Global equity markets endured a bear market bounce over the month of July as the FTSE All-World Total Return USD Index climbed 6.9%. Similarly, the bond market rebounded with the FTSE World Broad Investment-Grade Bond Index returning 2.2% over the month.
Many idiosyncratic events transpired in July. Tragically, the ex-prime minister of Japan, Shinzo Abe, was assassinated while the UK prime minister Boris Johnson resigned. Dutch farmers protested cabinet plans to reduce nitrogen and ammonia emissions by 50% by 2030 which would meaningfully reduce fertiliser usage and livestock. Uproar surfaced in Sri Lanka as the country grapples to pay for basic necessities with inflation remaining untenably high. Germany’s primary energy supplier, Uniper, requested government assistance amid heightened uncertainty around Russian gas imports. The commitment by Europe to reduce Russian gas imports by 15% through next winter is indicative of the current market pressures.
Perhaps the most noteworthy event in July was the delivery of back-to-back 75 basis points hikes by the US Federal Reserve amid the highest CPI print since November 1981 (+9.1% year-on-year in June). The Fed’s commitment to stem inflationary pressures comes at a fragile time in the economic cycle after the US registered two negative quarters in real GDP growth confirming that the world’s largest economy has been in a technical recession. Similarly, the European Central Bank delivered a surprise 50 basis points hike despite economic data and confidence levels trundling at depressed levels.
Recently the market has been transitioning from stagflation to recessionary fears as evidenced by the downturn in global sovereign bond yields. Nevertheless, the Bloomberg Commodity Index rebounded 4.3% in July, although falling 10.8% in the previous month. The rebound in breakeven inflation rates toward the end of the month can likely be attributed to market perceptions of a Fed pivot to a less aggressive monetary policy path going forward. We will be watching this closely as unanchored inflation expectations will almost certainly be met with a tight monetary policy stance. Despite slowing demand dynamics, the dollar has acted as a safe haven as liquidity continues to be drained from financial markets. In fact, USD/EUR traded below parity mid-month underpinning the greenback’s allure in times of global turmoil.
Despite economic data showing signs of an improvement in China, partial lockdowns were erected once again in several regions. This combined with regulatory fines for large technology companies and housing market fears dampened investor sentiment in July. Reports of a US$44 billion real estate fund being set up to assist property developers will likely partially assist in addressing the latter issue.
We remain cautious about the returns for global equity markets as the supportive monetary and fiscal policy that helped propel equities last year continues to fade. Developed market consumption expenditure is expected to be more muted amid lower savings rates, subsiding government transfer payments, and as real disposable income is eroded by inflationary pressures. Accordingly, we continue to lower the overall fund beta to be less exposed to market risk. We believe inflationary pressures will dissipate toward the end of the year as we assume supply chain bottlenecks will likely unwind as trading conditions normalise. Increasing headwinds for consumer demand will also likely add to disinflationary pressures as high staple prices such as food and energy erode real consumption expenditure prospects. Moreover, more favourable base effects will likely assist in lowering year-on-year CPI prints.
The USD Global Growth and Balanced Fund rebounded by 4% and 3.4% respectively. This was slightly behind Morningstar peer groups which climbed 4.4% and 3.7% for each respective fund. The downturn in gold, underweight to US and European regions, as well as a geographical tilt toward China and Hong Kong, were among the primary detractors over the month. Nevertheless, both funds remain in the first quartile year-to-date and on a one-year basis. Our most defensive, the Sterling Asset Management Fund, returned 2.3%. Overall, we continue to remain vigilant by keeping the overall fund beta at lower levels compared to the majority of last year amid a highly volatile and uncertain economic environment.
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