July saw a huge re-embracing of risk assets after the weakness in June. This was prompted at first by better economic news – though this had started to wane by the end of the month – and there were also some high-profile corporate earnings announcements, which gave equity markets a boost.
Equities were the top-performing asset class in July, with the UK the place to be. US equities also did well, while European equities performed roughly in line and Japanese equities saw weaker performance. Corporate bonds were largely flat and government bonds fell slightly on the month.
Equities were initially given a boost by an International Monetary Fund report that raised global growth forecasts from 4.2% to 4.6%. The UK was one of the few countries where growth prospects were downgraded, but the change had been largely expected on the back of the ‘austerity’ Budget in June. There was also better news from Europe where PMI data showed improved confidence in the manufacturing sector while the weaker euro finally seemed to be feeding into positive growth for companies in the region.
But the good economic news did not hold up. Mid-month, Federal Reserve chairman Ben Bernanke said economic conditions were “unusually uncertain” and the struggling banking sector and near-collapse in the Greek economy were delaying a US recovery. And so it proved at the end of the month when US GDP growth figures came in behind expectations – the economy grew at an annualised pace of 2.4%, compared to expectations of 2.7%.
There was also bad news from China as the announcement the country’s growth had slowed to “just” 10.3% – from its previous level of 11.9% – spooked economists. The more optimistic pointed out this was a natural consequence of Beijing’s strategy of withdrawing its stimulus packages and tightening monetary policy, but it still raised fears of a double-dip.
Back in Europe, the much-anticipated banking stress tests proved something of a damp squib. There were few surprises and most analysts thought them insufficiently rigorous, which means they essentially failed in their primary aim – of restoring confidence in the sector.
So why did equities hold up? Principally, the strength of corporate profits continued to support prices. July saw the start of the second-quarter reporting season and early signs were promising. Shell and Exxon, for example, saw a near-doubling of profits, which helped ride out the worsening economic news.
