Quarterly Investment Review – Q2 2023
2023 has proved an awkward environment for investors. At the start of the year it was hoped that inflation would roll over, but strong employment has stymied that. Then the banking crisis in US regional banks sent interest rate expectations into reverse. Since then the continued strength of the economy, stubborn inflation pressures, and a brief panic over the US debt ceiling, have forced interest rates back up. After the brutal losses in bonds last year the result at mid-year is only a small recovery. This uncertainty left equity markets drained of confidence, leading to an extreme divergence of performance between the mega cap technology stocks and everything else. This divergence is best demonstrated in the US where the Dow has recorded a year to date performance of 3.8%, while the large cap tech index, the Nasdaq 100, gained 38.7%. The performance of the S&P500 of 15.9% was accounted for almost entirely by just seven stocks – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Facebook. Most of these stocks are beneficiaries of AI (Artificial Intelligence), and the rest of the market has barely moved. So, the tale of the year has been that jittery investors, unsure of the direction of inflation, interest rates and growth, have herded into the one area that has offered certainty pushing these companies’ share prices to a level that looks extended. It has been a difficult environment for a diversified strategy.
This tension in markets has been triggered by inflation and the accompanying rise in interest rates. Following more than a decade of near zero interest rates, when the Federal Reserve raised them by 500 basis points in fourteen months, there were bound to be some casualties. The most speculative companies, that require frequent capital raisings to keep going, are in serious trouble. But the tightening of liquidity is putting strain on much larger borrowers.
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