The economy: Scottish shower
- All advanced indices (PMI) confirm the widespread recovery of developed countries in both the service and industrial sectors.
- High volatility and uncertainty of macroeconomic data vs. estimates:
- Spike in year-on-year inflation in the US (+5.4%)
- 5th wave of COVID-19 due to the highly contagious Delta variant
- Lower contribution of China to global growth
- Confirmation of a US recovery, despite the Biden Administration’s difficulty in obtaining congressional approval for multi-year plans. Regardless, the pace of the recovery appears to have already peaked.
- European Commission approval of the first plans to receive Next Generation EU funding (Spain, Italy, and Greece).
- Vaccinations progress rapidly in developed nations, though less so in emerging and underdeveloped markets.
Markets: Tumult in US government debt
- Poor overall inflation data in the US coupled with an ambiguous response from the Fed prompted a surprising drop in US 10Y Treasury yields; many hedge funds incurred losses.
- These developments suggest investors trust that the Federal Reserve will be able to control inflation in the long term, or, alternatively, that they do not expect elevated economic growth.
- It was also a very volatile month for markets, with widespread declines and subsequent recoveries among indices. The Spanish Ibex 35 was hit hard by the impact of the banking sector and other cyclical companies that were non-starters in Q2 2021. It was also a substandard month for emerging markets.
- Macroeconomic misgivings have arrived in tandem with simply stellar H1 2021 earnings reports, especially for those companies selected by EDM. Many companies maintained and/or improved their guidelines for the year overall.
Investment policy: Trust in corporate profits
- Traders and asset allocation managers are hesitant about allocating their assets in H2 2021 given i) widespread unpredictability, ii) the sense that the economic recovery has already passed its peak, and iii) that the gains of the last 12 months have been considerable.
- The tension is palpable and, as a result, investors aim to anticipate the short-term performance of equity and bond markets, which fluctuate like a roller coaster in response to the news or comments from the central banks.
- Our global portfolios are slightly overweighted in equities because we are highly confident about the profit growth forecasts for our selected companies in 2021 and 2022.
- With regard to fixed income, our main funds are clearly in positive territory: EDM Ahorro L (+1.59% YTD) and EDM Credit Portfolio L (+2.39% YTD), contributing to the favourable performance so far this year.
- The shift from growth securities to cyclical securities, which was very effective in Q1 2021, worked in reverse during Q2 2021, when defensive and/or high-growth securities were the indisputable victors.
- Our clients benefitted from this and the discretionary portfolios have vastly outperformed the benchmark indices; once again, diversification was key. Funds investing in emerging markets, with less weight in our portfolios, lag behind developed markets.
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