Markets Tested by Geopolitics and AI Uncertainty, While Long-Term Fundamentals Remain Intact
Investor sentiment became increasingly cautious as renewed geopolitical tensions in the Middle East drove a sharp rise in oil prices, while concerns over the sustainability of artificial intelligence (AI)-related investment spending prompted a broad technology-led sell-off. Although economic data continued to point towards a resilient global economy, central banks largely held interest rates steady, signalling that inflation risks remain elevated and reinforcing expectations that monetary policy is likely to remain restrictive until greater confidence emerges that price pressures are easing sustainably.
Markets navigate geopolitical tensions and technology volatility
- Global equity markets saw considerable volatility, with the shares of Information Technology companies posting the steepest losses, which were weighed down by links to AI. Fears over too much spending on AI infrastructure without an obvious Return on Investment was the key cause of the decline. The energy sector advanced alongside oil prices amid escalating tensions between the US and Iran.
- Renewed military strikes between the US and Iran and continued disruption around the Strait of Hormuz lifted oil prices – with Brent Crude oil briefly exceeding $100 per barrel over July – and prompted a move from investors towards defensive investments. This further highlighted renewed concerns over global inflation, supply chains and energy security.
- The final key theme from July came from central bank interest rate decisions. This dominated market sentiment toward the end of the month with the Federal Reserve, European Central, Bank of England and Bank of Japan all influencing interest rate shift expectations by suggesting they were ready to act and fight off inflation, if needed.
Political transition meets subdued UK economic growth
- 322 of Labour’s 403 MPs formally backed Andy Burnham to succeed Sir Keir Starmer as Labour leader, comfortably exceeding the 81 nominations required. Andy Burnham officially came into power in July and is the UK’s seventh Prime Minister since 2016. The initial market reaction was muted.
- The newly elected Prime Minister announced plans to reduce household energy bills, expand regional devolution and appointed John Healey as Chancellor of the Exchequer.
- UK Gross Domestic Product (GDP) expanded 0.1% month-on-month in May, according to the Office for National Statistics, reversing April’s contraction and suggesting the UK economy continues to grow, albeit at a subdued pace.
Japan balances policy normalisation with currency pressures
- The Bank of Japan (BoJ) kept interest rates at 1.0%, but attention centred on reports that Japanese authorities intervened to support the Japanese yen after it weakened sharply against the US dollar.
- According to Bloomberg, intervention has renewed focus on the yen carry trade, where investors borrow cheaply in Japan to invest in higher-yielding investments abroad. Any further movements of the yen could increase volatility across global markets.
- BoJ Governor, Kazuo Ueda, continued to signal that further interest-rate increases remain possible should inflation continue to strengthen. Furthermore, the Japanese government released a publication of their final economic blueprint which confirmed the BoJ’s independence – in which markets welcomed strongly.
- Japan also approved its annual economic strategy, prioritising investment in AI, semiconductors and energy transition, while the yen remained close to a 40-year low against the US dollar.
Asset classes responded to volatility
Global equity markets experienced a more challenging month as investors rotated away from some of the year’s strongest-performing technology companies amid concerns that expectations for AI-related investment had become increasingly demanding. In contrast, UK equities proved more resilient, with higher dividend-paying companies and domestically focused businesses providing useful diversification during a period of heightened volatility. Emerging markets also came under pressure, reflecting their greater exposure to semiconductor stocks despite pockets of strength in China.
Government bond markets weakened during July, with yields moving higher as renewed geopolitical tensions and rising oil prices prompted investors to reassess inflation risks. Longer-dated government debt came under pressure as markets reduced expectations for near-term interest rate cuts, while concerns around fiscal sustainability also remained a key theme across developed markets.
Property markets delivered mixed returns as higher bond yields weighed on sentiment towards interest rate-sensitive assets. Commodity markets were dominated by energy, with Brent crude oil starting July at $72 a barrel and surged above $100 a few times during the month – the commodity is now finding its footing in between this range. Gold had a much quieter month, but saw some respite gaining $69 to finish at $4107 an ounce (it’s first monthly gain since February). The increased investor demand for defensive investments came as a benefit during this period of heightened geopolitical uncertainty.
In summary
While periods of market volatility can understandably feel unsettling, they are a normal part of investing. July’s headlines were dominated by geopolitical tensions, shifting expectations for interest rates and a reassessment of AI-related valuations, but these short-term events do not change the importance of maintaining a disciplined, long-term investment approach.
Well-diversified portfolios are designed to navigate changing market conditions, with different asset classes and regions helping to balance risk over time. Rather than reacting to short-term market movements, we remain focused on your long-term financial goals, continually monitoring developments and making considered investment decisions where appropriate. History has shown that patient investors who stay invested through periods of uncertainty are often best placed to benefit when markets recover.