Highlights
- Renewed geopolitical tensions in the Middle East and mixed reactions to US corporate earnings created a volatile backdrop for global markets in July.
- Technology companies faced greater scrutiny as investors questioned whether rising expenditure on artificial intelligence would generate attractive long-term returns.
- Higher energy prices placed renewed pressure on bond markets, although major central banks left interest rates unchanged.
- UK equities performed strongly, supported by a more cautious Bank of England and higher commodity prices.
- The contrasting performance of global markets reinforced the importance of diversification, with quality, value and income-generating assets outperforming several growth-focused areas.
A Volatile Month for Global Markets
Investors faced a challenging backdrop in July as renewed tensions in the Middle East pushed energy prices higher, while corporate earnings did little to resolve concerns about the scale of investment in artificial intelligence.
Performance varied considerably between regions and asset classes. US, Asian and Emerging Market equities were affected by weakness among technology and semiconductor companies, while the UK equity market performed more strongly. Fixed-income markets also experienced periods of volatility as rising oil prices renewed concerns about inflation and the future path of interest rates.
The contrast between markets reinforced the importance of maintaining a diversified portfolio. After an extended period in which a relatively small group of US technology companies drove global equity returns, July provided a reminder that market leadership can change quickly. Value-oriented and income-generating assets performed well, while some of the most highly valued growth companies came under pressure.
AI Investment Comes Under Greater Scrutiny
Technology companies have been among the strongest performers in global markets in recent years, supported by optimism surrounding the long-term potential of artificial intelligence. However, investors adopted a more selective approach during July as attention shifted from the potential benefits of AI to the cost of developing the necessary technology and infrastructure.
Elevated borrowing costs, increased competition from China and uncertainty about future demand contributed to a sell-off across several AI-related companies. Semiconductor businesses were particularly affected, weighing on technology-heavy markets in the US and Asia, as well as parts of the Emerging Markets.
Corporate earnings released during the month generally exceeded expectations. However, strong headline results were not always enough to reassure investors. Companies are continuing to commit significant sums to data centres, computing capacity and AI development, and markets increasingly want evidence that this expenditure will produce sustainable revenues and attractive returns.
This change in sentiment does not necessarily undermine the long-term investment case for artificial intelligence. It does, however, suggest that investors may become more discriminating when assessing individual companies. Valuation, profitability and balance-sheet strength are likely to become increasingly important as enthusiasm gives way to closer scrutiny of business fundamentals.
Renewed Geopolitical Tensions
Hopes of a lasting ceasefire between the US and Iran faded during July after peace talks failed to produce an agreement and both sides resumed strikes on military and infrastructure assets.
Tensions had eased substantially in June, allowing oil prices to return towards pre-conflict levels as markets anticipated that shipping through the Strait of Hormuz would gradually normalise. The resumption of military action reversed some of this progress, sending global energy prices higher and placing upward pressure on government bond yields as inflation concerns returned.
Later in the month, the US stepped back from the prospect of further military action and sought to resume negotiations. Iran rejected the proposals but announced an agreement with Oman concerning the administration of shipping through the Strait of Hormuz. A subsequent agreement to reopen the waterway partially represented a constructive first step, although Tehran maintained that the existing US blockade would need to be removed before normal shipping activity could resume.
Previous diplomatic breakthroughs have failed to produce lasting agreements, and the resulting uncertainty has caused energy prices to move sharply in both directions. A prolonged disruption to shipping would be likely to place further upward pressure on oil prices, affecting consumers, businesses and the outlook for inflation.
With negotiations continuing ahead of the US midterm elections, geopolitical developments are likely to remain an important source of short-term market volatility.
Central Banks Remain in Wait-and-See Mode
The decline in oil prices towards pre-conflict levels during June had provided some relief for global central banks. However, July’s renewed increase in energy prices once again complicated the outlook for inflation.
Despite these developments, the US Federal Reserve, Bank of England and European Central Bank all left interest rates unchanged during the month. Policymakers remained cautious, balancing the risk of renewed inflation against evidence of softer underlying economic activity.
The Federal Reserve’s decision was accompanied by limited guidance about the future path of interest rates. This more minimalist approach to communication contributed to greater market volatility before and after the meeting. Investors were left without a clear explanation of how policymakers were assessing the competing risks to inflation and economic growth.
Comments from the Fed Chair prompted a sell-off in US Treasuries, pushing yields higher and tightening financial conditions. Higher government bond yields can increase borrowing costs throughout the economy and may place additional pressure on future growth.
The Bank of England adopted a more cautious tone than its US counterpart, despite three committee members voting to raise interest rates. Policymakers acknowledged that the renewed tensions between the US and Iran had increased the upside risks to inflation.
However, weaker-than-expected inflation data, slowing wage growth and subdued underlying economic momentum have given the Bank of England scope to maintain a data-dependent approach. Our view remains that the Bank is well placed to keep interest rates unchanged over the coming months, although energy prices and geopolitical developments will remain important considerations.
UK Equities Demonstrate the Value of Diversification
UK equity markets benefited from the Bank of England’s relatively cautious statement, which suggested that the threshold for an interest rate increase was higher than some economists had anticipated.
Small- and mid-sized UK companies, which have faced a difficult economic backdrop in recent years, performed strongly during July. Larger UK companies also benefited from rising commodity prices, reflecting the market’s greater exposure to energy and resources businesses.
This performance contrasted with the weakness experienced by several technology-heavy international markets. It provided a timely example of how exposure to different regions, investment styles and sources of return can help portfolios navigate changing market conditions.
Our OBI Volatility Managed and Long Hold Income-focused portfolios benefited from their emphasis on quality and income-generating assets, outperforming their respective benchmarks during the month. Their more diversified positioning also provided protection from some of the weakness among individual AI-related companies.
Fixed Income Faces Headwinds
Fixed-income markets came under pressure as rising energy prices, a more cautious Federal Reserve and concerns about additional debt issuance from technology companies pushed yields higher across government and corporate bond markets.
Conditions improved towards the end of July as positive corporate earnings and relatively benign inflation readings helped yields move back from their monthly highs. The actively managed fixed-income holdings across the OCM portfolio suite consequently finished the period in marginally positive territory overall.
We continue to favour actively managed, high-quality holdings, where managers can respond to changing interest rate expectations and distinguish between issuers with different levels of financial strength.
Looking Ahead
Geopolitical developments and changing interest rate expectations are likely to remain important drivers of markets in the near term. We also expect investors to maintain a more selective approach towards technology companies as they assess whether significant investment in AI can deliver sustainable long-term returns.
The OCM portfolio suite has continued to deliver robust performance, demonstrating the value of combining different regions, asset classes and investment styles. As we move through the second half of the year, we will continue to monitor investment conditions carefully, maintaining our focus on diversification, risk management and positive long-term outcomes.
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
