Q2 Market Commentary 2023

Over the second quarter to 30 June 2023, inflation remained elevated in the west. Central banks reacted by increasing interest rates in the UK, US, and Europe. Over the coming period we expect inflation to remain as a key focus.

Let’s look at UK financial markets

The Bank of England continued to increase rates to bring inflation under control and direct it down toward the 2% target. During the quarter, core inflation numbers came in higher than economists had predicted. This led to the Bank of England increasing the rate by 0.5% in June, which took the base rate up to 5%. This rise placed pressure on those remortgaging.

The UK equity market was down slightly, by 0.72%, over the quarter as measured by the broad MSCI UK IMI index. Much of the weakness came from the energy and materials sector as demand and concerns on the Chinese economy led prices lower. The medium and smaller sized companies within the UK continue to be hit hardest on price despite many of the companies in the mid to small cap sector continuing to produce solid results and continue to generate strong cash flow often in niche areas. The dislocation on prices from fundamental valuations creates opportunity for active managers operation in this traditional engine room of the UK economy. Interest from overseas investors has picked up as a strong US dollar and low valuations look appealing for some corporate opportunities.

What about the USA?

US markets rose over the quarter. This was driven largely by the technology stocks and in particular the Artificial Intelligence which has given these companies a boost. More widely, companies are producing robust earnings and consumer spending remains strong. An agreement was reached on the US debt ceiling with the Democratic and Republican parties agreeing to extend the overdraft limit which reassured markets.

How are European financial markets fairing?

Within Europe the ECB raised rates again to 4%. Inflation is now projected to peak at 5.4% in 2023, before decreasing to 3% in 2024. The growth expectation was revised up to 0.9% for 2023 as inflation falls, households recover, and foreign demand strengthens.

ASAM’s approach to investment management

We regularly engage with all our fund managers. Within equities, we focus on the long-term drivers of total returns. We calculate this by considering the price you pay for investments, the earnings and dividends being produced, and their growth. Markets have often been led by world events and subsequently suffered from a narrow focus and dislocation. Many opportunities, particularly in the medium and smaller companies space, have attractive pricing, resilient earnings and progressive dividends. This combination is likely to be beneficial with core inflation likely to remain firmly above central banks’ targets for the upcoming period.

We always consider what is driving short term sentiment in the markets against the potential for opportunity longer term. We favour equities with a preference for active managers at this stage. We have seen our underlying managers activity pick up with many trimming and adding to positions when opportunities arise. We continue to focus on fundamentals of price, earnings, and dividends as the drivers of returns rather than short term trends.

We also favour a pool of diversified real asset funds. Some of the underlying investments in the funds are assets with inflation linked contractual payments, which are often backed by governments. Our portfolios remain diversified across each asset class, sector and geography, and our approach has the flexibility to take advantage of the changes in the markets throughout this period.

This information is obtained from sources considered reliable, but its accuracy and completeness is not guaranteed by Anderson Strathern Asset Management Limited. Neither the information nor any opinions expressed constitute financial advice. Investments can fluctuate in price, value and/or income and may return less than the original amount invested. Past performance is not necessarily a guide to future performance. Anderson Strathern Asset Management Limited is authorised and regulated by the Financial Conduct Authority.