Welcome to the latest episode of my monthly YouTube show where I discuss what is happening in investment markets and what to look out for. This episode I talk about how greed is currently trumping fear in global stock markets.
Each show lasts between 5-10 minutes and is aimed at DIY investors (including novices) seeking contemporary analysis to help them understand how investment markets work.
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Abridged transcript - Damien's Market Update - July 2023
So the end of June brought to a close the first half of 2023, a period in which equity markets performed strongly. The Nasdaq Composite, driven by prominent tech companies like Apple, Amazon, Microsoft, Nvidia, Alphabet, Meta, and Tesla, experienced its best start since 1984. Apple reached a valuation exceeding $3 trillion, and Nvidia tripled in price due to investor enthusiasm for AI stocks.
But it wasn’t just the Nasdaq that was being propelled higher by investor enthusiasm for tech and AI. As an interesting exercise chart the Equal Weighted S&P 500 (^SPXEW) versus the normal S&P 500 and you will see that the former was up just 4.88% in the first half of the year versus +14.9% for the latter. This beautifully highlights the influence of these tech giants on wider US stock market returns.
The stock market rally caught many investors off-guard, with investment banks' end-of-year targets for the S&P 500 being surpassed already. Yes we could still see a market correction later in the year resulting in the banks’ predictions being proved right, but many banks have already thrown in the towel on their original predictions and revised them higher.
But if we look beyond the US and the influence of AI, the rally in global stock markets has been heavily influenced by the predicted divergence in monetary policies around the world.
Generally speaking, the closer investors believe a given central bank is to the end of its rate hiking cycle the better its domestic stock markets have performed. That’s been bad news for the UK stock market. Among the winners (ignoring the US for a second) has been Japanese equities. While most central banks have committed to raising rates to combat inflation, the Bank of Japan has stood apart by maintaining negative interest rates which is why it has been such a strong performer in local currency terms.
European equities also experienced strong gains in the first half of 2023 as investors anticipated a slowdown in inflation and the European Central Bank's rate hikes reaching their peak. France's CAC 40 and Germany's DAX reached new all-time highs, but the UK's FTSE 100 lagged due to persistent high inflation and falling oil prices.
It means that in local currency terms, the Nasdaq Composite rose 31.73% in the first half of the year compared to 26.25% from the NIkkei 225, 15.91% from the S&P 500, 6.59% from the German DAX, 4.11% from the MSCI Emerging Markets Index, 3.05% from the MSCI ASIA ex Japan and just 1.07% from the FTSE 100.
If you listen to that back it’s almost a list from the most dovish (or least hawkish) central banks down to the most likely to keep raising interest rates for the foreseeable future (i.e. the UK).
You have to remember that the impressive equity market rally in the first half of 2023 occurred against a backdrop of conflicts, banking crises and debt ceiling negotiations. Investors bought every dip, demonstrating increased resilience compared to 2022.
But up until now I’ve talked about stock market returns in local currency terms. The reality is that the strength of the British pound due to the Bank of England's more hawkish stance (compared to other central banks) has created challenges for UK investors and continues to do so. If you factor in the rally in the strength of the pound you can knock off around 5% from most of those year to date stock market returns I quoted earlier. That is the impact of currency market moves and is why your portfolio returns won’t match the local currency numbers I mentioned earlier.
Yet the value of the pound has surged even higher in the last week after lower than expected US inflation data sent the pound above the $1.30 threshold, which hasn't been seen since April 2022.
UK investors are relying on the rise in value of overseas assets to be sufficient enough to offset losses caused by the stronger pound. In addition, the stronger pound always poses a challenge for the FTSE 100, as approximately 80% of its constituent companies generate revenue from overseas, particularly in US dollars. It’s one of the reasons why the FTSE 100 has been one of the global laggards since the spring.
So in conclusion many of the investment themes/concerns that have lurked in the background over the first half of 2023 remain (such as corporate earnings concerns, Chinese growth fears and geopolitical worries). In addition, the fear of further rate hikes is trumping the fear of recession in bond markets causing yields to rise in recent weeks. The 10 year US treasury yield was back above 4% in the last week before falling again.
But overall, we are heading into the second half of 2023 with the same nagging concerns that haunted markets at the start of 2023, before equity markets rallied strongly. The only difference now is that more and more investors have returned to the market, chasing the equity market rally. Or in other words, greed is now trumping fear.