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Monthly markets review - July 2021

August 10th, 2021 Back To News & Insights

Highlights

  • Developed market equities gained in July but emerging markets saw a sharp decline as China announced new regulations for the education sector.
  • Government bond yields declined (meaning prices rose), as concerns over the Covid-19 Delta variant and some signs of global growth moderating caused investors to shift toward safer investments.
  • Commodities gained, led by the industrial metals component.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US equities ended July higher again, despite contending with intermittent volatility. Fears over Covid-19 cases - in the US and globally - called into question the sustainability of economic momentum. In addition, the Chinese government intensified its focus on regulation, particularly in the tech and private education sectors, which introduced further uncertainty. However, both factors were ultimately overshadowed by the strong earnings season and equities rose.

China’s ongoing drive to assess and control the societal influence of large companies hit the New York-listed shares of ride-hailing app Didi hard in early July. The broader implications of the tighter regulatory scrutiny sent ripples through US equity markets that unsettled investors. Adding to these concerns was the rise in cases of the Delta variant of Covid-19.

Even so, data continues to paint the US economy as healthy. In the July Federal Reserve (Fed) meeting, the Fed acknowledged that the economy was making “progress” in-line with its mandate but said that tapering (i.e. slowing the pace of asset purchases) would require additional improvements – particularly in the labour market. It also acknowledged that there was upside risk to the inflation outlook, but retained the view that this would be transitory. Consumer confidence as measured by the Conference Board stayed at high levels in July unchanged from previous months, although the University of Michigan consumer confidence figure dropped to a five-month low as consumers cited inflation.

Europe

Even so, data continues to paint the US economy as healthy. In the July Federal Reserve (Fed) meeting, the Fed acknowledged that the economy was making “progress” in-line with its mandate but said that tapering (i.e. slowing the pace of asset purchases) would require additional improvements – particularly in the labour market. It also acknowledged that there was upside risk to the inflation outlook, but retained the view that this would be transitory. Consumer confidence as measured by the Conference Board stayed at high levels in July unchanged from previous months, although the University of Michigan consumer confidence figure dropped to a five-month low as consumers cited inflation.

Meanwhile, the vaccine roll-out accelerated with Spain, Italy and Germany all overtaking the US in terms of the share of people fully vaccinated against Covid-19. This boosted hopes that rising cases of the Delta variant would not necessarily lead to further lockdowns and restrictions on economic activity.

Eurozone business activity grew at the fastest rate for 21 years in July. The flash composite purchasing managers’ index reached 60.6, compared to 59.5 in June, with services activity offsetting a slower pace of manufacturing growth. (The PMI indices, produced by IHS Markit, are based on survey data from companies in the manufacturing and services sectors. A reading above 50 signals expansion.)

UK

UK equities rose over July, although many defensive large cap overseas earners performed poorly, partly due to sterling strength against both the US dollar and the euro. It was a volatile period as markets initially sold off in the first part of the month amid ongoing fears around the global growth outlook and the spread of the Delta Covid-19 variant.

As appetite for risk returned, however, and markets bounced back in the second part of the month, many economically sensitive areas of the market performed well. Defensive sectors, meanwhile, struggled to make any progress during the second half of July. As a result, defensives underperformed economically sensitive areas over the month as a whole.

The market recovered well in the second half partly on the back of some very strong Q2 results, including from the basic materials, financials and energy sectors. Meanwhile, economically sensitive mid-cap equities performed very well over the month as a whole – ongoing merger and acquisition activity was partly a factor here.

The Office for National Statistics confirmed that the UK economy grew by 0.8% in the month of May, well below consensus expectations of 1.5% growth, and much slower than the revised 2% growth achieved in April. Supply shortages and production bottlenecks were seen as an issue, with manufacturing output contracting by 0.1% in May, following no growth in April.

Asia

Asian equity markets fell in July as concerns over the delta variant of Covid-19 took their toll whilst China’s large regulatory changes and increased scrutiny of its internet giants impacted sentiment. The materials sector was the only positive for the region.

Chinese equity markets fell sharply in July, dragging down emerging markets which underperformed developed markets. A large drop at the start of the month was the product of newly imposed regulations against the internet sector. This included the ride hailing giant, Didi, being removed from the app store amidst updates to cybersecurity rules. Furthermore, there was a crackdown on the after-school tutoring industry which triggered widespread markets concerns.

Hong Kong equity markets were down, nevertheless outperforming the broader Asia region. This drop was due to the ramifications of the stricter regulatory measures imposed by Chinese authorities on the education, internet, healthcare and property sectors, with technology companies particularly impacted. Tencent, Alibaba and Meituan – three Chinese internet giants – suffered the greatest share price weaknesses as they faced the heaviest repercussions.

Korean equities also registered losses after a winning run. The fall can be largely attributed to increasing Covid-19 infection rates, worsening consumer sentiment and intensifying US-China disputes which dampened investor confidence. Despite the Bank of Korea maintaining the base interest rate at 0.5%, July’s Monetary Policy Board (MPC) meeting indicated the upside risk of May’s inflation outlook.

Emerging Markets

Emerging markets (EM) lagged in July and underperformed developed markets. Given the region’s slower vaccination rate, it was impacted by fears around the repercussions of the delta variant on growth and mobility. This uncertainty was also felt by investors holding Chinese equities in the context of tightening regulations, a shift in focus towards “common prosperity” (signalling a changing social welfare landscape), and geopolitical tension. Europe, Middle East and Africa (EMEA) was the best performing region, followed by Latin America, with Asia performing the worst.

Latin American equities were down for the month as Argentina and Mexico posted the strongest returns. Colombia, Chile, Brazil and Peru were laggards as Latin American currencies depreciated against the US dollar. Brazilian equities faced headwinds following concerns around the delta variant, while Mexican equities gained ground due to the success of telecommunications. One of the key drivers of Argentina’s strengthening equity markets was the government’s imminent signing of a decree that would enable the Pfizer, Moderna and Janssen vaccines into the country to ramp up vaccination rates.

India markets were sluggish in July, trading flat, however they outperformed the broader markets. As of the end of July, c. 27% of the population had been administered a Covid-19 jab, with estimates suggesting that by the end of the year this would reach c. 62%.

Only the materials sector in EM posted positive returns in July thanks to a strengthening of commodity prices, while conversely the communication services and consumer discretionary sectors detracted from performance.

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