What’s happened in markets?

FTSE All Share 1.99 4.35 -1.20 -0.45 5.46 3.20 3.95
Euro Stoxx 50 3.10 7.47 -0.61 -11.21 -6.21 5.23 4.71
S&P 500 4.28 9.22 0.38 -12.59 -4.66 13.35 12.82
Japan Topix -0.79 3.72 2.30 -1.26 4.53 10.00 6.12
MSCI Asia Pac. -0.18 -1.14 -5.08 -17.17 -19.70 2.58 2.05
MSCI Emerg. Mkts. 0.42 -0.17 -6.33 -17.68 -19.82 1.21 1.29
Jo’burg All Shares 1.28 4.22 -4.46 -4.21 5.02 10.74 8.31
UK Gov’t Bonds 0.73 2.62 -2.24 -11.81 -13.72 -3.25 -0.29
US Gov’t Bonds 0.29 1.59 0.88 -7.69 -8.69 -0.32 1.03
Global Corp. Bonds 0.75 3.35 0.72 -10.05 -11.09 -0.29 1.83
Emerg. Mkt. Local 2.23 1.07 -2.44 -12.29 -16.08 -4.51 -1.45
Figures in the respective local currencies as at the end of trading on 29/07/2022.

It was a relatively quiet week in terms of economic data. The main news was a further drop in US gross domestic product (GDP), this time by 0.9%. Technically, this second consecutive quarterly dip puts it in recession, but this data is often revised later and so should be treated with caution.

For his part, Federal Reserve (Fed) chair Jerome Powell made it clear he believes the US is not yet in recession. He also said there would be a point where the Fed slows rate rises to assess their impact. These statements were seized on by markets eager for positive news.

The Fed did raise interest rates by a further 75 basis points, as expected, and a similar rise could follow at the September meeting. There were signs of a cooling of the property market as US pending home sales fell by a dramatic 8.6% on the month, but this was unsurprising given the recent increases in mortgage rates. However, unemployment remains very low and the July figure is expected to drop further, to 3.5%. Investors will also be watching for further signs in the coming week’s data on manufacturing purchasing, trade balance and consumer credit.

Meanwhile, the Eurozone GDP outperformed that of the US, showing 0.7% growth during the second quarter. However, the bloc faces strong challenges from high inflation and European Central Bank interest rate hikes. In addition, Russia’s decision to cut gas deliveries through the Nord Stream pipeline to around 20% of capacity threatens the Eurozone with the prospect of disruption, outages and energy rationing.

On the political front, US president Joe Biden and his Chinese counterpart, Xi Jinping, had a “candid” call and mooted a possible face-to-face meeting. However, Taiwan remains a point of contention.

The big corporate news was Meta’s first-ever quarterly decline in sales. The company announced a 1% year-on-year drop to US$28.8 billion and predicted that growth in the third quarter could fall further. However, there was better news for other tech giants. Amazon beat market expectations with 7% sales growth year on year, albeit while recording a second consecutive quarterly loss. Apple’s earnings also outstripped predictions, with year-on-year growth of 2%.

With players anticipating a less aggressive approach to interest rates from the Fed, most markets performed strongly over the week of 25 July and were positive over the month. There was a reversal of fortune in equities, with growth stocks (+8.7%) outperforming value (+3.1%) in July. The rally spanned all styles, with small capitalisation stocks up by 7.1% and large capitalisation stocks up by 5.8%. Developed markets (+6.8%) continued to outperform emerging markets (-1.5%) over the short term.

Recession concerns left commodities continuing to struggle over the last 30 days. However, supply constraints saw oil rally (-7.7%) over recent precipitous drops. The best performing sector was information technology (+10.4%), while global property also did well (+6.1%). Communication services (+0.2%) was the worst performer over the month.

Bonds, too, have enjoyed an increase in value, with government (+2.6%), investment grade (+3.6%) and high yield (+4.4%) over the last 30 days.

Latest Consensus Forecast
UK GDP (QoQ) 0.8
UK PMI 52.8 52.8
UK CPI (YoY) 9.4
EU GDP (QoQ) 0.7
EU PMI 49.4 49.4
EU CPI (YoY) 8.9
US GDP (QoQ) -0.9
US PMI 55.3 53.7
US CPI (YoY) 9.1 8.8

What’s happened in portfolios?

The portfolio remains strong despite market volatility, as we continue to shift our bias slightly to reduce our exposure to more cyclical markets.

In equities, the emphasis is moving from value to quality stocks, which are more likely to offer better margin protection in the current economy. Our quality defensive holdings were the outperformers over July. This was underlined by their overweight to large cap tech stocks which outperformed this month given good earnings results. Microsoft’s returns were up by 9% compared to the second quarter of 2021, and Automatic Data Processing (ADP) announced annual growth in earnings per share of 15%.

Similarly, in fixed income, yields fell as gloomy economic data caused investors to believe the Fed may have to slow its aggressive pace of monetary tightening. This meant our longer dated, better quality investment grade bonds were well supported and outperformed the Bloomberg Global Aggregate Index. We continue to reduce credit risk and move towards quality and longer duration. To this end we are adopting a position in US Treasury inflation protected securities (TIPS).

Real assets continue to offer high yields with protection from inflation. However, we again moderated our view on cyclical assets by reducing our exposure to real estate investment trusts (REITS). The week of 25 July saw positive reports for the first half of the year from Greencoat UK Wind, who posted a NAV (net asset value) up by 15% (or 18% including dividends), and TRIG, The Renewables Infrastructure Group, whose NAV rose 12.5%. Both were boosted by high inflation and energy prices.

Finally, in alternative strategies, there was a very pleasing report from Oakley Capital Investments, which posted NAV growth of 11% for the second quarter. This gives clear evidence that the portfolio remains strong despite the recent volatility in markets.

What’s happening this week?

3 August • EU Retail Sales (June) | 4 August • UK Bank of England Interest Rate Decision | 5 August • US Nonfarm Payrolls (July)