• This quarter we saw the first interest rate cut from a G7 central bank with the Central Bank of Canada cutting rates by 0.25% during early June, this was swiftly followed by the ECB, which made its well-flagged cut at its most recent meeting. The Bank of England bides its time for now, however the interest rate cutting cycle is upon us, which should serve as a more welcome backdrop for markets than they have been used to in recent years.
  • Sooner or later, the realisation that inflation is no longer enemy number one will begin to be digested by central bankers and politicians alike. The rate of inflation has been steadily falling for the last couple of years, quickly at first and more steadily of late. The timing of the energy price cap in the UK has helped bring CPI into line, food inflation has slowed and goods are in outright deflation. In the States, idioms like ‘owners equivalent rent’ (the theoretical amount a homeowner would pay if they sold their house and rented it) are keeping headline inflation rates higher than the ‘real world’ experience. There are reasons to believe risks to inflation are to the downside – narrowing budget deficits, less accommodating monetary policy (QE), weaker retail sales and normalised supply chains will help suppress inflation in the coming months.
  • The US continues to look stronger economically than the UK and Europe, but further ahead in its growth cycle too, supported by a high degree of deficit funded spending and quicker implementation of post-Covid stimulus packages. Overall, the global economic outlook looks more resilient than anticipated some quarters ago and labour markets are not showing obvious signs of stress through the unemployment numbers. China remains weak as it continues to struggle resurrecting consumer demand and issues in its property sector remain.
  • From a yield perspective, fixed income is looking attractively positioned, particularly in comparison to what investors have been used to since the Great Financial Crisis. There are nuances though. Corporate credit is looking somewhat expensive, but again is delivering a good income. We are expecting 2024 to deliver solid returns from the asset class and continue to use a selection of investment grade corporate and strategic bond funds, whilst selectively adding to US & UK government bonds in recent months.
  • We have had two years of very narrow equity markets; energy in 2022 and mega-cap US tech in 2023 delivered an oversized amount of the total return from equity markets. There are some highly cash generative companies in areas such as mega-cap US equities, but they also trade at a rich premium. We continue to believe that valuation is an integral and important part of the investing equation. As such, over the last few years, we have been gradually edging away from areas we believe to show signs of elevated valuation. We have sought out (or remain happy to continue to hold) pockets of assets which look relatively attractively valued that can also deliver an ongoing dividend or interest payment.
  • The Japanese yen continues to be weak versus the British pound. The euro was showing some weakness too, particularly after the French legislative election was unexpectedly called. Meanwhile, the US dollar marginally gained versus sterling.
  • Brent Crude has been up and down this year but finished the quarter at c$85/barrel. Daily US oil production now easily surpasses that of Saudi Arabia, which alongside improving well productivity in non-OPEC + countries represent a challenge to OPEC in its attempt to control pricing. Gold shone particularly brightly, rising strongly in March/April, then levelling off to finish the end of June at >$2300/oz.
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