Month ending 31 July
Equity markets rebounded in July, with all main regions delivering positive returns in local and GBP terms. Europe and the US were the strongest performers (+4.8% and +4.5% respectively), followed by emerging markets (+2.9%). The UK delivered +1.4%, and Japan +0.8%. The US remains the strongest market year to date (+10%), while the emerging market is the only region to remain negative in GBP terms (-2%).
Local currency bond performance was broadly negative. Only UK corporate bonds gained on the month (+0.1%), while UK and European and US government bonds declined -0.4%.
GBP continued to decline against USD (-0.6%) and EUR (-0.7%), but strengthened further versus JPY (+0.4%).
Oil reversed course in July, falling -7.3% in USD terms, while gold weakened a further -2.4%.
Markets struck a more optimistic tone in July, boosted by a strong earnings season, signs of stronger economic data, and progress on trade negotiations.
While risks do persist and volatility remains high, so far we see few signs that we are near the end of the current economic cycle and we think it has longer to run. Inflation has risen in some developed markets, but productivity-enhancing investment and a more moderate path for growth means the risk of uncontrolled inflation in developed markets appears to be contained.
Given that earnings have been growing faster than share prices, price to earnings multiples have contracted, offering investors a greater degree of comfort. We expect robust economic growth and strong earnings growth to continue to outweigh investor fears around political risk.
In the current economic climate, we still believe that shares can continue to outperform bonds, although we expect more modest returns and higher volatility than 2017. At a regional equity level, we remain overweight the US, Europe, Japan, and select emerging markets. We remain underweight the UK, where uncertainty remains high.
In fixed income, we maintain our strategy of being overweight investment grade corporate debt with shorter maturities, and underweight longer-dated Gilts. High quality, short duration assets are at the core of our strategy.