Markets have been steady in July with many developed economies continuing their strong start to the year. The focus this month remained on central bank decisions and economic data stemming from China’s fiscal and credit policy. We are yet to see the full effect of China’s stimulus package but we expect it to support growth not only in China but throughout the rest of Asia and Europe.


It is unclear how the UK’s new Prime Minister, Boris Johnson will affect future negotiations with the EU. The added threat of his willingness to walk away with a no-deal has shifted the value of the pound even lower against the US dollar, as markets are beginning to price a no-deal as a realistic outcome. In addition, the perceived likelihood of another general election has increased over recent months, giving yet another reason to deter global investors from UK equities. We remain cautious and we are positioning our portfolios to minimise volatility by reducing our UK equity exposure until more clarity emerges after Boris Johnson restarts conversations with the EU over the withdrawal agreement.


Despite uncertainties created by trade disruption in the US, the S&P500 and NASDAQ both reached record highs at close on 26th July, as they were boosted by the prospect of interest rate cuts. On 31st July, the Fed reduced interest rates by 0.25%. It was the first time in 11 years that the Federal Reserve has cut interest rates as they hope to squander the first signs of financial distress and bring a recovery to global markets. The Fed chair Jerome Powell suggested that the reduction in interest rates does not signal the start of a “lengthy cutting cycle” which brought some disappointment to equity investors. Unfortunately, this wasn’t enough for Mr Trump, who’s immediate comment was that Jay Powell (Fed Chairman), had “let us down” by failing to cut rates further. The next day, a new tariff threat against China was announced – 10% on all remaining Chinese import worth $300bn and all markets fell significantly. Low interest rates have supported asset price rises for the past couple of years, so it appears that the US president is trying to influence the Fed to cut the rates further by issuing new trade war threats which damage the global economic outlook. Our Fidelity US Index fund was our best performing fund in July achieving returns of 7.6%.


Brazil’s promised pension reform bill passed a crucial legislative hurdle in July, which is widely seen as essential to restore confidence in the Brazilian economy. The bill that raises the retirement age to 65 for men and 62 for women, would create savings in excess of $250bn over the next 10 years. It still needs to be approved in the Senate, where it would be voted on twice, but confidence remains that the reforms are still on track.

China’s future is somewhat controlled by the United States. The threat of tariffs encourages Chinese stimulus to support their economic outlook. China’s surrounding neighbours benefitted as companies have either announced or are considering moving production facilities in order to avoid the current tariff charges. The stimulus will take some time to feed through to their economic data and a sharp fall in the value of the Renminbi would lead to further disputes with the US over currency manipulation.


Although economic data is deteriorating throughout Europe, equities were given some support when the ECB’s Governing Council used its July meeting to send strong signals to the market that a stimulus package is coming. It is likely that the announcement of rate cuts or the resumption of QE will come at their September meeting after more clarity from economic developments are released. In other news, Christine Lagarde submitted her resignation as managing director of the International Monetary Fund following her nomination to take over from Mario Draghi as the next European Central Bank chief at the start of November.


In July, Japan has placed certain export restrictions on chemicals and other materials that South Korea’s technology sector reply upon in the manufacturing of semiconductors and smartphone screens. Japanese exporters will now have to get permission before sending the materials to South Korea, a process that takes about ninety days. The escalating tensions, including a boycott movement from South Korea towards Japanese brands that started on 5th July, as well as retailers withdrawing Japanese products from their shelves only add more friction to global supply chains which in turn, will slow the global economic outlook. In the midst of all this our Legg Mason IF Japan Equity fund returned 6.0% in July, another superior performance compared to the NIKKEI 225 which returned 1.2%.


The global economy faces many challenges and market sentiment is constantly switching from fears of a recession to prospects of re-acceleration. In this volatile period, we will be conservative and look to protect the value of your portfolios.