The MSCI UK All Cap Net Return index returned +0.5% during the three months to the end of July, whilst the MSCI World ex UK (£) Net Return index returned +8.8% in Sterling terms. Equity markets recovered a significant amount of the ground lost during the brutal decline in asset prices observed during the first quarter of the year. The collapse was triggered by a sudden realisation that the economic impacts of the policies, enacted to restrain the COVID-19 virus outbreak, would result in a deep recession, the scale of which could challenge the debt-based capitalist economic system. However, policy makers were swift to announce enormous economic support packages, both fiscal and monetary. These, alongside the easing of lockdown restrictions in many jurisdictions and positive incremental news concerning the extraordinary effort being applied to develop possible vaccines, helped improve investor confidence during the past few months.
In Sterling terms, most major regional equity markets performed strongly, the exceptions being the UK (see above) and Japanese markets (MSCI Japan NR (£) Index, +0.2%). The Emerging Markets ‘region’ produced the strongest return (MSCI Emerging Markets Net Return (£) Index, +13.3%), aided by more effective track and trace procedures which have boosted the pace of economic recovery relative to developed economies and a weaker US Dollar.
The UK equity market return was impacted by the index’s significant exposure to energy and financial stocks (which in share price terms have lagged the recovery seen in other sectors), the persistence of COVID-19 within the population and concerns regarding the outcome of Brexit negotiations.
Following a period of strong performance, Gilts produced a marginally negative return over the three months to the end of July (iShares Core UK Gilts ETF, -0.1%). Investment grade debt rebounded strongly as credit spreads narrowed following the announcement that the Federal Reserve would support corporate debt markets1 (iShares Core £ Corporate Bond ETF, +4.5%). ‘Riskier’ high yield debt produced a strong positive return (iShares Global High Yield GBP Hedged ETF, +8.1%) underlining the more constructive investment environment.
The Brent crude oil price ended July at $43.3/barrel, an increase of 71% since the end of April. The hard stop to global economic activity has seen a collapse in demand for oil products, however production cuts and an incremental relaxation of economic lockdowns has helped the oil price recover somewhat.
In the three months to the end of July the gold price rose 17.2% to $1976/oz as US Dollar weakness and the opportunity cost of holding the precious metal fell. Sterling strength versus the US Dollar reduced the gain for UK based investors (+12.5%, to £1,508/oz).