12/08/20192 mins

Monthly Commentary – July

The world’s stockmarkets continued to rise in July. The start of the second-quarter earnings season played a part, as many companies beat analysts’ muted expectations. But the main factor was the widely anticipated development on the last day of the month, when the US Federal Reserve cut its benchmark interest rate for the first time since 2008.

Although there had been speculation about a 50 basis point cut, the Fed opted for a reduction of just 25 basis points. The move was accompanied by some hawkish guidance from Fed Chair Jay Powell who described the cut as a “mid-cycle adjustment”, implying that further easing is not a given. In response, the US stockmarket dipped in the closing hours of the month. Other major central banks indicated that they could take similar action. This came as concerns mounted about the health of the global economy and as trade negotiations between the US and China appeared to falter.

Those trade negotiations had resumed in Shanghai towards the end of the month. However, the fragile truce, established at the G20 summit at the end of June, soon came under strain as President Trump spoke out against what he saw as China reneging on its promises to buy US agricultural products.

In the UK, Boris Johnson’s appointment as prime minister heightened concerns about a no deal Brexit, given his repeated statements that the UK will leave by 31 October. In consequence, sterling had its worst month since October 2016.

The anxiety over Brexit meant that the UK and European markets were relatively weak, although they still produced positive returns. The strongest market was the US, helped by the robust performance of its technology stocks. Japan and Latin America also did well, with the latter boosted by progress in Brazil’s pension reforms.

The best performing sectors were information technology and communication services. These segments are home to many of the fashionable growth stocks that typically find favour when lower interest rates are expected. After the US agreed to lift its ban on US companies selling components to Chinese telecommunications giant Huawei, semiconductor manufacturers also performed well. The main laggards were economically sensitive sectors such as energy and materials, as investors continued to worry about the global growth outlook. Despite heightened tensions in the Persian Gulf, macroeconomic pessimism drove the oil price down over the month.

Among the companies reporting solid results in July was GlaxoSmithKline, one of our “ugly duckling” investments. The company has been undergoing a transformation under the leadership of Emma Walmsley, since her appointment as chief executive in 2017. Having merged its well-known consumer brands with those of its US counterpart Pfizer, Glaxo is refocusing on its core pharmaceuticals business. It is seeking to reinvigorate growth by boosting the productivity of its research. While these changes take shape, the shares reward us with an attractive dividend.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.