This note contains an overview of our market views, what we are watching, and our portfolio strategy. Any reference to portfolio positioning relates to our flagship discretionary portfolios. Clients with bespoke or advisory portfolios should consult their Client Advisor for the latest update on your portfolio.
At a glance
As suspected by the market for some time, Joe Biden decided to pull out of the US presidential race, endorsing his Vice President, Kamala Harris. While Harris polls better than Biden, she still lags Donald Trump. Even though there doesn’t seem to be any obvious challengers within the Democrats, the party can still choose other candidates. Meanwhile, Trump officially accepted the Republican nomination. At this stage, our US equity exposure is in line with our long-term allocation, nothing more but also nothing less. During the first Trump presidency, US equities outperformed other regions. But valuations were lower back then, and the market wasn’t driven by a concentrated number of stocks as it is currently. Speculations that Trump’s policies could be mildly inflationary, given a possibly large fiscal stimulus, may also impact US Treasury bonds. We’ve recently reduced our exposure to those and we’re also underweight US investment grade bonds, preferring their European counterparts across government and quality corporates as valuations are more attractive. In addition, we’ve built our portfolios in a way that aims to withstand bouts of volatility in case it picked up further over the summer. We are well diversified across asset classes and regions, and own an ‘insurance’ instrument designed to mitigate the impact of an equity market drawdown in the US and Europe (where client knowledge and experience, and regulations, permit).
Diversification remains key to navigate possible short-term turbulence
In the absence of major economic releases last week, company earnings and geopolitical developments took centre stage. This somewhat deepened US-China tensions, with the uncertain situation in the South China Sea grabbing the headlines once again, but particularly hitting the tech sector. The tech war between the US and China has been going on for a while, but protectionist comments from Trump hit tech stocks, which underperformed other large stocks. This was compounded by the Microsoft IT outage on Friday. However, earnings reports from Taiwanese TSMC and Dutch ASML revealed surging demand for AI chips and related semiconductor tools. We don’t think this structural trend towards AI is in jeopardy if Trump was to win the election, so we’ve positioned our portfolios to capture it over the long run, via our single-line equities, thematic funds, and our strategic US equity exposure.
Lower rates likely in Europe, a tailwind for short-dated government bonds
As we’ve recently increased our exposure to short-dated European government bonds in our euro-denominated portfolios, we closely followed the monetary policy meeting of the European Central Bank (ECB) last week. The ECB decided not to cut interest rates (the main refinancing rate remains at 4.25%) and President Christine Lagarde offered very little clues about the next policy move. However, we still believe the central bank will deliver another interest cut in September as inflation slowly drifts back towards the 2% target. On the other side of the Channel (where we increased our exposure to short-dated gilts), headline inflation stayed at the 2% target in June. Despite some stickiness in services inflation, several leading indicators point to lower inflation in the UK. We think the Bank of England will start cutting interest rates in August. Last week, short-dated EUR and GDP government bonds yields fell (i.e. prices rose) on expectations of interest rates cuts.
Fundamentals matter
This week began with a surprise interest rate cut by the People’s Bank of China, a move aimed at supporting the country’s recently disappointing economic growth. At this stage, we’re neutral emerging market equities and run a structurally low exposure to emerging market debt. In the Eurozone, markets expect Wednesday’s release of the purchasing managers’ indices for July to show a rebound in economic activity across the Eurozone. We think it’s on track to meet our above-consensus growth forecast of 1% for 2024. The improving economic activity driven by services has been one of the reasons why we increased our allocation to European equities recently. In the US, economic growth for the second quarter (Thursday) has likely rebounded from the first quarter. This underpins the resilience of the economy and the fact that a recession is still quite unlikely over the next 6-12 months. That said, relative to the strong growth of last year, the US is clearly slowing. Inflation will be in focus again this week, with the release of the US personal consumption expenditures index (Friday), the US Federal Reserve’s preferred inflation measure, which we believe is likely to moderate further towards the central bank’s target. Unless inflation comes in higher than expected, markets will likely still expect a September interest rate cut in the US, at least until the release of the jobs report next week. The corporate earnings season is still in full swing and could reflect a rather good growth story. Notably, US tech giants Alphabet and fellow magnificent-7-member, Tesla, are due on Tuesday. European mega-caps, Roche and Nestle, report on Thursday.
Important Information
Information correct as of 22 July 2024.
This document is designed as marketing material. This document has been composed by Brown Shipley & Co Ltd ("Brown Shipley”). Brown Shipley is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales No. 398426. Registered Office: 2 Moorgate, London, EC2R 6AG.
This document is for information purposes only, does not constitute individual (investment or tax) advice and investment decisions must not be based merely on this document. Whenever this document mentions a product, service or advice, it should be considered only as an indication or summary and cannot be seen as complete or fully accurate. All (investment or tax) decisions based on this information are for your own expense and for your own risk. You should (have) assess(ed) whether the product or service is suitable for your situation. Brown Shipley and its employees cannot be held liable for any loss or damage arising out of the use of (any part of) this document.
The contents of this document are based on publicly available information and/or sources which we deem trustworthy. Although reasonable care has been employed to publish data and information as truthfully and correctly as possible, we cannot accept any liability for the contents of this document, as far as it is based on those sources.
Investing involves risks and the value of investments may go up or down. Past performance is no indication of future performance. Currency fluctuations may influence your returns.
The information included is subject to change and Brown Shipley has no obligation after the date of publication of the text to update or amend the information accordingly. Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it.
This is non-independent research and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
All copyrights and trademarks regarding this document are held by Brown Shipley, unless expressly stated otherwise. You are not allowed to copy, duplicate in any form or redistribute or use in any way the contents of this document, completely or partially, without the prior explicit and written approval of Brown Shipley. Notwithstanding anything herein to the contrary, and except as required to enable compliance with applicable securities law. See the privacy notice on our website for how your personal data is used:
https://brownshipley.com/en-gb/privacy-and-cookie-policy
© Brown Shipley 2024
