Quarterly Market Update: Q2 2023
Welcome to Balance: Wealth Planning's second Quarterly Market Update of 2023.
Throughout this year, our financial planners will collate important market information that occurred within each quarter, which we will then share with you.
Each quarterly update will contain a market review of the last three months, with any announcements or trends. As well as a review of our portfolios and how they have performed in the last three months. And finally, the long-term view of the financial market.
So, without further ado, please enjoy!
Introduction to our quarterly updates
Here is Krupesh Kotecha, our Investment Director and Financial Planner, introducing the second newsletter in our series of quarterly market updates for 2023.
Below we reflect back on Q1 and what changes we have seen into Q2, The Bank Of England interest rates and the results of this in the bond market.
Market Review
We finished the first quarter with a market sell-off as the fear of another financial crisis arose due to Silicon Valley Bank going bust. However, these fears were short-lived as we witnessed equities and bonds bounce back. This was led by big growth stocks such as Nvidia and Tesla producing triple digit returns year to date, driven partly by the overly positive sentiment around artificial intelligence.
The focal point over the quarter was the question around the US debt ceiling and whether a deal would be passed in time before the US defaulted on its debt. This generated a lot of noise in the market and spooked some investors. It’s important here to look at events in context; in the last 10-years the US has been close to breaching their self-inflicted debt ceiling on 10 previous occasions. Each time, the debt ceiling was either suspended or raised. An important reminder to look through any market noise in the short-term.
Over the quarter the Bank of England rose the base rate to 5%. This was on the back of wage inflation being higher than expected. The market now expects the base rate to peak at around 6% by the beginning of 2024, before rapidly declining back to 3.5% by 2028. In contrast to the UK, the US Federal Reserve decided not to raise interest rate, after US inflation fell rapidly from a peak of 9% down to 4%.
The bond market traded sideways in the later part of the quarter, as the market struggles to price in the differing actions of the main central banks. On a positive note, with equities performing so strongly, the inverse bond-equity correlation has now returned so bonds are once again protecting portfolios when equities fall, something they did not do in 2022.
Portfolio Review
While equities in general have been buoyant in the second quarter, when we look under the bonnet, most of the return had been generated by big-tech stocks which are a disproportionality large part of the US market. When you take out the biggest 5 stocks in the US market, the remaining 495 were largely flat or slightly negative over the quarter in terms of performance.
This meant in terms of factors growth & quality were big contributors over the quarter while value and minimum volatility lagged. This was a complete reversal to what we saw in the first quarter of 2023.
In bonds, short duration assets were largely flat or slightly positive over the quarter, whereas longer date bonds were negative as interest rates continued to rise.
Over the long-term the portfolios continue to perform in-line with expectations. It is positive to see the equity-bond correlation return back to normal, meaning bonds can once again provide protection for portfolios.
Our long-term view
Cash rates have now hit a two-decade high. It is possible to find banks and a building society now offering 1-year fixed term accounts paying almost 6% interest. It is no surprise that we have seen a rise in clients asking whether they are better to hold cash than invest. This is an interest question, as it hasn’t been present in financial advice since before the Financial Crisis in 2008.
Firstly, while cash rates rose strongly, so has inflation. This means the value of cash is now eroding at a faster pace than for most of the previous decade, despite today’s available rate. This means that long-term investments are more important than ever before.
The certainty that cash offers is only with its nominal value; a £100 today will still be £100 in the future. Timing is therefore critical if you hold cash as while over shorter periods cash may fare better against inflation, over the longer-term we know that cash fares far worse, even through periods of low inflation.
Research by Schroders has highlighted that over the last 96 years, while cash and equities have had very similar probabilities of beating inflation in the short-term (1-3 months) over the long-term (10 to 20 years) we can see that equities beat inflation most of the time whereas cash remains at the same probability in the short-term.
So, does cash have a place within your investment strategy? Yes. As it always has been, cash is vital for short-term income requirements and to provide you a certain rainy-day fund should you ever need to access it. But for long-term wealth creation, cash is a poor asset to use. We know through academic research that equities continue to provide the best opportunity for wealth creation over the long-term. Balanced with a bond allocation to provide you a suitable portfolio for your given risk tolerance.
Cash does have its place, but it remains a small addition to the side of an individual’s investment strategy. It is a nice added bonus to gain 6% on your rainy-day fund, in the short-term, while it lasts.
Please note: This update is provided for information only, and you should not take any action before speaking to a Financial Planner, who will confirm what suits you. In addition, past performance is not a guarantee of future returns. Values can fall and rise – you may get back less than you have invested.
Please feel free to share it with anyone who may be interested. If you have any questions, please get in touch with your usual contact or investments@balancewealth.uk.