Looking at the headline results, it’s probably fair to say that the overall performance has been stronger than we might have expected – particularly for the higher risk portfolios.
At the start of the year, the dominant message seemed to be that “bonds were back” – given the higher starting yields. And while bond yields are certainly higher than a year ago, it can take time for investors to see the benefit in their portfolios. The recovery in equities has been sharper and more immediately noticeable, with global equities rising 8% in sterling over the first half of the year.
So, what explains this early-year rally?
First, it’s worth noting that the rally in equities has been quite uneven. Certain markets, like the UK, have lagged after its strong relative performance last year. On the positive side, Artificial intelligence has been a major talking point over the first six months of the year and that excitement has driven the tech indices, particularly in the US. And we can see that reflected in the performance of some of our thematic baskets.
Looking at the macroeconomic environment, inflation is still very much front and centre. Inflation has generally been stickier than analysts had expected, as we (and everyone else) have noted – even if we are seeing a downward trend. The US appears a bit ahead of Europe in terms of taming inflation, while the UK continues to face challenges. The message from Central Banks has been hawkish. Central bankers have been keen to signal that they don’t think they’ve beaten inflation and that interest rates will likely rise from here and stay higher
The other side of that message is that macro indicators have also proven more resilient than expected. That’s particularly true for the labour market, where job creation still seems quite strong and unemployment remains low. We can debate whether it’s just a question of time before those metrics begin to weaken, but for now, the combination of above target inflation and strong labour markets mean that Central Bankers are comfortable raising rates.
As we look forward, the outlook is mixed. On the negative side, we can see the prospect of higher interest rates, slower growth and the usual array of geopolitical concerns. On the positive side, we are seeing inflation slow and developed market economies holding up better than we might have feared. That’s helped corporate profits to hold up better than expected over the past few months and explains some of the strength we’ve seen in equities over the first half of the year.
For now, all of that leads us to maintain a slightly cautious positioning, compared to our internal benchmarks. But, with inflation moving in the right direction and policy rates coming close to a peak, we’re wary of being too conservative as we head into the second half of the year.
Thanks for listening and look forward to speaking to you again soon.
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