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July was a positive month for equity markets, with investors hopeful that resilient economic growth and falling inflation may yet mean that central banks are able to bring inflation down without engineering a painful recession. This environment provided a favourable backdrop for most assets and regions, delivering investment returns that have been welcomed by investors.

UK

UK equities ended the month on a positive note, with corporate earnings holding up and inflation finally beginning to roll over. Inflation has been a thorn in the side of the Bank of England, recently prompting more aggressive tactics with a 0.5% interest rate hike in June. July’s inflation report indicated an easing in inflationary pressure and although the UK is not out of the woods, the lower inflation number allowed the BoE some breathing space to deliver a more modest 0.25% hike in early August. Overall, the UK economy performed better than expected by many economists at a time when rising interest rates have continued to pile pressure on household budgets. UK government bonds performed well relative to those of other major economies during the month.

US & Europe

Global equities, largely driven by US stocks, performed well as inflation continued to fall more quickly than predicted, giving investors hope that the Fed would soon announce an end to its programme of interest rate increases. With headline inflation in the US falling to 3% and interest rates at 5.25%, markets are not predicting the Fed will feel compelled to instigate another rise in September.

In Europe, economic growth data improved, largely driven by France and Spain. This data together with the prospect of a pausing of interest rate hikes in September, provided support to the region’s equity markets despite a deterioration in business confidence. Energy and materials businesses were among the winners, while IT and utilities lagged.

Asia & Emerging

However, it was the strong performance of Chinese equities that led to strong returns for the Asian and emerging markets regions, with the latter up nearly 5%. Support from the PBoC (China’s central bank) and the anticipation of further initiatives have helped to pique investors’ interest. Meanwhile Japanese equities remain a strong performer for 2023 although performance in July was a little more subdued, largely a result of currency fluctuations driven by the Bank of Japan’s interventions in the bond market.

Overall, financial markets have been buoyed by the possibility that inflation can be tamed without the need for too many more interest rate hikes and without significant damage to economic growth. Our view remains that a cautious approach is appropriate in this environment, and we continue to be mindful of both the overall level of risk in portfolios, with a focus on quality dividend paying equities wherever possible.