Developed Markets Take a Step Back
In the month of July, international developed stock markets dropped 1.21%. The U.S and Japanese markets had modest gains of 1.51% and 0.14%, respectively. Europe ex UK and the UK dropped 1.99% and 1.80%, respectively. Year to date returns are still sizable across the board, overturning much of 2018’s losses. Trade uncertainty remains a downside risk for equities.
Brazil and Russia Outperforming in 2019
Broader emerging markets declined by 0.55% for the month. Brazil and Russia recorded gains of 2.55% and 0.29%, respectively. Korea lagged other markets in July, dropping 6.18%. Emerging markets have gained 11.12% year to date, but still trade at attractive valuations relative to the U.S. market.
Telecommunications and IT Have Strong Month
Telecommunications and information technology recorded gains of 2.44% and 2.43%, respectively. Energy and materials lagged other sectors, posting losses of 3.09% and 2.71%, respectively. Much of this bull market’s return has been driven by technology and consumer discretionary companies. Investors should not extrapolate these returns, especially given the business cycle is in the late stages.
Value underperforms Growth
In July, value underperformed growth in the large-cap and small-cap space. Momentum recorded a gain of 2.74%. Historically, different equity factors have their own periods of outperformance, usually in shorter time periods but sometimes lasting a decade. However, tilting portfolios to capture more of the value and size premium has historically compensated investors in the long run.
Investors Bidding Up Growth Companies
In the international developed markets, value underperformed growth. Momentum recorded a loss of 0.68% while small-cap emerging market stocks dropped 1.32%. Growth investors continue to be rewarded; however, this outperformance is coming primarily from higher valuation multiples as opposed to earnings growth.
The Fed Cut Rates
The Fed cut rates by 0.25% in July. The drop in rates will affect savers; however, with the U.S. equity market trading at a high valuation and fixed income spreads low, investors can still earn a competitive risk-adjusted rate of return. Investors can earn a similar annual rate on cash versus those of intermediate-term bonds. The CPI increased by 1.66% year over year through June.
Bonds Provide Diversification in July
The returns of deflationary hedges were primarily positive for the month. Emerging market bonds led the way, returning 1.15%. The Barclays U.S. Agg Bond Index was up 0.22%. Emerging market bonds are off to a strong 2019, returning 11.87% year to date. Emerging market debt may warrant a higher portfolio allocation if developed market growth continues to slow and their high debt levels become burdensome.
Gold Outperforming Over Past Year
Inflation-sensitive investment returns were mixed for the month. Foreign inflation-indexed bonds and U.S. real estate recorded gains of 2.97% and 1.60%, respectively. Gold bullion posted modest gains. Over the past year, gold has outperformed other inflation-sensitive investments. Given its favorable supply/demand dynamics and role as a hedge against late cycle risks, gold merits an allocation in clients’ portfolios.
U.S. Dollar Strengthens Against British Pound and Chinese Yuan
Over the past three months, the U.S. dollar appreciated against the British Pound and Chinese Yuan by 6.92% and 2.18, respectively. Relative to the U.S. dollar, the Swiss Franc and Japanese Yen appreciated by 2.81% and 2.68%, respectively, over the past three months. For international equity investors, a weakening U.S. dollar will provide a tailwind to returns.
Brandon Yee, CFA, CAIA – Research Analyst
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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