Hello. I'm Andy Miller, lead investment director with Quilter Investors, and I'm joined today by Marcus Brookes, who’s our chief investment officer.
We're gonna be considering how markets have performed over the last quarter and what the outlook is going forward from here.
So, Marcus, if I can address that question to you, we are just past the halfway point of the year.
How did Q2 look from a market returns perspective?
Yeah. Q2 was, I think, quite a difficult quarter for many investors. If you reflect back on 2022, there was negative returns for the bond market because there was a bit of inflation that had emerged, and central banks were seen as being a bit behind the curve.
With Russia invading Ukraine in general.
And, that followed through into Q1 where, actually, people started worrying about inflation. Then we had a mini banking in America with Silicon Valley Bank
and First Republic. And then in Europe, we had Credit Suisse being taken over by UBS.
So coming to Q2, I think there was still some worries going on about, well, what's going on with the wall, what's going on with inflation is the banking crisis over. And it turns out actually the banking crisis, in particular, was dealt with very neatly. The one emerging issue well, the the remaining issue really is the inflation issue. And that has been a really sticky issue.
So returns for Q2 if you look at the MSCI World, global equities basically, up four percent. So actually made some money in the equity space.
In the UK, a small loss, we saw there. But overall, if you're invested in Europe, you've made money. Japan, you made a good amount of money actually, Japan was up quite strongly. And in the US, if you had those large cap, Facebook, Amazon, Netflix, Google type names, they had their best return for forty years. So there was opportunity there for investors. The area of weakness unfortunately, it was the bond market.
This sticky inflation seemed to have eroded people's confidence in the bond market. Gilts were down six percent over the quarter. So you will have seen in actually lower risk type portfolios where you got more bonds and you have equities actually gave you, a slightly negative return in some cases, whereas the more equity heavy portfolios did far better. So markets, I think, were actually pretty good over time, a lot more balanced, but I think inflation is really the issue.
Inflation is the issue, inflation isn't going away. It's coming down, but it isn't going away. So how does that leave the outlook going forward from here?
Well, it depends on your view on inflation.
I mean, we're actually cautiously optimistic as a whole.
And then the inflation, where I think we're a little bit more pragmatic than some of the market commentators. Recent inflation has moderated. I think level that we were sort of expecting people have been saying, maybe interest rates in the UK get to six point five.
As of today, they're now saying maybe six. We think it's gonna be slightly below six. And that basically signals that we think inflation is being starting to come down. The hard work of last year and coming into this year by the Bank of England has a lagged effect.
We're starting to see those lags actually starting to make a real difference to the inflation numbers. There are some really good reasons why it will stay a bit higher than people expecting. That doesn't mean that everything's gonna be really bad. And actually, it may well reassure people that we don't need to have a really deep recession because they don't need to do too much more on the interest rate rises.
Thanks, Marcus. So if I am considering investing or indeed if I'm invested just now, I look at markets going forward from here, and there is a degree of uncertainty there, and yet I can get certainty if I go to bank or rebuilding society, I can put my money in there, and I can get a return that feels like it's higher than it's been for a long, long time. At least the last ten years, why shouldn't I do that?
Well, in some circumstances, that might be the right thing.
I mean, I would look at those nominal interest rates, the actual number that they're advertising, two, three, four percent, and then compare that to the level of inflation, which is like seven or eight. So if I have a hundred pounds today and I invest it in the years’ time, my bank will give me a hundred and two pounds worth of investments or it would have turned into a hundred and two. But, actually, if I'd met just kept track with inflation, that would be a hundred and eight So the difference between what you're gonna get on your savings and what's happening to the prices of the things you want to spend those savings on is actually pretty poor on a ten-year basis.
That's that difference between the inflation rate being seven, and what you're getting on savings, two, or if you go to the bond market maybe five, you're still getting a negative real return. The nominal return, looks good, but after the effects of inflation is pretty poor. And then I suppose the issue I think I have as an investor, I'm thinking five six, seven, ten years in advance, when we get a moderation in this situation, when inflation really does come down and markets get confident that the risks have receded. It will start pricing in a better environment very quickly, and it will take off.
And I if I was an investor, I'd be worried that I might miss out on those things. What's the signal that's gonna get me out of my cash rate or my bond into the equity market to make really good use of those returns that could be coming.
Marcus, thank you very much for your time.
