Global Market Overview

After a strong first half, market returns in July were more muted as trade tensions continued to cause concern. However, for sterling-based investors the relative strength of the dollar, euro, and yen meant that investments overseas generated strong returns. Thus, whilst in local currency terms the MSCI World index rose 1.18%, this translated into a return of 4.46% in sterling. The S&P 500 was the strongest performer in sterling terms rising 5.40% and reaching a new all-time high. Year to date the index is up over 20%. The TSE TOPIX index rose 4.08% with MSCI Emerging Markets and MSCI AC Asia ex Japan up 2.67% and 2.11% respectively. European markets lagged with a return of 1.95%. Sterling weakness also drove the outperformance of the FTSE 100 which returned 2.24% relative to the FTSE 250 ex Investment Trusts which rose 0.87%.

In the US, real GDP (which is adjusted for inflation) rose at an annual rate of 2.1% in Q2, a significant slowdown from the 3.1% growth rate in Q1. The July Purchasing Managers’ Index (PMI) edged upwards to 51.6, therefore remaining above the significant level of 50 indicating continued expansion. Weakness in manufacturing was offset by activity in the service sector. The economy is clearly slowing but with a further 164,000 jobs added to the economy according to the July nonfarm payrolls data, unemployment remains very low. The US earnings season has also been positive thus far with over 60% of S&P 500 companies having reported by the end of the month and three-quarters of these having beaten analysts’ estimates. Closer analysis however, reveals that this was largely driven by share buybacks and the fact that analysts had lowered their expectations. So, although consensus expectations for US earnings growth is 11% in 2020 there is considerable room for disappointment.

With mixed economic data and trade tensions also at the fore the Federal Reserve, in a widely anticipated move, cut interest rates by twenty-five basis points at the very end of the month. However, the accompanying statement was not as dovish as some investors would have liked and risk appetite dwindled quite sharply leading to a sharp sell-off in the markets.

Economic growth in Europe remains sluggish. Q2 GDP data showed that the economy grew by only 0.2%, slowing from a growth rate of 0.4% in Q1 with the inflation rate remaining below target. Manufacturing data from Germany showed continued weakness and business sentiment surveys have declined to six-year lows. There was more positive news on a geopolitical front with the nomination of Christine Lagarde to take over from Mario Draghi as the leader of the European Central Bank (ECB) at the start of November. She is regarded as one of the more dovish candidates having previously supported Draghi’s accommodative stance on monetary policy. At the ECB’s Governing Council Meeting in July, a strong signal was sent that a stimulus package is being drawn up. Also, the European Commission concluded that Italy is no longer in breach of the EU’s fiscal rules.

In the UK the significant macro news was the widely predicted win by Boris Johnson of the Conservative Leadership election which saw him assume the role of Prime Minister. Whilst there has been no change to the parliamentary arithmetic – indeed the Conservative’s majority has been reduced to one following the Brecon and Radnorshire by-election on 1st August which was won by the Liberal Democrats – his hard-line rhetoric makes the prospect of a no-deal seem more likely. As a result, sterling fell by circa 4% against the US dollar and circa 2% against the euro. The UK economy shrank 0.2% in the second quarter of 2019. This is the first quarter of contraction since Q4 2012. July’s data was mixed. Markit’s UK manufacturing PMI came in at 48.0 in July unchanged from June. There has been a slowdown in new orders due to ongoing uncertainties surrounding global trade tensions and Brexit. However, services PMI rose to 51.4 in July from 50.2 in the previous month.

Japan continues to be negatively impacted by the trade dispute and slowing global economy with Japanese corporate results for the second quarter showing a slightly negative bias. Industrial production data was also weaker than expected. The Upper House elections were won by Prime Minister Shinzo Abe’s Liberal Democratic Party which means a continuation of policy for the foreseeable future. The Bank of Japan made no changes to policy or guidance but has indicated that they might intervene if the yen were to appreciate to a level that threatened to impact the real economy.

The situation in Asia is dominated by US/China trade relations. Asian shares, as measured by the MSCI Asia ex Japan index, declined over the month (although this translated into a positive return for sterling-based investors). South Korean, India and Thailand lagged whereas Taiwan, China, Indonesia and the Philippines outperformed. Q2 data pointed to a slowdown in the Chinese economy but retail sales and industrial production data showed some signs of stabilisation. The authorities are committed to keeping the economy stable via stimulus measures. Sentiment was also buoyed by the easing of US restrictions on Chinese telecoms company Huawei.

Emerging markets also experienced mixed fortunes. Mexico, Chile and Peru underperformed the MSCI Emerging markets index. By contrast Turkey performed strongly after the central bank cut interest rates by 4.25% to 19.75% which beat market expectations. Brazil also did well as the market responded positively to pension reforms.

The ICE BofAML US Treasury index fell 0.11% in dollar terms, paring back some of the gain from June. In the UK, bonds fared better with the ICE BofAML Sterling Corporate Bond index outperforming equities with a return of 2.30%. The FTSE Actuaries UK Conventional Gilts All Stocks index rose 2.06%.

The oil price rose by 0.58%.

Performance of RPW Models over one month to 31st July 2019

The performance in July was very similar to June’s with all RPW models advancing over the month. The RPW Cautious model rose 1.12%, the RPW Moderately Cautious model by 1.60%, the RPW Balanced model by 2.45%, the RPW Moderately Adventurous model by 3.18% and the RPW Adventurous model by 4.20%.
Performance of RPW Models over three months to 31st July 2019

Performance of RPW Models over three months to 31st July 2019

Over the past three months, the RPW Cautious Model rose 1.99%, the RPW Moderately Cautious model 2.59%, the RPW Balanced Model 3.13%, the RPW Moderately Adventurous model 4.33% and the Adventurous model 5.72%.

Performance of RPW Models over one year to 31st July 2019

Over one year, all models have generated a positive return. The RPW Cautious model rose 3.21%, the RPW Moderately Cautious model by 3.76% and the RPW Balanced model by 3.92%. The Moderately Cautious and Balanced models were out of sync last month but as expected the situation has reverted this month. The RPW Moderately Adventurous model rose 4.98% over one year and the RPW Adventurous model increased by 6.25%.

(Source: Financial Express Analytics, Total return, gross of fees, as at 31st July 2019).

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.

Funds Update

July was another positive month for the majority of the funds held in the models. The exception was Man GLG Undervalued Assets which declined 0.63%. The fund was hurt by not owning AstraZeneca and Vodafone, both of which performed strongly and a fall of 13% in chemical company Synthomer which is held in the portfolio. The fund managers remain of the view that Synthomer offers excellent value but as it is now the most highly leveraged business in the portfolio they will be “watching it with extra vigilance”.

The best performing funds held in the model were Legg Mason IF Japan Equity (in the Adventurous model only) which rose 9.51% and the US funds all of which achieved returns north of 6%. Baillie Gifford Pacific continues to do well, outperforming its benchmark over the month with a return of 3.98% versus the MSCI AC Asia Pacific ex Japan return of 2.11%.

Outlook

We discussed last month how the actions of central banks appear to be driving risk appetite. On the last day of July, the US Federal Reserve cut US interest rates by 0.25% but the immediate market reaction implied that some investors had been hoping for a more significant move and most indices remain under water at the time of writing. However, whilst mixed, the data does not point to a global economy on the brink of collapse. It is slowing but not stalling (yet). Although investors were disappointed a more aggressive stance does not seem to have been warranted and with inflation still positive in the US the authorities would not have wanted to cut by too much and risk causing inflationary concerns to surface. It takes time for interest rate policy to feed through to the real economy and other stimulus measures have yet to make an impact. It is therefore possible that stock markets could make further progress in the second half of the year although the strength of returns seen so far make it more likely that future ones will be more modest. If, on the other hand, investors start to discount a future recession, as is often the case, then as we have said before on numerous occasions there is little to be gained in trying to time when to exit or re-enter the market. Investors should be prepared for greater volatility in markets and a potential bumpy ride, the extent of which will depend on their attitude to risk and the portfolios we have constructed for each level of risk appetite.

In the UK we have Brexit to negotiate and although sterling is now trading at multi-year lows and is deeply undervalued on a purchasing power parity basis it is entirely possible that it could go lower given that it is the main mechanism through which international investors can express their concerns about a messy outcome. As a consequence, we are content to maintain our regional and market exposures as they are. If we were to make any changes it would be all too easy to end up being on the wrong side of the market with the timing of a potential rally in sterling impossible to predict. With the situation so tenuous it also seems sensible to have a decent allocation to non-sterling denominated assets.

Summary

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.

19th August 2019

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