Some key factors that have influenced investment markets in recent weeks are discussed below.
A positive month for stockmarket investors.
Having seen signs of investor nervousness in June, last month saw investors regain their appetite for risk, and it proved to be a sunny climate (matching the weather) for most global stockmarkets. The overall result was a rise of 3.1% for the MSCI World Index.
Looking at fund performance in July, IA Europe Ex UK was the best performing sector, returning 3.7%. Global equity income (+3.7%) and IA North America (+3.0%) were also amongst the strongest sectors. The only two stockmarket sectors to show a negative return were IA China and Greater China (-1.9%) and IA Japanese Smaller Companies (-0.7%).
Low volatility despite ongoing uncertainty
Despite political upheaval at home and abroad, continuing to dominate headlines and causing an uncertain backdrop, investors were in a relaxed mood and stockmarket volatility in July was very subdued.
UK stockmarkets subdued
Following a strong recovery in the second quarter and improving global investor sentiment the returns from the UK stockmarket were tempered, over the month, by Brexit worries. The Chequers Brexit Plan split the Cabinet and an increased prospect of a No-Deal Brexit has returned to the forefront of investor concerns. As a result, sterling fell over the month, which benefited blue chip exporters but UK smaller companies underperformed
European stockmarkets show recovery
In terms of overseas exposure, having underperformed for much of 2018, European stockmarkets were at the forefront of performance in July. Improvements in economic news-flow and corporate earnings boosted investor sentiment on the continent. Investor sentiment was also boosted by agreements regarding tariffs between the EU and the US Government, reducing the chance of a fully blown trade war
Currency diversification boosts performance
Currency continued to influence market returns and a weakening of the pound versus other currencies (particularly the dollar) enhanced returns for UK investors with overseas exposure. The 3.1% return from the MSCI World Index over the month translated into a gain of 3.8% for UK investors. We continue to extol the virtues of holding well-diversified international exposure given the political uncertainty that threatens the domestic economy
Mixed returns from bond markets
Away from stockmarkets, there was a mixed performance from bond markets. Improving investor sentiment over the strength of the global economy boosted demand for higher risk areas of bond markets but more interest rate sensitive, defensive areas of bond markets struggled over concerns of rising interest rates. The IA Gilts sector was one of the few areas to lose money (-0.7%
The best of the rest
Commercial Property had another month of providing solid gains. The asset class is again displaying the two attributes we seek – attractive yields compared to Government bonds; and a lack of correlation with equity and bond markets.
The recent political turbulence is just background noise in our view and does not alter our investment outlook. We remain more focused on central bankers and believe that interest rate policies will be key drivers of asset prices. Despite tightening of monetary policies at home and overseas in recent weeks our view remains that any interest rate increases are likely to be cursory, due to a lack of sustained inflationary pressure and fragile economic growth.
A version of the above article above first published by Whitechurch Securities, August 2018