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July’s top and bottom performing funds

A round-up of the major fund and sector trends in July as investors found some reprieve from a difficult year so far.

| 5 min read

Markets staged a recovery in July, bucking a miserable downward trend over the course of the previous six months. The S&P 500 was up almost 14% from its mid-June low, despite economic news remaining poor, with persistently high inflation and the US entering a technical recession as defined by two consecutive quarters of economic contraction.

Pivot ahead?

The Federal Reserve made its second consecutive 75 basis points interest rate hike in an attempt to tame runaway US inflation, which topped 9%. There was some relief in bond and equity markets that the Fed wasn’t more aggressive, and at the current 2.25-2.5% rates there are hopes that a ‘neutral’ level has been reached.

There was also a hint the Fed might decide to ease up a little, depending on what happens next. With the Fed switching to a ‘data dependent’ stance, anticipation has grown that a ‘pivot’ to cut rates as inflation peaks and subsides might be nearer than previously thought. There is, however, wide dispersion of views. Some economists believe rates in excess of 4% will be necessary to get inflation under control, others that a couple more 0.5% hikes before the year-end will do it.

The big wildcard remains energy prices. We all need energy, so higher prices act as a tax that reduces what can be spent on other things and curbs demand.

Our belief is the pivot from tightening to easing is probably still some way off. The Fed remains focused on a tight labour market, and it will take time for core components, energy and food, to turn deflationary rather than inflationary. Market hopes for an earlier pivot following a “1% and done” peak in the interest rate cycle stand in contrast to the Fed’s own expectations of further hikes in 2023.

The big wildcard remains energy prices. We all need energy, so higher prices act as a tax that reduces what can be spent on other things and curbs demand. Commodity prices did retreat a little further during the month, leading to weakness among funds specialising in natural resources, but much still relies on supply issues and the geopolitical outlook, notably the war in Ukraine. This has particularly negative consequences for Europe given the possibility of a complete cessation of Russian gas supplies, which are already dwindling and forcing up prices.

Earnings a mixed picture

Besides the interest rate outlook, a flurry of company earnings towards the end of the month painted a mixed picture.

Amazon and Apple announced better-than-expected quarterly sales and less-negative corporate news also came from Netflix in the form of lower-than-expected subscriber reductions. Meanwhile, Tesla’s results reflected an easing impact from supply-chain issues.

Less positively, Facebook owner Meta posted its first-ever year-on-year fall in sales, as a slowdown in advertising spending caused revenues to slip 1% annually in the second quarter, and US retail giant Walmart issued its second profit warning in ten weeks in an unscheduled update.

Although there were stock-specific disappointments, markets were resilient overall.

Although there were stock-specific disappointments, markets were resilient overall – perhaps partly owing to the bearish positioning of many investors ahead of earnings season. The technology sector was also given a fillip after the US Senate pushed forward a $50bn bill to boost microchip manufacturing in the country.

The main exception to more upbeat markets was Chinese equities, which, having been a positive outlier in June, performed poorly as Beijing’s response to the Covid-19 pandemic continued to hit the economy. Dozens of cities are currently implementing full or partial lockdowns in China, or district-based control measures, which involve stringent restrictions on the mobility of residents. Data showed the Chinese economy contracted 2.6% year-on-year in the second quarter, and the IMF now expects GDP growth at 3.3% for 2022, well below official hopes of 5.5%.

A fine balance

Overall, sentiment continues to swing between fears of a downturn that will damage corporate profits and hopes that weaker demand will cool inflation and allow central banks to implement less restrictive monetary policy. Ironically, markets could cheer weak economic data as high-interest rates are what investors fear most. Although accumulated savings do provide a cushion in terms of consumer spending, the outlook remains cloudy, compounded by the adjustments to global supply chains, shifting energy complexes and changing work patterns.

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 2022 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 2022: 30/06/2022 to 31/07/2022. Onshore and retail open-ended funds only.

*There are several thousand funds on sale in the UK. The Investment Association divides these into 45 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

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