At last some good news on inflation. Following encouraging signs from the US, June’s UK CPI reading came in much lower than expected at 7.9%, prompting a change in market momentum during July. We are not out of the woods by any stretch, but it is now believed the Bank of England will get away with fewer interest rate hikes to keep on top of rising prices.
Consensus expectations now pencil in a peak of around 5.75% for Bank of England base rate. High by recent standards, but a long way below the 6.5 to 7% forecasts floating around only a few weeks ago. The great unknown is how sticky ‘core’ inflation will prove to be, i.e. the rate with highly variable components such as energy and food stripped out, but it seems we are in the final stages of the rate-tightening cycle nonetheless.
In the US, interest rates continue to ratchet up to combat inflation too, but again the market emphasis is increasingly on how long they stay elevated to dampen it down to target levels rather than precisely how high they will peak. The US Federal Reserve no longer sees a recession ahead, which ought to be good news for investors, but it does mean that rates will probably need to remain around current levels for a longer period of time. Mixed blessings then for investors who ideally want a ‘soft’ economic landing and lower rates – having your cake and eating it some might say.
Bond market volatility
The impact on gilt (UK government bond) yields was quite dramatic over the course of the month. The 10-year gilt yield rose to a peak of around 4.7% around three weeks ago and then tumbled to 4.3% today. As yields fall prices rise, and the value of inflation and interest rate-sensitive assets therefore had a reasonable period overall. Gilt sector averages, unusually for recent months, saw positive returns. However, that hid the significant weekly, and even daily, volatility along the way.
Other areas attuned to gilt yields also rallied, notably property and real estate companies and funds. Dividend-paying UK equities were also in demand, with heavyweights in the FTSE 100 also benefitting from a slight bounce in the US dollar, which had been weak this year to date and an impediment to the UK’s large, international earners. There was relief too for many domestically oriented UK shares as investors eyed a less aggressive path for interest rates and a less severe economic downturn as a consequence.
A broadening out of performance in shares
Against this background there was a welcome broadening out of share market performance, which had previously been highly concentrated over the course of 2023. As we have described previously, a narrow band of stocks, the so-called ‘magnificent seven’ (Apple, Microsoft, Nvidia, Tesla, Alphabet, Amazon and Meta) dominated returns from global market indices in the first half of the year.
Notably, commodities have seen a recent uptick with oil, copper and wheat all breaking out of trading ranges. If this is sustained it could have broader implications for inflation numbers in months to come. Yet for now it seems levels are in the ‘not too hot and not too cold’ territory whereby headline inflation numbers are dropping as previous price spikes fall out of the calculations, but are sufficiently strong to demonstrate demand is not collapsing.
It was Chinese equity funds that dominated the top performers over the course of the month, though, albeit this represented only a partial rebound following extremely poor performance year to date as the nation’s Covid-reopening economic bounce fizzled out. The Chinese government pledged to revive flagging growth recovery through measures to boost consumer spending and improve access to funding for businesses, as well as signalling more support for the property industry.
Although investors should be aware past performance is not a reliable indicator of future results, here are the top and bottom ten Investment Association (IA) funds and sectors* for July 2023:
Top ten funds
Bottom ten funds
Top ten sectors
Bottom ten sectors
The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for July 2023: 30/06/2023 to 31/07/2023. Onshore and retail open-ended funds only.
*There are several thousand funds on sale in the UK. The Investment Association divides these into about 45 sectors, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
Explore our Preferred List for a curated list of funds and trusts that are overseen by experts.See more