Global equity markets continued to climb in July with the FTSE All-World index gaining 5.1%. Smaller companies, and those showing growth and earnings momentum, performed best during the month. The technology sector continued to be the standout performer with little sign of slowing down since the market bottomed out in late March.
The Global Equity Income model fell 0.4%. Although there was no trading activity over the month, July is typically a busy month for corporate reporting. This year earnings season, for dividend yielding stocks, was on balance disappointing. The portfolio benefited from favourable stock selection in the consumer staples sector with Unilever providing a positive update. Lloyds bank reported a loss for the second quarter of 2020 as a result of increased provisions based on the expectation of greater non-performing loans in the future. While we have seen almost all banks prudently build up provisions, the market reacted negatively to Lloyd’s reported quarterly losses. Lloyds stock remains, in our view, exceptionally good value and, once regulators permit the company to pay dividends again, should provide a great yield. British American Tobacco (BAT) performed particularly poorly in the run up to reporting at the end of July and is seeing greater than expected volume declines. Their position within the portfolio is under review.
Towards the end of July there was increased concern of a second wave of Covid-19 in developed markets. We are by no means relaxed about the rise in case numbers in Europe and the USA, however, a more nuanced approach to lockdowns means that the economic threat of a second wave has diminished. An increase in testing capabilities, track and trace programs, a better understanding of who is at risk from the virus, and more local quarantine policies, should enable economies to continue their recovery. Vaccine development remains of great interest and the month saw promising progression by several candidates.
Consensus is that central bank policies will remain highly stimulative, therefore we expect to continue to see asset prices increase. The US$ weakened by close to 4% over the month, perhaps as risk takers move away from the overvalued safe-haven currency. The enormous monetary and fiscal stimulus has introduced the fear of monetisation and potential inflation. Fortunately, equities have been one of the best asset classes during times of moderate to high inflation.
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