Duncan Lawrie Online ▼

Posted on: 06 August 2015

On a relative basis, July was a good month for UK stocks, finishing up 2.4%, and making up for some of the underperformance in June. This was ahead of the rest of the world, where equities in aggregate were up by 1.4% in sterling terms.

On a sector basis, the pharmaceutical, tobacco, and household goods sectors were the most significant contributors to returns, as investors favoured their resilient earnings streams, while mining, oil & gas producers and beverages were the biggest negative contributors.

Emerging markets continue to underperform developed markets, from both an economic perspective and a market perspective. Brazil and China, two of the powerhouses of Latin America and Asia respectively, have hit a soft period of economic growth and investors are in fear of the medium-term prospects of each region.

As China moves from an investment-led model of growth to one with a greater balance between consumption and investment, its economy has to digest large amounts of debt issued since the Financial Crisis, while at the same time opening up to investment from the rest of the world. This is a slow process, and the Chinese Government has had mixed success so far. July saw another correction in the Chinese equity market, following the introduction of share sale restrictions.

Brazil has been caught at the sharp end of China's slowdown and, despite having only 11% of its GDP linked to exports[1], the drop in commodities prices has had a detrimental effect on the Brazilian real, which has fallen by 33.6% against the US dollar over the last 12 months.

It seems Brazil has made its own problems worse through poor management of the economy by the present Government, led by Dilma Rousseff. During July, S&P downgraded its outlook on Brazil's credit rating to 'Negative' from 'Stable'. This means there is a chance of a full downgrade to a rating that would be below investment grade. Joaquim Levy, Brazil's finance minister, is seeing resistance in Congress to his pro-reform agenda, which has disappointed the credit ratings agencies. Brazil, like much of Latin America, has a great deal of potential, but the road to realising this potential is likely to be long and bumpy.

We retain a diversified exposure to emerging markets within client portfolios, seeking out collective funds that have the potential to outperform over the investment cycle.

Other highlights in July included Greece, which is now technically classified as an emerging market. Greece's Prime Minister, Alexis Tsipras, secured the support of Greek MPs to begin a series of reforms required by the country's bailout agreement, while the IMF decided to pull its contribution to the next bailout, citing a poor pace of reform and high debt levels. We continue to monitor the situation and its broader impact on Europe.

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All data has been compiled by Duncan Lawrie from sources believed to be reliable. Full details of sources are available on request.
Information provided in the above articles and any opinions expressed are for general use only. You should always take specific advice to suit your personal circumstances before taking any action. Errors and omissions excepted.
The value of investments and income generated may fall as well as rise, and investors may not get back the amount invested. Past performance is not a reliable indicator of future results.


[1] WorldBank, 2010