Quarterly Market Update: Q3 2023
Welcome to Balance: Wealth Planning's third 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 Susie Lovell, one of our financial planners, introducing the third newsletter in our series of quarterly market updates for 2023.
Below we take a look in detail at the UK economy and inflation. We also tackle the topic of sustainability and the UK's net zero goal.
Market Review
2023 was expected by most, to be a better year for investment markets, but a bad year for the economy. This has somewhat been the case, however, the latter has not been with most economies appearing more resilient than expected. UK GDP is surprisingly on the upside, having risen 0.2% over the quarter, when the market consensus was in fact for the economy to have flat lined. Combined with inflation surprisingly falling to 6.7%, the lowest rate since February 2022, this was enough to see the Bank of England hold interest rates for the first time since December 2021.
In the US, Fitch (the credit rating agency) downgraded the US government's credit rating from AAA to AA+, citing unsustainable debt, deficit trajectories and increased political dysfunction. While this led to multiple news articles and heated debates within the government, it had little impact on the US bond market. There was better than expected economic data in July & August, and we saw yields continue to rise.
On the sustainability front, Rishi Sunak announced that he was rolling back key policies intended to help Britain deliver its 2050 net zero goal. One of those was moving the ban on new petrol and diesel car sales from 2030 to 2035. While this delay brings the UK into line with the European Union, it was a surprise to the automobile industry, with most now in a position to only produce hybrid or electric vehicles from 2030.
Apple became the world’s most valuable company again at the end of June, passing the $3 trillion valuation market. That means Apple is now more valuable than the entirety of the UK stock market, the 3rd largest stock market in the world.
Portfolio Review
Equities had a volatile but positive quarter. In contrast to the previous quarter, value and minimum volatility factors outperformed growth & quality, although all factors were positive contributors to performance over the 3-months.
Short-dated bonds continued their positive performance from Q2, providing further stability to the volatility experienced with the equity bucket. Q3 was another negative quarter for long-date bonds, as positive economic data outweighed the respite from central banks pausing their rate hikes.
Over the long-term, portfolios continue to perform in-line with expectations. It is positive to see our bond bucket providing stability to the portfolios, due to the weighting to short and ultra short-dated fixed income. Especially at a time when long-dated bonds continue to add volatility to the standard model portfolio.
Our long-term view
A film called Dumb Money was released this month, that focused on the tale of a group of people who turned GameStop (a gaming company in the US) into the hottest company on Wall Street and made millions of dollars in the process. As humans we are always intrigued by the ‘rags to riches’ story or finding the next overnight success. Its why people purchase a lottery ticket despite the odds of winning the jackpot being 1 in 45 million (for context, the odds of being struck by lightning are 1 in 10 million) or why people invest in cryptocurrencies, looking for the next Bitcoin.
While the majority of us won’t be lucky enough to discover the next Amazon, the one tool we all have at our disposal is the ability to compound. The process by which the value of our investments increase over time as dividends or interest are reinvested. This creates a snowball effect and can provide substantial growth over time.
Take an investor who made an investment of £5,000 into the FTSE All-Share index 20 years ago. If they had taken out all the dividends paid, their investment would now be worth £9,951 (a return of 99.02%). If they had reinvested all their dividends, their investment would now be worth £20,157 (a return of 303.15%). This 20-year period includes the 2008 Financial Crisis and the 2020 Covid Pandemic.
How do we benefit from this compounding? Patience. Over the 20-year time period, the investor would have experienced declines of over 30% in a single 12-month period. Yet staying investing and allowing compounding to do the heavy lifting, meant the investor benefitted from an additional £10,206 of growth.
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.