Q2 market review

There was significant dispersion across asset classes over the quarter as investors tried to understand where the global economy was at in the cycle, whether inflation was under control and whether interest rates had peaked.

Sticky inflation in the UK saw interest raised sharply with signs of more increases to come and this resulted in GBP rallying, particularly against the Yen which held back returns for UK investors. The Japanese stockmarket rallied a remarkable 14% over the quarter but only 3.6% when converted back into GBP.

A challenging quarter

The entire quarter was dominated by inflation with each monthly data point eagerly anticipated by investors. The Federal Reserve paused interest rate increases in June following signs that inflation was falling back while the Bank of England increased rate by 0.50% in June as rates persistently came in higher than expected. This made for a challenging backdrop for fixed interest investments with UK gilts falling back over 5%, and while UK corporate bonds were a little better, they still fell over 3% during the quarter.

Within equities, the UK fell back a little late in the quarter on the back of the increase in interest rates. The best performing region was the US which was up over 5%, however, it was a hugely narrow market with the seven largest stocks in the market accounting for almost all of the gain. Asia and the emerging markets continued to struggle with China dragging down the indices despite very robust performance from India.

In the alternatives space, both property and infrastructure had a challenging quarter which was unsurprising given their close association with the direction of interest rates.

A more positive future

Looking ahead, there are some positives on the horizon. While a recession looks to be almost inevitable, particularly in the UK, this should point towards the end of the interest rate rising cycle. Given markets are forward looking, they are now beginning to look towards this point and any signs that inflation is falling back should be received positively by interest rate sensitive investments such as bonds and infrastructure and property as much of the bad news looks to be priced in.