After strong performance in June, equity markets made further progress in July, with the US again leading the way. Our returns were boosted by weakness in sterling, which declined by more than 4% against the US dollar over the month. A fall in the domestic currency, all else being equal, will enhance our NAV returns, given the high weighting within our portfolio to overseas assets.
The decline in sterling, close to a multi-decade low, coincided with the ascent of Boris Johnson, a key figure in the ‘Vote Leave’ campaign, to the position of Prime Minister. He pledged to leave the EU by 31 October, ‘deal or no deal’. This uncompromising stance has seen the odds of a ‘no deal’ exit increase, and has weighted on sterling.
Globally, markets looked to the US Federal Reserve (Fed), which delivered its first interest-rate cut, of a quarter point, in over a decade. Nonetheless, expectations were such that the Fed’s move was seen as ‘hawkish’, with no clear commitment to any further easing of policy. Markets had aggressive expectations of future rate cuts which did not match those of Chairman Powell. He indicated a greater sense of data dependency going forward, and said that this cut should be characterised as a ‘mid cycle adjustment to policy’ rather than ‘the beginning of a lengthy cutting cycle’.
Global economic data was mixed, with some improvements in the US labour market, as well as reasonable retail sales data and manufacturing output. The US-China trade war continues to rumble on; the temporary ‘truce’ that existed in July has rapidly disappeared, weighting on markets.
European data, in contrast to the US, saw continued deterioration, particularly in manufacturing. The euro area manufacturing indices fell, driven by the ongoing slump in German manufacturing, where factory orders and factory sales were very weak. Meanwhile, the IFO (the main business climate index) also fell. The European Central Bank remained on hold, but suggested that September rate cuts, along with deposit tiering and a restart of asset purchases (QE), are part of the policy toolbox. The central bank’s president, Mario Draghi, steps down this year, with Christine Lagarde (the former head of the IMF) confirmed to take over in October; she is expected to follow Draghi’s dovish approach. Emerging-market equities underperformed developed markets in July, particularly Asia as protests in Hong Kong and trade tensions hurt performance. Despite this, Chinese economic data is showing signs of improvement. Monthly data highlighted a pick-up in economic activity towards the end of the second quarter, as June’s industrial production as well as domestic demand beat expectations.
We ended the month at a discount of 3.9%, wider than our 1.5% starting point for the year. This short-term widening in our discount has negatively impacted shareholder returns, although our discount is at relatively low levels compared with recent years.
Equity markets have posted strong gains in the year to date, fully recovering the losses suffered in the latter part of 2018. Despite the recent recovery, valuation metrics in a number of areas remain reasonable and, providing that growth stays on a positive path globally, equities can continue to make further progress. Nonetheless, the cycle is mature and the bull market in stocks is extended, with sentiment vulnerable to short-term shocks. We expect that volatility will be heightened in the coming quarters, and we continue to invest in a range of diversified underlying stock-selection strategies. we remain well placed to withstand any further short-term volatility in markets and continue to focus on longer-term opportunities.
All information as at July 2019, unless stated otherwise.