Written by:
Alex Chappell
Investment Manager at Amber River DB Wood
July is a big month for corporate earnings, and in fairness this has been good (as we anticipated), and so some sectors, banking being one, have performed very well, leading markets and our portfolio’s to all-time highs
July was a strong month for portfolio returns, with all of our risk rated portfolio’s reaching all-time highs, along with several global stock markets, the UK and the US to name just two.
The year to date has been very volatile. Mr Trump’s hot air has been blowing hot and cold, and for the large part, markets have seemed unsure how to read his strategy. More recently, July saw the passing of his ‘big, beautiful bill’ as he called it, and a high level agreement with the EU to settle on a 15% tariff rate. The very thought of such outcomes early in the calendar year would have sent most economists into a spin around a pending recession, and markets would have reacted accordingly. Although, as we progressed through July, markets seemed fairly immune to the effects of these policies. July is a big month for corporate earnings, and in fairness this has been good (as we anticipated), and so some sectors, banking being one, have performed very well, leading markets and our portfolio’s to all-time highs. That said, the journey year to date has been very different. Our High Risk Portfolio fell over 14% between the months of February and April, though, so far this calendar year it has recovered to being up 6.65% at the time of writing (year to date). In contrast, our Low Risk portfolio fell by just 3% over the same period and currently sits just 1.5% or so behind High Risk, year to date. So, a similar outcome over the year so far, though with quite a different journey. For context, the US stock market (S&P 500) fell by 22% peak to trough earlier this year, though is now up 2.47% in sterling terms – quite a recovery it should be said, though also justification for our low allocation to the US so far this year.
So fast forward to July, and markets have been much more supportive of riskier assets. True, a number of trade deals have been struck, covering the UK, EU and Japan to name but a few, and talks with China are ongoing and apparently progressive. The fact that economic data has slowed, but not fallen off a cliff, twinned with sightly more clarity around some of the key policy issues, appears to have reassured investors.
Yes, spending can be helpful to economic growth, but if it is not seen as productive it can constrain policymakers in the future.
Another key factor is that interest rate cuts seem much nearer than they have for some time. Naturally lower interest rates are supportive for economies, and therefore company earnings, so as we get closer to further reductions, investors are currently being rewarded for their patience. We are expecting 2 cuts in the UK over the next 5 months.
Now it is important to note that a higher level of positivity increases the chance for things to disappoint. Things have flipped somewhat, investors are now wearing rose tinted glasses, and in our view starting to ignore some of the key risks which are unresolved. Some of these are short term, such as the unknown impact of tariff policy on US businesses and US inflation. Others are long term, such as the fiscal deficit position in both the US and the UK – which continue to widen at above forecasted rates. Yes, spending can be helpful to economic growth, but if it is not seen as productive it can constrain policymakers in the future.
As markets have recovered, we have therefore started to become more cautious on the outlook. It is not that things don’t look better than they did in April… they almost certainly do, though it does unnerve us that some of the key risks are not being sufficiently factored in.
From a portfolio perspective that continues to mean a laser focus on diversification across the portfolio range. Our equity bucket is geographically spread, with a much lower focus on the US than our peers, and a greater weighting in high quality, high dividend paying businesses. In addition, we remain overweight in bonds, which continue to offer income yields of circa 6% per annum, as well as holding a number of alternative positions which are offering significant diversification benefits. Our cash weighting is reasonably low, but that is more an output of the number of good individual investment ideas we have, rather than an overall optimistic stance. We feel we are well positioned for a slowdown economically, and that our fixed income portfolio still has bags of value to deliver in the months ahead.
All together we are close to fully invested but remain heavily diversified and ready to change. There is no doubt July saw an increased appetite for riskier assets, though we remain locked in to the challenges they will likely face moving forward. Many of the risks are being downplayed, and have certainly not disappeared, so as ever its important we remain active and vigilant in our pursuit of providing clients with a profitable forward path.
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Our team at Amber River DB Wood includes Chartered financial planners who look after clients across the East Midlands and beyond.
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