Multi Asset Update - July
In July, the announcement by US President Donald Trump’s administration of several trade agreements, plus the signing into law of the One Big Beautiful Bill Act (OBBBA), brought more clarity to the likely policy backdrop for investors. In combination with an upbeat start to the US earnings season (when companies reported their second-quarter results), this supported sentiment in markets. During the month, global developed market equities rose to a new all-time high, with the positive earnings season results providing a tailwind. Close to 80% of companies in the US S&P 500 index that have reported so far have beaten consensus earnings and revenue growth expectations. This is higher than the long-term average.
Emerging market equities were boosted by Greater China (including Hong Kong) and Korea in particular. Investors were encouraged by signs the Chinese economy is showing resilience, with sentiment improving and the People’s Bank of China injecting more money into the financial system. Emerging markets, which are major producers of commodities, also benefitted from price increases for iron ore and steel. Expectations of heavy spending by many major governments acted as a headwind for bond markets. However, on a more positive note, US consumer price index (CPI) inflation figures for June were slightly better than forecast, with core inflation lower than expected. While early signs of the effects of US trade tariffs are beginning to emerge, they remain limited so far. Investors appear to be anticipating a “Goldilocks” scenario – one in which economic growth picks up, fuelled by fiscal stimulus and an artificial intelligence-driven surge in productivity, while inflation stays moderate. However, with global equities trading on a price-to-earnings multiple* of 20x – well above the historical average of 16x – there is limited margin for error.
In this context, we believe maintaining well-diversified portfolios is crucial to help guard against the twin risks of a rebound in inflation – leading to significantly higher bond yields, which would mean a fall in bond prices – or a potential slide into recession.
UK
It was an uncertain start to the month for the UK, with the government having to make several concessions on its welfare reform bill. This caused bond yields to rise, as investors became increasingly concerned about the prospect of future tax rises to enable Chancellor Rachel Reeves to meet her own fiscal rules. Despite the uncertainty, the FTSE 100 broke through the 9,000-point barrier and achieved a return of 4.3%. This was mainly because of strong company results and weaker sterling, which increases the value of global companies’ overseas earnings. Amid global uncertainty, the more defensive nature of the FTSE 100 also proved appealing to investors, with valuations continuing to look cheap relative to comparable stock markets around the world.
Europe
During the month, Europe saw encouraging economic signals and cautious optimism. The European Central Bank (ECB) kept interest rates on hold, as widely expected, and year-on-year CPI inflation was confirmed at 2%, which is in line with the ECB’s target. A new US-European Union (EU) trade agreement was signed, with a 15% tariff on most European imports into the US. This supported market sentiment, because it was half the 30% tariff previously threatened by Trump. Europe’s earnings season has been mixed so far, with strong results from banks offset by weaker performance in the consumer and luxury sectors due to weaker demand, particularly from China.
US
In addition to the EU trade agreement, the US signed a series of other deals with key partners including Japan, Indonesia and the Philippines. The overall effect was to ease tariff tensions. Meanwhile, as mentioned above, the positive earnings season – with strong technology and artificial intelligence-driven results – further boosted investor sentiment. However, tariff concerns still linger, and the prospect of rising costs tempered forward guidance from companies in several sectors. The central bankers of the US Federal Reserve kept rates on hold, with Chair Jerome Powell saying they are waiting for more information about the impact of tariffs.
Japan
Japanese equities rallied during the month. The Bank of Japan held its policy rate at 0.50% at the July meeting, after a unanimous vote. Governor Kazuo Ueda pointed to the trade deal with the US as a positive. He also reiterated that future rate rises will depend on whether underlying inflation is likely to settle around the bank’s 2% target. Investors are now eyeing October as the potential month for a rate rise.
Asia Pacific (excluding Japan)
Asia Pacific (excluding Japan) equities delivered strong gains during the month, with the MSCI AC Asia Pacific ex Japan index rising 5.8% in sterling terms. Performance was broad-based across the region, driven by improved global risk appetite, strong earnings from the region’s technology and financial sectors, and stabilising economic data from China. Taiwan, South Korea and China led gains, while India lagged on weaker domestic sentiment. Investors largely looked through geopolitical risks, focusing instead on economic recovery signals and artificial intelligence-driven optimism in the technology arena.
Emerging Markets
Emerging market equities also delivered strong returns in July. The MSCI Emerging Markets index rose 4.3% in sterling terms, outperforming non-US developed markets. This return kept the asset class in the top spot for performance year to date. It was driven by renewed confidence in China, India and Latin American markets. Investor sentiment was buoyed by easing global trade tensions, clarity about central bank policy and resilient flows into Asian and Latin American equities.
Bonds
Investors were permitted a short period to try and forget about the unorthodox international trade policies coming from the White House, as delays and trade negotiations by the Trump administration raised hopes of a more positive outlook. The true destination remains unclear, but what we have been able to do in the weeks since April’s ’Liberation Day’ is gather a little evidence from the economic data. What we seem to know so far is that the effects of tariffs are showing up just about everywhere. They are evident in domestic US consumer prices, in international export price data and in company margins on both sides of the trade. In essence, the effects of tariffs are being spread throughout the supply chain. This is probably the best outcome economically, but it makes the job of setting monetary policy, and by extension predicting it, rather tricky. For this reason, bond markets continue to gyrate, trapped between the bulls and the bears, and the hopeful and the fearful.
