moreover, high-yield bonds showed growth, with significant returns from the ICE BofA European Currency (€/£) and the US High Yield Index.