Two glasses half-full
After a nervous start to the month, markets settled on two encouraging themes: signs of stronger growth in the United States and growing hopes that the deteriorating economic profile in Europe would force the ECB into further monetary stimulus. Both bonds and equities reacted well, with government bond yields falling further and equities rising by between 1% and 6%. Russia and, to some extent, Germany continued to lag other markets owing to the ongoing conflict in Ukraine.
The S&P 500 breaches 2,000 on strong growth
The US economy confirmed its resilience with second-quarter GDP growing at an annualised rate of 4.2%, encouraging signs that the previous weaker growth numbers may have been weather-related. The S&P 500 index closed above 2,000 for the first time, a gain of 5% on the month.
We remain cautious on valuation levels, however. This market continues to hit new highs and a lot of good news has already been priced in. There is also a significant amount of borrowed money pushing prices higher, which makes the market more vulnerable to a change in sentiment.
Forward guidance puzzles as the MPC splits for the first time in three years
The MPC's forward guidance policy continued to confuse. The Quarterly Inflation Report appeared to signal no change in interest rates until 2015, but subsequently minutes from the latest meeting revealed the first split vote in three years, with two members voting for a rise in rates.
We are happier to believe in the UK growth story than in most other economies. There is a greater consistency of economic data pointing towards an expanding economy with, as yet, few signs of inflationary pressures. We expect this momentum to build going into the general election next May. The FTSE index is struggling to return to its May high; although shares briefly closed below support at 6,600, they rallied back above that line the following day. We still believe the greater risk lies in a more meaningful correction and would look to use such an opportunity to buy shares at lower levels.
Deflation fears drive bund yields to record lows
Bond yields continued to fall across Europe as fears of deflation persisted. German 10-year bunds hit a new record low below 1% on expectations that the European Central Bank would announce its own version of quantitative easing, possibly as early as September. Both bonds and equities reacted well to strong hints that the ECB was preparing to buy assets.
There is a likelihood that an ECB stimulus programme pushes bond yields lower still, but in our view yields are already too low to compensate for the risk of capital loss.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Emerging markets face turbulence but offer longer-term value
Our core Asian fund significantly outperformed the sector, falling by less than 1% against an index fall of 5.7%. Although the emerging market sector may suffer some turbulence as the US Federal Reserve brings its quantitative easing programme to an end, we believe it still represents good value over the longer term.
The UK equity market is hard to call. Even with the US hitting new highs, the FTSE index is struggling to return to its May peak. We still believe the greater risk lies in a more meaningful correction, and we would look to use any such pullback as an opportunity to add to positions at lower levels.
A lot of good news has already been priced in, and there is a lot of borrowed money pushing prices higher.
We remain underweight fixed income funds, preferring the higher yield offered on commercial property and the lower volatility of absolute return funds. In equities we favour the larger companies with a consistent dividend-paying record over smaller growth-related firms.
Property and absolute return over fixed interest
We continue to prefer commercial property and absolute return funds to traditional fixed income. With bond yields at or near record lows across Europe, the risk of capital loss in conventional gilts and government bonds outweighs the meagre income on offer.
Repositioning for rising rates
We have continued to change the composition of our fixed interest content, reducing our strategic bond position on lower-risk portfolios in favour of bonds that will benefit from rising interest rates.
Defensive equity income over aggressive growth
In equities we prefer the larger companies with a consistent dividend-paying record to the smaller growth-related firms. We favour defensive equity income funds over more aggressive options, mindful that elevated valuations in the US leave markets vulnerable to a shift in sentiment.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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