Halfway Through

At the beginning of the year, the Bank of America Fund Manager Survey showed a huge amount of bullishness on China due to the reopening from Covid-19 restrictions. But this has very much not materialised in terms of equity returns, with dedicated China funds propping up the bottom of the list of poor performers. We are also increasingly seeing new launches of emerging market funds excluding China, as many struggle to get to grips with an increasing state regulatory presence in business and potential violations of human rights. That said, China is definitely a country to keep an eye on for the second half of the year, as it currently stands out as one of the cheaper markets. It is not out of the realms of possibility that it has a resurgence, just like the tech sector this year.

One area that has gained a lot of headlines of late but doesn't feature at all among the leading funds is Japan. The headlines at half year tell you that the market is up over 25%, depending on which index you look at - but that’s in yen terms. For UK investors, MSCI Japan is up just 7%, reflecting an increasingly weak yen due to the ongoing policy of holding the 10-year government bond yields down at 0.5%. Given the moves up in other bond yields, this has significantly weakened the currency. Plenty of commentators expect the Bank of Japan to relax their policy, not least because inflation has taken hold in Japan, albeit still only around the 3-4% level. In that instance, one would expect some currency appreciation, so again it may feature on this list come the end of the year.

Source: Morningstar, Quilter Cheviot as at 30/06/2023

The investment trust space has similarly seen a return to form for technology focused investments, with Polar Capital Technology and Allianz Technology Trust both hitting the top ten. Interestingly, however, fellow tech titan Scottish Mortgage has still not achieved the feats of 2020/21, despite its heavy weighting to the sector as it looks to battle back.

One trend that has been noticeable in the investment trust space, though, is the meaningful improvement in the discounts of some trusts, particularly those investing in some parts of private equity. This was a sector that came under huge pressure as interest rates rose and growth investing faced somewhat of a headwind. However with underlying asset values holding up and quoted growth equities performing very well, some of these wide discounts have naturally reduced.

Looking at the laggards, we can see more illiquid assets, such as infrastructure and renewables, struggling as these are also often most sensitive to rising interest rates. One of the key benefits of investment trusts is their ability to invest in illiquid assets, but this clearly comes with its own set of consequences and again helps to make the case for investing in the long-term. As interest rates begin to come down again, assets such as these should once again come good, particularly given the long-term tailwinds in place for these sectors.

Some areas of private equity also weren't immune from the difficult environment at the beginning of the year. Ultimately private equity is just like listed equity spanning multiple sectors, regions and sizes, and thus investments will be hit by their own set of factors, as well as more macro driven ones, such as interest rates and the global economy.

Where the second half of 2023 leads us will be fascinating. There are certainly areas of the market that look optically cheap, at least on a relative basis, but all face their own challenges. Equally the areas that have the momentum at present must at some point take a breather, but as ever predicting that is always a very difficult task.

Source: JPMorgan, Quilter Cheviot, as at 30/06/2023. Excludes investment trusts with market cap below £20m

This is a marketing communication and is not independent investment research. Financial Instruments referred to are not subject to a prohibition on dealing ahead of the dissemination of marketing communications. Any reference to any securities or instruments is not a personal recommendation and it should not be regarded as a solicitation or an offer to buy or sell any securities or instruments mentioned in it.