• 10 year US bond yields dropped to their lowest levels since late 2016, with 10-year yields reaching below 2% during the month.
• The MSCI All Country World Index (MSCI ACWI) rebounded after a negative May, and ended close to the highs for the year rising by over 6.3%.
• The G-20 Summit meeting between Trump and Xi produced a market-pleasing agreement to not escalate trade war.
• Mario Draghi announced that the European Central Bank (ECB) would be willing to provide further Eurozone stimulus, including dropping interest rates further into negative territory should that be required.

Market update

Global equity markets recovered all of the May losses in rebounding from its first negative month. A growing belief that the US Fed, in particular, would come to the rescue of a slowing US economy was the initial catalyst for the positive turn. This was aided by the ECB President Mario Draghi announcing that the ECB would be willing to provide further monetary policy stimulus (including actual interest rate cuts), should the Eurozone economy weaken further.

The reality that most of the key central banks around the world have communicated a willingness to provide further stimulus if necessary has fed through to a positive outlook for the global economy, despite clear signs of slowing. Fears of recession though have faded and certainly the key assessment is that this will be a soft patch, rather than a hard landing.

Importantly with that monetary support, the trade side of the equation, particularly the US-China trade war, has also seen a positive turn with Presidents Trump and Xi meeting at the G20 summit. The result of that meeting was an agreement to hold off on the imposition of further tariff increases and to continue to seek an amicable solution to the issues.

Whether this vague agreement will be sufficient to satisfy the market’s desires for positive outcomes remains to be seen, it still appears as if the underlying positions between the US and China are rather far apart.

Importantly, markets do seem to be hedging their bets with the Japanese yen (as a safe haven currency) which had another a strong month. So while equity markets appear to be in risk-on mode, both currency movements and bond yield movements appear to be in risk-hedging mode.

Portfolio strategy

Whilst June was a positive month for equity markets, we are still concerned about the sustainability of a positive trend given the fragility of economic indicators. From a valuation perspective they are certainly not cheap, but by the same token are not historically very expensive. This points us towards being marginally underweight our benchmark, with some important tilts away from technology and a positive tilt toward financials.

We continue to prefer inflation linked bonds over nominals and with nominal yields having fallen substantially, we retain an underweight duration position.

We remain overweight the Yen as it is still fundamentally cheap with strong risk diversification properties whilst being relatively neutral on sterling. On the US dollar we remain underweight as it continues to be expensive on a valuation basis and on the back of a Fed that is most likely preparing to cut rates at some point soon.

Fund performance

With global equity markets recovering during June – the MSCI ACWI was up by over 6.3%, with the losses of May all but eliminated. This is seen too in our global multi asset range, with fund performances all in positive territory. We are concerned however that the market is susceptible to either too much pessimism or too much optimism, and would caution that return expectations may well be muted.

The Global Growth Fund returned 3.6% for the month, whilst the Sterling Asset Management Fund being more defensive in nature returned a slightly lower 2.4%. In particular, positions that worked for us included being long Japanese yen and overweight emerging markets, whilst performance detractors were being slightly short overall equity position.