Our monthly summary of market movements over the past month, what drove them, and our views ahead. We will also reveal our top fund recommendation for July 2021, alongside other interesting funds ideas worth highlighting.

Cheng Jingyan |  Published on 20 Aug 2021

How did FSM Indices (Equities & Bonds) perform in July?

In a mixed month filled with conflicting narratives, global equities have carried on trucking along and have outperformed global bonds across July. FSM Indices – Global Equities registered returns of 1.78%, and FSM Indices – Global Bonds registered returns of 0.62% in comparison. (as of 31 July 2021).

Notably, China continues to be the black sheep among global markets and has faced a difficult July. The Chinese government’s relentless crackdown continues, weighing on its equity markets; while its High Yield Fixed Income markets – which is heavily dominated by property developers, faced significant credit risk. Therefore, the result of this is that China funds continue to underwhelm, with the FSMI Indices – China Equity registering returns of -11.34% and FSM Indices – Asian High Yield Bond registering returns of -4.16%, significantly underperforming its global counterparts. 

Chart 1: FSM Indices Performance for July

Source: iFAST Compilations
Data as of 31 July 2021

What Drove Markets in July?

July: A month of conflicting narratives

July has generally continued the investment trends that we have identified in the 2nd Quarter. The tug-of-war between Growth and Value continues, as markets try to find the sweet spot between a healthy recovery and fears of rising rates, inflation, and the increasing number of COVID-19 variants.

Driven by excellent earnings reports, particularly in the US, developed markets have generally done better than their emerging market counterparts. In Europe, vaccine roll-outs continue to go well, with Spain, Italy, and Germany all overtaking the US in terms of share of the fully vaccinated . This development would hopefully lower the probability of further lockdowns and restrictions when the Delta variant inevitably spreads in the region. FSM Indices – US Equity and FSM Indices – Europe Equity returned 1.64% and 2.35% respectively (as of 31 July 2021).

Outside of these developed markets, both equity and fixed income markets continue to be weighed down by the aforementioned neverending series of bad news coming out of China. July saw China’s regulatory hammer seek further victims, of which the most notable include both Edtech and Tencent Music. Meanwhile, many of its Asian neighbours continue to struggle, facing extended lockdowns due to low vaccination rates and a rampaging Delta variant. While China continues to be the worst of the bunch, the rest of the region hasn’t fared particularly well either, with the FSM Indices – Asia Ex Japan Equity registered -5.17% and the FSM Indicies, Emerging Market Equity registering -4.49%.

July also saw the US 10-year yield further retrace some of its significant rise in 1Q 2021, ending the month at 1.23% (as of 31 July 2021). Since hitting a high of 1.75% in March, yields have fallen significantly since then, as concerns over decelerating growth and the Delta variant continue to persist. This could also indicate that markets have bought into the Fed’s “transitory inflation” narrative. 

What next?

Markets conditions continue to look rosy moving forward, with strong earnings, further reopening, and increasing global vaccination rates contributing to provide a rosier outlook. Even in some of Asia, some of the Delta variant headwinds are starting to clear, which might not be noticeable at first glance due to China’s overwhelming representation in the region. In particular, India’s equity market advanced slightly, with FSM Indices – India Equity coming in at 3.65% (as of 31 July 2021). India’s daily COVID-19 cases have started to ease, and the impact of lockdowns due to the second wave is looking less severe than earlier predicted. This has led to positive consumer and business sentiment in the country, and India could be an investment opportunity for investors comfortable with the higher volatility.

In our final segment of this article, we would like to highlight the Recommended Fund of the Month, but before that, here are some noteworthy fund ideas we have been writing on in July.

Here are some noteworthy Funds we’ll like you to check out

1.      Look no Further than APAC REITs for steady income:

Singaporeans are certainly no stranger to investing in property, with its high income with the potential for long-term capital growth making them popular among many Singaporean investors. Despite the impact of the pandemic, REIT’s have stayed relative resilient, as many REITs have kept leverage ratios low post the 2008 Global Financial Crisis.

This is especially true for APAC REITs, with healthy gearing ratios indicating strong balance sheets, and a strong rebound in M&A activity in the region indicating growing business confidence. With leverage being low, the threat of rising interest rates is also diminished. We believe that the underlying cause of rising rates – an improving economy – should prove a conducive environment for the region’s REITs, and should outweigh the negative repercussion of higher rates.

We particularly favour the Manulife APAC REIT Fund for its heavy exposure to Singapore REITs. Singapore’s high vaccination rate should indicate a relatively smooth reopening, as well as reduce the severity and likelihood of potential future lockdowns, which should help bolster REIT earnings.

For investors looking for a hassle-free method to invest in dividend-paying funds, the Manulife APAC REIT Fund is an attractive option. 

2.      5 Funds that Investors should look at for the Second Half of the Year:

As part of our Mid-Year Review, we also highlighted some funds that investors could look at for the second half of the year. Strong economic data and initial inflation prints have sounded a loud and persistent warning bell for a new, post-pandemic era, one that is unlikely to see a continuation of the current low-interest-rate environment. This makes it imperative that investors start positioning their portfolios accordingly.

For the second half of the year, equity continues to be our favoured asset class, and we believe that a quality and fundamental focus is the way to go. Not all assets are made equal, and in an inflationary and rising rate environment, different assets will react differently. It is in such environments where quality and fundamentals shine through, and investors should position their portfolios accordingly.

Finally, Our Top Fund Pick for the Month!

Our Top Fund Pick for July is the UBS (Lux) Equity Fund – Greater China!

Why this fund?

Despite China’s ongoing woes, our stance on China remains firm. While the Chinese government’s ongoing attempts to get its house in order continue to inflict significant volatility on the market, the long term trajectory of the Chinese equity market remains clear. We would like to once again reiterate our belief that investors should look past the short-term market noise, and look to invest in the long-term growth of the region.

For long-term growth, the UBS (Lux) Equity Fund – Greater China ticks all the boxes – the fund’s bottom-up, research-intensive approach and focus on quality should position them well for the long run. That said, regulatory headwinds, by nature, are near-impossible to predict, and it is anyone’s guess which sector the Chinese regulatory radar will pick up next. Rather than leaving this entirely up to chance, we advocate for an active approach, where investors can fully utilize the expertise and research capacity of the fundhouses to navigate this minefield and avoid any ticking time-bombs. In addition to this, investors can also consider an RSP approach – and gradually build up exposure to the Chinese market rather than jump in with both feet.

Looking forward

Looking forward, markets face an intriguing mix of positive and negative drivers. While most of the market continues to have a rosy outlook, investors have to be aware of potential corrections, especially considering the elevated valuations in most equity and fixed income markets. The best way to navigate this uncertain climate is to ensure that your portfolio has a quality focus, as well as being well-balanced and diversified.