Monthly Comment - June 2023

Global equity markets experienced gains during the quarter, driven primarilyby developed markets, particularly the US, while emerging market stocksunderperformed. The technology sector benefited from the enthusiasmsurrounding Artificial Intelligence (AI), leading to strong performance in technologystocks. In the period, several major central banks implemented interest rate hikes,although the US Federal Reserve chose to maintain its rates in June. As a result,government bond yields increased, indicating a decline in bond prices.US equities concluded the quarter on a positive note, experiencing significantgains primarily in June. This upward trend was supported by easing inflationarypressures and resilient economic indicators, despite higher interest rates. Notably,the revised Q1 GDP growth figure revealed a substantial expansion of 2%(annualized), surpassing the previous estimate of 1.3% growth.However, in June, the Fed opted for what economists refer to as a "hawkishpause," refraining from further rate increases. The projected path of interest rates,as indicated by the "dot plot," suggests the possibility of two additional rate hikes in2023.US inflation, measured by the Consumer Price Index (CPI), moderated to a 0.1%increase (month-on-month) in May, down from a 0.4% rise in April. This declinewas driven by the continued decrease in energy costs. Consequently, the annualinflation rate decreased to 4.0%, falling below the anticipated 4.1%. Overall, theUS economy remains robust, despite the increase in the unemployment rate from3.4% to 3.7% in May.Furthermore, Congress approved legislation in early June to suspend the debtceiling, accompanied by spending concessions that are not anticipated tosignificantly impact economic growth.Eurozone shares recorded gains in the second quarter, primarily driven by thefinancials and IT sectors. However, the energy and communication servicessectors struggled to perform well during this period.The IT sector experienced a boost, particularly fueled by semiconductor stocks.This surge was supported by higher-than-anticipated sales projections from selectUS chipmakers, highlighting the growth potential associated with AI.Towards the end of the quarter, the Dutch government announced that a licensewould be required to ship high-end chip manufacturing machines overseas,potentially resulting in reduced exports to China. This development could impactchip equipment manufacturers based in the Netherlands. Among financials, banksoutperformed as strong earnings are anticipated in the near term.The European Central Bank (ECB) raised interest rates twice in the quarter,bringing the main refinancing rate to 4.0%. Throughout the period, headlineinflation declined, with an estimated annual inflation rate of 5.5% in June, downfrom 6.1% in May. However, core inflation (excluding energy, food, alcohol, andtobacco prices) inched up to 5.4% in June from 5.3% in May.Growth data indicated that the eurozone experienced a mild recession during thewinter, with GDP declining by -0.1% in both Q4 2022 and Q1 2023. Forward-looking indicators point to a slowdown in the momentum of the eurozone economy.The flash eurozone composite purchasing managers' index (PMI) decreased to50.3 in June from 52.8 in May, marking a five-month low and suggesting that theeconomy may be approaching a state of stagnation. (A PMI reading below 50indicates contraction, while above 50 signifies expansion.)UK equities declined in the quarter due to weaknesses in commodity prices,concerns over the Chinese economy, and the impact of a strong Sterling. TheBank of England raised interest rates twice, leading to underperformance indomestically focused areas of the market. The reacceleration of rate hikes wasdriven by strong UK jobs market numbers, wage growth, and core inflationreadings. The sell-off in UK gilts resulted in rising yields, impacting the domesticeconomy and sectors like housebuilders.Japanese shares maintained their strong momentum throughout June, leading to asignificant rise in the TOPIX Total Return index by 14.4% in local terms for thesecond quarter. Concurrently, the Japanese yen continued to weaken, reachinglevels of 144 yen against the US dollar in June. This depreciation in the yenresulted in lower returns for foreign investors in Japanese equities whendenominated in foreign currencies.The market achieved its highest level in 33 years, with the Nikkei reaching 33,700yen in June. This impressive performance has been driven by consistent buyingfrom foreign investors since April. Furthermore, the gains can be attributed topositive expectations regarding corporate governance reforms and structuralchanges within the Japanese macro economy. The weakening yen, coupled withthe strength of the US market, further supported a risk-on sentiment in theJapanese equity market. Despite market valuations, such as price-to-earningsratio, reaching fair levels, there remains potential for upward revisions in earningsin the upcoming months, supported by yen weakness.Chinese equities experienced a significant decline during the second quarter asthe initial economic rebound, triggered by the reopening of the country after theCovid-19 crisis, began to lose momentum. Factory output in China has started todecelerate due to sluggish consumer spending and a decline in export demand,influenced by interest rate hikes in the US and Europe. Consequently, Hong Kongshares also faced a decline in prices during the quarter, as the cooling Chineseeconomy dampened investor sentiment towards Hong Kong stocks as well.The second quarter of 2023 witnessed a decrease in market volatility, althoughgovernment bond yields showed some divergence among countries. The UK andAustralia underperformed due to higher-than-expected inflation and thedetermination of central banks to address inflation concerns. While major centralbanks continued to raise interest rates, the US Federal Reserve decided to pausein June after a series of consecutive rate increases.Corporate balance sheets remained relatively strong, despite a slight increase indefault rates. Global high-yield bonds outperformed global investment-gradebonds as immediate recessionary worries eased. In the US, economic growthexceeded expectations, resulting in a market consensus of a "soft landing"scenario. US investment-grade bonds posted negative total returns butoutperformed Treasuries, while US high-yield bonds delivered positive returns.The US 10-year yield climbed from 3.47% to 3.81%, and the two-year yieldexperienced an inversion of the yield curve, rising from 4.03% to 4.87%.The European Central Bank (ECB) continued to raise interest rates andannounced plans to end reinvestments under its Asset Purchase Program in July2023. However, headline inflation decreased significantly from its peak. Germany's10-year yield increased slightly from 2.31% to 2.39%. Eurozone high-yield bondsoutperformed investment-grade bonds during the period.Surprising inflation in the UK prompted the Bank of England (BoE) to take strongeraction, raising interest rates by 50 basis points in June. UK bond yieldsexperienced significant jumps, with the 10-year yield rising from 3.49% to 4.39%and the two-year yield increasing from 3.44% to 5.26%. In terms of creditperformance, UK high-yield bonds outperformed UK investment-grade bonds.