The return on LD Discretionary, the largest investment portfolio within The Cost-of-Living Allowance Fund, stood at 4.0% on 7 July 2023. Over a 36-month period, the portfolio has generated a positive return of 10.2%. The Return on the Holiday Allowance Fund stood at 5.5% at the start of July 2023. The first half of 2023 has thus seen positive returns in both funds. However, the returns have also been characterised by a fair amount of volatility.
Bullish markets and rising interest rates
It is equities in particular that have driven returns higher. Global equities, as measured by the MSCI World Index, have delivered a return of 11.0% year-to-date in Danish kroner. Danish equities, represented by the leading OMXC25 index, have returned 4.5%. The rise in global equities has been concentrated mainly around 7–10 technology companies, which have risen significantly in the spring of 2023. And it is, in particular, advances in Artificial Intelligence (AI) that have driven these price rises. If one looks at the stock market excluding these 7–10 companies, the return in 2023 has been more moderate.
The US Federal Reserve continued its series of interest rate rises in May, raising the rate by a further 0.25 per cent, bringing the US key interest rate to 5.25 per cent. At least one further interest rate rise is expected in the US this year. In Europe, further interest rate rises are expected in the second half of 2023. It is high core inflation (inflation excluding energy and food prices) that is driving the need to tighten monetary policy further. The yield on a 10-year US government bond is now 4.0 per cent, whilst the yield on a German government bond is 2.6 per cent.
Slowing growth despite continued activity
Activity remains strong in the European and US economies, particularly in the US services sector, but there are also areas where activity is slowing. US consumers are continuing to draw down the savings they built up during the Covid-19 lockdowns. As this savings surplus is drawn down, economic growth is expected to slow over the next six months.
It is encouraging that the labour market remains strong and that there are few new jobless people in the US. This helps to underpin private consumption in the US, which benefits businesses and, consequently, the stock markets. However, leading indicators of economic growth in Europe and the US are temporarily weak and point towards a recession over the next 6–12 months. In China, leading indicators also show that the positive effect of last year’s reopening of the Chinese economy is coming to an end, and growth is slowing.
The VIX index, which is a market index measuring volatility in the stock market, has been falling over the last six months and now stands at 15, having peaked at 33 in October 2022. The current level of the VIX index is therefore a sign that the financial markets have calmed down over the summer following a turbulent period in the autumn and winter. In the coming months, there will continue to be a strong focus on central banks’ interest rate policies and on whether tighter credit conditions will affect corporate earnings.
