Relief and anxiety in equal measure
This was a month of two halves. In Europe the mood was one of relief as Greece and its creditors reached an agreement of sorts, and equities responded with gains of nearly 4%. The US and UK followed with rises of 2.7%, while fixed interest bonds added a steady 1–2%. Asia and emerging markets told a very different story, however, falling by 1–4% as China's equity market imploded and authorities resorted to extraordinary measures to stem the rout.
A Greek deal in name, humiliation in practice
An agreement of sorts was reached between Greece and Germany — for which read the European Union. Other than the desired humiliation of Mr Tsipras' Greece and the fact that technically Greek bonds still have a value, there was little to shout about. The conditions imposed were harsher than those previously voted down by the Greek public, and it is hard to see how the country's fortunes can improve unless there is a debt-forgiveness plan.
Debt forgiveness is something that the IMF and ECB favour, but Germany remains strongly opposed. For now the can has been kicked down the road, and markets have chosen to take comfort in that. Whether this proves to be anything more than a temporary reprieve remains to be seen.
China abandons market principles to arrest the fall
As the Greek door closed so the Chinese door opened, with possibly far greater ramifications for stockmarkets. The official response to further selling of Chinese shares differed markedly from the mainstream action of monetary stimulus: selling by larger holders was banned for six months, large companies were "encouraged" to buy their own shares, and all companies were allowed to suspend their shares at will.
Whilst this caused a temporary rally, it represented a significant set-back to introducing China to free-market forces and unnerved investors already concerned at the slowdown in the economy. The danger here extends beyond China itself to other Asian markets and commodity-related economies like Australia and Canada.
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
The US bounces back as Carney signals a turn
The US economy bounced back to life, growing at an annualised rate of 2.3% in the second quarter, following an upward revision to the previously negative first quarter. In their latest meeting, members of the US Federal Reserve left open the option of hiking rates at their next meeting in September but offered no firm steer to markets.
Governor of the Bank of England, Mark Carney, gave a strong indication that UK rates would rise "around the turn of the year" but tempered this by indicating that rates would top out at around 2.25%. In stark contrast, there were further rate cuts in Russia, Canada and New Zealand — a reminder that the global picture is far from uniform.
With good news already in the price, markets are more vulnerable whenever the earnings these valuations imply are put in doubt.
Summer illiquidity, but opportunity in the volatility
The summer holiday period is notoriously illiquid across stockmarkets, more so than usual. This can result in more volatility but without necessarily a change in overall direction. We view this time as possibly presenting entry opportunities. We put some money back into the market last month during the Greece-related weakness and have set tough targets for where we would be happy to deploy further.
Stripping out the short-term swings, many developed stockmarkets are not too far from their highs. With good news already in the price, this makes markets more vulnerable whenever the earnings these valuations imply are put in doubt — whether through weaker economic data, higher interest rates or geopolitical uncertainty.
Asian and emerging markets arguably offer more value, certainly relative to developed markets. They have suffered for some time now on the expected fall-out from rising US interest rates and more recently from the sharp correction in Chinese equities. We think it is likely that there will be an automatic mark-down when US rates do rise, but feel that the market has had plenty of time to adjust and that there could be buyers waiting for this opportunity to re-enter.
We remain underweight fixed interest across the portfolios and continue to favour absolute return funds as a source of stability, with tough re-entry targets set for European equities and a preference for value over growth.
Absolute return for stability
We continue to like the less volatile protection offered by absolute return funds. These add some stability to the portfolios and their more consistent value offers a sound platform from which to take the plunge into cheapening equities.
Europe underweight with entry levels set
We remain underweight in Europe but have set levels that we feel would represent some value and where we would be prepared to invest further. Greece-related weakness last month allowed us to deploy some capital, and we are watching for further opportunities.
Value over growth
In general we currently prefer funds that offer a value style of investing to those focusing on growth. We feel that these will provide a better return with less risk to capital over the medium term.
Property and equity income over bonds
We remain underweight fixed interest funds across the portfolios, preferring a combination of equity income funds, absolute return funds and a relatively high weighting in commercial property. The exception is on our income portfolios, where we mostly prefer the higher income from bond funds to lower-yielding absolute return alternatives.
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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