John Husselbee

The Multi-Asset Process

July 2017 market review

John Husselbee

Patience is a vital ingredient of our long-term investment style and as discussed in previous updates, we have been reluctant to overpay for favoured parts of the market so far in 2017.

Having kept a watching brief for much of the year however, we were finally comfortable making a number of trades in late June/early July, taking profits in some areas and finding more attractive valuations in others.

We reduced our UK equity position post-General Election for example, moving towards funds focused on mid and small caps as these companies sold off amid recent volatility. We have also rebalanced our allocations in the US and Europe, making similar shifts towards more attractively valued smaller companies. 

On the bond side, we continue to believe global fixed income portfolios are a good way to access this asset class and boosted this exposure by taking profits in gilt and European high-yield funds after strong performance. More generally, we have reduced duration across our bond positions as we look to limit correlation with equities and maximise diversification benefits.

On the macro side, more of the same was the story in July, with another month of markets largely dismissing political volatility and subdued economic growth to post record highs.

The month was busy on the policy front, with a number of central bank meetings, and markets and currencies often fluctuating in the run up to these. Most countries are now at least considering the end of quantitative easing and just as putting money into markets this way was an experiment, taking it out is similarly without precedent.

Starting in the US, the Federal Reserve adopted a more cautious tone on inflation at its July meeting, suggesting a mooted further rate hike this year might be pushed into 2018. Noting ‘roughly balanced’ near-term risks to the economic outlook, the Fed kept rates unchanged but expects to start paring back bond holdings “relatively soon” – increasing expectations this will start in September.

Meanwhile, controversy surrounding President Trump showed little sign of abating, as his plans for economic revitalisation faltered once again. Trump’s healthcare reform bill is effectively dead in its current form after more Republican senators announced their opposition to the plan, and rumours continue to circle about Russia’s possible role in the Presidential election.

Despite all this however, equity indices continued to ascend and the Dow Jones, S&P 500 and Nasdaq all hit record highs during the final week of the month. There was a fresh bout of volatility as July closed however, with disappointing earnings rattling many technology shares.

In the UK, June’s lower-than-expected inflation figure – dropping to 2.6% from 2.9% in May, largely on the back of lower petrol and diesel prices – looks to be enough to stifle calls for higher interest rates. There had been concerns about imminent hikes as certain members of Monetary Policy Committee (MPC) grow more hawkish but following the inflation drop off, a rise at the August meeting came off the table.

GDP figures also revealed a sluggish environment: preliminary estimates show second-quarter growth of 0.3% compared to 0.2% in Q1, the slowest half-yearly growth rate since the start of 2013. Commentators have predicted some improvement in the second half if inflation tails off but few are confident enough to claim growth will return to above-trend levels for at least a year.

As for Europe, policymakers also decided against raising rates or trimming back the bond buying programme, claiming early tightening could jeopardise a still-nascent recovery. European Central Bank president Mario Draghi said he is keen to avoid the kind of ‘taper tantrum’ seen in 2013 when the US began trimming its balance sheet and therefore accommodative monetary policy is still needed.

Finishing our world tour, the Bank of Japan also kept policy unchanged after its July meeting but cut inflation forecasts for fiscal years 2017/2018 and 2018/2019. The bank now expects inflation to be at 1.1% for the current year, down from its previous forecast of 1.4%, rising to 1.8% for 2018/19.

Against this backdrop, Asian equities rose to the highest level in almost 10 years during the month as declines in the US dollar, and the Federal Reserve’s signal that inflation remains persistently below its target, bolstered the outlook for risk assets in the region.

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Wednesday, August 9, 2017, 11:19 AM