Markets continued to be positive in Q2, though to a lesser extent than Q1 or H2 2023. Equities rose in low single digits globally while high yield spreads widened very marginally and remain tight at 351 bps at end-June. Commodities were mixed, though precious metals continued with strong performance for the year.
One key characteristic of markets has been the divergence in performance drivers within equities and credit. Equities have seen very narrow performance, with much of the YTD gain being led by a handful of mega-cap tech stocks, the so-called Magnificent Seven. Credit, by contrast, has seen the majority of the market rally dramatically to very tight spread levels, but there is massive dispersion between these higher-quality credits and names where there is a risk or expectation of restructuring, those rated CCC. You have (close to) record tight spreads with an elevated level of distressed debt.
Our outlook remains consistent with prior quarters. We believe we are potentially seeing too much exuberance in markets given the risks and uncertainty that exists. We maintain limited directionality across our core portfolios with our underlying managers identifying strong investment opportunities which are largely independent of market direction. Our portfolios are designed and aiming to deliver high single-digit annualised returns in this environment with limited equity, credit or fixed income beta, which we feel is a compelling offering.