This note contains an overview of our market views, what we are watching, and our portfolio strategy. These developments may not mean changes to your portfolio so please contact your Client Advisor for the latest update on your portfolio.
At a glance
- Last week, equity markets continued to make progress, posting better returns than bonds. This meant flagship portfolio performance was positive for the week.
- There was, however, some notable regional dispersion. UK equities were the standout performer last week, while emerging market equities continued to be dragged down by Chinese equities. Chinese growth disappointed in the second quarter, driven by slowing manufacturing and global growth, and ongoing trade tensions. On the positive side, this raises the probability of extra policy stimulus, which should be supportive for Asia-Pacific equities.
- In the US, while the S&P 500 closed the week in positive territory, the tech-focused Nasdaq fell following a strong run from tech stocks so far this year. This was perhaps due to earnings-related news flow (Netflix, Tesla to name a couple).
- Our choice to keep higher-than-normal exposure to high-quality government bonds proved beneficial, providing stability to portfolios as bond yields fell in Europe and the UK last week.
- Overall, markets continue to contend with mixed economic data. Last week, US jobless claims fell, retail sales were positive but missed expectations, and housing data contracted. The real miss came from falling purchasing manufacturing indices at the start of this week, with factory output estimated to fall at the fastest pace since the pandemic first took hold. Although the manufacturing sector has contracted globally for several months, the downturn in eurozone business and services activity was deeper than expected.
Past performance is not a reliable indicator of future returns.
How we’re positioned
What we’re watching
- Given market headwinds and macroeconomic uncertainty, our flagship portfolios hold a higher-than-normal exposure to high-quality government bonds. In turn, we hold fewer equities and riskier bonds than normal.
- We have continued to benefit from our decisions to take profits in strongly performing equity segments and to hold more defensive positions. Specifically, our positions in low volatility equities in the US and Europe and in US dividend equities should provide support in times of market choppiness.
- Our focus on a balanced asset allocation proved effective in managing risks while capturing some of the upward trend in equity markets. Our tactical tilts may have dampened some of the upside, but they also acted as a mitigating factor when mega-caps faded, and non-tech and value stocks gained preference.
- Our holdings in Asia-Pacific equities including Japan remain promising, with the expectation of further stimulus and attractive valuations. Japanese equities, which delivered a solid performance tactically, offer potential for further gains.
- The pause in the central banks’ tightening cycle is a moving target.
- Firstly, we believe a 25 bps increase in interest rates from the Fed is likely this week, to reach 5.5%. The central bank will probably signal another one will be needed, though whether this final hike will materialise remains a close call.
- Secondly, the European Central Bank will likely raise interest rates too, to take its main refinancing rate to 4.25%, and has long signalled it is ready to do more.
- Thirdly, we think the Bank of England (BoE) still has ground to cover to bring inflation down. Although inflation fell in June, wage growth is still strong, which supports the case for more rate increases. While there’s significant uncertainty on timing and magnitude of further rate increases, and there are arguments for slightly higher or lower peak rates, we now expect the Bank rate to peak at 6%.
- Lastly, the window for the Bank of Japan to raise rates remains narrow despite inflation still reading above the central bank’s 2% target.
- In terms of economic and corporate data, investors this week are likely to watch US GDP growth for the second quarter, which consensus estimates expect to show slower growth. Separately, big tech firms, such as Alphabet, Microsoft, and Meta, will report their second quarter earnings.
Data as of 21/07/2023. Source: Bloomberg. Note: The Yield and P/E figures for stock markets respectively use 12m forward dividends and earnings divided by the index’s last price. For bond markets, the yield to maturity is used.
Past performance is not a reliable indicator of future returns.
Information correct as of 24 July 2023.
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