Markets at a glance
(See Market Return Table):
The week ahead:
- US equities climbed nearly 2% last week, recording the third weekly advance in the past 14 weeks. European stocks rose by almost 2.5% – the largest one-week percentage gain since the week ending 27 May. And, despite the political uncertainty, UK equities added 0.4% over the week.
- In fixed-income markets, US Treasuries rallied early last week on rising slowdown fears, before giving back gains on several upside surprises in key data, including a strong US jobs report on Friday.
- US nonfarm payrolls – one of the most crucial ‘hard employment data’ – overshot consensus expectations (372,000 vs 265,000 expected), leading markets to fully expect a 75 bps Fed rate hike to between 2.25% and 2.50% on 27 July. The ISM services purchasing managers’ index decreased by less than expected in June, still pointing to growth.
- China’s services purchasing managers’ index rebounded strongly and more than expected, to 54.5 in June from 41.4 in May, the largest single-month rise since early 2020. Details within the report were strong, suggesting further progress. Reopening and stimulus support the recovery.
- In the UK, Prime Minister Boris Johnson announced his resignation as Conservative party leader. A leadership contest is about to start. Mr Johnson said he will stay until the new leader is in place. UK equities and the pound were relatively unmoved on the back of the news.
- In Europe, the euro risks hitting parity vs the dollar in the short term as concerns about an energy crunch linger. The Nord Stream 1 gas pipeline will undergo its annual maintenance on 11-21 July, but several observers fear Russia won’t restart supplying gas afterwards.
- Most non-gas commodity prices have fallen recently on the back of slowing demand. This may take some pressure off inflation numbers going forward. However, plans for a large Chinese stimulus package in the second half of 2022 did revive the commodity complex at the end of last week.
Asset allocation and portfolio views
- Wall Street banks will report their Q2 earnings. The market expects a further rise in US inflation, but slowing core inflation (Wednesday), which has decelerated for 2-3 months. US retail sales and industrial production should have held up, but not the University of Michigan consumer survey (Friday). China GDP likely contracted last quarter given the lockdown, but reopening and stimulus suggest that retail sales and industrial production (Friday) are rebounding. The German ZEW survey (Tuesday) should show weaker sentiment following surging gas prices. In the UK, we’ll get May’s GDP (Wednesday).
Our investment strategy pillars
- Your Portfolio is managed according to its objectives. The bedrock of a portfolio is what we believe is an optimal strategic asset allocation, which remains stable through time and aims to drive 80-90% of long-term performance. The remaining 10-20% of returns are derived from a combination of tactical asset allocation and instrument selection (via funds and direct investments).
- The simultaneous sell-offs in fixed-income assets and equities have left few places to hide from negative market performance in 2022. Such an event has rarely occured historically.
- Our approach to tactical asset allocation is one that is selective and applied when there is greater clarity in our market and macro indicators. This is becoming less and less the case in aggregate as we are seeing a generalised loss of momentum in macroeconomic indicators and as we enter an earnings season which will be important in providing direction on the further path of markets. We maintain a slight bias towards US equities over highly rated credit, and still see value in Emerging Markets (EM) equities and in EM hard currency sovereign bonds over US duration.
We remain disciplined
and focused on the long-term objectives. Even though market conditions have been challenging for our strategy this year and portfolio returns remain negative, we have seen a stabilisation in the performance of our three pillars since the end of May. We maintain conviction in their ability to help drive portfolio performance in the future:
- We invest globally, within equities and bonds, which gives access to a wide pool of potential growth, income drivers and exposures. US equities have outperformed in recent weeks.
- We invest in companies with what we believe to be quality growth characteristics, those with competitive franchises, pricing power, and high returns on capital. Even though these companies have not been rewarded in the last six months, our research shows that they remain well positioned for the future. As investors have been increasingly concerned over recession risks, their quality features have been rewarded in recent weeks.
- We invest in an increasingly sustainable manner. We want to be ahead of the curve by backing assets with high or improving social, governance and environmental standards.
In a year where there has been no place to hide, your portfolio holds assets whose prices have fallen but, we believe, whose potential future value has increased given their unchanged expected long-term characteristics. We therefore maintain conviction in the return potential of these assets over the long term.
Group Chief Investment Officer
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Information correct as at 11 July 2022.
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