European equities ended broadly flat during the period, with Food & Beverages outperforming, while Banks and Basic Resources suffered the most. The ECB did not cut its rates, acting mainly to set up a policy package for the September meeting through tasking the committees to look into options on forward guidance, while mitigating measures on rates (i.e., tiering) and the size/composition of any new asset purchases. The meeting was somewhat hard to interpret, as Mario Draghi’s comments during the press conference felt less clearly dovish than the prepared statement and his Sintra speech. The Brexit situation deteriorated further after Boris Johnson became the new UK PM on a “no-deal-if-we-have-to” platform, while, in Italy, the fiscal and political situation improved, thanks to a dovish ECB and after the EC had decided not to activate the EDP process against the country following fiscal adjustments from a friendlier Italian government.
We continue to focus on well-positioned local retail banks, which, for instance, are outperforming investment banks in the current market environment. We might increase our small- & mid-cap exposure given their future growth potential while continuing to reduce our ‘quality/growth’ bias (as it is relatively expensive), reinvesting the proceeds in ‘Value’ names.
The global stock market closed almost unchanged, with investors digesting solid Q2 results but rather light guidance for the rest of the year. Let's not forget that, in the first half of this year, most companies were hinting at a strong recovery in 2H, although that is a scenario that will probably not unfold.
As expected, the Fed cut interest rates, injecting additional oxygen into the economy, at the same time leaving the way open to further cuts if needed. US-China trade negotiations resumed, with Trump and Xi meeting at the G20 summit and with their respective trade representatives meeting in Shanghai, although no progress was made, with the next round of trade talks planned for September.
The earnings season was rather positive in the US, despite a challenging geopolitical environment. As a result, we cut our ‘underweight’ position in Consumer Staples to ‘neutral’ amid strong results led by the higher volumes and prices that drove profits higher. We kept our positive stance on Communication Services, focusing more on social media stocks while monitoring the Information Technology sector for a potential upgrade in case of any trade-talk improvement. We kept our ‘overweight’ position in Health Care and, as we expected, the sector (apart from Illumina) delivered strong results, and had the advantage of being rather cheap.
Emerging Markets once again delivered a negative performance, with no real progress on the trade talks.
Emerging markets declined in July, underperforming developed markets. Global equities saw divergent trends this month, with the developed market rally led by the US, while Emerging Market equities drifted lower, as no progress was made in the trade talks and elevated Fed expectations were pared, eventually disappointing. The 2Q earnings results and economic data were mixed, with the June US and Chinese hard activity data showing some early signs of bottoming. Positive earnings revisions were concentrated on the CEEMEA and LatAm regions, while most Asian countries saw negative momentum.
Turkey was the best market performer in EM during July, Korea the worst. The market struggled with macro headwinds, including the trade dispute with Japan, North Korea’s recent missile launches and Trump’s attack on Korea's special status at the WTO.
Brazil outperformed the market, on the back of the social security reform and a constructive global scenario. On the macro front, the highlight was the beginning of the easing cycle, with Copom cutting interest rates by 50bp.
The technology sector performed well amid the easing of restrictions on Huawei, while Financials and Materials underperformed the broader markets. Large-cap tech names such as TSMC, Largan and Win Semi – supported by better-than-expected 2Q19 results – led the rally.
The dollar touched a 2-year high as the Fed warned against a lengthy easing cycle and defined the current rate cut as a mid-cycle policy adjustment. Oil prices were flat. Although Department of Energy stats were relatively supportive, supply-side drivers, including US-Iran tensions and Tropical Storm Barry, improved as the month advanced, to exert downward pressure.
We remain cautious on China by focusing on stocks mostly exposed to domestic consumption amid trade-deal uncertainty and, as a result, limited direct/indirect US exposure, while adding to self-help stories with positive earnings momentum as well as to defensives.
On the back of sluggish economic growth and the highest unemployment figures in a decade, we continue to reduce our exposure to South Africa. We slightly increased our stake in Russia, based on positive risk-reward. We are also monitoring any entry window in semiconductors, as these have reached their bottom. Markets remain extremely volatile. The deal/no-deal situation and hawkish/dovish Fed remains fluid and we need to adjust the portfolio accordingly.