IG Investments: July markets review
Low equity market volatility and stock markets at or near record highs may be causing a bit of complacency among investors. Beneath the surface, there is much going on, with central banks thinking about tightening their policies and currency movements starting to have an impact on portfolio returns.
|Headline asset class||Statistics for July (GBP returns)|
|Equities||FTSE All Share +1.2%, S&P 500 +0.65%, MSCI World +0.7%, MSCI Emerging Markets +4.5%|
|Fixed income||UK ten year Government bond yield 1.23%|
|Currencies||GBP/USD +1.46%, GBP/EUR -2.1%, GBP/JPY -0.48%|
Global equity markets continue to flirt with new highs, with the S&P 500 reaching a record close in late July. However, looks can be deceiving as currency is having a real impact on returns: year to date the US index, the S&P 500, is up by 11.6% in US dollar terms, but just 4.4% in sterling terms and is actually down 0.4% in euros. Emerging markets continue to perform well, with the weakening USD and strong economic growth from China (an increase of 7.4% in July) driving the emerging markets index to a 17.5% return year to date.
Aside from currency movements, developed markets have been quiet. The VIX index, the so-called ‘fear gauge’, continues to fall to new lows.
The real party is in cryptocurrencies with a remarkable 1025 now available for individuals to chance their arm on. But which will be the future winners here or indeed will there be a winner? With daily stories of exchanges being hacked, and the majority of the world’s population in the dark as to whether digital wallets are stores of value (gold has seemingly been forgotten), a genuine medium of exchange, or the most peculiar of investment bubbles, it makes sense to tread very cautiously.
We are now five years on from Mario Draghi’s speech on 26 July 2012 in which he pledged to do ‘whatever it takes’ to save the euro, and investors have a lot to thank him for. Since then, UK investors in the EuroStoxx 50, the index of the largest eurozone companies, would have more than doubled their money (110.3%) compared to just 59.3% in the FTSE 100. Eurozone economic data is firing on all cylinders, with business surveys looking especially strong in Germany.
Less remarked upon has been the performance of European High Yield Bonds, where yields have come down from 9.4% five years ago to just 3% at present, making it very cheap for companies to refinance their debt. This is an extraordinary low prospective return, given that the EuroStoxx 50 equity index has arguably superior credit quality, a higher yield of 3.4%, and the prospect of long-term capital growth. The big question is whether the European Central Bank (ECB) will continue its bond purchase beyond the end of 2017 now that the economy appears to be growing strongly. German government bond holders are already making small losses as the fear of deflation rescinds, and yields start to rise.
IG Smart Portfolios
The easiest way to protect yourself against future sterling strength against foreign currencies is to buy GBP-hedged exchange traded funds (ETFs), which are the backbone of IG Smart Portfolios and have the added benefit of helping to reduce portfolio volatility.
The portfolio asset allocations are positioned with the expectation that global interest rate policy will be tightened over the coming months, as even the Bank of England (BoE) is talking about the possibility of raising rates at some point. Consequently, client portfolios are positioned cautiously with respect to fixed income, with an underweight to duration. This means that if interest rates do rise, then short-term losses in the portfolios will be modest. Equities are still the asset class of choice for now, and there is scope to raise the equity allocations a bit higher if an attractive opportunity presents itself.