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June proved to be a challenging month for risk assets as both equities and bonds declined, continuing their downward trajectory since Easter and year to date.  In fact, this marks the worst first half-year start for global equities in over 50 years. Unfortunately, there have been very few places for investors to hide as even traditional “safe haven” assets like government bonds and precious metals fell over the month and quarter.

Investors are still contending with multiple headwinds which have led to market volatility.   In the UK, political uncertainty is front and centre as Boris Johnson abruptly resigned as Prime Minister following a series of key minister resignations from his cabinet including the former chancellor Rishi Sunak and health secretary Sajid Javid.   The revolt was triggered by revelations about the prime minister’s handling of sexual misconduct allegation from a former Deputy Chief Whip as well as lingering issues over breaking his own lockdown laws.  Now a leadership contest hangs over the British economy which is struggling to contend with rampant inflation, recession fears and Brexit.   In addition, the war in Ukraine continues to rage on with no end in sight and this has only exacerbated fuel and food shortages, particularly in Europe.   Finally, Chinese COVID lockdowns have weighed on its economy as well as global supply chains; although there appears to be signs that lockdown restrictions are easing, which should lead to some recovery.  Despite these negative factors, it is encouraging to note that the labour market remains healthy in terms of job availability and wage growth across regions.   In addition, consumer spending remains remarkably resilient as pandemic fears subside.

Inflation remains the focal point for central banks and its path will likely be a key driver for the economic outlook and markets in general.   In June, the Fed raised interest rates by 0.75%, targeting a range of 1.5% to 1.75%, marking the largest single day rate hike since 1994.  The Bank of England took a more measured approach raising rate by 0.25% to a target of 1.25%. Despite this, inflation levels remain at multi-decade highs and are projected to increase above 9% in most developed markets. Based on this, it appears that central banks are still playing catch up when it comes to fighting inflation.  That said, they are in a difficult position trying to fight inflation on one hand, while simultaneously trying to avoid a recession on the other.

Overall, we believe that maintaining a lower risk portfolio is warranted given the uncertainty over inflation as well as other concerns highlighted above. On a more positive note, we are seeing more attractive valuations across equities and bonds which present some more interesting investment opportunities, however the uncertainty regarding earnings outlook and interest rate moves gives us some pause.  Based on this, we believe there is still potential for downside risk in the short term and believe it is prudent to remain defensively positioned.