The tug of war in financial markets between expectations of a structurally more inflationary world and the ‘transitory’ scenario posited by the US Federal Reserve and other Central Banks continued in July. Whether inflation ends up a short- or long-term phenomenon has significant implications for the pricing of assets of all kinds and remains the key driver of sector trends.
The rise of the delta environment and thereby the increasing prospect of a downshift in economic growth also tilted investors towards safer assets. Gilts – UK government bonds – rallied alongside other developed world government debt, while in equity markets stocks perceived as offering reliable growth had the upper hand over more economically sensitive (aka ‘cyclical’) areas, though on a day-to-day basis the ascendency ebbed and flowed.
In China, there is now a sustained crackdown on technology companies as the government lines up a ‘Personal Information Protection Law’, imposing stricter measures on how tech companies store user data. Unlike Western governments, Chinese authorities are not comfortable with businesses having more data on citizens than they do.
Shares in Tencent, a major holding of many Asia and global equity funds, tumbled as its WeChat messaging app temporarily suspended the registration of new users to implement a technical upgrade ‘to align with relevant laws and regulations’. Meanwhile, shares in online tuition companies collapsed after the government effectively banned them from making a profit, alarmed by the financial burden fees might place on families and potential inequality issues. In addition, Meituan, a food delivery company held by many China specialist funds, fell as authorities ordered the sector to improve courier pay and benefits and relax delivery deadlines.
Consequently, funds exposed to China dominated the list of worst performers in July, and we are mindful that this negative sentiment could last for a while with Chinese authorities prioritising long term goals ahead of market returns. Increased competition and addressing inequality are headwinds for many of China’s larger internet and e-commerce businesses, as well as for particular sectors in the crosshairs of regulators. However, there may ultimately be a silver lining for investors among smaller and mid-sized Chinese businesses that stand to benefit from the upheaval and reduced dominance from larger businesses. I wrote more about the issues and the consequences of Chinese shares.
The Chinese sell-off had a knock-on effect on many Emerging Market funds, which tend to have chunky exposure – sometimes 50% of more – as well as Asia Pacific funds. However, some of these, broader regional options have largely avoided China and the tech sector in particular – one example being Stewart Investors Asia Pacific Sustainability, part of our Foundation Fundlist, which only has 8% in mainland stocks and a similar level of exposure to Hong Kong.
Elsewhere, investors made small gains in most over the month with European and UK smaller companies among the bright spots, while bonds, property and areas with reliable yield also performed well. Our general view is that share markets making further progress from here rest heavily on the continued goodwill and credibility of the main central banks, led by the Fed. The Fed’s reassurances that the sharp move up in inflation is temporary are important to market performance. If more investors thought the Fed wrong and anticipated the need to withdraw money support and raise interest rates, there could be a swift reversal of the current bull market.
Although investors should be aware past performance is not a reliable indicator of future results, here are the top and bottom ten Investment Association (IA) funds and sectors* for July 2021 in full:
Top 10 funds:
Bottom 10 funds:
Top 10 sectors:
Bottom 10 sectors:
Past performance is not a reliable indicator of future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for July 2021: 30/06/2021 to 31/07/2021. Onshore and retail open-ended funds only.
*There are several thousand funds on sale in the UK. The Investment Association divides these into nearly 40 ‘sectors’, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
July’s top and bottom performing funds
Read this next
Beating the index is tough, but investors can do itSee more Insights