In July, the full impact of the coronavirus pandemic was seen on a national level in quarterly GDP data. The US recorded a 9.5% year on year contraction in the second quarter of 2020, while the Euro Area was hit even harder, registering a 15% decline. Gold, traditionally a safe haven asset, continued its ascent towards a record $2,000 per troy ounce, indicating continued investor appetite for protection from a possible second dip in markets and potential medium-term inflation. Equity markets mostly continued to rally, as quarterly corporate earnings reports beat estimates in many markets.
The Dollar came under pressure in July, experiencing its greatest monthly decline since 2010. Relative dollar weakness and negative real yields on US treasuries, provided further support to an already buoyant equity market going into the corporate earnings season. However, this was not quite enough to counterbalance the currency effect on returns, with the MSCI USA, in sterling terms, marginally down -0.04% during July. US retail sales continued on an upward trajectory in June, reaching a level only 1% below the January 2020 peak, However, the pause, and in some cases, reversal of reopening plans across many US States in July may halt retail momentum. Elsewhere, US corporate quarterly earnings have thus far been better than expected, albeit those expectations are markedly lower than last year. On the same day that broadly strong ‘Big Tech’ earnings were announced, their CEOs testified before Congress. The hearings have led some commentators to speculate that the Congress subcommittee has enough evidence to bring formal antitrust cases against some of the companies. Still, the hearing did little to stifle market enthusiasm for tech, with Alphabet, Apple and Amazon all ending July at or within touching distance of all-time share price highs. In another chapter in an increasingly strained US-China relationship, President Trump piled pressure on Chinese technology companies with access to US user data, prompting TikTok owner ByteDance to attempt to sell the US arm of the popular video app to Microsoft.
The MSCI Asia ex Japan index was up 2.60% in July, led by heavy domestic retail investor activity in the Chinese stock market, as State-run media outlets encouraged investment. The event had echoes of 2015, where government induced euphoria for domestic stocks quickly evaporated. Gains were pared back towards the end of the month, as some State-linked media began cautioning against such exuberance. Chinese government debt has been a net beneficiary of falling yields across developed markets, as a record $619bn of foreign capital moved into Renminbi-denominated government debt in the second quarter of 2020. With yields as high as almost 3% for a ten-year bond, investors from regions with low inflation can still secure an attractive real yield, spurring the inflows.
UK equity performance remains muted relative to most major equity markets, with the MSCI UK down -4.36% in the month and -21.46% for the year to date. The prospect of the UK’s furlough scheme winding down in August and a temporary reversal of lockdown easing in the Northwest weighed on investor sentiment. UK corporate quarterly earnings in July offered little respite as it became clear that many companies would be cutting dividends, reducing one of the main attractions of UK large-cap equities. The yield on the FTSE 100 index, estimated by AJ Bell to be 4.7% this year before the crisis hit, is forecast to decline to 3.6%, even when factoring in large share price declines. The temporary VAT cuts in hospitality and tourism to January 2021 and the ‘Eat Out to Help Out’ scheme this month could provide the boost for which some businesses have been searching.
European stock markets ended their run of positive performance in July, with the MSCI Europe ex UK index falling -1.19%. European leaders managed to overcome significant disagreements regarding the structure of the coronavirus relief package, with four fiscally conservative nations accepting a higher proportion of loans to grants and budget rebates in return for backing of the fund. In general, markets reacted positively to the news of a deal. The Euro rose through the month, and the spread between German and Italian government bonds narrowed to the lowest level in four months.
Pressure on Emerging Market economies continued in July, as Latin America, India, and Africa experienced a rise in Covid-19 cases. Latin America now constitutes approximately half of the daily death toll for the virus, with Brazil, Peru, and Mexico particularly hard hit. Many economies on the continent entered the crisis in poor condition, with Argentina and Ecuador in default and Venezuela experiencing rapid inflation, leaving the region with fewer fiscal and monetary measures to utilise in response. Relations between India and China have deteriorated following a border clash in June where 20 Indian soldiers were reportedly killed. India has since banned several dozen Chinese apps, including Tik Tok, and restricted Chinese investments into India. Without competition from Chinese companies, US companies such as Facebook have seized the opportunity to invest in India’s promising tech market, most notably Jio Platforms, the telecoms arm of the £142billion Indian conglomerate, Reliance Industries.
Market volatility remained elevated in July as investor sentiment swung on short term Covid-19 news and government responses to the pandemic. Globally, trade disputes are becoming more prominent. Whether these are long-term relationship breakdowns, like that seen between the US and China, or temporary hostilities, remains unclear. To navigate this period of heightened volatility and growing protectionist rhetoric, we think it is prudent to hold a diversified global portfolio across asset classes and regions. Whilst it remains important to follow monthly market fluctuations, we view our portfolios over a longer timeframe and advise investors to keep sight of their own long-term objectives through events such as the Covid-19 pandemic.
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice as at the date above, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future.