Developed market (DM) equities delivered a positive return (MSCI World +1.8% MoM) for the sixth-consecutive month. US stocks were amongst the best performers (S&P 500 +2.4%MoM), as large US corporates started reporting 2Q21 earnings. Around 60% of S&P 500 companies had reported earnings by month-end, with those earnings doubling relative to 2Q20. While earnings were expected to be significantly higher than 2Q20 (the quarter most severely impacted by the pandemic) earnings in aggregate were still c. 18% ahead of expectations for those companies that have reported results thus far. Technology (tech) shares generally fared better than cyclicals, the latter came under pressure as a renewed acceleration in COVID-19 infections began to emerge as the more infectious Delta strain started to spread through DM economies in the throes of reopening.
Emerging market (EM) stocks fared poorly in July (MSCI EM -6.7% MoM) dragged down by Chinese stocks, particularly the Chinese tech heavyweights, as Chinese regulators cracked down on the sector in July. The first salvo from the regulators was the demand to remove Chinese ride-hailing app, DiDi Chuxing, from app stores in China, just days after its c. $65bn IPO in the US. This was followed days later by Chinese online education companies being banned from making profits. Regulators also discussed placing additional curbs on raising offshore capital and increasing scrutiny for anti-competitive behaviour. The Nasdaq Golden Dragons Index of US-listed Chinese companies fell 22% MoM and is down c. 43% since its peak in February.
Chinese equities were the biggest pain point amongst EM stocks, but Brazilian equities also had a tough month (-4% MoM) as did the local currency (Brazilian real -4.7% MoM). With 15 months to go until the next Brazilian election, polls showed incumbent, Jair Bolsonaro falling behind and his strategy for holding on to power seemed to be a pre-emptive attack on the electoral system, which did not sit well with investors. The Brazilian stock market’s exposure to iron ore miners also did not help its cause in a month which saw iron ore prices drop by 10% in the face of a pledge by Chinese authorities to clamp down on steel production. Energy companies also had a tough month, with the S&P 500 energy sector comfortably the worst-performing sector in July (-8.3% MoM). During the month the price of Brent crude oil briefly fell below US$70/bbl as oil-producing nations agreed to increase output but, while energy companies responded poorly to the news, energy prices quickly recovered to end the month higher as the prospect of small supply increases is unlikely to bring material relief to a still tight oil market.
In US economic data, 2Q21 economic growth missed lofty expectations, coming in at 6.5% QoQ, with the underperformance largely attributed to shrinking inventories, as producers struggled to keep up with robust consumer demand. Retail sales again accelerated (0.6% MoM), with vehicle purchases still significantly above average. Inflation continued to exceed expectations with June prices reported to be 4.5% higher YoY although the message from the US Federal Reserve’s Federal Open Market Committee (FOMC) remained somewhat cautious and US 10%-year rates drifted 0.25% lower, ending the month at 1.2%