Performance, July 2021
July was generally a good month for financial market investors despite a minor correction along the way. We are currently experiencing what is probably one of the longest periods of the past century in which we have seen an equity market correction of more than 5%. While there were plenty of focus areas that could have ended the bullish equity markets, highly positive Q2 financial reports are testament that companies have emerged strong-ly from the COVID-19 challenges and remain highly profitable – even more so than most analysts had expected.
Bond yields have continued lower (chart 1) and tell a whole different story than equity markets do, and they are more sensitive to relatively negative news and expectations that economic growth has peaked for now. In terms of the pandemic, the Delta variant continues to weigh on society, and continuing supply chain disruption is causing bottleneck problems in certain industries.Chart 1: 10Y US yields
Moreover, the Chinese regime has scaled up its regulation of private-sector enterprises with the aim of limiting the financial clout of foreign businesses, which has weighed heavily on Chinese stocks in general and IT and education businesses in particular. As Chinese stocks represent nearly one-third of all EM equities, the drop in Chinese equities of some 10% has of course had a negative impact on returns for the overall index, which ended just above 5% lower in July.
Furthermore, falling bond yields have entailed that defensive equity sectors such as healthcare, telecommuni-cations and real estate generally outperformed several of the other sectors in July, not least value stocks, which usually rally on strong growth and rising yields.
Asset class performance
It was another month of positive returns for most asset classes in our portfolios, and the highest returns were once more to be found in the global equity markets (ex. EM equities), which rose by just below 2%, and we are at nearly 19% for the full year. Except for Emerging Local Market Bonds, high-yield bonds also saw positive returns. The background is the declining yields and the continued risk appetite among investors. The same factors re-sulted in positive returns in July for our holding of mortgage bonds which is, however, not yet in positive territo-ry for the year due to the rising yields in early 2021.