After another highly volatile week in markets, investors welcomed positive earnings updates and central bank updates yesterday, soothing market nerves and tempering concerns over the short-term outlook for risk assets.
Over the week, markets faced fresh regulatory risks on the back of Beijing’s latest regulatory crackdown, resulting in a three-day decline in Chinese equities which spilled over into everything from the yuan to the S&P 500 index. The falls were triggered by China’s shock decision to ban swathes of its booming tutoring industry from making profits, raising foreign capital and going public. It was the government’s most extreme step yet to rein in companies it blames for exacerbating inequality, increasing financial risk and challenging the government’s grip on the economy. The crackdown resulted in a rapid repricing of Chinese equities for government regulatory risk, following concerns that more sectors and industries (predominantly tech companies) could face stricter regulation moving forward. Chinese authorities have since announced that the policies were targeted and not intended to hurt companies in other industries, leading some suggestions that the selloff may have been overdone.
The market decline halted as Chinese state media sought to reassure investors shaken by the regulatory crackdown. Chinese tech companies were boosted by recent news that China will continue to allow local firms to go public in the US, however sentiment remains fragile. Regulatory risk has always been a key consideration when investing in this area, however we continue to watch this area closely for excess risk which may drag on return potential. At the moment, it is our view that concerns have been overdone in the short term, however should the long term outlook shift on a changing long term regulatory outlook, we will adjust our allocation accordingly.
Central bank actions helped to offset negative sentiment over the week, after the Fed’s reassurance that there is still some way to go before tapering stimulus provided a welcome boost to US markets, while China’s central bank issued a short-term cash injection to soothe recent turbulence across mainland China and Hong Kong. Meanwhile, the Q2 earnings season continued to gather momentum, signalling a strong corporate recovery. European equities rose to a fresh record on earnings updates, alongside recent data suggesting record high economic sentiment across the Euro Area despite the recent concerns over virus cases across the region.
Elsewhere, UK covid cases declined over the week as progress continues to be made on the vaccination front, with the percentage of the population having received 1 or more shot expected to reach 70% before the end of the week. Scientists suggest that despite the lifting of pandemic restrictions on 19th July, the recent decline in cases is due to the recent mini heatwave, start of the school holidays and end of the Euro 2020 football tournament, alongside the vaccine rollout.
Investor concerns over the Beijing regulatory clampdown resulted in a mixed intraweek performance for equity indices. US equities gained over the week as central bank expectations and strong earnings data offset negative sentiment, while European equities also benefitted from a strong set of earnings and economic data. German equities lagged somewhat over the week on challenging auto sector earnings. As expected, Chinese equities declined significantly over the week, with the CSI 300 index offsetting some of its declines during the last couple of trading sessions.
As expected during periods of elevated concern in financial markets, non-equity sectors that are typically less risky than equities have performed positively this week, with the inflation-adjusted index-linked bond sector experiencing the strongest gain. Looking at the OBI portfolio dataset, the portfolio performance on the whole has remained neutral over the week, successfully navigating the elevated market volatility. OBI 3 to 5 all gained in the period due to their higher non-equity and lower equity weightings relative to OBI 6 to 8. OBI 6 to 8, which currently hold between 56% and 80% equity, encountered slightly more challenging conditions given the recent movements in markets, with Chinese exposure within the higher risk portfolios dragging on performance over the week, albeit this exposure performed better than the equity indices monitored. The benefits of portfolio diversification are evident during events like these, having seen both high growth and defensive multi-asset funds contribute positively to the dataset below.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges and trading spreads. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
After a volatile week, the improvement in equity market conditions observed in recent trading sessions is welcoming, reiterating the positive long-term outlook for risk assets going forward. This is not to say the short-term volatility is over, and we expect this level of short-term volatility to continue as we transition through the economic recovery. In our view, although markets remain susceptible to temporary changes in investor sentiment, we see global vaccination rates, favourable policy and improving economic fundamentals as key drivers for performance in the coming months.
Key Events We Are Watching This Week:
- This week’s earnings releases as the Q2 earnings season gathers momentum
- Friday 30th : US Spending data, Euro Area Q2 GDP
- Monday 2nd : China Manufacturing data
This Day in History
On this day in 1954, the first part of J.R.R Tolkien’s fantasy epic The Lord of the Rings was published. The novels became a sociocultural phenomenon and were adapted into a series of blockbuster films in the early 2000s.
Thank you for reading, have a great week!
Jason, Gina & Ben
