Back to main news
3rd July 2023

Market update

Last week the Bank of England’s Monetary Policy Committee (‘MPC’) increased UK interest rates by 50bps to 5%. This was the 13th consecutive increase, reaching the highest level since 2008. The higher-than-expected rise was enacted following stronger inflation for May than expected.

Inflation remains high and was unchanged from the previous month at 8.7%. Economists had expected this to fall to 8.4% on the back of lower energy costs. The MPC commented, “There has been significant upside news in recent data that indicates more persistence in the inflation process, against the backdrop of a tight labour market and continued resilience in demand.”

The question remains as to how far interest rates will rise, as the MPC continues to try to squeeze inflation out of the system. Markets are now predicting rates will reach 6% before the end of the year.

Whilst the higher rate benefits savers, borrowers with mortgages on variable rates will feel the pain of the increase. Those on fixed rate mortgages due to end soon will also feel the impact when they come to remortgage; with the prospect of further rate rises, decisions on choosing short-term fixed or variable rates may be difficult.

The rate rises have pushed up yields on UK gilts (by lowering their prices), especially those with shorter terms to maturity, to levels above those reached during the aftermath of Liz Truss’s failed budget in September last year. The chart below shows how much the yield on the UK 2-year gilt has risen over the last 12 months:

graph 01

Source, Factset

With the expectation of further rate rises in the short term, the risk of a recession is increasing. The market believes that rate cuts will be needed if the economy struggles under the pressure of the sharp increase in interest rates. Consequently, longer-term gilts have risen less than shorter term, and the 10-year gilt is still below the peak reached in October 2022:

graph 02

Source, Factset

This means that the capital value of these bonds has fallen as the yields have increased, and shorter-dated bonds have been impacted more than longer-dated ones; the more an investment portfolio is exposed to short-dated bonds, the greater impact the recent moves will have had. However, money market funds continue to offer increased returns on the back of the higher interest rates, giving the asset class a worthwhile place in diversified portfolios. With the prospect of a recession in the UK increasing, the more economically-sensitive sectors of the stock market - housebuilders and consumer discretionary (products and services that consumers could cut back on) could underperform defensive sectors such as consumer staples (necessary products and services, e.g. Food and toiletries), healthcare and utilities.

Across the Atlantic, the Federal Reserve (Fed) held rates at the most recent meeting (14th June) on the back of falling inflation. The market had anticipated this decision, however the surprise came from the ‘guidance’ given on future rates. Whilst the market expects rates to remain around the current level before retreating in the medium term, the Fed has indicated two further increases to rates may be made later this year. Markets reacted negatively initially, with stock markets easing back and shorter-term bond yields rising, before shares returned to their recent upward momentum.

At the risk of repeating ourselves, this impetus has been driven primarily by the ‘hype’ around artificial intelligence (‘AI’) and has shown little sign of letting up. Valuations of stocks impacted by this are reaching extremely high levels. We have previously highlighted Nvidia Corporation, which has seen its share price increase by almost 200% so far this year and pass the $1 trillion market capitalization level. At the current levels the company’s share price is trading at more than 200 times the earnings the company makes per share. Even against its five-year average of 71 times (which is still extremely high) this looks incredibly expensive. This, in our view, calls for continued vigilance around stock market valuations at present.


Our Financial Advisers are available on the phone so please contact us if you have any questions.

Important information

Past performance is not a guide to future performance and may not be repeated. Investment involves risk.

The value of investments and the income from them may go down as well as up and investors may not get back any of the amounts originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall.

This communication/presentation is for information purposes only. Nothing in this communication constitutes financial, professional, or investment advice or a personal recommendation. This communication should not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the document. Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Ascot Lloyd as a result of using different assumptions and criteria.

This communication is issued by Capital Professional Limited, trading as Ascot Lloyd. Ground Floor Reading Bridge House, George Street, Reading, England, RG1 8LS. Capital Professional Limited is registered in England and Wales (number 07584487) and is authorised and regulated by the Financial Conduct Authority (FRN: 578614).