After a dreadful first half to the year, there was some respite for investment funds in July, when global stock markets enjoyed a bounce.
The FTSE World index made a gain of 10.3% through the month, limiting the year-to-date loss to 4.1%. The FTSE Eurozone index recovered by 7.3%, though the YTD decline at end-July was 12.3%.
FTSE North America was up by 11.8%, bringing back the YTD index retreat to 3.4%. Time will tell whether mid-June will prove to be the low point of the 2022 markets crash.
July’s investor optimism was in the face of ever increasing interest rates, ever spiking inflation, and the unresolved conflict in Ukraine that shows every sign of dragging on into the autumn and winter.
Financial history tells many tales of dead cat bounces, and at Zurich, an active fund manager, the company says it continues to favour equities over other asset classes.
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In a H1 investment update, the company commented that as inflation is the key factor for policymakers and for all asset classes, if medium term inflation expectations remain reasonable, that raises the probability that the underlying equity trend remains intact.
“Equally, we are prepared to pivot in a different direction if our judgement is that inflation expectations have not stabilised at a reasonable level,” is the Zurich house view.
In that context, the Zurich stock pickers will have noted the Bank of England’s decision in early August to increase the base interest rate by 50 basis points to 1.75%, the highest level since late 2008. The size of the increase was the largest in 27 years, as the UK’s monetary authority forecast that consumer price inflation could top 13%, and that a long recession in Britain is inevitable.
The Zurich investment team also commented that while price/ earnings ratios have contracted materially this year, this has mainly been from equity prices falling rather than earnings expectations. Flows into equity markets have continued to be positive, despite the negative returns and poor sentiment, according to Zurich.
“Sector dispersion is likely to continue, as certain sectors will have more scope to pass on price increases and preserve profit margins in a higher interest rate environment,” the company says. “Opportunities in more defensive sectors, or within those that benefit from higher rates, have emerged, and will continue to do so over the rest of the year.”
Through H1, only one of Zurich’s funds was in positive territory. Its Indexed Global Energy and Metals Fund
is niche, with a fund size of just €29m, but its canny participants enjoyed precharges appreciation of 29.9% in H1 when everything else was headed in the opposite direction.
The fund invests in a passively managed BNP Paribas Exchange Traded Fund. With New Ireland and Davy now back together under the same Bank of Ireland roof, the life company has been extolling the virtues of the Davy Defensive High Yield Fund, which targets around 50 global equities that pay above average dividends.
These include Microsoft, Johnson & Johnson, Procter & Gamble, Nestle, JP Morgan Chase, Pfizer and Merck. Fund manager IQ EQ says the fund’s decline of 3.0% through H1 compared favourably with the 13.5% decline in the MSCI World Index in the same period.
As part of the strategy, the fund manager buys three-month put options on the S&P 500 and Eurostoxx 50 indices to protect the downside. The fund bias to North America equities (56%) makes sense, as appetite for risk investment is still stronger on the other side of the Atlantic.
