Monthly Commentary – July 2021

As investors digested the quickening pace of Covid-19 infections and the potential repercussions for monetary policy and economic recovery, the world’s equity markets gyrated in July. Despite there being considerable turbulence along the way, in aggregate, markets were little changed over the month.

Driven by the more infectious Delta variant, a surge in Covid cases led some to question how quickly normal activity would resume. Nevertheless, the rapid pace of vaccinations in the UK meant that many restrictions were lifted in July. We believe that the road to recovery will not be easy, but that the direction of travel is clear. Our portfolio contains companies that are set to benefit from recovery, though importantly, we see potential for them to sustainably increase earnings, not merely recover to pre-pandemic levels.

In the US, inflation data was again higher than expectations, rising at the fastest annual pace since 1991. The Federal Reserve continued to argue that an elevated pace of price rises would prove temporary but admitted that they were closer to achieving the conditions necessary to begin withdrawing its ultra-accommodative policy. In Europe, the European Central Bank strategy review, effectively allowed inflation to rise above the previous ceiling of 2% over the medium-term. We expect inflation to prove more persistent than many currently assume.

China’s apparent policy shift to increase restrictions on certain sectors caused significant volatility in markets over the month. The move appears to be particularly focused on technology companies – many of which suffered significant share price falls in July. We have long considered tightened regulation an inevitability as digital industries mature. There is a growing push from regulators around the world to appropriately tax and supervise technology businesses and we believe that this threat is not yet fully recognised.

Second-quarter earnings reports drove returns for many stocks. The strongest gains came from the healthcare sector, followed by information technology and materials. Energy recorded the weakest returns as Opec reached an agreement to increase production. Meanwhile, consumer discretionary and financials lagged on tempered hopes for the recovery and depressed bond yields. Europe and North America were the strongest regions. Asian indices were badly hit by China’s technology crackdown.

One of our best performers in July was PageGroup, in which we initiated a position earlier this year. Based in the UK, PageGroup is one of the world’s leading recruitment firms, with operations in 37 countries across Europe, North America, Latin America and Asia. The labour market has been depressed by the pandemic, and a normalisation of activity should provide a tailwind for fee growth. Results announced during the month confirmed strong momentum, resulting in an improved profit outlook for this year.

We are also looking beyond the pandemic-driven rebound. The company’s longer-term strategy involves growing organically, expanding into new regions, industry sectors and professional disciplines. PageGroup’s strong balance sheet makes the business well placed to navigate downturns, grow the business and return cash to shareholders.

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.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.