July was a lot calmer than recent months, and although trade tensions are still in the air, a strong earnings backdrop from the US and Europe has helped soften the effects.
What’s been going on in the markets?
Volatility quietened down in July. It’s not that trade tensions between the US and China have gone away, they’re very much still there. It’s just that the noise associated with these tensions has been overwhelmed by the news coming from the US earnings season, with companies reporting their results for the second quarter of 2018.
Analysts had already been expecting really good earnings to be reported by US companies, but they’ve turned out to be even better than expected, with earnings up around 23% compared to last year. European company earnings have also been positive.
Looking to financial markets, US equities performed well, returning around 3.5%. The UK and Japan returned between 1% and 1.5%, while emerging markets returned just over 2%.
The story surrounding Chinese markets continued to unfold in July, with trade tensions having significant local impacts. Since around mid-June, the Chinese currency has fallen by more than 6%, and the stock market has fallen by around 10%, while market interest rates have fallen sharply.
We’re continuing to monitor Chinese markets closely, but on the whole, financial markets were much less volatile in July.
Against this backdrop, how did Nutmeg portfolios perform in July?
We had some good gains during the month, driven by the performance of US stocks and some improved returns from emerging markets. Returns ranged from around 0.3% in the low risk portfolios, up to almost 2.5% in the highest risk portfolio.
With this in mind, have you made any changes to the fully managed portfolios?
We’ve made quite a few changes to improve our portfolios. We’ve swapped an ETF, which tracks US equities with a currency hedge, for a more cost-effective one. We expect this to result in a significant saving for customers over the next 12 months.
We’ve made a small change to our fixed income holdings by selling our exposure that tracks US government bonds linked to inflation because they’ve become quite expensive, and moved this to other US treasury bonds.
We’ve also moved about 30% of our holdings tracking large Japanese companies to track smaller Japanese companies instead. This is in anticipation of a move by the Bank of Japan to begin tightening monetary policy.
Customer question
This month, our customer question comes from Richard via Twitter. He asks:
“What will you be doing in the run up to the Brexit date next year? Would an impending no deal Brexit mean you move all investments out of the UK and Europe?”
Our investment team talks about Brexit almost every day, reviewing the probabilities of each scenario. We’re focused on the lead-up to the scheduled Brexit day at the end of March next year, rather than the Brexit day itself, as the markets are already pricing in the different potential scenarios right now.
In July, we considered that the probability of a ‘hard Brexit’ had gone up, albeit from a relatively low level. So we added some more exposure to the US dollar and the Japanese yen to help mitigate this risk.
Our allocation to continental Europe is already very low, so our options for managing the risk through our current portfolios involve adapting our exposures to UK assets, including bonds, equities, and currency.
We’ll continue to follow developments very closely over the next ten months, monitoring changes to the likelihood of each potential outcome and adjusting our position if we feel we need to.
About this update
This update was filmed on 7th August 2018 and covers figures for the full month of July 2018 unless otherwise stated. Data source: Bloomberg
Risk warning
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance.
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Shaun Port
Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.Other posts by Shaun Port
