Global Market Overview
In July there was a rebound in global stock markets with the MSCI World up 3.79%. Concerns about trade wars persist but the strength in corporate earnings was sufficient to propel developed equity markets higher. The S&P 500 rose 4.36% whilst the best performing market for sterling-based investors was Europe, which returned 5.06% and was boosted by the relative strength of the euro versus the pound. The UK and Japan were relative laggards with the FTSE 100 rising by a more modest 1.52%, as Brexit worries took their toll, and the TSE TOPIX index posting a return of just 0.89%.
Economic data in the US continues to be above trend with the strength of the labour market boosting consumer spending and retail sales now growing at the fastest pace since 2012. The annualised rate of GDP growth for the second quarter was an impressive 4.1% and inflation rose to 2.9% in June, in part as a result of higher oil prices. Against this backdrop and with the Federal Reserve continuing to tighten it is unsurprising that the 10-year US Treasury yield once again tested the 3% mark.
In the UK, Brexit continues to dominate the headlines and July saw the resignation of both David Davis and Boris Johnson as Teresa May struggles to achieve a consensus to take the negotiations forward. On 2nd August the Bank of England announced a widely expected increase in interest rates by 0.25% to 0.75%, the highest level for almost a decade. UK government bonds declined by 0.35% over the course of the month.
The European recovery seems to be intact despite the Spring wobble and the Eurozone’s composite PMI (Purchasing Managers’ Index) remains well above the significant level of 50 at 54.3. There has been no change to the European Central Bank’s accommodative policy so that although they plan to start tapering quantitative easing by the end of the year they have signalled their intention to hold interest rates at their current levels. Trade talks between the EU and US, whilst still ongoing, ended the month on a positive note which provided a boost to market sentiment.
Emerging markets continue to exhibit mixed fortunes with those countries with high levels of debt proving vulnerable to rising US interest rates and the stronger dollar. China, meanwhile, has put in place a raft of policies designed to offset the slowing economy and which should provide a boost to commodity prices.
Performance of RPW Models over one month to 31st July 2018
All RPW models ending the month in positive territory.
Performance of RPW Models Year to Date, to 31st July 2018
All RPW Models have made gains so far this year, albeit with greater levels of volatility.
Performance of RPW Models over 1 Year to 31st July 2018
Over one year to 31st July 2018, the Adventurous model has returned 10.89% and the Cautious model 2.43%. (Source: Financial Express Analytics, Total return, Gross of fees, as at 31st July 2018).
Please note that these figures are unaudited and indicative. The performance of actual client portfolios may be different. The effect of fees will reduce the returns achieved.
The best performing fund over the month was Jupiter North American Income which returned 4.18%. A pleasing performance for a fund which has struggled in recent years owing to the manager’s focus on valuation and hence his being overweight sectors which are out of favour. As evidence of his contrarian approach the fund has had very little exposure to technology or the consumer discretionary stocks like Amazon which have fuelled the performance of the US stock market. The relative underperformance has been disappointing, but the investment approach provides some additional diversification for those models with a higher weighting to the US, as this month’s better than expected returns demonstrate.
The similarly beleaguered Invesco Perpetual UK Strategic Income fund posted a returned of 2.03% in July, outperforming both the FTSE 100 and All-Share indices.
The only two funds in negative territory were Allianz Gilt Yield (-0.61%) and Legg Mason IF Japan Equity (-1.13%). The gilt fund suffered in line with bonds which sold off on ongoing inflationary concerns and the spectre of rising interest rates. Legg Mason IF Japan Equity underperformed the TSE TOPIX index during the month but remains comfortably ahead over six months having returned 6.11% versus the index return of 2.08%.
The summer can often be a weaker period for markets and with ongoing concerns about trade, volatility is likely to persist. However, markets are currently being buoyed by very strong corporate earnings. A key question is the sustainability of high corporate profit margins, given where we are in this already long economic cycle, and whether or not faster wage growth (which has thus far been much more restrained than one would normally expect given the tightness of the labour markets) will start to take its toll. Another threat is greater regulation particularly for those technology giants such as Amazon and Facebook which have been leading the equity markets higher and which are trading at substantial premiums.
International investors are continuing to shun the UK market which, with so much uncertainty, is not surprising but in certain sectors there is value emerging. Meanwhile the Bank of England is forecasting economic growth of 1.4% this year with an increase to 1.8% next year and a further fall in the unemployment rate leading to a pick-up in wage growth. This justifies the upward move in interest rates but further rises are likely to be gradual and limited so much so that the financial markets are forecasting only a maximum of two more interest rate rises of 0.25% before 2020. This should mean that although bonds are undoubtedly expensive the fallout from rising yields need not be as drastic as some forecasters have suggested.
Although trade talks between the US and Eurozone were positive, relations between the US and China deteriorated over the month, a reminder not to be complacent about one of the biggest risks, to both economies and markets, going forward.
Volatility is likely to persist and investors should continue to maintain diversified portfolios with a blend of defensive and more risky investments. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
2nd August 2018