Investment update for July 2021
Olympics, delta and interest rates
The Delta variant of COVID-19 continues to spread widely, including large numbers of new cases in the US and UK, but to date deaths from COVID have not risen as sharply. As restrictions are eased in response to vaccination levels, global economic activity continues to rebound and World equities again produced a positive return in July.
In the US, business sentiment remains at elevated levels, including increasingly positive sentiment in the services sector. Corporate earnings reported in the US have been particularly positive to date, with the large proportion of stocks that have released earnings beating analysts’ expectations. US equity markets continued to perform strongly in July and outperform the World index.
Business sentiment and activity is improving in Europe, as lockdown restrictions are eased, and economic growth improves. However, European equities were broadly flat over the month.
Japanese equities were negative in July, despite the opening of the Olympics in Tokyo, which are effectively a spectator-free event given government restrictions. COVID-19 new cases are reaching new highs in Japan, while vaccination rates lag leading developed markets.
Australian equities produced a positive return for the month, despite the implementation of lockdowns in response to COVID-19 outbreaks that will likely result in a contraction in economic growth. The positive return was driven by the Resources sector that recorded large gains. Despite the iron ore price falling from recent peak levels, other commodity prices such as copper and specifically the price of coal have risen significantly.
Emerging markets equities were negative over the month, driven by the material negative returns in Chinese equities. Chinese equities were impacted by regulatory changes in the education sector that follow ongoing intervention in the Technology sector. In addition, economic growth in China is weakening, including a slowdown in growth of infrastructure and property construction activity.
The US Federal Reserve kept interest rates unchanged and reiterated its support for the current stance on monetary policy remaining accommodative, although some Committee members made statements that suggest interest rates could start to rise earlier than expected. Inflation data showed a sharp spike up over the last 12 months, both a function of the base effect of the initial COVID-19 downturn, as well as increasing energy prices and supply chain constraints.
The European Central Bank released its strategic review in July, including adopting a symmetric 2% inflation target over the medium term compared to the previous below, but close to, 2% target. This is consistent with announcements from other central banks, indicating a willingness to support inflation at slightly higher levels than in the recent past.
Domestically, the Reserve Bank of Australia (RBA) left the cash rate at 0.10% and retained the target for the April 2024 government bond, which means the maturity of the yield target will naturally decline from three years over time. The RBA stated that its central scenario for the economy is that conditions to raise rates will not be met before 2024.
Bond yields fell over the month producing solid positive returns for government bonds. This was somewhat inconsistent with the improving economic growth, higher inflation and expectations that central banks would therefore raise rates earlier than had been expected. Returns from corporate bonds were somewhat lower, as credit spreads increased a little in July.
Listed infrastructure and property stocks produced small positive returns, with valuations supported by the fall in bond yields.
Please view our full investment commentary brought to you by our advisers – Frontier – for a more in depth analysis of market conditions this month. The monthly commentary can also be viewed on YouTube.
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