30th June 2023

Cappuccino Commentary

A relaxed read on the issues of the day

The month of May saw a real mixed bag of returns within equity regions, and the same was true within fixed income and alternative assets. The best performing equity region was the US, delivering +3.1% in sterling terms, while Asia ex-Japan declined -4.9%. Alternative assets such as infrastructure, commodities & property were all in negative territory to varying degrees, while gold returned +0.5%. Fixed income saw government bonds, investment grade corporates and high yield deliver negative returns. We shall discuss below what the drivers were across the different asset classes and regions.

US equity markets delivered positive returns during May from a sterling investors perspective, as the dollar strengthened over the month. There were mixed signals coming from the US over the period – economic data remained broadly positive, but there was the looming prospect of a US government default, in relation to the US debt ceiling, which made investors nervous. At the same time, the Federal Reserve (Fed) raised interest rates by a further 0.25%, as expected, bringing the rate to 5.25% from 5%. Enthusiasm over Artificial Intelligence (AI) boosted technology stocks. Fervour around AI and the potential boom for related technologies drove chipmakers higher. This was in stark contrast to the energy and materials sectors, which sold-off, on the back of a weaker demand outlook.

European and UK equity markets were weak over the month (down -2.3% & -3.1% respectively). Just like in the US, most sectors in Europe posted negative returns, the exception was information technology driven higher by semiconductors. Also relating to the positive outlook for the sector based on the future potential growth stemming from AI. This was despite better than expected data coming from Europe over the month – inflation falling and the purchasing managers index remained above the 50-level reading (53.3), indicating continued growth in business output. The UK market declined around -3.0%, with the energy sector and basic materials the worst performers. Again, just like in Europe & the US, technology was the only sector to post a positive return, though financials were flat over the period. As forecast, the Bank of England (BoE) announced a further 25bps hike in interest rates, bringing the base rate to 4.5%. UK economic data was better than forecast and we are seeing signs that inflation is starting to decline though core inflation is proving much higher than forecast and came in at 6.8%, which is the highest since 1992. This was one of the main reasons for driving the UK market lower.

Japan had a strong month which was partly driven by positive economic data and also many companies in the region announcing increased dividend pay outs and share buys backs. Foreign travel has also been picking up and tourism spending is back to pre-Covid levels. Asia & China had a challenging month. Recent economic data coming out of China has been disappointing and there are signs that demand has been declining. The broader emerging markets were also weak on the back of this.

Global bond markets were generally weak – government bonds, investment grade bonds and high yields all sold-off to varying degrees. The main drivers were the rate hikes that were implemented by central banks and inflation proving generally stickier than anticipated. Our positioning towards short, dated investment grade bonds helped preserve capital, whereas the longer dated, long duration parts of the fixed income market were the most negatively impacted.

Alternative assets were generally weak over the month, in part due to those rising interest rates. Slowing economic demand also saw most commodities decline, with natural gas and crude oil the worst performers. Most agricultural commodities saw declines, though Gold delivered marginal positive returns from a sterling investors perspective.

All in all, a relatively challenging month for most asset classes, with some bright spots within.


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    Copia Capital Management

    Hamilton House, 1 Temple Avenue, London, EC4Y 0HA

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    This information is intended for professional financial advisers only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such. Model investment portfolios may not be suitable for everyone. The value of funds can increase and decrease, past performance and historical data cannot guarantee future success. Investors may get back less than they originally invested.

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