Momentum fades despite record highs
Markets lost momentum and drifted lower to varying degrees. The US Nasdaq index closed at a record high during the period and Japanese shares recorded their best level for eighteen and a half years, but both finished the month in negative territory. Fixed interest bonds fell by between 1% and 3%, the FTSE 100 lost over 6%, and emerging markets fell by a little more than that. Two stories dominated: the Greek crisis and the sudden unravelling of the Chinese equity market.
Athens crosses the Rubicon with an IMF default
Markets continue to be dominated by speculation on whether Greece will remain in the European Union and the repercussions if it is forced to go it alone. During the month Greece became the first developed nation to default on a repayment to the International Monetary Fund, triggering a temporary closure of the Greek banks and a referendum in which Greeks voted not to accept the austerity measures imposed as part of bailout conditions.
Government bond yields fell as bonds returned to safe-haven status. The obvious exceptions were bonds issued by Greece and its peripheral troubled partners — Spain, Portugal and Italy — where the crisis renewed concerns over sovereign credit risk.
China's retail-driven rally collapses despite state intervention
While Greece is grabbing the easy headlines, China is quietly imploding. Chinese shares had been the year's star performers, driven higher by retail investors gambling with borrowed money. Recently, despite government intervention, this market has collapsed, dragging large parts of Asia with it. The scale and speed of the decline suggest that the consequences may prove more significant than the Greek situation in the months ahead.
A world divided on interest rates
The dichotomy in global interest rates remained firmly in place. During the month Russia, China, South Korea, Sweden and New Zealand all cut interest rates, while speculation continued over the timing of the first hike in the United States. The US Federal Reserve signalled a possible rise as early as September but at the same time lowered its projected path of future increases, cutting its growth forecasts in the process.
Positive data and a lone voice for higher rates
Data in the UK was positive, with upward revisions to last year's GDP numbers, a flicker of inflation and further improvement in the employment figures. One member of the Monetary Policy Committee said that he might consider voting for an interest rate rise in August. We suspect he will be pretty lonely.
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
Nervous selling ahead, but opportunity with it
In a marked change, the recent weakness in European equities has been accompanied by a weaker euro. Although we are not big fans of Europe, we view this combination as approaching a more realistic buying level across the portfolios.
We still prefer the value offered by UK equities and smaller companies in particular. This sector lagged larger companies ahead of an uncertain UK election but is now coming back into form.
We anticipate further bouts of nervous selling over the coming months as the Greek situation continues to play out and the prospect of a US rate rise moves closer. The plan is to use these moves as an opportunity to increase market exposure, but these windows may be brief and tricky to trade within.
This nervousness, together with the European Central Bank's ongoing bond-purchasing programme, could push bond yields lower again. However, we do not feel that this is a trade worth pursuing and would prefer to sell more bonds at the tighter levels.
While Greece is grabbing the easy headlines, China is quietly imploding.
We took advantage of market weakness to edge money back into equities and made a notable fund switch in our UK smaller companies allocation. Our overweight property position proved its worth as a diversifier, providing a positive return when few gains were on offer.
Adding to equities on weakness
We used the broad market weakness as an opportunity to edge a bit of money back into equities. On the higher-risk funds we dipped a toe back into Europe, and on the remaining funds we increased our exposure to UK smaller companies.
Switching to Unicorn UK Smaller Companies
We recently met the managers of the Unicorn UK Smaller Companies fund and liked their style and process. We had been monitoring the fund with a view to investing for some time, and the shock resignation of the fund manager for the Standard Life UK Equity Unconstrained fund presented the catalyst for the switch. The Standard Life fund has served us well, but for now we prefer to watch that fund and the previous manager's new venture from the sidelines.
Property as ballast, bonds kept light
Our overweight property position proved its worth as a diversifier, providing a positive return on the month when few gains were on offer across markets. 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 funds.
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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