Monthly commentary

Portfolio Performance

At 7IM, we believe that taking a long-term view is essential when investing. We can’t always avoid the short-term bumps and shocks that the financial world has in store, but a well-diversified portfolio goes a long way towards smoothing out some of the journey. The long-term nature of our strategic and tactical process is a good complement to the Succession Matrix Expected Parameters.

Source: 7IM/FE. Annualised return is defined as ‘Ann. Return’ in the performance table above and is as at end July 2022. The extreme COVID-19 related drawdown at the start of 2020 means performance should continue be viewed with caution. Portfolios are towards the lower end of their ranges for the five-year returns, with the more defensive end struggling a little in the face of low interest rates.

Summary

The past month has seen more than its fair share of change - both in politics and in markets. We had Boris announce his resignation; the shocking assassination of former Japanese Prime Minister Shinzo Abe; and the resignation of Italian PM, Mario Draghi.

Market moves during the month were a great illustration of how market expectations can be more powerful than what is actually going on in the world when determining asset class returns.

The ECB delivered its first rate hike in a decade, the Fed increased rates by 75 basis points, and recession fears gripped treasury markets as the US yield curve inverted between 2 and 10 years. There were also negative signs in other key indicators. Real wage growth was negative, largely due to inflation-beating expectations, fears that Russia would shut off supplies gripped commodity markets once again, and July’s PMIs suggested that the US is going into contraction.

Despite all of these negative indicators, markets began to focus on the prospect of interest rate cuts next year, with most asset classes rallying and longer duration assets performing best.

The graphic below from JP Morgan shows asset class and style returns. With the exception of emerging markets continuing to underperform, there has been an almost perfect flip in which asset classes have performed best.

Source: Bloomberg Barclays, FTSE, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. DM Equities: MSCI World; REITs: FTSE NAREIT Global Real Estate Investment Trusts; Cmdty: Bloomberg Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in US dollars. Past performance is not a reliable indicator of current and future results.

Factor performance fed through to regional returns as you would expect, with the S&P rallying over 9% for the month.

Source: FTSE, MSCI, Refinitiv Datastream, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency, except for MSCI Asia ex-Japan and MSCI EM, which are in US dollars. Past performance is not a reliable indicator of current and future results.

All of this highlights the importance of what the market is pricing in. If you asked someone with a blank piece of paper what will happen to markets if rates rise, they would most likely say the opposite to what has happened. So, as an investor, forming a view on whether the market is adequately pricing in changes is just as important as taking a view on the changes themselves.

Actions taken

During July, no major changes were made to the AAP portfolio.

Core views

At 7IM, we have a number of long-term core views that help to guide our investment decisions and allocations within portfolios:

Over the next twelve months, we think markets will generally move sideways with volatility. In this environment, it is important to rely on a stable identity. Economic uncertainty creates fear and investor sentiment tends to overreact to economic turning points. Going forward, we believe that:

• A global manufacturing downturn is unavoidable… but the service sector should be resilient
• Inflation will fall eventually… but the short-term outlook is less clear
• Central bankers are under pressure… so the interest rate outlook changes frequently
• Corporate profit margins have peaked… but most companies will keep growing earnings

Source: 7IM

And so, investors are starting to worry about what’s next for financial markets. The next economic data aren’t likely to stabilise until the end of 2022, so ‘sideways with volatility’ is the most likely scenario for the next few months.

We know our investment identity helps us to deliver in just these kinds of environments. We have positions that can generate returns despite this volatile backdrop.

Source: 7IM. *Includes Short Term Sterling Bonds **Includes Convertible Bonds ***Includes Infrastructure