July 2023

Given everything going on in the world, the first half of 2023 has delivered surprisingly good performance for investors.

Reflecting on the First Half of 2023

  • The global equity market delivered strong returns – up over 14% in local currency terms and 12% for Euro investors.
  • Bonds performed less strongly but were still up circa 2%.
  • There was a notable decrease in energy prices, with Natural Gas prices plunging by 50%.
  • Headline inflation fell but core inflation remained high at 5.4% in the EU and a similar level in the US.
  • In response to fears of persistent high inflation, central banks continued to raise interest rates significantly.
  • This hike in rates played a role in the collapse of three US banks, while in Europe, issues with Credit Suisse prompted authorities to orchestrate a takeover by UBS.
  • Economic growth slowed but managed to avoid collapse, and labour markets showed remarkable resilience.

Equity Markets

The following chart shows the global equity market rose 12% in the first half of the year.

Source: MSCI, ACWI, Euro investor

The US equity market, as represented by the S&P 500, was up 16% in USD.

The Magnificent Seven

The surge in U.S. equities primarily resulted from the remarkable performance of a select group of stocks, recently dubbed the “Magnificent Seven”. The exceptional rise in their share prices, as shown below, was fuelled by growing enthusiasm surrounding the potential of Artificial Intelligence (AI). For a short overview of AI, refer to last month’s Markets in 1 Minute.

  • Stripping out the performance of these 7 companies reveals that the other 493 companies in the S&P 500, as a group, were broadly flat year to date.
  • As these seven companies make up 50% of the technology-heavy NASDAQ, that index was up over 30% in USD.

Interest Rates Still Rising

Over the past 15 months, we’ve observed a substantial surge in interest rates. The latest June meetings demonstrated varying strategies across global banks:

  • The European Central Bank (ECB) implemented a 0.25% hike, accumulating to a total increase of +4% since July 2022.
  • The Federal Reserve (Fed) opted for no change but indicated their expectation to resume hiking later this year.
  • The Bank of England slightly surprised markets, implementing a significant 0.5% increase as the country grapples with heightened inflation.
  • In contrast, China took the route of cutting interest rates by 0.1% (from 2.75% to 2.65%), aiming to bolster economic confidence. The economic boom following its COVID reopening has fallen short of expectations while their economy continues to be weighed down by a property downturn, weakening trade, and underwhelming domestic economic data.

Better Cash Returns Available

While higher interest rates are feeding directly into higher mortgage and loan costs, banks have been slow to pass on better deposit rates to investors. We continue to help clients access better cash returns that are now approaching 3.5% and are expected to increase further next month.

Headline Inflation Down but Core Inflation Remains High

Core Euro inflation (yellow line) increased slightly in June and remains well above the long-term target of 2%. As a result, we expect the ECB to raise interest rates again this month (July).

The Most Expected Recession of All Time, That Still Has Not Arrived

Most market analysts are scratching their heads as to why and how the US and other economies are proving so resilient. Most expect that this can’t last but end up being forced to kick their recession predictions further down the road.

When investors can receive a higher return for lending for 2 years than they can for 10 years, it is viewed as a signal of trouble ahead (recession). As you can see from the chart below, with the difference in yields currently at around 1%, the yield curve inversion is greater now than at any time since the 1980’s.

So, caution is advised. The rapid rise in interest rates may well cause things to slow further.

Apple Now a $3 Trillion Company

Last month I wrote about Nvidia being only the 5th company to have a valuation that surpassed $1 trillion and I referenced that Apple was the first company to hit that particular milestone in 2018. Well, Apple has just surpassed the $3 trillion valuation milestone for the first time.

EV Car Sales Increasing

Tesla delivered 1.3 million vehicles in 2022 and Musk indicated in January that the company could deliver up to 2 million this year. In the 3 months ending June it produced 480k vehicles and price cuts led to the sale of 466k units in Q2.

Meanwhile its main rival in China, a company called BYD, sold 1.26 million vehicles in the first half of 2023, almost double what it produced in 2022.

June and YTD Market Numbers

So, as we can see, both equities and bonds are up in the first half of the year, while energy costs continue to fall.

Our Investment Outlook

Overall, we remain cautious about what happens next recognising that (a) it takes time for higher rates to have an impact, (b) that core inflation remains high and (c) we continue to see lots of indicators pointing in different directions.

  • The impact of the fractures in the banking sector is to ultimately put further downward pressure on economic growth.
  • That downward pressure, if it translates into a reduction in company earnings, may ultimately lead to an uptick in unemployment (the jobs market has remained incredibly resilient up to now).
  • Central bankers likely need to be more data dependent going forward and see core inflation begin to fall if they are to avoid raising rates further. The risks of a policy mistake (by raising rates too far) have also increased, particularly in the EU.
  • Ukraine and other geopolitical risks remain significant with bad outcomes not currently priced into markets. The core assumption of markets remains that the Ukraine war will not end, or escalate significantly, any time soon.
  • Overall, markets are likely to remain volatile until there is more certainty around (a) financial stability (b) core inflation falling back to the target of 2% and (c) the depth and length of economic slowdowns / recessions.

For short-term investors, this is not a market to be in but for our clients who are long-term investors, we continue to advise them to follow their plan and use market weakness to build on positions.


John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.