Paul Dennis and the Holden & Partners investment team reflect on economic trends across the globe as we hit the mid-year point.

Included in this update

UK Inflation news continued to make grim reading and interest rate rises are impacting millions of mortgage holders as fixed-rate deals expire.

Europe The Ukraine war’s impact on inflation appeared to moderate.

US The debt ceiling drama came to a close and the US enjoyed a rebounding from March woes.

Asia A mixed picture with Chinese equities suffering from tensions with the US while Indian and Indonesian equities rallied.

Alternatives UK house prices fell, and the commercial sector was also affected by rising interest rates.

Sustainability The International Sustainability Standards Board (ISSB) issued their inaugural standards, bringing in a new era of worldwide sustainability-related disclosures in capital markets.

Cash Higher interest rates make cash deposits seem more appealing, however over the longer term you are likely to lose out.

Our portfolios Our portfolios were largely flat over the quarter, outperforming their relative benchmarks.


Big headlines surrounding inflation and interest rates arrived at the end of the quarter. Overall, the inflation data for May made for grim reading. The Consumer Price Index (CPI) remained flat at 8.7% – the same as April, and higher than the expected 8.4%. Core inflation, which excludes volatile sectors such as food and energy, rose by 6.5% in the 12 months to May 2023. Up from 6.2% in April, and the highest rate for over 30 years. 1

On a slightly more positive note, Producer Price Inflation (PPI), a measure of prices of goods bought and sold by UK manufacturers, continues to ease. Whether this translates to significant declines in inflation remains to be seen, with profit-led inflation being a big problem.

The above data may have spooked the Bank of England (BoE) as they surprisingly increased the base rate 0.5% (0.25% looked more likely) to 5% in June’s meeting. 2 When asked if they feared this would cause a recession, Andrew Bailey said: “We’re not expecting, we’re not desiring a recession. But we will do what is necessary to bring inflation down to target.” While some commentators see this as a positive move, arguing that it shows that the BoE is serious about tackling inflation (we feel that horse may have already bolted…), others feel this is a knee-jerk reaction that does not target the root of inflation. Markets are now pricing in the rates will hit at least 6% by the end of the year. 3

Q2 proved difficult for UK stocks relative to other markets with the FTSE All-Share falling 0.46%. Housebuilders proved a drag on performance, as mortgage costs continue to soar following the series of interest rate rises. The full impact of this remains to be seen – 2.4 million fixed-rate mortgages will expire before the end of 2024. 4


Last quarter we mentioned signs that the war’s effects on European inflation could moderate. This seems to have come to fruition with various provinces of the Euro empire reporting slowdowns in inflation, most notably Italy and Spain. Italy’s headline CPI was unchanged on a monthly basis and up 6.4% year-over-year (YoY) in June, down sharply from 7.6% YoY in May. Meanwhile, Spanish headline inflation fell to below 2% (the central bank’s target rate) for the first time in two years. While these are ‘headline’ numbers and include volatile components like Energy and Food, which are large contributors to this sharp slowdown, core inflation, which excludes these volatile components has also been trending down. Although the European Central Bank (ECB) can take some positives away from these readings, they have been countered by a negative euro area reading for June which showed core prices rising 5.4% YoY, up from 5.3% YoY.

What this all means for European monetary policy is the ECB is unlikely to deviate from its hawkish path in the near term, with three interest rate hikes appearing likely. Further evidence of this is the positive update in the labour market indicating that there has been no increase in joblessness so far during this tightening cycle, which housed two more 0.25% interest rate hikes in the second quarter, pushing the benchmark interest rate to 4%.

The pan-European STOXX Europe 600 index was relatively flat over the quarter as the rally that began early this year started to stall on the back of China’s weaker-than-expected COVID recovery and the potential for higher-for-longer global interest rates. 5

European geopolitics briefly returned to the forefront near the end of the quarter as Yevgeny Prigozhin, a Russian oligarch and mercenary leader, launched a rebellion threatening to overthrow the Russian government. He only pulled his troops back when President Putin agreed to a deal. While the reaction from markets was muted, Putin’s illusion of invincibility is now gone.


The US started the quarter with rebounding from March woes despite growing pressures as the debt ceiling loomed near and lingering fears over the stability of the banking system. The latter culminated in the second and third largest failures in US banking history occurring within two months of each other, but investors were reassured by government intervention and subsequent acquisition by JPMorgan Chase. The never-ending political farce surrounding the debt ceiling came to its inevitable close with the Fiscal Responsibility Act, buying the government two years until the Congressional drama returns. Economic data has been largely mixed, confounding economists and investors alike. Inflation continued its descent, aided by base effects from oil prices (which peaked in May 2022), leading core inflation above headline inflation. The headache faced by the Federal Reserve is that strong wage growth and low unemployment are not consistent with the end-goal of targeted 2% inflation.

After following consensus and delivering a 25bp hike in May, the Federal Reserve chose to hold rates at 5.25% in June. US government bond yields rose over the quarter, reaching levels not seen since the March SVB collapse. Concerns over sticky core inflation and the tight labour market have led many to believe that we are not at the end of the rate hiking cycle yet.

The strong US equity market over the quarter was driven by the resurgence of large tech growth stocks, leading the S&P 500 to return 8.7%. The A.I. craze and the belief that falling inflation spells the nearing end of the rate hiking cycle has led to many of 2022’s losers to recapture lost ground and some. NVIDIA, a world leader in A.I. computing hardware has returned a staggering 190% year-to-date. The sustainability of such a rally has come into question, given the relatively muted returns generated by the rest of the index. Currently, the top ten companies (by market capitalisation) in the S&P 500 currently account for 31% of the index.


Chinese equities were hampered by political tensions with the US despite better-than-expected Q1 GDP growth, with the MSCI China index falling 8.9% over the period. For broader Asia-Pacific and Emerging Market indices, this was offset by strong India and Indonesian equity rallies. As a broad generalisation, Indian equities are known to trade at a premium to emerging market peers, but that is driven by a growing middle class and accommodating foreign investment policies. Emerging market debt recorded strong gains, with structural tailwinds in the form of falling inflation and many Asian economies further along the interest rate cycle with cuts predicted by the end of the year.

Japanese equities stole the limelight in Q2 as the best-performing equity index (MSCI Japan up 15.6%). The nation finds itself in a strong economic position compared to Western peers, with the Bank of Japan maintaining its loose monetary policy, inflation at seemingly manageable levels and a labour market with room to grow without threatening higher inflation. Low interest rates pushed the Yen lower, which benefitted Japanese exporters and hedged foreign investors. Corporate reforms are making the Japanese market more inviting to foreign investors, the once cash-hoarding culture is changing, and recently the Tokyo Stock Exchange called for better balance sheet management to promote growth and higher stock prices.


Changes in interest rates affect economic activity and inflation through several channels which in turn affect spending, saving and investment behaviour. A significant channel where we are seeing these effects take place is the market rate channel, most notably mortgage rates. The effects are more pronounced in countries with short-term fixed-rate mortgages like the UK and this is reflected in the Nationwide Housing Price Index, which showed UK house prices fell by 3.5% YoY in June. Commercial real estate is also being affected by rising interest rates as banks tighten their lending standards and debt financing becomes too expensive. Evidence of this can be seen looking at the MSCI Europe Real Estate Index which fell 18.3% in the 3 months to 31st May.

The broad commodities sector as measured by the Bloomberg Commodity Index was also hit, falling approximately 4% over the quarter. A lot of this weakness can be attributed to the weaker global demand picture which has put pressure on energy and industrial metals prices. Two commodities to note of this quarter have been Gold and Oil. Gold hit an all-time high of $2,067.16 an ounce buoyed by the potential of systemic collapse following the regional banking crisis in the US and the collapse of Credit Suisse toward the end of the first quarter. The price has somewhat levelled off since reaching its all-time high, however, as the realisation that interest rates will be higher for longer has put downward pressure on the precious metal which tends to perform poorly against a backdrop of high-interest rates. In addition, the price of Brent crude oil has continued its downtrend this quarter, falling approximately 8% to $76 a barrel despite Saudi Arabia and Russia announcing cuts to oil supply. 6 It suggests the large amounts of oil being released from the likes of the US Strategic Petroleum Reserve (SPR) and China on top of weakening global demand have countered the supply-side constraints.


The International Sustainability Standards Board (ISSB) issued their inaugural standards, bringing in a new era of worldwide sustainability-related disclosures in capital markets. These standards help to create a global baseline and ensure that companies provide sustainability-related information alongside their financial statements. Emmanuel Faver, ISSB Chair, said “The ISSB Standards have been designed to help companies tell their sustainability story in a robust, comparable, and verifiable manner. We have consulted closely with the market to ensure the Standards are proportionate and will result in disclosures that are relevant for investment decision-making”. 7 While these standards are supported by many, the UK have yet to set a deadline on when they will be integrated, but we suspect there will be some interaction with the FCA’s upcoming Sustainable Disclosure Requirements (SDR).

It is now confirmed that June 2023 was the hottest on record for the UK with an average mean temperature of 15.8°C – 0.9°C higher than the previous record. 8 Paul Davies, Met Office Climate Extremes Principal Fellow and Chief Meteorologist, explains “Alongside natural variability, the background warming of the Earth’s atmosphere due to human induced climate change has driven up the possibility of reaching record high temperatures”. While some fluctuations in temperature are to be expected, this statement highlights the issue we continue to face.

Cash rates

With interest rates reaching levels that haven’t been seen for some time, we are now being asked by clients about deposit and fixed term deposit accounts. An unloved method of saving for sometime is now back in the spotlight as they are now paying decent levels of rates. Whilst it may seem attractive to lock in a near ‘guaranteed’ return here are some points that need to be considered.

  • Inflation will eat into the nominal rate of return. Whilst the rates being paid on deposits look attractive with inflation at the level it is, you are losing money in real terms.
  • Compare this with the long term returns of equities and cash underperforms. Whilst equites over the long-term have consistently outperformed inflation. As long term investors we try not to be swayed by short term noise and whilst deposit accounts are attractive presently over the longer term they are less so.
  • Timing markets is very difficult. As such if you were to move money out of an investment portfolio into a deposit account you would want to do it in a manner that makes the most of the interest on the deposit whilst getting it reinvested when the markets are on an upwards trajectory. This is impossible to do and will most likely mean that investment returns are missed out on.
  • At the beginning of the year, we increased our holdings to cash and cash like investments so have benefited from this pick up in interest rates.

All in all, as long-term investors we understand the appeal of cash deposits however over the longer term you are likely to lose out.

How the portfolios have fared

Our portfolios were pretty much flat for the quarter. Across the board they outperformed their relative benchmarks which is always pleasing. Looking at some of the underlying holdings, Royal London Sustainable Leaders returned 1.5% over the quarter when the FTSE All Share returned -0.46%. Being short duration in government bonds is still the correct call with our holding in Lyxor UK Government Bond 0-5 outperforming the broader index. Overall, we are content with the quarter’s performance.









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