Highlights
- Global financial markets ended the first half of the year positively, supported by resilient corporate earnings, lower energy prices and an improvement in investor sentiment.
- An agreement between the US and Iran has helped shipping activity through the Strait of Hormuz recover, reducing concerns about a prolonged disruption to global energy supplies.
- The European Central Bank raised interest rates in response to inflation risks, while the US Federal Reserve and Bank of England left rates unchanged.
- Asian and Emerging Market equities contributed positively to the OCM portfolios, while lower bond yields supported both Growth- and Income-focused strategies.
- Following strong performance during the first half of the year, the OCM portfolio suite enters the second half in a robust position. We continue to monitor geopolitical, political and economic conditions carefully.
A Positive End to the First Half
June was a volatile but ultimately positive month for global financial markets. Investor sentiment improved as geopolitical tensions eased, energy prices declined and corporate earnings remained resilient.
The month began on a more challenging note as renewed tensions between the US and Iran prompted investors to consider the potential consequences of further disruption to the Strait of Hormuz. The waterway is a crucial route for global energy supplies, and restrictions on shipping raised concerns about the availability and price of oil.
The risk of higher energy prices, together with evidence of persistent inflation, led markets to consider whether interest rates might need to remain higher for longer. Investors also began to price in the possibility that central banks in the US, UK and Europe could be forced to raise rates again.
However, an agreement to reopen the Strait of Hormuz helped oil prices return towards pre-conflict levels. This has provided welcome relief for households, businesses and policymakers, while reducing concerns that higher energy costs will lead to another sustained increase in inflation.
The resulting recovery in risk appetite supported both equity and fixed-income markets. Against this backdrop, the OCM portfolio suite delivered positive performance during June and remains in a strong position as we enter the second half of the year.
Geopolitical Tensions Begin to Ease
The agreement signed by the US and Iran during June represents an important step towards a more lasting ceasefire, with negotiations continuing over Iran’s nuclear programme.
The reopening of the Strait of Hormuz has allowed oil flows through the region to recover, increasing global supply and placing downward pressure on energy prices. This is positive for consumers and businesses, while also easing some of the immediate pressure on central banks.
The rapid decline in oil prices demonstrates how sensitive energy markets have become to geopolitical developments. Having risen sharply during the conflict, prices have now returned towards their pre-war levels following the agreement and recovery in shipping activity.
Further short-term increases in oil prices remain possible while negotiations continue. However, if production and supply from previously disrupted refineries continue to recover, stronger global oil flows should reduce the risk of the sustained price increase that might otherwise force central banks to act.
The initial agreement provides a 60-day window for the US and Iran to work towards a more comprehensive settlement. While this is encouraging, recent events demonstrate the fragility of the truce. Attacks on ships travelling through the region have prompted a response from the US military, followed by retaliatory strikes from Iran.
These developments highlight the potential for further setbacks and suggest that financial market volatility is unlikely to disappear immediately. With negotiations continuing, diversification remains particularly important when navigating short-term geopolitical uncertainty.
Central Banks Remain in Focus
Changing energy prices continued to influence expectations for inflation and interest rates throughout June, keeping central bank policy firmly at the forefront of investor attention.
The European Central Bank moved quickly to address renewed inflation risks, raising interest rates following an 11-month pause. Policymakers were keen to prevent higher energy costs from developing into a broader inflationary cycle similar to that experienced in 2022.
By contrast, the US Federal Reserve and Bank of England both left interest rates unchanged. The risk of an immediate increase diminished following the agreement between the US and Iran, which helped return oil prices to pre-conflict levels.
Financial markets have become increasingly hopeful that central banks will be able to look beyond any temporary increase in inflation caused by volatile energy prices. These expectations helped government bond yields decline towards the end of June, providing support for fixed-income and equity markets.
Although the outlook remains uncertain, the easing of immediate inflation concerns has reduced the pressure on policymakers to tighten monetary policy further. This creates a more constructive environment for a broad range of financial assets.
UK Political Uncertainty
Political developments added another source of volatility in the UK during June. Reports that Prime Minister Keir Starmer was facing pressure to step aside unsettled markets, particularly UK government bonds.
UK bond markets have remained sensitive to political uncertainty and concerns about the public finances since the sharp sell-off experienced under Liz Truss in 2022. Rising debt-servicing costs and a wider fiscal deficit have increased the importance investors place on credible and predictable economic policy.
Keir Starmer’s subsequent resignation has paved the way for Andy Burnham, the leading candidate, to become Labour Party leader and Prime Minister as early as 17 July if no challenger emerges. The prospect of an orderly transition has helped market volatility ease as investors await more information about the incoming Prime Minister’s policies.
The next government will nevertheless inherit a challenging economic backdrop, including elevated debt-servicing costs, a historically high tax burden and continued inflationary pressures. As a result, some further volatility is likely while the political outlook becomes clearer.
Despite these challenges, we remain constructive on the outlook for UK assets, particularly given the improving global energy picture and the potential for political uncertainty to ease as the transition progresses.
Markets Benefit from Improving Sentiment
Geopolitics and technology continued to influence financial markets throughout the second quarter. However, sentiment recovered during June as energy prices declined and expectations for further interest rate increases eased.
Corporate earnings remain resilient, while the benefits of investment in artificial intelligence continue to broaden beyond a relatively small number of major US technology companies. This supported equity markets during June despite concerns about elevated valuations in some areas.
Asian and Emerging Market equities performed particularly well and were important contributors to our Growth-focused portfolios. Their strong performance helped the OCM Growth-focused portfolios outperform their respective benchmarks during the month.
Fixed-income markets delivered more mixed performance as bond yields remained sensitive to movements in energy prices and central bank communication. However, the decline in oil prices towards the end of June provided relief as investors reduced their expectations for further interest rate increases during the remainder of the year.
Robust corporate profitability also supported corporate bonds. Investors were rewarded for accepting credit risk as the improving inflation outlook and possibility of less restrictive monetary policy created a more supportive backdrop for the asset class.
The resulting decline in bond yields benefited our Income-focused portfolios, while the broader improvement in risk appetite supported performance across the OCM portfolio suite.
Looking Ahead
Cooling geopolitical tensions, resilient corporate profitability and continued economic growth are providing a more constructive environment for risk assets. While further periods of volatility remain likely, the easing of pressure in global energy markets represents a meaningful improvement in the investment backdrop.
Performance across the OCM portfolio suite was strong during the first half of the year. Although valuations remain stretched in some areas, we continue to believe that active management and a high level of diversification can help the portfolios participate in positive markets while managing the risks created by geopolitical uncertainty.
As we enter the second half of the year, we remain focused on monitoring investment conditions carefully and maintaining an appropriate balance between opportunity and risk.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment. OCM Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (FCA Registration No: 418826) OCM Asset Management is a trading name of OCM Wealth Management Limited
