Investment Comment July 2021

Sterling denominated returns of major indices	H1 2021 (%)	Year 2020 (%)	Year 2019 (%)	Year 2018 (%)	Year 2017 (%)	Year 2016 (%)
Equities
UK	11.2	-11.8	18.4	-9.8	13.0	17.4
World (ex UK)	11.1	14.0	22.0	-3.5	13.3	29.3
Emerging Markets	6.3	14.7	13.9	-9.3	25.4	32.6
Fixed Interest
Overseas Bonds (unhedged)	-4.5	5.6	2.7	5.1	-2.3	21.9
Corporate Bonds	-2.5	8.0	9.5	-1.6	4.4	10.6
Property	7.0	-9.5	22.4	-7.8	8.1	-3.0
Cash	0.0	0.0	0.0	0.0	0.0	0.0

Source: MSCI UK IMI, All Country World Ex-UK, Emerging Markets, UK IMI Liquid Real Estate, Cash Equivalent (GBP 1W LIBOR -1%); BofA ML: Global Broad Market+, Sterling Non-Gilts. Total Return, Sterling adjusted.

 

Markets were relatively calm in June, as equity markets in all geographies except the UK inched up. Bonds likewise rallied, with longer dated developed market prices recovering most strongly following weakness earlier in the year. This marked a partial shift in market focus from concerns around inflationary pressure and tightening monetary policy. The strong rotation from long duration ‘growth’ assets into more cyclical sectors continued to unwind, with investors seemingly comfortable with Central Banks’ assessment of future inflation as ‘transitory’.

The United States led the way in June, as the MSCI US index rose 5.48%. The Federal Reserve’s suggestion of rate rises and potentially slowing its asset purchase programme was relatively well received by investors in both equities and bonds. While it triggered short term rotations, major indicators of market sentiment such as the volatility index, implied inflation from inflation-linked government bonds, and equity futures signalled calm. US jobs data aided the overall economic outlook, as the US added 559,000 jobs in May and an expected further 690,000 in June, taking the unemployment rate to 5.7%. President Biden also initiated a much-debated $1 trillion infrastructure spending bill, which gained bipartisan support. The bill focuses on sustainable and ‘real’ infrastructure, such as roads and bridges, and is seen as a potential stimulus to aid the recovery from the coronavirus pandemic. The Democrats will likely face stronger opposition to a much larger $4 trillion ‘social’ infrastructure spending bill proposed recently, which will focus on education, healthcare, and social welfare initiatives. Such a combination of fiscal stimulus and a tight labour market has traditionally been an inflationary force, and so informs Federal Reserve policy on interest rate rises.

The MSCI Asia Pacific ex-Japan index rose 1.42% on the month. China signalled that it will release its reserves to keep commodity prices from spiralling out of control, as factories recorded increasingly fast rises in raw material prices leading into June. Coal, copper, aluminium, zinc, and iron ore in particular are viewed as strategically important to the Chinese economy, and prices declined through the month as announcements on various commodities were revealed. However, prices rebounded somewhat in copper, aluminium and other metals when the State Reserve Bureau announced the sale of less than expected quantities to market. This episode illustrates that commodity markets are sensitive to government policy, and market dynamics are often impacted as much by geopolitics and strategy as by industrial supply and demand.

European equities edged up this month, gaining 0.49%. June provided a slew of positive data for the European economy, as the continent continued to seek a return to normality. Encouraging statistics emerged in travel, household spending, and employment, with some measures moving back towards pre-pandemic levels. In the financial economy, bond yields remained low, limiting borrowing costs to deal with the strains caused by Covid-19. Greece issued 5-year bonds at close to 0% yield in the month, underscoring investor’s confidence that the European Central Bank will act to prevent credit crises in weaker nations. During the heights of the Eurozone crisis in 2012, yields of the same 5-year bond peaked around 60% and as recently as 2015 topped out above 30%, as investors believed the Greek government was on the verge of default. Now, only Italy has positive, albeit only nominally above zero, yields on its 5-year bond. While this enables European nations to borrow cheaply to combat the pandemic, it has also caused an explosion of debt, and many formerly distressed economies have government debt levels in excess of 100% of GDP.

The UK was the only equity market in negative territory, losing 0.40% over the month. The UK’s housing market continued to grow in June, registering the fastest price growth figures for 17 years, as buyers sought to complete purchases before the end of the pandemic stamp duty suspension. The Bank of England signalled that inflation was likely to run above 3% for a short period but said that it wouldn’t raise interest rates pre-emptively. Departing BoE Chief Economist Andy Haldane warned that inflation would near 4% by the end of the year, posing policy problems not just for monetary but also political and fiscal policymakers too. Even so, British business looks set to capitalize on the country’s rapid vaccination programme as all social distancing rules are set to be removed on July 19, according to incoming Health Secretary Sajid Javid.

Japanese equities performed well, with the MSCI Japan index up 2.15%. However, corporate Japan continued to grapple with incursions by activist investors. Toshiba’s chairman, Osamu Nagayama, was removed from the position by shareholders after an independent inquiry was published by lawyers detailing the links between Toshiba’s board, the country’s $1.6 trillion pension fund, and its Ministry of the Economy, Trade, and Industry. The scandal has even drawn in Prime Minister Yoshihide Suga, who was receiving updates on efforts to keep members of Toshiba’s board in place, against shareholder resolutions to remove them. The previous head of the pension fund allegedly used his influence to prevent Harvard’s endowment fund from backing key proposals to remove board members, instead securing an abstention from the US university. This episode highlights the ongoing corporate governance changes afoot in Japan, as previously the re-election of such a well-connected and respected business leader would have been customary.

The MSCI Emerging Markets index rose 1.66% in June. Many Emerging Market central banks began tightening monetary policy, increasing interest rates in order to cool down overheating economies. Countries such as Brazil and Russia have benefitted from sharply rising commodity prices and are among those seeking to raise interest rates.  These economies face a potential double hit if the reflation trades in commodities reverse and US yields rise. There is also a danger that the lagging vaccination rates in emerging markets could slow or even derail any recovery. Growth in advanced economies is above that of emerging markets since the beginning of the pandemic, widening the gap between those who have the capacity to deal with the virus both economically and epidemiologically, and those who do not have capacity.

As always, Cantab recommends diversified portfolios across geographies and asset classes to seek returns and mitigate risk.

Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.