• US-China trade talks failed to make any progress and markets commensurately stalled, with the MSCI All Countries Index scraping out a 0.2% return for July.
• US bond yields likewise, after having plunged in the previous two months were flat for the month, trading a touch above 2%.
• The US Federal Reserve (the Fed) cut rates by 0.25%, interpreted as an ‘insurance cut’ to pre-empt an economic slowdown. Markets were disappointed by Fed’s comments.
• Boris Johnson was elected as UK Prime Minister and risks rose for a no-deal Brexit. Pound sterling plunged in value, losing almost 4.5% against the US dollar in the month.

Market update

Global equities crept slightly higher in July as incoming data points were so mixed that both markets and policymakers were left rather confused by which direction the global economy is heading. The MSCI All Countries Index eked out a 0.2% return for the month as markets tried to digest the policy shifts combined with the slowing global economy.

It appears as if the economy is not yet slowing fast enough for equity markets to correct downwards, and monetary policy is not stimulative enough to advance. As such, even bond yields traded roughly sideways for the month. In that benign environment, emerging market (EM) debt exposures were clear beneficiaries, with EMBI spreads declining again to reach levels last seen in early 2018.

Headlines were dominated though by the stalling trade talks between the US and China. In the previous month, at the G-20 Summit, both Trump and Xi had purportedly agreed not to escalate the trade war and this agreement had been welcomed by markets, leading to the rebound in June. By late July though, Trump had reversed course and imposed further tariffs in an effort to spur China into making concessions. These actions are likely to lead to a further brake on trade activity, exacerbating the slowdown already in play.

On the back of this, the Fed delivered, as was widely expected, a rate cut of 0.25% - a mere seven months after its hike in December 2018 and where it had stated that the door was still open for further rate hikes. This completes a stunning turnaround in monetary policy expectations and almost certainly positions that last rate hike as being somewhat of a policy error.

The reality for income investors now is that enormous quantities of developed market (DM) bonds are now trading at negative yields. The entire German yield curve for example is now trading negative. This is likely to exacerbate a global search for yield and increase the potential for inappropriate risk-taking amongst investors. For the time being though, this dynamic will reinforce demand for good quality higher yielding debt instruments such as investment grade corporate and EM debt.

Portfolio strategy

We retained our slightly underweight equity position against benchmarks and strategic asset allocation levels. Whilst we are concerned about the possibility of a global recession and certainly that this risk has increased, it does not form part of our base case scenario.

Accordingly, we also believe that bond yields have overreacted to this possibility and are, in the short term, overvalued; hence we retain our underweight duration positions. Furthermore, on a valuation basis we favour positions within the inflation linker space relative to nominals.

On a geographic basis our bias persists for US equities given the quality of earnings relative to other regions. On a sectoral basis there is a clear value bias, leading to an underweight tech sector exposure, whilst given yield curve expectations we have an overweight financial sector theme.

In the UK, risks for a no-deal Brexit are rising. The path going forward remains difficult to assess with high conviction as the parliamentary majority that the Tories have is razor thin, meaning any and all outcomes are still possible. Accordingly, we remain neutral on sterling whilst remaining overweight the Japanese yen on the back of its strong risk diversification properties.

Fund performance

With roughly sideways moves across bonds and equities, our range of multi asset Funds delivered pleasing performance; notably our flagship Sterling Asset Management Fund outperformed the benchmark 0.9% over the month. Our overweight EM debt positions in particular worked for us.

Going forward, we have shifted some EM hard currency exposure to EM local currency, whilst also transferring our Africa equity exposure to EM Asia.