Hello, and welcome to our market update. I'm Andy Miller, lead investment director with Quilter, and I'm joined today by Marcus Brooks, who's our chief investment officer.
Marcus, can I just ask you? The first half of the year, broadly, we saw good returns in equity markets. The third quarter felt a little bit different.
Is that fair to say? Yeah, I think that's fair, actually, because the first half was quite different to, the third quarter of 2023. In the first half, saw a real dominant performance from US equities.
And in particular, the really big technology names, companies like Nvidia that have a chipset that is absolutely perfect for artificial intelligence had an incredible performance in the first half. And now it looks quite expensive. When you look at what those, type of companies did in quarter three, lot more lackluster. There was a real handing over of the baton.
The companies that did well in quarter three were more value type companies, they tend to be commodity companies. Not that surprising given that, Brent crude oil went up twenty eight percent over the quarter. So profitability in oil companies in particular would expect to be much, much better as a result.
So very different. I suppose the consistent element would be, in the first half of the year, the bond market was again weak as we saw persistently high inflation.
It was moderating, but perhaps not at the, pace that bond investors would like. We saw continued weakness into quarter three. Couple of percentage points loss in terms of capital value. And again, it comes down to this inflation story.
Interest rates look like they're gonna stay higher for longer. Longer than people have would have expected in in past periods. They're at five percent. This is a level that people in the nineteen eighties and nineteen nineties would think is actually quite low.
But considering that interest rates were largely zero since the financial crisis in two thousand eight, this is starting to have to really crimp people's behaviours. It's now more expensive to borrow money to fund projects or even to roll your government debt and as a result, until I think the bond market gets convinced that rates have definitely peaked that there are some sort of rate cuts on the horizon and there's some confidence about that, what that would be, then bond markets could remain a little bit weak or be it with decent yields now. Thank you, Marcus. So that is the year to date, which looks broadly speaking okay if you've been invested, but if I am someone who has some money invested or is thinking about investing some money, I'm seeing an awful lot of negative headlines just now.
There are horrible geopolitical situations not just in Ukraine, but now also in the Middle East. Inflation still does not seem to have been tamed just yet, and we're talking about interest rates potentially being higher for longer. So all of these negative headlines are there still good reasons to invest money?
I generally think that there are actually, if you were to ask us this question in May, June time, we'd have been pointing to data that looked like it was getting weaker and weaker, and perhaps the possibility of a recession was becoming more likely. Actually, more recently, the data has picked up a little bit. Now, for central bankers, that's a problem. Does that mean that they need to raise rates even higher to slow things down?
We don't think they do actually. But if you look at the, pickup in economic activity, that would lead you to believe that economic growth will be okay. It'll be moderate at least. It won't be recession, which is typically better for investors.
And it also means the backdrop for companies to be able to make profits in selling goods and services, to consumers. Again, that actually looks okay as well. So if I'm thinking about investing, I think the equity market looks like it should be much better than people thinking two, three months ago. And in the bond space, if we do get to the point where interest rates could conceivably be cut because inflation's come down, Then the yields of five percent or so on government debt, for instance, they could look very, very attractive at this point in time.
I happen to think they look very good from a diversification benefit anyway. Because if something were to happen, if one of the bad scenarios you were mentioning gets worse, then actually bond, markets or the bond returns could be quite positive in the event that equities are poor. So, actually, I think we are more cautiously optimistic and the optimism is higher than it would have been three months ago. Thank you, Marcus.
And just one more question, if I may, I've asked you this before. You might be sick of me asking this, but we have interest rates, okay not as high as they were in the 1980s. That's for sure, but an awful lot higher than they've been for some time.
The same time, we've got uncertainty in investment markets. If I am considering investing, why should I not just leave my money in cash and be certain of that return, I'm gonna get over perhaps the next twelve months. Yeah, and that's a reasonable question.
If you know that you've got a certain bill that you need to pay in a shorter time frame, putting money in cash earning four or five percent seems like a very sensible thing to do. If however your financial goals are more long term in nature, it probably isn't the ideal time to be doing this. Putting it very simply, if your weekly shop is a hundred pounds. And then you put a hundred pounds away for a year, currently, you would get around about a hundred and five pounds in total in a year's time.
But if your weekly shop is a hundred pounds now and it just behaves in the same way as core inflation, six point two percent, then your weekly shop would cost you a hundred and six pounds twenty next year you've only got a hundred and five pounds. So at the moment, there's a negative real return or reduction in purchasing power by holding your money in cash relative to the current inflation level. Now if inflation moderates, to below five and you are able to get five percent then actually that looks quite attractive. But I would argue at the moment it's one of the worst times to keep your money in cash if you have a longer term financial goal and actually equities in particular have been very good at giving inflation protection, over the longer term.
So, yeah, I'm not sure I'd necessarily go with that if you're thinking longer term. Marcus. Thank you very much for your time.
