Market review and outlook – August 2023

Inflation and interest rates remain a bit of a conundrum

The Bank of England’s decision to raise interest rates by 0.25% to 5.25% at the beginning of August didn’t come as much of a surprise, given that inflation remains well above the Bank’s 2% target. The question is what next for inflation and how much further will interest rates rise?

With inflation falling in both June and July, it looks like it has now peaked. But strong wage figures are still causing headaches for central banks when it comes to considering what’s next for interest rates. Melanie Baker, Senior Economist at Royal London Asset Management, doesn’t think we’re quite at peak rates yet, and is pencilling in another 0.25% rise by the Bank of England this year.

Despite better-than-expected news about economic growth in June, higher interest rates are still likely to lead to some level of slowdown in the UK economy over the latter part of the year. This would have an impact on company earnings and profits, and could also lead to more companies having their credit ratings downgraded or even defaulting on loans. Other impacts of an economic slowdown could be a rise in unemployment and a flattening out in wage demands.

What does this mean for markets and investments?

Equities remain a largely positive story

2022 wasn’t a great year generally for investors, with stock markets recording their worst yearly losses since the 2008 financial crisis. But, despite concerns about inflation, interest rates and possible recessions, plus worries about the stability of the banking sector, the first half of this year was much more positive generally for stocks and shares (also known as equities). These gains have continued into the second half of the year too. Technology companies have been particularly strong this year, largely due to enthusiasm around artificial intelligence (AI). And at a country-level, Japanese equities continue to outperform most other global equity markets, although returns have been fairly modest recently.

The outlook for equities still looks quite positive. But with recessions potentially on the cards for some countries, certain sectors and regions are likely to provide better opportunities than others. For example, businesses that have relatively stable earnings, such as consumer goods, financial and pharmaceutical companies, tend not to be too adversely affected by economic downturns and provide steadier returns.  

A mixed picture for other investments

Other types of investments haven’t fared quite as well, with commodities (things like oil, gas and agricultural crops) and commercial property in negative territory this year so far. But there are positive signs for some commodities, such as crops, with demand potentially outstripping supply. There have been well-documented supply issues with some crops following Russia’s invasion of Ukraine, and the situation may be exacerbated further by a weather pattern called El Niño. El Niño disrupts normal types of weather, so could potentially affect agricultural production, which in turn could drive up commodity prices.

Bonds have also performed poorly over the last year. Generally, bonds are seen as more stable and less risky investments than equities. But events like the war in Ukraine and the fallout from some of the decisions made by Liz Truss’s government have had an adverse impact on bond performance. On top of that, bond prices almost always fall when interest rates are rising, like they are now. Longer term though, the outlook for bonds is looking brighter. 

If you’re not sure how market and economic events may affect your pension investments, think about speaking to a financial adviser.  

The information in this article shouldn’t be taken as financial advice. The value of all investments can go down as well as up and you may get back less than you paid in. Past performance isn’t a guide to future performance.