Hello, and welcome to our quarterly market and economic update webinar. I'm Andy Miller, lead investment director, and I'm joined today by Lindsay James, our investment strategist.
Lindsay, if I can just ask you about market returns over the last quarter. What performed well, what performed badly, and why?
Over the second quarter, we've seen good returns across most markets. Now fixed income hasn't really participated in that, and that's partly because we've seen inflation continuing to be quite sticky across the main developed markets.
Now when we look at equity markets, we've seen the US again being one of the standouts, but this time along with China as well where returns have been very strong.
I think this is partly because of activity by the Chinese government to support the stock market. They've been stepping in and mandating some of their homegrown funds by Chinese equities, and I think that is having an impact. But when we look at Japan, unfortunately, returns haven't been quite as strong. And there, I think it's more a case of currency where the weakness of the yen has got to the point where there are concerns about what impact that will have on the domestic economy and, of course, on returns as well for international investors investing in that market.
But closer to home in the UK and Europe, we've seen reasonably good returns coming through at around three and a half percent in the UK.
A little bit weaker in the second half of the quarter in Europe partly because of the political element that we've seen coming in since the French elections.
But by and large, it's a signal that there is reasonable confidence in financial markets at the moment, and investors are happy to see inflation slowly coming down and interest rates increasingly, likely as we move into the second half of the year.
And that brings us on to our next subject, Lindsay, or, like, next topic rather, which is that we have seen in the UK inflation return to its two percent target and remain stable at two percent, and yet the Bank of England has not started cutting interest rates or has not started yet. Why not, and should we expect it soon?
I think, yes, we can expect it soon. When we look at what the market is expecting, what's priced in, if you like, that would be for two quarter point cuts by the end of the year with the first coming even as soon as August possibly.
I think September's slightly more likely, but nevertheless, it is coming. But when we look ahead over next year, the market's expecting interest rates to finish 2025 still a little bit above four percent and to only trough at about three and a half percent in three years' time. So although cuts are coming, they aren't going to be significant at least in the short term. So why haven't the Bank of England moved already? Well, it's because of the core inflation numbers. So although the headline figure is two percent, core inflation, which is when you strip out food and energy, that's still at three and a half percent, and that's fundamentally because wage inflation is still quite high at six percent, and that pushes up prices particularly in the service economy.
And so we're going to have to see more actions by the government to try and encourage people into the workforce to boost labour supply, and that would be the most effective way to bring down wage inflation, but it could be some time before we start to see that having real effect.
Thank you, Lindsay. Last question, politics. We have a new government in the UK. Has this had an immediate impact on markets? And going forward, what's your expectation of how things could change both for the economy and ultimately for UK markets as well?
Well, because Labour were ahead in the polls for three years, investors really had quite a long time to get used to the idea of a Labour government in the UK. And so since the election, we haven't seen any significant moves in the market, but some small positives. So we've seen sterling continuing to strengthen against the dollar. We've seen gilt yields come down a little bit, which is telling you that the risk investors would ascribe to lending to the UK government has been seen as slightly lower.
We've also seen equity markets a little bit higher since then. So so far, investors quite like what they hear. But there is a touch of reality about this, which is that there is still a significant hole in our public finances if, as we assume, the government wants to stabilize long term debt. And so we are expecting tax rises to come in potentially as soon as September when we'll get the first budget.
And I think this would potentially include things like CGT and IHT, but we'll hear more about that in due course. Now there are some levers that the government can pull even in the absence of more spending, and they're around things like planning reforms, which they've already started to announce. I think that could have a a meaningful effect on the UK economy in the long term, but there are obstacles to bringing those in. We'll have to see, what details we're presented with in coming weeks to have more confidence on the impact of that.
But by and large, the UK is now seen as a safer place to invest relative to some of the European countries, which are going through their own political upheavals at the moment and even potentially compared to the US in some ways. So, I think, you know, overall, the environment now is one of stability. The government understands the restrictions on borrowing.
And whilst economic growth might take some time to improve, signals are that it is slowly.
Thank you, Lindsay, and thank you very much for tuning in today. I hope you found that useful. If you do have further questions, please contact your financial adviser, and we look forward to speaking to you again next quarter.
