Up until the last day of July, everything was going great: stocks were solidly up for the month, the DJIA was on the verge of 17,000, and the wealth effect was flourishing, if not the economy. Then yesterday happened, and everything changed: not only did the S&P turn red for the month, but the DJIA slid to red for 2014. So what is the best performing asset class in July? With the PBOC now openly unleashing QE in its economy, no surprise that it was the Shanghai Composite, which returned over 8%, if virtually nothing since 2009. However, don't expect this to last: for China real estate is orders of magnitude more important than the stock market to boost the wealth effect.
As for the best returning assets class in 2014 YTD: don't laugh - it's still Spain and Italy. Expect the day of reckoning for Europe's periphery to be fast, unexpected and very brutal.
From Deutsche Bank:
The last 48 hours have made a big difference to returns in July with a sell-off in rates, credit, equities and commodities changing the month dramatically over this period and leaving a few more markets down for 2014 now.
DM equities were tipped into negative territory for July while EM stocks had enough outperformance through the rest of the month to largely stay in positive territory despite the weakness in Russian equity markets. China was the key outperformer with the Shanghai Composite (+8.8%) posting its best monthly total return performance since December 2012. The rally in China also benefitted Hong Kong equities with the Hang Seng (+7.3%) recording its biggest monthly gain in two and a half years. Back to the DM world, the Stoxx 600 and S&P 500 were -1.6% and -1.4% respectively – with the former probably negative impacted by the BES-driven weakness in Portugal (-10.5%). A poor month for the DAX (-4.3%) and CAC (-4.0%) has pushed them both into negative total return territory for the year at -1.5% and -1.2%, respectively. The FTSE was down -0.1% on the month keeping it in slightly negative territory for the year (-0.3%) although dividends have helped YTD total returns stay in the green. The DOW is also down YTD now.
Moving on to Fixed Income, it was a mixed month for core rates with Europe outperforming Treasuries. This is perhaps not surprising with core European rates flirting around their all time lows whilst USTs suffered a dip following the strong GDP print just a day before month end thus giving up about half of all of the month's earlier strong gains. Turning to Credit, it was modest month for IG total returns but nevertheless IG still did better than HY with US HY (-1.7%) underperforming on the ETF outflow story. Staying in fixed income but moving to EM, the overall benchmark was down 0.6% with strength in Asia (+1.3%) neutralising the weakness in Latam (-0.7%) and EEMEA (-1.3%).
The commodity complex had a very weak month with Corn, Wheat, and Brent all down -16%, -6%, and -5% respectively. Incidentally this also came during a fairly encouraging month for the Dollar bulls with the Greenback appreciating about 2% against a basket of major currencies.
To sum up the year to date performance so far, the European peripheral complex is still the key winner with the IBEX (+12%), FTSEMIB (+11%), Spanish Bonds (+10%) and BTPs (+10%) topping our performance ranking chart and returning about twice as much as the S&P 500 (+6%). EM equities have also done surprisingly well this year with a +8% gain to date. The latest July performance in China has also bumped both the Shanghai Composite (+7%) and the Hang Seng (+9%) into our top 10 list. Core DM rates are still in positive territory, though not surprisingly with Bunds (+6%) outpacing Treasuries (+3%). On the other end of the spectrum, the Nikkei (-3%) remains a key laggard while Russia (-5%) is feeling the heat from the ongoing geopolitical volatility. Generally commodities are amongst the worst performers this year largely led by softs.
Visually, the month of July
[13]
And YTD:
[14]
