Asset allocation review – July 2019

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After a negative May, equities posted a second month of positive performance in July. Developed markets (+2.0%) outperformed their emerging market counterparts (-0.4%), with the US S&P 500 index recording new all-time highs.

  • Fixed income: mixed, but eurozone peripherals rally
  • Fed cuts rates; the ECB on the verge of easing too
  • Sterling drops again
  • Gold gains; oil has a rollercoaster ride

Supportive central banks, the trade truce between the US and China at the G20 meeting in late June and the resumption of their trade negotiations in late July, as well as a strong company earnings season buoyed equities.

There was a mixed performance in fixed income: US Treasuries fell slightly by 0.4%, while German Bunds gained 1.0%.

In Europe, ‘peripheral’ bonds rallied by 1.8%, led by Italian BTPs (+3.8%). Indeed, despite the threat of new elections reiterated by Deputy Prime Minister Matteo Salvini, investors are seeing Italian yields as juicy enough to cover for messy politics. Investors were partly reassured by the Italian government’s decision to cut its 2019 budget deficit target to comply with European rules, thus avoiding sanctions and an Excessive Deficit Procedure.

On the central bank side, at the 31 July FOMC meeting, as expected, the US Federal Reserve announced a 25bp interest rate cut and the end to its balance sheet drawdown. The statement and comments by Fed Chairman Jerome Powell highlighted low inflation and the growing risk to growth related to the tensions between the US and China over trade.

In Europe, Christine Lagarde, currently chairman of the IMF, was announced as the next ECB president. She will succeed Mario Draghi in November. At the July ECB council meeting, Mr Draghi strongly hinted at upcoming stimulus, leaving the door open to rate cuts, rate tiering and QE.

In terms of currencies, the euro and sterling fell against the US dollar by 1.9% and 4.3%, respectively. After a rebound in the second half of June, the pound dropped again in July, driven by market concerns around Brexit and the UK’s possible no-deal exit from the EU. Indeed, the election of Boris Johnson as Conservative leader and consequently UK prime minister can ben seen as increasing the uncertainty over the UK’s future. Johnson has said repeatedly that he is committed to delivering Brexit by 31 October, taking the UK out of the bloc with or without a deal on its relationship with the EU.

Commodities rose by a slightly 0.4% in July: gold gained 1.1%, whereas Brent crude oil was flat over the month after a rollercoaster ride. Oil prices fell in the first half of the month amid market concerns that a slowing global economy would weigh on oil demand, but it recovered on the back of tensions in the Strait of Hormuz, where the Iranian navy seized two UK-flagged oil tankers.

On the data front, eurozone PMIs for July disappointed: the composite index fell to 51.5 from 52.2. The manufacturing index fell by over a point to 46.4 from 47.6, while the decline in services was less pronounced (53.3 after 53.6). In China, the latest GDP data was in line with expectations. It confirmed the structural trend to lower growth rates (6.2% after 6.4%).

Exhibit 1: July 2019 asset class returns – mildly positive

July 2019 returns - mildly positive

Source: Bloomberg and BNPP AM, as of 31/07/2019


In this video, Maximilian Moldaschl, Senior Multi-Asset Strategist in the Multi Asset, Quantitative and Solutions (MAQS) team presents the asset allocation outlook for August 2019

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This is an extract from the latest Asset Allocation Monthly by the MAQS team at BNP Paribas Asset Management. For the full version, click here >

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Maximilian Moldaschl

Senior Global Multi-Asset Strategist

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