Strong gains across the board
The US and emerging markets gained 6%, while the UK and Asia rose 5%. Japan and Europe closed a more muted 2% higher. Bond markets remained subdued, closing marginally higher. The gold price rose 1%, while silver continued to take up the running, advancing a further 4% for the month. Expectations of lower rates led a rotation into cyclical sectors such as industrials, financials and energy, while defensive areas such as utilities and consumer staples lagged.
The FTSE 100 breaks 9,000 for the first time
The FTSE 100 index closed above 9,000 for the first time, an achievement which highlights the resilience of UK equities despite ongoing economic challenges and political uncertainty. Sectors such as aerospace and defence and banks have boosted returns this year. The UK earnings season was also supportive, with solid results from companies across sectors, including NatWest, Barclays, Next, IAG and Unilever.
The month also brought greater clarity over US trade policy. The US and EU concluded a trade agreement that imposed a 15% tariff on EU exports, lower than earlier threats that had run as high as 50%. In exchange, Europe pledged hundreds of billions in purchases of US energy and military equipment. This followed a similar agreement with Japan. Both deals were welcomed by markets, as the removal of uncertainty should encourage businesses to resume investment spending, although the reaction from equities in the EU and Japan was far less exuberant than that of their US counterparts. China has yet to come to an agreement with the US, despite multiple rounds of talks, with a further tariff pause looking likely. Elsewhere, India and the UK finally sealed a free trade agreement after three years of negotiations, eliminating tariffs on a wide range of products.
Softer data raises expectations of easing
Weaker US economic data and an in-line Consumer Price Index print, combined with more political pressure on the Federal Reserve from the White House, raised expectations that interest rates would fall through the second half of 2025. Payroll figures missed expectations and saw substantial negative revisions to prior months, data so poor that the President dismissed the official responsible for publishing it. The Federal Reserve voted to keep interest rates unchanged for the fifth time in a row, but the minutes suggested a more dovish stance looking forward, with a growing willingness among policymakers to ease, contingent on inflation remaining relatively subdued following the introduction of tariffs.
The UK economy grew by 0.4% in June, having shrunk for two consecutive months in April and May. The biggest contribution to growth came, not surprisingly, from government spending. On a less welcome note, the rate of inflation jumped by more than expected, hitting 3.6%, and unemployment moved up to 4.7% from 4.4% at the start of the year. The Bank of England voted to cut interest rates from 4.25% to 4.0%, but warned that the increasing price of food will limit its ability to make further reductions. Policymakers placed the blame for the economy's predicament squarely at the Chancellor's door: the raid on employers' National Insurance contributions and the latest jump in the minimum wage are forcing up living costs, particularly for food and drink. The Bank warned that the cost of the weekly shop will keep rising for the rest of the year amid a challenging backdrop of weaker pay growth and higher inflation, which is now expected to peak at 4% in September. Elsewhere, the European Central Bank held rates at 2.15%, following seven consecutive cuts since September 2024.
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
Risk appetite returns, with a wary eye on the Autumn Budget
Risk appetite has returned as a result of easing trade tensions and a positive results season. The trade tariffs to date have not yet inflicted any serious damage on growth, inflation or corporate earnings, despite being much higher than expected at the start of the year. A trade war has also been avoided, as virtually no country has retaliated. Investors can now look forward to the prospect of lower interest rates during the remainder of the year, providing a positive backdrop for financial markets. Leadership in many markets has started to switch to more recovery-orientated value stocks and smaller companies in anticipation of a cyclical upswing.
Another reason for optimism is the shifting landscape for global growth. For the first time in years, regions such as Europe and China are taking a proactive role in stimulating their economies. This diversification of economic drivers should lead to a more balanced global economy, where investors do not have to rely on the US for returns. As a result of the recent recovery, equity valuations in the US have returned to historically high levels, with US equities trading at twice the valuation multiples of other major markets. US companies are still the best in the world, but valuations arguably more than reflect this. History tells us that stocks trading at these valuations rarely deliver the returns needed to justify their price tags.
It is a welcome change to see the UK at the top of the leader board this year. However, we would not be surprised to see a pause for breath ahead of the Autumn Budget, where the Government appears to be setting itself up for a repeat of last year's confidence-sapping run. The difference this time around is that the black hole in public finances is of its own making. Forecasts for the amount of spending cuts or tax rises needed currently range from £20bn to £50bn, with the final number depending on the forecasts of the OBR. In the meantime, speculation about new taxes is likely to overhang sentiment in the short term.
A strategy based on buying undervalued assets has proved the best way to secure superior returns over the long term.
The opportunities for active long-term investors are expanding, supported by a broadening out of growth drivers in the US, away from excessive concentration on a handful of mega-cap technology stocks, and a reappraisal of the attractions of other regions.
Leadership is broadening beyond the winners of recent years. We continue to favour undervalued markets and sectors, with equities our preferred asset class and diversification our first discipline.
The United Kingdom
UK equities remain undervalued and under-owned despite their recent strong performance. It is worth noting that the five-year compound total return of the UK index has risen to an attractive 13%. The market offers exposure to global earnings, solid balance sheets, a high yield and valuations that remain low by international standards, suggesting there is still value to be unlocked. This is supported by the level of takeover activity, which has continued to accelerate. The recent broadening of the recovery beyond large caps highlights the superior valuation opportunities further down the market capitalisation spectrum.
Emerging markets
Emerging market stocks offer an attractive combination of historically undervalued valuations and opportunities for growth and income. A weaker dollar and the potential for monetary easing present a good backdrop for the region. Profits growth has picked up in recent months and is now growing at a faster rate than in the US. China remains on the cusp of a recovery and has the potential to surprise investors with an improvement in data. Latin America is also well positioned to benefit from the repositioning of global supply chains following the new tariff regime.
Bonds over cash
While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. From an income perspective, yields are now attractive in both absolute and real terms relative to the level of inflation. Bonds also provide diversification in the case of slower growth but will not protect portfolios from the possibility that inflation remains higher for longer, with the exception of index-linked bonds. Upside may also be capped by concerns over the sustainability of government debt, as policymakers lack the will to cut spending.
Diversification beyond bonds
The current environment argues for broader diversification, including inflation hedges like energy and commodities and geopolitical hedges such as gold, in addition to recession hedges like government bonds, alongside core holdings in equities. As well as reducing risk, incorporating additional asset classes allows us to capitalise on wider opportunities outside of traditional assets.
Conviction in gold
We continue to view gold as essential portfolio insurance. We have held the view for some time that the combination of higher geopolitical risk, deteriorating fiscal trends and strong central bank demand has the potential to drive a powerful bull market, where multiple pockets of global capital attempt to diversify away from dollar assets into gold as a safe monetary asset. For gold mining equities, current prices are likely to translate into record profit margins and the highest growth rate of any sector in the broader equity market. Despite this, the sector currently trades at a reasonable multiple of 12X earnings.
Capturing the upside, controlling the risk
Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while also effectively controlling risk, to dampen volatility and smooth the path of returns. This is the discipline our clients have come to expect, and the one we believe best serves the long-term stewardship of capital.
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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