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Back on an even keel

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Markets returning to an even keel

July was a generally positive month, with some rebound in economic activity (albeit from low levels), and continuing support from central banks and governments. All the major regional equity markets saw gains, except Japan and the UK. UK bonds meanwhile have continued to rise in value as yields hit historic lows.

Activity in the UK

The start of the summer holiday season has seen a further easing of lockdown and attempts by the Chancellor Rishi Sunak to boost the leisure sector with the “eat out to help out” initiative. The government is also encouraging workers to get back on public transport and return to the office to increase footfall in surrounding cafés, restaurants and bars. However, it’s expected that many will continue working from home, at least until schools are due to reopen in September.

The impact of Covid on unemployment has been reasonably muted, thanks to the furlough scheme, although redundancies are picking up and now stand at over 150,000. During July, Boots, John Lewis, British Airways, Burger King and Dyson joined those companies making significant layoffs, sparking fears for the 9.3m people on furlough as the scheme winds down from August.

The deadline for the UK to agree a further extension for leaving the EU passed on 30th June, so it’s now fixed that Brexit will go ahead at the end of the year. Details of any trade deal are still to be agreed, and businesses will need to prepare for the possibility of a “hard Brexit”.

Over July, the UK market fell by 2.3% (FTSE All Share), driven by oil, gas and financials. While oil prices rose marginally, they’re still far below levels at the start of the year. The very low interest rates are weighing on financials, and banks have seen an increase in bad debts due to Covid.

In bond markets, UK gilt yields hit new lows over July, while inflation expectations were broadly unchanged. This led to small positive returns for UK conventional gilts, index-linked gilts and investment grade corporate bonds.

Activity across Global markets

The major overseas equity markets enjoyed a largely positive month with Chinese equities leading the pack, rising over 9%. China is the furthest ahead in rebuilding after Covid and is experiencing a strong uptick in domestic tourism. Emerging markets in general rallied 8.4%, US equities rose by more than 5%, while developed Asia Pacific ex Japan returned 3%. The laggards were the Europe ex UK region (+0.5%) and Japan (-1.2%). All returns are quoted in local currency terms, as measured by the FTSE indices.

Sterling also strengthened which dampened returns for unhedged UK investors. While the unhedged sterling returns for China, emerging markets and Asia Pacific ex Japan equities were positive, performance of US and Europe ex UK equities fell into negative territory for unhedged sterling investors.

July was mostly a continuation of trends for industrial sectors. Alternative energy, general retailers, technology and software performed strongly, while fossil fuels, aerospace, financials and the leisure and tourism industry lagged. Interestingly there was some turnaround in beverages, chemicals, construction, mining and autos – a positive sign of recovery for sectors which have struggled during global lockdown.

Looking to the future

Governments and central banks are still providing significant support to markets. At their July meeting the US Federal Reserve committed to keeping rates at 0-0.25% until the economy strengthens. It also pledged to increase its holdings of Treasury securities and certain other bonds at least at the current pace, as well as offering large-scale short-term lending.

However there are reasons for investor unease. Global Covid cases are still very high (source https://www.ecdc.europa.eu/).

Covid cases worldwide 4 August 2020There has been an escalation in US / China hostilities, exacerbated by the introduction of the Hong Kong security law on 30th June. Reflecting this investor unease, gold – the ultimate safe haven asset – hit $1,944 per ounce during July, beating its previous record of $1,921 set in 2011.

As we look forward to the rest of 2020, we see the potential for significant market volatility from Covid, trade tensions, the US election and Brexit. To help investors navigate these choppy waters, we are maintaining well-diversified portfolios in our solutions. We believe active managers have an important role at this time, in that they can tilt towards more attractive sectors and away from those with a poor outlook, while passive funds are forced to hold these in line with the market.

While the situation remains unsettled, our investment team is holding weekly discussions on tactical asset allocation – rather than quarterly – in order to keep abreast of changing conditions and determine whether any adjustments are appropriate as we try to keep an even keel for our clients.



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