Market Summary for July 2010
Global equity staged a spectacular comeback in the month of July. While one expects improvement in trading activity after the World Cup, few would have expected such a strong fight back by the market bulls. MSCI AC World index gained 5.1% in July, helped by a strong 8.7% rebound in the Stoxx 600 index (returns in terms SGD terms). Other regional markets did well too with MSCI Emerging Markets index returning 5.1% and MSCI Asia ex-Japan index returning 2.6%.
Strong earnings from US help improve risk appetite
While the outlook painted by economic indicators was dim, corporate profits indicate things are indeed picking up. Since 2Q 2010 reporting season began, a majority of the corporations that have announced their 2Q 2010 earnings beat analysts’ expectation. With net positive earnings surprises, the S&P 500 saw one of its best months, rising 6.9% in July (in USD terms). However, USD depreciated 2.8% against SGD over the month, hence discounting the actual returns of local investors. Consequently, analysts have begun revising quarterly estimated earnings for S&P 500 companies upwards by 5% (year-on-year growth in quarterly earnings is almost 50%), a reflection of the better-than-expected earnings posted.
Europe stress tests results received positively
On 23 July 2010, the Committee of European Banking Supervisors (CEBS) released the bank stress test results. The stress test is conducted on a sample of 91 European banks which represent 65% of the European market in terms of total assets. Based on their adverse scenario analysis, 7 banks would see their Tier 1 capital ratios fall below 6% (threshold of 6% is used as a benchmark solely for the purposes of this stress test) and will be required to raise capital of 3.5 billion euro. The stress test scenarios were leaked before the scheduled press release and analysts have criticised that the stress scenario used as overly optimistic, a poor reflection of current market rates. However the response from the market since the official release of test results has been positive, suggesting that investors deem the findings as credible, at least for now.
IMF forecasts world recovery to continue
While investors are concerned that global growth may slow down, IMF does not think so. In their latest “World Economic Outlook” released on 7 July 2010, IMF projected the world to grow at 4.6% this year, an upward revision of 0.4% compared to April’s projections. The growth forecast for emerging markets was raised to 6.8%, an upward revision of 0.5%. Surprisingly, IMF has kept the projection of Eurozone’s growth unchanged at 1.0% for 2010 but lowered 2011 growth by 0.2% to 1.3%. Though remaining bullish, IMF has however warned that risk has risen markedly, escalated by concerns of Europe’s debt crisis.
Asian dollar debt rallied but still attractive
Asian dollar debt delivered a total return of 2.5% in the month of July as yields fell about 40 basis points. The difference between Asian dollar debt and 5-year US Treasuries had widened in the month of June but narrowed significantly to 306 basis points. This is in line with historical average. However, given the better debt profile of Asian economies, a lower spread could be justified and thus, we believe this current spread still presents attractive investment opportunities for bond investors.
Maintain overweight in equities
Investors’ appetite for risk has been recovering with concerns over sovereign risk fading. Our portfolios have all benefitted from an overweight position in equities. With corporate earnings still driving equity returns, we believe it is still early for us to shift to a neutral allocation in equities. We continue to maintain our overweight position in equities for all five recommended portfolios but will watch out for any sudden turn of event that may once again cloud investors’ sentiments.
| Table 1: Past 6 Months Portfolio Performance |
| 29-Jul-10 |
2.6% |
3.2% |
3.8% |
4.9% |
5.3% |
| 30-Jun-10 |
1.2% |
1.5% |
1.8% |
0.4% |
1.0% |
| 27-May-10 |
-2.7% |
-3.9% |
-5.0% |
-6.5% |
-8.0% |
| 29-Apr-10 |
1.2% |
0.7% |
0.1% |
0.4% |
-0.2% |
| 31-Mar-10 |
1.5% |
2.6% |
3.7% |
3.7% |
4.8% |
| 26-Feb-10 |
0.2% |
0.1% |
0.0% |
0.0% |
0.1% |
| 6 months chain-linked performance |
4.0% |
4.1% |
4.2% |
2.6% |
2.4% |
| Chain-linked performance since revamp (end Aug 2009) |
7.6% |
7.2% |
6.8% |
3.5% |
3.1% |
| Source: iFAST Compilation |
Risk takers rewarded with bigger winnings
The strong equity performance saw the aggressive portfolio rewarded with a 5.3% gain as it emerged as the top performing portfolio for the month. With a slight underweight in our Europe allocation, we did not manage to reap the full reward of a European equities rebound. This also highlights the importance of a global diversification and why we should not shrug off exposure to the developed regions despite the relatively slower growth. On top of that, both the aggressive and moderately aggressive portfolio also benefitted from their supplementary portfolio exposure to global financials.
All portfolios’ funds returned positive in July
All the portfolio’s funds performed well in July, with none of them generating negative returns. Equity funds’ performance were impressive, led by PRU Pan European Fund which returned 10.1%. The second best performing fund was UOB United Global Capital Fund which returned 6.7%. Similarly, bond funds performance were also in the positive zone, led by Legg Mason Asian Bond Trust and PRU Monthly Income Plan Cl A which returned 3.0% each. The bottom performing fund for the month was UOB United Glb Emerging Mkts Portfolios S$ whose return was flat. However, this was affected by a dividend issuance with ex-date on 1 July 2010. The actual performance of the fund will be the dividend yield which will only be made known at a later date. For more details of the fund performance with respect to individual portfolios, please refer to the monthly factsheet of respective recommended portfolios.
Start with $20,000
Investors would be able to follow the target allocation in Table 2 with S$20,000 starting capital. The research team at iFAST will be providing the portfolio review on a monthly basis at the start of each month.
Latest Portfolio factsheets
The portfolios' factsheets are updated on a monthly basis and links for the most up-to-date factsheets are as provided below:
- Conservative Portfolio
- Moderately Conservative Portfolio
- Balanced Portfolio
- Moderately Aggressive Portfolio
- Aggressive Portfolio
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