Month ending 30 June
Trade tensions weighed on equity performance, with only the US delivering positive local currency returns. GBP weakness boosted US returns in GBP terms (+1.3%) and translated to modest positive returns for European equities (+0.2%). However, yen strength exacerbated the decline in Japan (-1.8%). The UK delivered -0.1% while emerging markets were the laggards, declining -3.7%.
Local currency bond performance was mixed. European government bonds recovered strongly, gaining +1.4%, and US government bonds edged +0.1% higher. In the UK, both Gilts (-0.6%) and corporate bonds (-0.3%) declined.
GBP continued to decline against USD (-0.7%) and EUR (-0.6%), but strengthened versus JPY (+1.1%).
Oil appreciated strongly in June, gaining +10.6% in USD terms, while gold weakened -4.2%.
While markets have recovered strongly in the last three months, volatility remains high, and we recognised this may continue, as the risk of a potential trade war continues to worry investors.
Nonetheless, the fundamentals remain robust. Global growth continues but it is becoming less synchronised, with the US decoupling from the rest of the world. While global economic data may show signs of slowing, corporate earnings growth continues to be very resilient and we expect solid economic and profits growth to continue for now, albeit at a slower pace.
In the current economic climate, we still believe that shares can continue to outperform bonds, although we expect more modest returns and higher volatility than 2017. We remain slightly overweight equities and underweight bonds.
At a regional equity level, we remain overweight the US, Europe, Japan, and select emerging markets. Given the less attractive outlook in Europe at the moment, we have trimmed our exposure.
We remain underweight the UK, where uncertainty remains high, but we have added modestly. The UK index continues to be attractively priced, with an above average dividend yield, offering income, and exposure to sectors that do well in the later stages of the cycle.