In this month’s investor update, our marketing director, Grant Warnock, speaks with our chief investment officer, James McManus, about the impact of the delay to lockdown easing in the UK, inflation and the outlook for global markets, as well as our portfolio performance.
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June saw a reversal in the fortunes of some asset classes, but global stock markets continued to march higher, their fifth consecutive month of gains. Developed markets delivered returns of around 2.3% in local currency terms, ahead of their emerging market peers for another month in 2021. The standout performers in developed markets were Swiss equities, alongside the growth centric Nasdaq index, while smaller companies in both the UK and Europe delivered negative returns and UK stocks as a whole struggled to keep up with their developed market peers.
Turning to the bond markets, government bonds had their best month in quite sometime after the losses suffered already this year. UK government bonds returning around 0.7% for June – actually their best monthly return since December, and US treasuries offered returns of around 0.8% – the best monthly performance since July last year. Elsewhere in the bond market, investment grade corporate bonds offered investors returns of just under 1%, while riskier high yield bonds offered returns close to 1.4%.
Two assets that didn’t perform as well in June were gold, which fell around 7%, and the pound sterling, which weakened just under 3% against the US dollar.
What were the main drivers behind market movements in the month?
In a month that saw losses in gold, and gains in the US dollar and government bonds, you might not be surprised to hear that one of the biggest drivers behind market movements has been central bank communications and the persistent topic of inflation.
In the US, the Federal reserve published its latest assessments of the US economy, surprising investors somewhat by increasing their projections for the level of inflation this year and suggesting a more advanced schedule for interest rate hikes than previously communicated. Meanwhile the Fed’s preferred measure of inflation grew to 3.9% for the year through May. Government bond assets have remained volatile in June as investors digested the Fed outcomes, but ended June stronger after medium term inflation expectations tempered on the back of the Federal Reserve’s narrative.
The big winner from the Federal Reserve reaction was the US dollar – rallying back towards its highs for the year against major currencies such as GBP. Currencies tend to strengthen with the prospect of interest rate rises, but with Fed officials at odds to stress this remains some time away, and with the Bank of England likely to be ahead of their US counterparts in raising interest rates, we remain positive about the medium-term prospects for GBP.
June was supposed to mark the end of lockdown measures in the UK, but with rising cases there was a four-week delay introduced. How has this impacted markets, consumer confidence and the economic outlook?
The Bank of England have been revising forecasts upwards, for both growth and inflation this year. The extended activity restrictions in some sectors of the economy for a further month are unlikely to have a material effect on the rosier outlook, where the Bank of England now expect a recovery to pre-Covid growth levels in 2021.
Despite Bank of England expectations of inflation now a full percentage point higher than their target later this year, much like their US counterparts they have been at odds to stress their belief in its temporary nature – its relation to temporary mismatches in supply and demand – and are signalling a patient approach to raising interest rates.
When we look at the UK economy, there is much to take comfort from in the recovery so far – the labour market appears to be relatively robust with improving confidence, job vacancies above pre pandemic levels and participation in the furlough scheme falling strongly. Activity indicators in manufacturing and services sectors continue to show expansionary level, and at an aggregate level at least, household balance sheets appear in good health, boosted by higher house prices and stronger savings rates.
That said, June has been a relatively poor month for UK equities which have largely underperformed global peers this year, and we haven’t yet seen the outperformance of smaller, more domestically focused UK equities as the UK economy has reopened in 2021.
Against that market backdrop, how did the Nutmeg fully managed portfolios perform during June?
June was a positive month for portfolios returns, capping what has been a strong second quarter in 2021. For fully managed portfolios, this meant returns of around 0.4% in lowest risk portfolios, 1.3% in a typical medium risk portfolio and 2.4% in our highest risk portfolios.
Given everything that’s happened lately, have you made any changes to the Nutmeg fully managed portfolios?
We made two changes in the month of June to fully managed portfolios. First, we added to Japanese equities in our medium to higher risk portfolios at the expense of Asia Pacific stocks. We have long held an underweight in Japan but the market has underperformed its global peers significantly year to date and so we began to rebalance that position.
Second, we took advantage of the rally in bond yields to further reduce our government bond position. While policy makers remain cautious about the outlook for interest rates, the strength of the economic recovery makes normalisation an inevitability medium term and we look for higher bond yields by the end of the year as conversations about the reversal of extreme policy measures advance.
In June, we announced the next chapter of the Nutmeg journey with plans to be wholly acquired by JPMorgan Chase. Can you tell us a little more about what this will mean for our clients?
For the best part of a decade the team at Nutmeg has been focused on building a truly inclusive wealth management business, that through technology, democratises access to high quality, personalised investment solutions for our clients.
In June, we announced that, subject to regulatory approvals, Nutmeg will become part of JPMorgan Chase. For our clients, there is no change in the products and services you currently enjoy, and the entire Nutmeg team will remain with the business.
And, in the future, with the backing, support and investment of JPMorgan, Nutmeg will continue to develop and enhance our products to help us better serve your financial needs.
But importantly, all of us at Nutmeg will continue to strive every day to ensure that we deliver the highest possible service to you, as we help our over 140,000 Nutmeg clients reach their personal financial goals.
About this update: This update was filmed on 05 July 2021. All figures, unless otherwise stated, relate to the month of June 2021. Source: MacroBond, Nutmeg and 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 or future performance indicators are not a reliable indicator of future performance.
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