Summary

• The US dollar continued to slide, losing over 4% in July, as the ramifications of enormous stimulus, both monetary and fiscal, weighed on the currency.

   

• Oil prices remained mostly unchanged, as market equilibrium appeared to have been reached. Other commodities however climbed, with the CRB Spot Raw Industrial Index rising 4.5%.

   

• Equities continued their strong run, with the FTSE All-World Index rising another 5.1% in July, while the S&P 500 Index similarly rose by 5.5%, with tech megacaps, again, showing strong underlying performances.

   

• US Treasuries yields drifted lower, as signs of economic recovery stalled at current levels and as macro data pointed to the extent of damage in first half of the year. The 10-year bond yield ended the month down at 0.56%.

Market update

Markets continued to buy into a recovery narrative during July, both in an economic as well as a health context, with global equity markets continuing to rise further. The FTSE All-World Index was up a further 5.1% during the month, while the Bellwether S&P 500, in the United States (US), rose by 5.5%. The tech sector continues to be the standout performer, with the MSCI World IT Index now up 20% year-to-date, and with little sign of any pause since the market bottomed out in late March.

In our mind, there are sound reasons to be cautious around the improved economic and healthcare outcomes, but what cannot be disputed is that in this pandemic crisis, the single most resilient sector will remain technology. In a world with little available yield in fixed income - cash delivering practically zero return and many other sectors remaining fragile - technology has become the safe-haven equity sector. Factor in the fiscal stimulus, which is providing a backstop for assets and a source of liquidity, and we get the type of dynamics that are playing out currently.

Given these dynamics, markets are in a risk-seeking mood, which has seen capital flow out of US dollars into cross currencies. The DXY US dollar Index lost over 4% in July and the anticipated decline in the strength of the currency appears to have arrived. Capital is flowing strongly into gold, as a hedge against US dollar weakness, as well as on the back of the unprecedented fiscal and monetary policy stimulus that we have seen so far. Gold is now up over 30% year-to-date and may well still have room for a further move upwards.

In the commodity space, oil flattened out, and the March fears around a lack of demand and surplus supply seem to have found an equilibrium. However, other commodities now seem to be in recovery mode, with the CRB Spot Raw Industrials Index rising 4.5%, after having flatlined after the March crash. This may well be indicative of Asian recovery as well as US$ weakness.

In the fixed income space, we saw a renewed push downwards in US bond yields. The 10 year bond traded down to 0.56%, after having drifted sideways, a touch above 0.62%, for the past few months. This is an important signal about the US economic recovery and a delay in re-opening the US economy should be taken seriously. US elections are just three months away, and political imperatives may well cause unintended consequences in the economic recovery. At the same time, the battle in Congress between the House and the Senate, over the terms of fiscal stimulus, seems to have reached an impasse. This is endangering the plight of those who have, in the light of record unemployment, no other lifeline.

Geographically, we are still biased towards Asia, given their resilience through the pandemic. However, if the continued tensions between the US and China build, it could spell trouble for markets.

Fund strategy

July saw us continue with a largely neutral overall equity position. This in line with our balance between overly optimistic valuations in some sectors and geographic areas, and the backstop of continued fiscal and monetary policy stimulus on a global scale.

In this respect we balanced the neutral equity position with an increase in defensive positions. In particular we increased the size of our gold exposure. This position reinforces our long-held view that the US dollar is overvalued, and despite being the go-to safe-haven currency, in a world awash with liquidity and low yields, capital will likely seek out risk positions in non-dollar assets. Further to this, the real yield differential that the US has enjoyed, as a tailwind to currency strength, is fast fading. Lastly, the enormous monetary and fiscal stimulus introduces the fear of monetisation and potential inflation. We are already explicitly underweight the US dollar and our position is that gold remains one of the best ways to diversify risk in this environment.

We have also executed on the decision to diversify our fixed income emerging market exposure into China sovereign bonds. Beyond this we are comfortable with the overall fund positioning as having the right balance between upside and downside risks at the current time. Focus remains on finding ways to add “recovery” trades, without taking on inappropriate levels of risk.

Fund performance

In our Global Multi-Asset Funds, we delivered positive performance across the range. The Global Growth Fund was up 2.9% in the month, on the back of another solid showing in global equity markets.  Fixed income positions did add slightly as we saw declines in developed market bond yields, the US in particular.

The Global Defensive Fund was up 1.0%, while Global Balanced was up 1.8%. In the Sterling Asset Management Fund (GBP base) we delivered 2.0%. We have maintained a neutral equity position, which continues to reflect our cautious optimism. We are, at the same time, concerned about renewed episodes of downside volatility, as such continue to seek ways to balance the optimism with some defensive positions.