Equity markets rebounded sharply from their late June lows. A combination of positioning, resilient earnings, and less hawkish commentary from the Federal Reserve post its July meeting drove the rally. The perception that bond yields had peaked led to ‘growth’ outperforming ‘value’. The S&P 500 had its best monthly performance since late 2020, rising 9% and the technology-heavy Nasdaq gained 12%. The fund returned 4.7% versus the MSCI Europe index that rose 4.8%.

The sustainability of July’s rally is open to debate. Investors may well have read too much into the Federal Reserve Chairman, Jerome Powell’s, comments. Indeed, in the aftermath of his speech, several Fed officials sought to downplay the suggestion that the pace of future interest rate rises has slowed. Inflationary pressures remain acute and the Bank of England declared that it forecasts UK inflation peaking at 13% later this year. While markets may have been premature in pricing interest rates cuts in 2023, market-based measures of inflation have stabilised. For the rally to be sustained, however, there needs to be further evidence of inflation subsiding.

Pessimistic commentary from the Bank of England, industrial unrest, and the lacklustre Conservative leadership continue to weigh on sentiment towards UK equities. It might appear that there is little respite in sight but many stocks, particularly those exposed to the domestic economy, are already pricing in significant cuts to earnings. Of course, that doesn’t mean that the shares will react positively to earnings downgrades, but it does present opportunities for the longer-term investor. We continue to selectively add to our consumer and industrial cyclical holdings. We remain overweight in the UK relative to Europe as we believe the current pessimism is overdone and valuations are supportive.

Alpha Financial rose as investor’s continued to digest last month’s full-year results and the implications for the current year. IMI gained as interim results showed further progress in revenues and margins. Each of the group’s businesses have strong positions in structurally growing markets and management remain confident of their 20+% medium-term margin target. Capgemini jumped as interim results came in ahead of expectations and the company raised its outlook for the full year. Organic revenue growth for the first half was 17% driven by broad-based demand for digital transformation. OSB outperformed as investors anticipated a positive impact from higher interest rates on its Net Interest Margin.

Smith & Nephew dropped as interim results disappointed. After a positive start to the year growth slowed in the second quarter and margins were impacted by cost pressures. This resulted in mid-single digit downgrades to earnings forecasts but left investors fearful of a more substantial revision to management’s medium-term financial targets. Creo continued to decline despite further positive operational developments. The recent trading update disclosed that users of its Speedboat Inject tool has more than doubled compared to the previous six months and that it continued to engage with potential strategic investors.

The holding in John Menzies was exited and a new unit taken in M&S.

Equity markets rebounded sharply from their late June lows. A combination of positioning, resilient earnings, and less hawkish commentary from the Federal Reserve post its July meeting drove the rally. The perception that bond yields had peaked led to ‘growth’ outperforming ‘value’. The S&P 500 had its best monthly performance since late 2020, rising 9% and the technology-heavy Nasdaq gained 12%. The fund returned 4.7% versus the MSCI Europe index that rose 4.8%.

The sustainability of July’s rally is open to debate. Investors may well have read too much into the Federal Reserve Chairman, Jerome Powell’s, comments. Indeed, in the aftermath of his speech, several Fed officials sought to downplay the suggestion that the pace of future interest rate rises has slowed. Inflationary pressures remain acute and the Bank of England declared that it forecasts UK inflation peaking at 13% later this year. While markets may have been premature in pricing interest rates cuts in 2023, market-based measures of inflation have stabilised. For the rally to be sustained, however, there needs to be further evidence of inflation subsiding.

Pessimistic commentary from the Bank of England, industrial unrest, and the lacklustre Conservative leadership continue to weigh on sentiment towards UK equities. It might appear that there is little respite in sight but many stocks, particularly those exposed to the domestic economy, are already pricing in significant cuts to earnings. Of course, that doesn’t mean that the shares will react positively to earnings downgrades, but it does present opportunities for the longer-term investor. We continue to selectively add to our consumer and industrial cyclical holdings. We remain overweight in the UK relative to Europe as we believe the current pessimism is overdone and valuations are supportive.

Alpha Financial rose as investor’s continued to digest last month’s full-year results and the implications for the current year. IMI gained as interim results showed further progress in revenues and margins. Each of the group’s businesses have strong positions in structurally growing markets and management remain confident of their 20+% medium-term margin target. Capgemini jumped as interim results came in ahead of expectations and the company raised its outlook for the full year. Organic revenue growth for the first half was 17% driven by broad-based demand for digital transformation. OSB outperformed as investors anticipated a positive impact from higher interest rates on its Net Interest Margin.

Smith & Nephew dropped as interim results disappointed. After a positive start to the year growth slowed in the second quarter and margins were impacted by cost pressures. This resulted in mid-single digit downgrades to earnings forecasts but left investors fearful of a more substantial revision to management’s medium-term financial targets. Creo continued to decline despite further positive operational developments. The recent trading update disclosed that users of its Speedboat Inject tool has more than doubled compared to the previous six months and that it continued to engage with potential strategic investors.

The holding in John Menzies was exited and a new unit taken in M&S.