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July was a mixed month for equity markets with many developed world indices dropping towards the end of the month as news broke of increases in coronavirus cases in a number of Western countries.  This development could slow the easing of social and economic restrictions and therefore hamper economic recovery. We are keeping a close eye on developments.  The MSCI World index fell -1.36% in July and the index is down -2.14% in the year to date, which is significantly less than the -15.65% drop in the first quarter. Whilst developed markets lost steam over the month, the MSCI Emerging Markets index gained 8.12% in Sterling terms in July taking gains to 2.17% in the year to date.

The Covid-19 pandemic has caused the sharpest and deepest short-term economic contraction in modern economic history with global GDP falling 9% in the first quarter, according to data published by Vanguard.

We perceive the greatest risks to the US market to be the possibility of a slower than expected recovery and the fact that a comparatively small number of companies, especially technology companies, have been driving market gains. We are keeping a close eye on developments but note that our model portfolios are already underweight to the US market in comparison to a number of leading multi-asset funds.

UK stocks have remained somewhat out of favour compared with other regions over the past month and the FTSE 100 dropped -4.20% in the last month. In particular banks (lower interest rates and falling profitability), oil companies (lower demand), travel companies like Carnival and Tui and aircraft parts manufacturers Melrose and Rolls Royce (lower demand) weighed on the index. An additional issue is that Brexit remains unresolved. Either the next six months will see a breakthrough and a free trade agreement (FTA) will be established or the UK will leave and trade on World Trade Organisation (WTO) terms i.e. a “hard Brexit”.  Despite this uncertainty we note that a number of large, financially robust companies are domiciled in the UK and feature in the portfolios of our UK equity fund choices. For instance, Astra Zeneca is a world leader in the search for a Covid vaccine, while Unilever showed during the pandemic that it can quickly pivot to meet demand for its products globally. Additionally, the UK market is better value than many overseas markets, creating potential for recovery in time as Brexit is resolved and the social and economic restrictions to contain COVID-19 reduce. We are monitoring the situation closely and will keep you updated.

During the month, the European Union (EU) agreed a 750 billion Euro recovery fund in response to Covid-19. Importantly, the recovery fund will be backed by common bond issuance by the European Commission. This coordinated response is a significant step toward potential fiscal integration across the EU. The FTSE World Europe ex-UK index lost -1.44% in the last month in Sterling terms, but lost -0.41% in local terms because news of the recovery fund assisted in raising market sentiment.

Yields on “investment grade” (good quality) bonds are comparatively low because of the historically low interest rates in the major global economies. However, the quantitative easing measures in play do create the potential for some capital growth (increase in prices).   Our Investment Committee wishes to maintain exposure to fixed interest in portfolios to provide diversification.   

We remain patient as uncertainty persists and continue to keep a close eye on infection rates to determine whether a “second wave” is emerging in any major economy or region where we have exposure in our portfolios . Further volatility is possible. We continue to focus on potential long-term returns, global diversification to spread economic and market risks and will avoid attempts to “time” the markets as it can be extremely difficult to make such a call correctly and can impair returns if we attempt to do so.

This article is for information purposes only. It does not constitute investment advice and is not a recommendation to invest. The value of investments and the income from them may go down as well as up and you may not get back your original investment.  Past performance is not a guide to the future.

Date of publication: 4 August 2020


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