Investment market updates

Inflation falls to 2% Bank of England target

The UK annual rate of inflation (for the year to end May 2024) fell to the 2% Bank of England (BoE) target for the first time since July 2021. As a result of Covid lockdowns, interest rates were slashed around the world to stimulate faltering economies. The return to normal, and low borrowing costs, started to push prices up as cheaper borrowing and the end of lockdowns enabled consumer spending. Then the Russian invasion of Ukraine caused energy and agricultural prices to surge, with inflation reaching a high of just over 11% in the UK late 2022.

While inflation is back to target, the BoE held the UK base rate at 5.25% at its June meeting. This was despite the European Central Bank cutting its main interest rate by 0.25% to 3.75% earlier in the month. The BoE is expected to cut rates at its August or September meetings, kickstarting a (slow) cycle of rate reductions to more ‘normal’ levels of between 3% and 3.5% over the next 2 years or so.

UK economy growing, but not enough to save the Conservatives

The UK economy did return to growth in Q1 2024, but it was too little too late to save the Conservatives from their worst ever general election result, losing close to 70% of their MPs.

Q1 growth (+0.7% GDP) was the highest of any G7 nation but, with mortgage rates remaining high, the Conservatives paid the price for the cost-of-living crisis which left many feeling worse off than when they came into power 14 years ago.

A large Labour majority provides the mandate for change, but they will be constrained by an already high tax burden and low investment levels. The new government will need to raise investment and boost UK manufacturing for any meaningful productivity gains. To that end, they’ve pledged to invest over £8 billion into Great British Energy, a new publicly owned green power company. The new entity will work with the private sector to co-invest in emerging technologies such as tidal power, while scaling investment in more mature technologies such as solar and wind.

Strong gains from most shares markets

The expectation that interest rates have peaked, and that we will enter a new period of rate cuts, has helped drive stock markets higher. Lower borrowing costs are good for both businesses and consumers.

For the 12 months to end June 2024, global markets rose 20% (in GBP) when factoring in the reinvestment of dividends. The world’s largest stock market, the US, was up 25% (S&P 500 measured in GBP) as strong consumer spending contributed to US GDP growth of 2.5% for 2023 - higher than previously forecast. Job creation data was also better than expected with approx. 2.5m new non-farm jobs added over the last year.

In the UK, the FTSE 100 reached a new record high of 8,445 mid-May before falling back a little to 8,164 by the end of June. European shares returned similar to the UK, 13% and 12% respectively, a good return considering the ongoing conflict in Ukraine.

However, while developed markets such as the US and Europe performed well, it was a mixed bag in emerging markets. The Chinese stock market touched multi-year lows in February, falling 1% for the 12 months to end June (in GBP). Weak consumer spending amid falling property prices has meant China battling too-low inflation, rather than too high as experienced in western economies. Inflation fell 0.8% in January, its biggest single month decline for more than 14 years, and has hovered near zero for each month since then. Deflation (falling prices) is considered a worse situation than modest inflation: it leads to consumers delaying purchase decisions, which further weakens an economy already likely to be slowing.

In sharp contrast to China, Indian stocks were up an impressive 36% for the year. India surpassed the UK as the fifth largest world economy and is predicted to overtake Japan and Germany by the end of 2027, according to Morgan Stanley analysis.

Bond markets

Bond markets have also been performing well, although not as well as shares. The broadest measure of global bonds was up 4% (including reinvestment of interest) for the 12-month period, while the sub-set of those denominated in Sterling did a little better, returning 6%.

Bond values go up and down based on how markets think interest rates will change over the term of the bond. Increases in interest rates make the future income payments from bonds (which are usually fixed at outset) less valuable in today’s money and vice versa.

Bond values have partially recovered (from the falls caused by the sharp hike in interest rates in 2021-22) on the expectation that interest rates have peaked and the next move(s) will be downwards. Values have steadied somewhat as inflation remains sticky (particularly in the US) and rate cuts have been deferred.

However, the previous falls in price meant that we entered the 12-month period with bond yields (income divided by price) quite high and, even without capital appreciation, returns have been decent just through earning the regular income.

Virgin Money investment funds

All Virgin Money investment funds generated positive returns over the period, ranging from 6% for the Defensive Fund to 18% for the Global Share Fund. Our Cautious, Balanced and Adventurous approaches performed in order of risk, ranging from 8% for Cautious (Growth Fund 1) to 15% for Adventurous (Growth Fund 3).

Most of our investment funds benefit from a global investment approach, with only the UK Index Tracker Fund (up 12% for the period) investing only in the UK. The strong returns from US shares helped boost returns for the three growth funds and the Global Share Fund in particular. The Global Share Fund invests close to 60% in the US, whilst Growth Fund 3 is about half that, as it is diversified across a wider range of growth assets.

The Climate Change Fund returned 7%, a tale of two halves, with pretty much all the gain coming in H1 2024. During 2023, the Fund suffered from some cancellations of renewable energy projects in the US, impacted by higher financing costs. Returns have been stronger this year and the Fund has added new investments in BYD (Chinese electric vehicle maker) and Coats Group (UK based provider of sustainable materials to the clothing and footwear industries).

The Bond Fund had a strong 12 months, returning 10% with income reinvested. The Fund added BBB bonds in Dec 2022, and this contributed an additional approximately +1.5% to returns compared to if the Fund had remained solely invested in A-rated bonds.

You can see the return for each of our funds over the last 5 years on each fund’s specific web page.