Strong earnings and a busy political backdrop
A busy month in which President Trump dominated the headlines saw strong corporate earnings push equity markets higher across the developed world. A return to risk-on sentiment also favoured many emerging markets and high-yield bonds, while the Bank of England surprised with a unanimous vote to raise interest rates.
Developed markets advance as risk appetite returns
In sterling terms, American and European stock markets gained over 4%, while shares in the UK and Japan rose by just over 1%. A return to risk-on sentiment also favoured many emerging markets and high-yield bonds. The lion's share of political headlines were taken by President Trump, with opinions expressed on NATO, Europe, China, Brexit and even the Federal Reserve's interest rate policy. His European tour saw him threaten to pull the US out of NATO, castigate Theresa May for not following his advice on negotiating with Europe, and confuse the word "wouldn't" with "would".
In the UK, the Bank of England's Monetary Policy Committee delivered an unexpected unanimous vote to raise interest rates to 0.75%. The subsequent statement signalled that, on current forecasts, further rises were likely to remain gradual but dependent on the outcome of Brexit negotiations. In follow-up interviews, Governor Mark Carney warned that a no-deal Brexit was "highly undesirable" but the chances of it were "uncomfortably high".
The Fed stays bullish while the Bank of Japan quietly shifts
The United States Federal Reserve offered a bullish assessment of the economy, citing the strong jobs market and inflation close to its objective. The overall narrative was taken as a sign that interest rates would rise again in September, though investors continued to doubt the Fed's commitment to raise rates a further three times the following year.
At first glance, the Bank of Japan meeting appeared as predictable as usual: a downward revision of the inflation forecast and a restated commitment to the 80 trillion yen monthly asset-purchase programme. The 'we're not tightening' message even had a touch of Mario Draghi, President of the European Central Bank, about it. But hidden in the small print was a change of wording that would allow Japanese bond yields to rise to 0.20%, from the previous barrier at 0.10%, without intervention. This caused a small rise in most international bond yields, and we viewed it as an acknowledgement that volatility in bond markets was rising and that the Bank would be prepared to tolerate a small increase in yields and be more selective about when to take on market forces.
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
A rosy picture, but worth looking beneath the surface
July painted a rosy picture of economic and corporate life in America. The economy grew at an annualised rate of 4.1% in the second quarter, and almost 90% of companies that had reported earnings beat expectations. Earnings growth ran at around 20%, which to some extent justified current valuations. Apple beat Amazon in the race to briefly become the first US company with a $1 trillion market value.
There are, however, a few points worth noting beneath the exuberance. First, the 4.1% growth rate is only one quarter's annualised figure; the rise over the past year was a still-respectable 2.8%, but somewhat lower than the headline. Second, the growth figure was boosted by massive export orders of soybeans ahead of likely trade tariffs. Third, the rise in corporate earnings was down to President Trump's tax changes: while post-tax earnings beat forecasts, the pre-tax numbers did not.
Almost 90% of US companies beat earnings expectations, but the rise was driven by tax changes rather than underlying growth.
We made no changes to the portfolios during July. Against a more uncertain backdrop, we are content to maintain a strategy of avoiding the political noise as far as possible, seeking out less crowded lower-risk areas and focusing on fundamental value.
Underweight fixed interest
We remain underweight fixed interest bond funds, preferring a combination of equities, property and alternative investment funds.
Focus on fundamental value
Our strategy continues to seek out less crowded, lower-risk areas of the market where we see genuine fundamental value, steering clear of political noise as far as possible.
Holding cash to redeploy
Having used the recent recovery to reduce risk, we are content to hold some cash for the time being, ready to redeploy as opportunities present themselves.
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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