Record equity gains and collapsing bond yields send mixed signals
Global equities delivered their best June on record, and government bond yields fell to new lows, as the United States and China announced a temporary truce in their trade dispute and central banks returned to a monetary easing bias. Even as US stock markets soared to record highs, the US economic expansion officially became the longest on record, with focus shifting to the deterioration in forward-looking surveys around the world.
Equities and bonds rally simultaneously as central banks ease
In sterling terms, Asian and emerging markets led the way with gains of 5-7%, while US and European shares rose by over 4%. In the UK, the ongoing political situation and Brexit uncertainties led to a disparity between shares with overseas earnings, which rose by around 2%, and domestically biased shares which showed small losses.
Even as US stock markets soared to record highs, President Trump stepped up attacks on the Federal Reserve for not cutting interest rates fast enough. Oblivious to the irony, he also criticised the European Central Bank for weakening its currency by promising to loosen monetary policy if and when necessary. In what was becoming a predictable pattern, Trump agreed a truce with China, putting further tariffs on hold, but opened up fresh disputes with India, Iran and the European Union.
As the US economic expansion officially became the longest on record, focus centred on the deterioration in forward-looking surveys around the world, with some countries implying an economic contraction. In the UK, the weighted measure of all three indices, manufacturing, construction and services, pointed to negative growth over the past quarter.
The ECB and the Fed ready the market for further easing
President of the European Central Bank Mario Draghi gave his clearest indication yet that the Bank would launch another round of stimulus if the climate of weak growth and political uncertainty continued. The US Federal Reserve said it would "act as appropriate to sustain the expansion," using further language to ready the market for a cut in rates following their July meeting.
Government bond yields collapsed as investors predicted a future of easy money and lower interest rates. Were you to lend the UK government money for ten years, you would have been paid 0.66% in annual interest, less than the official borrowing rate of 0.75%.
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
Markets send mixed messages as uncertainty risks becoming self-fulfilling
Asset markets were sending mixed messages, with strong rallies from both risk-on instruments such as shares and risk-off instruments such as bonds and gold. Investors gave the impression of being simultaneously confident in future corporate earnings yet worried about a global recession.
It did feel as though we were collectively worrying ourselves into recession. The most common reason given for falling sales and order books, cancelled investment projects and generally lower data was uncertainty, whether Brexit-related or stemming from the expanding threat of protectionism and trade disputes. Uncertainty over Brexit and UK politics in general was the cause for the UK almost certainly showing negative growth for the past quarter. It was hard to see any positive news that would lift growth over the next three months, which could then put us in a technical recession.
Central banks had been persuaded to abandon their move to normalise markets and allow investors to make up their own minds on valuations. After that experiment provoked a sharp fall in prices the previous winter, the banks had returned to their previous policy of monetary stimulus. The last episode of monetary easing would suggest that asset prices would be driven ever higher as investors sought an income stream above that offered by cash deposits. This might prove to be the case, but we saw most markets as discounting a lot of good news and we remained mindful of the risks lurking close to the surface.
Arguably the greatest risk was the erratic and unpredictable Trump Twitter feed. With no concept of economics, and with policy dictated by an election timetable, the President was almost single-handedly generating the global uncertainty that was damaging growth. Further risks to asset prices included central banks not following the bond market's implied path of interest rate cuts, and the risk of stronger economic data. At the time of writing, better than expected US employment numbers had knocked 200 points off the US index and sent bonds and gold lower.
Central banks have been persuaded to abandon their move to normalise markets and allow investors to make up their own minds on valuations.
With bond yields falling to new lows, we further reduced our exposure to interest rate risk by changing a couple of bond funds on our cautious and balanced portfolios. We continue to believe that the UK stock market offers better value than most other markets.
Further reduction in interest rate risk
With the fall in bond yields to new lows, we further reduced our exposure to interest rate risk by changing a couple of bond funds on our cautious and balanced portfolios.
Underweight fixed interest
We remain underweight fixed interest, preferring equities and alternative investments. Where we do hold fixed interest, we mostly use funds that have limited exposure to rising interest rates.
UK equities offer the best value
We still believe that the UK stock market offers better value than most other markets. The risks are well-rehearsed, but the market has been unloved for a long time now and prices take account of much of this.
Well-diversified portfolios
With so much uncertainty around the world, accompanied by record levels of debt, we believe there is a strong case for running well-diversified portfolios, investing in actively managed funds with sound investment processes.
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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