Commentary on July 2014
Markets had to contend with a growing wave of potentially upsetting events; in addition to the geopolitical wobbles in the Ukraine and Middle East, Portugal’s largest bank collapsed, the EU voted to back the US with tougher sanctions on Russia, a spate of corporate earnings failed to meet expectations and fears grew that interest rates in the US might rise sooner than expected.
Russian and European stockmarkets were hardest hit with falls in the region of 5-7%; Portugal fell by 13% on contagion fears following the failure of Banco Espirito Santo.
In the US strong employment data sent the Dow Jones index to a record high above 17,000, but the market ended the month nearly 600 points lower. The US Federal Reserve cut monetary stimulus (QE) by a further $10bn a month and signalled an expected end to QE in October.
In contrast to the woes of most developed markets, Emerging markets had a stellar month with gains of 2-4%.
Bond yields continued to fall across Europe as fears of deflation persisted. German bunds hit a record low of 1.12% whilst Italian and Spanish bonds both hit 2.5%,on a par with the US and UK!
We are happier to believe in the UK growth story than in most other economies. There’s a greater consistency of economic data pointing towards an expanding economy with, as yet, few signs of inflationary pressures. We expect this momentum to build going into the general election next May.
However, the FTSE index is currently looking tired and was flat over the month. For now there is technical support between 6600-6700 level but the greater risk lies in a more meaningful correction. We would look to use this opportunity to buy shares at the lower levels.
We remain cautious on valuation levels in the US; this market has hit repeated new highs and stronger economic data is suggesting that perhaps the previous weaker growth numbers were weather-related. However, a lot of good news had been priced in and a sell-off at the end of the month reversed all of the summer’s gains.
Bond yields in our view still remain too low to compensate for the risk of capital loss. The collapse of a Portuguese bank sent shivers through the market prompting a rare fall in high-yield prices.
How are we currently positioned?
On our lower-risk portfolios we continue to prefer a blend of equity income, property and absolute return funds to fixed interest assets. During the month we reduced exposure to high-yield bonds, switching into a fund with higher credit quality and less exposure to rising interest rates.
In equities, we generally prefer the defensive qualities of income funds to growth funds. Towards the end of the month we slightly reduced our equity exposure, including our weighting in the US. For most funds we switched into a less volatile absolute return fund but on the higher risk funds we increased the holding in property.
We continue to prefer the value in emerging markets to developed markets, although we recognise that this differential has tightened over the past few months. Our emerging market holdings were among the top performers, rising by 2-4% over the month.
Our gold funds continued to perform well, gaining around 3% on the month. This supported our view that gold has bottomed and is a sensible long-term hold.