Market Overview

Summary of world equity markets in July

After a first half that most would like to forget, the second half of the year started with a bang, with most assets delivering a positive return.  US stocks led the charge, but most markets chalked up robust gains.  With bond yields in decline, it was also a much brighter month for fixed income investors.  In contrast, commodities began the quarter on a weaker note as mounting worries about recession weighed upon sentiment.

The Bank of England warned that the economic outlook for the UK and the global economy had deteriorated materially.  The UK’s inflation rate rose to an eye-watering 9.4% in June, while the economy grew by 0.5% over the month, even as the housing market showed signs of topping and retail sales weakened.  Second quarter US GDP came in at -0.9% (the second consecutive contraction), and the inflation rate topped 9.1%.  With a backdrop of slowing growth, investors scaled back their expectations for US interest rates; indeed, markets went as far as to price in rate cuts within the next six months.  With growing pessimism about the economic outlook for Europe, data from Germany confirmed a picture of stagnating growth and falling confidence.  Meanwhile, the euro zone’s average inflation rate leapt to a new high of 8.6%.  Concerns were focused upon worsening tensions with Russia and the risk of further reductions or stoppages in the flow of natural gas, which would trigger a major recession across the bloc.  China’s economy grew by just 0.4% in the second quarter (year-on-year) as the country struggled with the consequences of ongoing lockdowns and stress in the property market.

The Governor of the Bank of England promised to do “whatever it takes” to bring inflation back down towards the 2% target, meaning that larger interest rate rises may be necessary.  The ECB finally kicked off its hiking cycle with a 0.50% increase to the deposit rate, thereby lifting it out of negative territory.  At the same time, the bank provided more detail about its “anti-fragmentation” tool, designed to control borrowing costs at times of stress for more vulnerable economies.  The US Federal Reserve confirmed that, although there were signs of some weakening in the economy, controlling inflation continued to be its priority.

It was a bumper month for equity investors, which saw a return to the “buy-the-dip” mentality.  Gains in equity markets were spurred by the idea that the US Federal Reserve would be forced to “pivot” on interest rates as the economy softens and inflation recedes from peak levels.

US markets surged ahead, with the technology-heavy Nasdaq Composite index chalking up a double-digit return.  European markets also performed strongly, as did Japan.  The UK large-cap market ended in positive territory but lagged its developed market peers.  However, on a year-to-date basis, the UK is one of the few markets in the green, bolstered by its value and commodity biases. Asian and emerging market indices underperformed developed markets.  The Hong Kong and Chinese markets were depressed by fresh COVID-19 incidents.  In addition, there was nervousness around Chinese technology companies, including Tencent and Alibaba, which were fined for flouting anti-monopoly rules.

Fixed income assets enjoyed strong positive returns.  Bond yields fell as investors priced in the prospect of less aggressive monetary tightening than had been feared, amid clear signs that economies are slowing. Our recommended UK & Global Property ETF funds delivered strong returns in July of 6.8% and 7.7% respectively.

AM&A’s Model Portfolios portfolio posted positive performance over the month, returns ranged from 2.1% in our Defensive Portfolio to 7.4% in our MA Aggressive ETF Portfolio.