How stock markets have performed – April to June 2023

Investments team
Q2 2023

For most people, investing involves the stock market. This is where shares in companies are bought and sold with the aim of making a profit. If you’re investing in funds, such as in your pension, a fund manager will do this for you.

The concept of the stock market is like any other market where you can buy and sell things. But instead of goods, you’re buying shares in a company. If you buy shares in Amazon, for example, you own a small part of that business. Therefore, you get to share in the company's success – or if things go badly – its failure.

This means if the price of the shares goes up, you make a profit when you sell. If the price goes down and you sell, you make a loss, and the value of your investments could fall. Share prices are influenced by various things such as how well a company is performing and the general health of the economy. Other factors can also influence share prices, for example, certain industries performing well or badly following a major event or news story. International political developments can also cause share prices to rise or fall.

To understand how a particular part of the world, or a group of companies, is performing we look at the performance of stock market indexes. An index measures the performance of a particular group of companies’ shares and shows how these shares are doing. For example, the FTSE 100 Index follows the performance of the largest 100 companies in the UK. The FTSE All-World is an index that follows the performance of more than 4,000 large- and medium-sized companies across the globe.

It's a good idea to keep an eye on how markets are doing. Seeing what’s affecting markets helps you understand how your investments might be performing. Here, our investments team gives you a snapshot of how shares, bonds, and property have performed over the last 3 months. The team also discusses what could affect them in future.

April to June 2023

From April to the end of June, many major world stock markets delivered positive returns. The FTSE All-World Index – which represents a broad range of companies across the globe – went up by 3.2%. Stock markets in Japan and the US did best over the period. The UK didn’t do so well, with the FTSE 100 Index falling by 0.3%. Two important factors had a big influence on performance: the strength of the US economy, which gave markets a boost, and interest rate rises, which held back performance for some stock markets.

Although energy prices are starting to fall, inflation (or rising prices) is still an issue in some countries, for example, in the UK. Increasing interest rates is one way to try to reduce inflation. These increases could affect economic growth and influence how well companies do.

Let’s look at how shares, bonds and property have performed over the quarter.

Shares saw some improvement in value despite further interest rate rises and signs that interest rates could stay higher for longer if inflation stays high. Better-than-expected economic news helped boost markets. In the UK, inflation slowed by less than expected. This led to the Bank of England increasing interest rates, which reached 5% in June. This could affect borrowing costs, such as mortgage and loan repayments, in the coming months.

In the US, high employment levels and reducing inflation helped performance. Although interest rates went up in May, they remained steady in June. Some economic numbers showed a fall in consumer confidence. 

Europe entered a recession. Lower spending hurt Germany and the Netherlands. Inflation has been difficult to control, which led to more interest rate rises. Interest rates across the Eurozone reached 4% by the end of June. Slower or falling energy and food prices may help slow overall inflation.

In the rest of the world, Japan’s interest rates stayed at the same level. Inflation in Japan remains lower than in many other countries. Emerging markets showed a mixed picture as politics influenced the markets in China and Turkey, for example, where there was a recent election. India showed strong economic growth and inflation fell.

Bonds saw a further bumpy ride from April to June. Both corporate bonds (loans to companies) and government bonds (loans to governments) saw values fall. Government bond values went up and down a lot over the period because of news on inflation and interest rates.

Property was affected by concerns about a possible economic slowdown and how rising interest rates could increase mortgage payments. Although commercial property – buildings that house businesses – showed signs of a continued global slowdown, the market for high-quality offices remained fairly strong in some areas. In the 3 months to the end of May, UK commercial property gained slightly in value. 

Outlook: Uncertainty can affect financial markets. While the 3 month period to June was generally free from any significant shocks, looking ahead, we can see that uncertainty remains. Globally, the ongoing conflict in Ukraine and the situation in Russia, and tensions with China, are being watched carefully.

There are still worries around inflation, and whether it falls back or sticks, and what that means for interest rates and global growth. In the short term that could mean a bumpy ride. That’s why we believe in focusing on the longer term – ideally 10 years or more. We also believe in making sure investments are spread across different types, which gives the best potential to deliver positive results.

All asset class moves are discussed in total returns sterling terms. Source: Financial Express

The impact of inflation

Inflation has hit the headlines in recent months and is having a large effect on world stock markets. This is because it’s an important sign of how well a country’s economy might do in future.

Inflation is the amount by which the costs of goods and services rise over time. The inflation rate is the percentage increase or decrease in prices over a set period of time. For example, if the cost of a litre of petrol was £1 a year ago, and the inflation rate is now 2% a year, motorists would spend an extra two pence – 2% more – compared with 12 months earlier. 

In the UK, inflation is measured by looking at the annual change in the Consumer Prices Index – or CPI. To understand CPI, think of a very large shopping basket containing the types of goods and services bought by households. CPI measures changes to the total cost of this basket over time. 

Countries’ central banks (official banks that provide banking services to their country’s government and other banks) set inflation targets. The UK’s central bank is the Bank of England, and its inflation target is 2%.

One way to manage inflation is by using interest rates. People will feel less well-off because their loan or mortgage payments rise when interest rates are increased. This may reduce demand for goods and services as people will have less to spend. It can be difficult to manage this process because increasing interest rates can also slow the country’s growth. 

Inflation and how banks respond to it can affect financial markets and your investments. Slowing demand for goods and services affects a company’s profits, which could also influence its share price. Bond values can fall if there is uncertainty over inflation and interest rates. Property markets are affected by interest rate increases, for example, or by slowing economic growth.