Monthly Outlook July 2020

  • 08 July 2020
  • 5 mins reading time

We’re still facing a tough economic outlook for the next year or two, but intervention from central banks and governments has blunted the possibility of a depression. The European authorities have surpassed expectations with a combination of government spending stimulus in Germany, plans for a European Recovery fund and an expansion of the Pandemic Emergency Purchase Programme.

As a result, we are slowly adding to our allocation of higher-risk rated assets, such as company shares or “equity” within our short-term or tactical asset allocation which, we estimate, accounts for around 10% of returns. (This complements the longer-term strategic asset allocation which our analysis suggests accounts for the majority of returns).


More specifically regarding our short-term portfolio tactics, we have increased our allocation to European equity and reduced that to US equity. We also created an allocation to smaller US companies which we have identified as having the greatest potential for price rises should this occur in US equity markets over the summer.

Regardless of the region in focus, we continue to have a bias towards stronger companies with solid cash-flows and relative robust profit potential. This is because we do not expect a quick return to normality, so lower-quality companies remain vulnerable in our view.


Our increased holding of company bonds in our short-term allocation has paid off. Now that the prices of some of these bonds has risen, the potential for further rises is more limited.

As a result, we are changing our allocation to bonds issued by companies in emerging markets (such as Asia). We’re reducing the allocation to bonds issued in dollars and increasing the allocation to bonds issued in the domestic currencies of the companies issuing the bonds. We see some potential for the rise in the values of those currencies which would be beneficial to us, but we’re continuing to focus on bonds for which the underlying companies have good cash-flows and prospective profits.

In terms of government bonds, the prospects have deteriorated. Government bond returns often correlate with prevailing interest rates, and interest rates are extremely low and look set to stay that way. So we have reduced our short-term allocation to government bonds to a more neutral holding i.e. not overly optimistic or pessimistic about their near-term future.

Regions and currencies

Turning to currencies, bond yields in the US are no longer much better than those offered in other countries. As a result, we anticipate that there will be less demand for the dollar which would send its value down. This could be exacerbated by a swifter return to economic growth in areas outside the US where contagion levels have been more tightly controlled.

In anticipation of these developments and to balance the overall regional and asset-related risk levels that we have across our short-term asset allocation, we have taken positions that would benefit from rises in the Japanese yen and the Swiss franc, and from falls in the euro and the pound. Meanwhile, we have closed our positions that benefited from the rising Australian dollar and the Norwegian krone as we believe that these positions are less likely to continue to deliver positive returns.

Asset overview

Our general view of assets over the coming months can be summarised as follows:

Important information

Any views expressed are our in-house views as at the time of publishing.

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Forecasts of future performance are not a reliable guide to actual results. Investment markets and conditions can change rapidly and the views expressed should not be taken as statements of fact nor relied upon when making investment decisions. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.

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