Monthly Commentary – June

After their slump in May, the world’s equity markets rebounded in June. Sentiment was boosted by the prospect of additional central bank stimulus and a more conciliatory tone in the Sino-US trade talks. As the month drew to a close, investors focused on the G20 summit in Osaka where the US and China agreed to restart trade negotiations and to not increase tariffs further. Meanwhile, heightened tensions between the US and Iran, after the downing of a US drone and the damaging of oil tankers, culminated in US threats of military retaliation and new sanctions.

An interest rate cut in the US took a step closer after the Federal Reserve removed the word ‘patient’ from its commentary. Most analysts now expect a cut at July’s rate-setting meeting. The European Central Bank indicated that additional monetary stimulus could be forthcoming in the Eurozone too. As investors reacted to the prospect of lower rates and a deteriorating economy, bond yields fell sharply. French government bond yields turned negative for the first time, joining Germany and Japan in offering sub-zero returns.

The strongest equity returns in sterling terms came from North America. The S&P 500 hit a record high, boosted by a renewed appetite for risk and a surge in big technology stocks, despite moves to increase regulation during the month. In Latin America, Mexico averted US tariffs by agreeing to stem the flow of illegal migrants. The region’s stock markets benefited from the ‘risk on’ environment. With a relatively muted positive return, Japan was the main laggard. The UK also trailed other markets. Boris Johnson emerged as the frontrunner to succeed Theresa May as prime minister, which some perceive as increasing the chances of a no deal Brexit.

The materials sector was exceptionally strong, helped by trade optimism and a surge in the gold price. Information technology also outperformed as hopes of looser monetary policy encouraged speculative investors. Among the weakest areas were the traditionally defensive sectors: utilities, consumer staples and telecoms.

The oil price rose as tensions in the Middle East threatened to constrain supply. The prospect of further central bank stimulus boosted gold, which is seen as a reliable store of value and tends to do well when cash looks less attractive.

A prime beneficiary of the higher gold price is Barrick Gold, the most recent addition to our gold exposure. Its shares rose by more than 25% in June. One of the world’s largest gold miners, Barrick has been central to the recent consolidation in its sector, having merged with Randgold Resources and bid for Newmont Mining. The Randgold merger should increase production and lower costs. The Newmont bid, although not consummated, culminated in a joint venture between the two companies’ Nevada operations, offering significant cost savings. We believe the merits of gold are currently overlooked and Barrick, with its strong operations and robust balance sheet, fits well into our portfolio. Barrick exemplifies our contrarian call on gold – a view that is paying off.

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.