Global Market Overview – July 2022
The past month has seen more than its fair share of change - both in politics and in markets. We had Boris announce his resignation; the shocking assassination of former Japanese Prime Minister Shinzo Abe; and the resignation of Italian PM, Mario Draghi.
Market moves during the month were a great illustration of how market expectations can be more powerful than what is actually going on in the world when determining asset class returns.
The ECB delivered its first rate hike in a decade, the Fed increased rates by 75 basis points, and recession fears gripped treasury markets as the US yield curve inverted between 2 and 10 years. There were also negative signs in other key indicators. Real wage growth was negative, largely due to inflation-beating expectations, fears that Russia would shut off supplies gripped commodity markets once again, and July’s PMIs suggested that the US is going into contraction.
Despite all of these negative indicators, markets began to focus on the prospect of interest rate cuts next year, with most asset classes rallying and longer duration assets performing best.
The graphic below from JP Morgan shows asset class and style returns. With the exception of emerging markets continuing to underperform, there has been an almost perfect flip in which asset classes have performed best.
Source: Bloomberg Barclays, FTSE, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. DM Equities: MSCI World; REITs: FTSE NAREIT Global Real Estate Investment Trusts; Cmdty: Bloomberg Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in US dollars. Past performance is not a reliable indicator of current and future results.
Factor performance fed through to regional returns as you would expect, with the S&P rallying over 9% for the month.
Source: FTSE, MSCI, Refinitiv Datastream, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency, except for MSCI Asia ex-Japan and MSCI EM, which are in US dollars. Past performance is not a reliable indicator of current and future results.
All of this highlights the importance of what the market is pricing in. If you asked someone with a blank piece of paper what will happen to markets if rates rise, they would most likely say the opposite to what has happened. So, as an investor, forming a view on whether the market is adequately pricing in changes is just as important as taking a view on the changes themselves.
Summary
Investors should try to focus on the fact that investing in the stock market over the long term, is a powerful tool to preserve the purchasing power of their wealth and on ensuring that they have an appropriate asset allocation for the level of risk with which they feel comfortable. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
August 2022
With thanks to Seven Investment Management LLP for their views and market thoughts. RiverPeak Wealth Limited