In this note, we provide you with an update on significant recent developments and our views. Comments on recent performance are not indicative of future performance. As our investment strategy and views are defined with a long-term horizon in mind, these developments may not mean changes to your portfolio. Please contact your advisor for the latest update on your portfolio.
Markets at a glance
Markets – Bad news is good news
- In July, stock markets rebounded despite weaker economic data and higher interest rates. The S&P 500 returned c.9%, the tech-heavy Nasdaq c.12.5%, the Stoxx Europe 600 c.7.6% and the UK’s FTSE 100 c.3.5%. Emerging markets equities were flat, held back by Chinese equities.
- The equity rebound mostly happened in the past two weeks, supported by robust quarterly earnings reported by companies. In the US, for instance, with half of the S&P 500 reporting numbers, c.70% of companies have beaten earnings expectations, a level only slightly below the long-term average. Beats are widespread across sectors, suggesting resilience across the market. Of the major stocks, notable beats came from Apple, Amazon, Alphabet and Tesla.
Central banks – Still hiking. No pivot yet, but now closer
- For the first time in 11 years, the European Central Bank (ECB) increased interest rates by 0.5% (to 0%), ending its negative-rate policy. The ECB could hike further as inflation has reached a new high of 8.9% in the euro area. Inflation and gas worries are depressing consumer and business sentiment (weak July German Ifo and GfK surveys) pointing to recessionary conditions.
- In the US, the Federal Reserve raised rates by 75bps again (to a range of 2.25-2.50%). Chair Powell said that the pace of increases will likely slow down, in line with our view. Markets reacted positively to this potential Fed pivot and government bond yields fell. The 10-year Treasury yield eased 34 bps in July. Recession worries spurred haven flows in Europe, with the 10-year German Bund closing below 1.0% at 0.8% (a -0.56% fall in the past month).
- In the UK, all eyes are on the Bank of England this week after inflation surprised to the upside recently, reaching 9.4% – a new 40-year high – despite core inflation (ex energy & food) slowing slightly.
Economy – Losing momentum
- US Real GDP surprised to the downside in Q2, falling 0.9% q/q annualised (Q1 -1.6%). Spending on equipment fell as businesses turned cautious and residential investment also fell on rising mortgage costs. Consumption slowed but remained positive (+1%). Overall, employment and income grew in the first half, thus not reflecting true recessionary conditions.
- Q2 euro area GDP surprised to the upside (+0.7% q/q). France, and mostly Italy and Spain saw a big boost from tourism (likely to fade in late Q3), with the latter also bolstered by fiscal support from the EU’s recovery fund. Germany, however, stagnated in Q2, with industrial activity impacted by supply chain disruptions and slowing demand.
- Gazprom cut Nord Stream 1’s gas deliveries to 20% of capacity, pushing European gas prices to new record highs. This, plus a more general energy shock, is likely to trigger a recession in the euro area this autumn/winter, even though the EU has proposed a 15% gas consumption reduction over the next eight months to limit shortage risks.
The week ahead
- Following June’s V-shaped recovery, Chinese Caixin purchasing managers’ index (Monday for manufacturing and Wednesday for services) could soften slightly.
- Ahead of the US jobs report (Friday), the US services purchasing managers’ index (Wednesday) is expected to remain in expansion, albeit with a continued downward trajectory.
- In the UK, the Bank of England is set to increase its policy rate (Thursday) for a sixth consecutive time, by a larger 50 bps hike instead of a more usual 25 bps, to 1.75%.
Tactical asset allocation
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- We recently reduced our equity position to neutral – in other words to its long-term strategic position - to reflect the uncertainty around the outlook for equity markets and more favourable bond yields. The rationale for a more cautious stance was highlighted this week when surprisingly equity markets reacted positively to a sizable negative US Q2 GDP (Gross Domestic Product) print.
- In such a highly uncertain environment, we continue to focus on exploiting opportunities selectively within asset classes ahead of a clear trend emerging.
- In our case, we favour US equities and emerging market equities over eurozone equities. Elsewhere, we remain overweight EM sovereign bonds (USD-denominated) vs local government bonds (EUR or GBP) but continue to monitor this position. With yields elevated in a number of fixed-income markets, we are actively looking for opportunities.
- We continue to assess the opportunity set for potential new tactical positions ahead of our asset allocation committee later in August.
Investment strategy
- After a difficult first half of 2022, a good July has generally led to an improvement in the absolute performance of portfolios, particularly those with higher equity exposures, although 2022 returns remain negative. Long-term 5-year returns remain positive.
- Portfolios generally outperformed in July, with positive investment selection a major contributor.
- Within equities, a number of third-party funds rebounded in developed markets such as Europe and the US, particularly managers with a quality bias. Our in-house direct equity strategy also had a strong July thanks to positive stock selection.
- Looking ahead, we maintain our conviction in our 1) global approach to asset allocation 2) increasingly sustainable approach and 3) quality growth-biased investments, all of which we believe should be rewarded in the long run.
Market Performance
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Information correct as at 01 August 2022.
Past performance is not a reliable indicator of future returns
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