Market Commentary – July 2021

Freedom or farce? The halfway recovery picture

Freedom Day on 19th July was intended to mark our return to a pre-pandemic life, with the month also seeing the halfway point in the year of recovery. But with news on the day reporting confusion for businesses amid the rising ‘pingdemic’, and the ensuing effect of staff isolations on the economy, particularly on the retail food sector, the day was seen by many as ‘freedom farce’.

Lifts in restrictions and confidence

However, July 2021 saw both the UK stock market and the UK government bond market back, almost exactly, to where they had been in January 2020, and the removal of most remaining coronavirus restrictions in England delivered much-needed hope and confidence for many businesses after what has been the toughest half-year on record. 

Tourism journey to recovery

The much-beleaguered travel and tourism industry also received a welcome boost this month with the introduction of the EU digital vaccine passport, and news that UK governments will accept vaccinated travellers from most of the EU and the US without having to quarantine. International cruises were permitted for the first time since March 2020, but despite passenger numbers recovering considerably from last year, they still remain far below pre-pandemic levels. Travel and tourism stocks still lag, but recent optimism, undoubtedly fuelled by increased freedom, sees many stocks recover some of their lost ground.

Inflation still flouted as temporary

Inflation continues to be a discussion point, with both US and UK inflation coming in higher than predicted, reopening the debate about whether the rises are temporary or permanent. Despite the numbers, central banks remain steadfastly confident that the rise will be temporary, maintaining the stance of no forthcoming adjustment on interest rates with the result that the markets seem to be accepting that inflation will be transitory and interest rates will remain at low levels. 

FTSE 100 positive performance and ‘best day’

The yield on the FTSE 100 came in at just over 3%, compared with 4.2% at the end of 2019, and the 21st of the month heralded as the FTSE 100’s best day in five months. UK dividend paying stocks continued to benefit from the reflation trade, which has favoured economically sensitive sectors, such as banks and energy companies. But banks are not the only companies restoring dividends; many other companies have since announced special dividends to make up for 2020’s missing payments, placing expectations of a further increasing yield on the index.

US recovery still short of analysts’ predictions

The US economy continued its rapid recovery with the latest data showing an annualised rate of 6.5%; a slight increase on 6.3% in the first quarter of the year but still below analysts’ expectations. As the central bank left interest rates unchanged at its July meeting, and maintained its monthly bond buying programme at $120bn, pressure continues for it to address rising inflation. With a clear dilemma between maintaining support for too long and fuelling inflation, and raising interest rates too soon and snuffing out economic recovery, US equity markets continue to rise as investors expect the central bank to leave market support in place for longer.

European inflation steady, in line with UK and US

The European Central Bank comes into line with UK and US inflation targets, modifying its wording on their official inflation target from ‘near, but below 2%’ to, ‘exactly 2%, but with limited tolerance of higher or lower inflation in the short term’. The ECB continues to hold its interest rates at a record low and is committed to running its asset purchase programme at a level of €20 billion a month for as long as required, even if that results in inflation going above the 2% target. With no sign of the end to the ECB’s bond buying, European government bonds continue along their recovery trajectory.

Chinese government control over tech stocks

The Chinese government exerted its authority over the entire technology and education sector in July, potentially indicating – though this is still uncertain – a renewed focus on hard tech, manufacturing and engineering. As investors feared that this would lead towards further regulatory tightening within other sectors, the Nasdaq Golden Dragon China index, which tracks Chinese technology stocks listed in New York, fell by almost 22%. It must be kept in mind that this fall in Chinese stocks has the potential to drag performance of emerging market funds, given their considerable contribution. 

Space investments fail to take off

Richard Branson flies into space this month, proving private space travel is possible. However, investors appear sceptical about the growth of space exploration investments. Virgin Galactic’s plans to expand its space travel venture failed to meet investor approval to raise $500m, and saw shares fall by 30%. 

House price index slows

From the 17-year peak of 13.4% in June, the Nationwide house price index remains high, but slightly lower at 10.4%, making the average property price, still approximately £250k, but nearer £244k in July, as opposed to June’s £245k. House prices in the UK and US continue to rise at their fastest rate in decades, with the pandemic helping to generate the residential housing boom and a demand for more living space at a time of low interest rates and shortage of homes on the market.

Asset ClassProxy1-Month3-Month6-Month1-Year
CashUT Cash/Money Market00.00%00.01%00.01%00.05%
Gilts FTSE Gilts All Stocks02.83%03.96%-01.41%-04.03%
UK Corporate BondsUT UK Fixed Interest04.98%06.84%02.56%-01.41%
UK EquityUT UK Equities00.99%03.33%15.69%38.15%
European EquitiesMSCI Europe ex UK01.27%06.53%17.19%32.44%
US EquitiesS&P 50000.84%04.68%14.45%26.84%
Japanese EquitiesMSCI Japan-02.18%00.39%04.63%30.01%
Emerging Markets EquitiesMSCI Emerging Markets-05.68%-04.05%-04.68%18.17%
PropertyUT Property03.36%06.97%15.44%21.46%

Data Sourced from FE Analytics, and Bloomberg Finance LP.

*The value of your investment can go up as well as down, you may get back less than you originally invested. Circumstances are subject to change. Performance from the past or yields quoted should not be considered as reliable indicators of returns. This communication is for general information only and is not intended to be individual advice