Market Insights July 2023
Current Topics in Markets
The return of optimism to financial markets was evident across most asset classes in the first half of this year. Inflation concerns settled back somewhat, the interest rate peak was supposedly in sight and the US economy was looking reasonably robust. At mid year we can say that at least some of that optimism has abated and things are looking a bit more uncertain than they were. At the recent Sintra summit in Portugal, both the US Federal Reserve and the ECB delivered a strong message around the plan for further rate hikes. The ‘risk’ for central banks of course, to the extent that they perceive it as a risk, is that economies are driven into recession as a result of interest rate rises going too far too rapidly. If anything, the likelihood of such a scenario unfolding is increasing.
Against this background, it is not a time to be adding risk in the form of growth equities to portfolios whereas it is probably a good time to be adding bond and alternatives exposure.
Equity Markets
With the exception of China, equity markets across the globe have performed strongly over the first half of the year. However, the rise in the US market in particular, has been driven by a small number of very large companies and the underlying market has been relatively flat. In recent weeks, markets have been demonstrating a high level of sensitivity to negative economic news with the result that volatility levels have risen. It is our view that this pattern may well continue over the Summer months and a larger correction certainly cannot be ruled out. We continue to be cautious on equities over the short term as a result, and favour larger dividend paying companies over the growth end of the market.
Bonds
Following the broadly based bond sell-off in 2022 and the continued uncertainty around interest rates, bond markets are offering investors real value now in our view. While we do not see the market settling fully until the peak in the interest rate cycle is clearer, that is likely over the coming months. Yields on sovereign bonds are currently 3% plus while higher yielding corporate bonds are paying more than 7% per annum. While we are advising clients to build a reasonably broad exposure to bonds, our favoured area continues to be the higher quality end of the high yield bond sector where the risk reward balance seems particularly attractive.
Property
Sentiment towards property remains in the doldrums in most global markets and we do not envisage any kind of real recovery from this in the short term. Serious question marks around future requirements for retail and office space continue to linger and are significantly suppressing investor appetite. However, the negative investor sentiment has also affected other sub-sectors of property including residential, logistics and healthcare where demand levels have been consistently buoyant. As a result, many property vehicles are trading at significant discounts to asset value and are reliable sources of attractive levels of income. While recovery may be slow, investors now will be compensated by the high yields currently available.
Alternatives
Alternative asset classes including infrastructure, renewable energy and selected hedge funds all have a place in investment portfolios in the current uncertain markets. Infrastructure and renewable energy attract high levels of government support, and this is unlikely to change and growth opportunities in these asset groups will continue as a result. They are both strong sources of yield also. Hedge funds on the other hand may offer a counter to the current volatility in equities.
Our Fund in Focus for July 2023 is ICG Enterprise Trust
As always, you should only consider the investment views contained in this Market Insights update in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you wish to discuss your investment portfolio, please contact Harvest Financial Services on 01 2375500 or email justask@harvestfinancial.ie.