June 2023 market commentary

June was a slightly better month for some of the major world equity markets, even if returns across the board were far from electrifying. In their local currencies, the S&P 500 and Euro STOXX 50 indices grew by 6.6% and 4.3% respectively while the FTSE 100 registered a more modest gain of 1.4%. This disparity in returns was reflected in the first 6 months of this year with UK equities some way behind their US and European counterparts.

(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/06/2023 – 30/06/2023) 

June markets overview

The Bank of England confirmed a 13th-consecutive base rate hike to 5% — its highest level since 2008. Surprising the market with a half-point increase, Bank governor Andrew Bailey warned that persistently high core inflation and a low-unemployment labour market could prolong the need for higher interest rates. Bailey denied trying to force a recession to tackle inflation, insisting that the UK economy is more resilient than previously thought. The UK’s continuing price control struggles were nevertheless underscored by the announcement that inflation in the Eurozone had fallen to 5.5%, compared to 8.7% in the UK.

The UK’s continuing price control struggles were nevertheless underscored by the announcement that inflation in the Eurozone had fallen to 5.5%, compared to 8.7% in the UK.

US inflation has fallen faster than in both the UK and EU. Stronger-than-expected data on durable goods orders and new home sales raised consumer confidence, further convincing analysts that the US economy is less likely to fall into recession later this year. This new optimism was reflected across major US equity markets which rallied at the end of the month.

International investor interest in Japan continues to grow. Pressure from authorities and investor groups is convincing Japanese firms to focus more on boosting market returns and with investors becoming more concerned about their Chinese holdings, Japan appears to offer a more attractive route into far eastern markets. The country’s stable inflation rate also makes it something of an outlier among major world economies.

United Nations sustainable development agenda

At the halfway point of the UN’s post 2015 sustainable development agenda, the Sustainable Development Solutions Network (SDSN) reported a third consecutive year of ‘static’ progress, warning that at the current rate of development, none of the 17 Sustainable Development Goals (SDG) will be achieved by 2030. Underlying SDG targets are largely off track and an alarming number of low-income (LIC) and lower-middle-income (LMIC) countries are reporting a reversal in progress. 

The report acknowledges the effects of converging pandemic, financial and conflict-related crises since 2020, but notes that high-income countries (HIC) were better placed financially to mitigate impacts. As a consequence, there’s a risk that the gap in SDG outcomes between HICs and LICs will increase significantly towards 2030.

LICs in particular are suffering from “deep, chronic and crippling under-investment.” The SDSN argues that this is largely down to a failure in the global financial architecture to deliver sustainable development investment streams to developing countries at pace and scale. Sovereign borrowers in LICs and LMICs struggle to navigate poor credit ratings and high borrowing costs — investment shortfalls exacerbate a vicious cycle of underdevelopment where restricted access to global capital markets limits the capacity of LICs and LMICs to finance sustainable infrastructure.
The SDSN is therefore advocating for increases in annual public sector commitments to SDG objectives totalling around $2 trillion or 2% of global GDP.

New sustainable activities and rating regulation for the EU

The European Commission announced a raft of new measures to strengthen the foundations of the EU’s sustainable finance framework and improve its effectiveness in contributing to the region’s Green Deal objectives. Central to this framework is the EU Taxonomy, a regional classification system for sustainable economic activities and an important market transparency tool for investors to assess how well those activities are contributing to sustainable outcomes.
To aid this process, the Commission introduced a new list of sustainable economic activities to the Taxonomy: transition to a circular economy, pollution prevention and control, the protection and sustainable use of water and marine resources, and the protection and restoration of biodiversity and ecosystems.

The Commission also proposed new rules for Environmental, Social and Governance (ESG) rating providers, requiring them to be authorised and supervised for quality and reliability by the European Securities and Markets Authority. 

Standards raised for global sustainability disclosures

After more than 18 months of preparatory work, the International Sustainability Standards Board (ISSB) issued their inaugural set of sustainability disclosure standards for world capital markets — IFRS S1 and IFRS S2. S1 provides companies with a range of disclosure standards to inform investors of short, medium, and long-term sustainability risks and opportunities. S2 focuses specifically on climate-related disclosures, complementing S1. Both standards incorporate the recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD).

Working with market participants, the ISSB’s disclosure standards have been designed to help improve investment decision-making by giving companies a globally comparable and verifiable means of communicating their sustainable agenda ambitions and actions.

Supported by the G20, supranational financial bodies and leaders in the business and investment communities, the ISSB built its disclosure standards on the foundations of IFRS accounting standards already adopted by over 140 international jurisdictions. Their global baseline approach allows for a more consistent delivery of sustainability-related information, reduces the need for jurisdictions to seek additional disclosures, and simplifies the decision-making process for investors used to dealing with competing or duplicated reporting frameworks.

Is oil staring down the barrel?

Having predicted in October 2022 that global demand for oil would plateau at some point in the mid-2030s, the International Energy Agency (IEA) have revised their calculations to suggest a slowing of annual demand to an eventual peak some time in 2028.

The IEA believes that the energy crisis highlighted significant resource shortfalls and dependencies, hastening a global shift towards clean and renewable energy sources. They also cite stricter fuel efficiency standards, the increase in global electric vehicle sales, and structural changes in aspiring low-carbon economies as supporting reasons for an earlier-than-expected oil peak.

The IEA believes that the energy crisis highlighted significant resource shortfalls and dependencies, hastening a global shift towards clean and renewable energy sources.

While the daily rate of oil demand growth is expected to “shrivel” towards 2028, the IEA nevertheless anticipates a shorter-term spike in oil and gas exploration. Investment levels are expected to reach an eight-year high in 2023 (over $500 billion collectively) and both Shell and BP have recently announced a partial scaling back of production cuts. While both companies state that they remain committed to their 2050 net-zero ambitions, the IEA have used their most recent forecast to warn oil companies in general to “pay careful attention” to the progress of the energy transition and calibrate their investments accordingly.