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Creation Commentary - July 2020

UK: Suitable for retail investors

In this month's edition:


Market review

Governments around the world tentatively reopened economies but at the same time, many countries faced a resurgence of coronavirus cases, prompting concerns that a ‘second wave’ was already underway.

In the UK, Chancellor Rishi Sunak delivered his summer statement in which he announced a VAT cut for the hospitality sector, the introduction of a jobs retention bonus, and a reduction in stamp duty. Despite the economic stimulus measures and extra precautions, the FTSE All Share ended the period delivering a total return of -3.6%. By the end of the period, 10-year UK government bond yields had reached new lows, with the ICE BofA 1-10 Year UK Gilt index returning 0.3% over the period.

Several European countries witnessed a spike in coronavirus cases, including France, Spain, Belgium, and Luxembourg. With the pandemic still very much a threat in the region, the MSCI Europe ex UK index generated a total return of -1.6% during the period.

Data published in July by Eurostat revealed that the eurozone economy contracted by a record 12.1% in the second quarter compared with the first quarter – the sharpest decline since 1995. Spain recorded the biggest decline, as its economy shrunk by 18.5% in the second quarter. The data showed that Portugal’s economy contracted by 14.1%, while France saw a decline of 13.8% in the second quarter. Talks between the UK and EU about a post-Brexit trade deal continued, but the EU’s chief negotiator Michel Barnier warned that “significant divergences remain” between the two sides.

Across the Atlantic, the US earnings season got underway. The US Commerce Department published data that showed GDP in the second quarter shrunk by 32.9% on an annualised basis, making it the fastest quarterly contraction on record. Shortly after the economic data was published, President Donald Trump tweeted the 2020 presidential election should be delayed, calling into question the accuracy of the postal voting system, as Democratic nominee Joe Biden continued to lead the polls.

The US dollar had its worst month in a decade, with the US dollar index (DXY) down more than 4%. The US dollar dropped by 5.5% versus sterling, which masked what was otherwise a strong month for US assets in local currency terms. The MSCI USA index consequently delivered a total return of -0.3% in sterling terms as the equity market focused on better than expected corporate earnings, but this was eclipsed by the fall in the currency, dragged lower by mounting coronavirus cases and rising tensions between China and the US. At its two-day meeting towards the end of the period, the US Federal Reserve left its policy unchanged, noting that it remains committed to deliver more stimulus if required.

The ICE BofA US High Yield sterling hedged index ended the period delivering a 4.5% return, while the ICE BofA US Treasury sterling hedged index, recorded total returns of 1.1% in sterling terms. This is compared to the returns of the unhedged indices where the weakening of the dollar against sterling pushed both indices into negative territory in sterling terms.*

Chinese stock markets rallied further in July, even as the country battled to contain a slight increase in coronavirus cases and trade tensions with the US rose. The National Bureau of Statistics reported 3.2% year-on-year GDP growth for the second quarter, following a contraction in the first quarter. The positive economic data helped buoy the MSCI China index which ended the period up 3%. Emerging market currencies climbed over the period as the US dollar declined in value, weighed down by worries about the economic recovery. This helped emerging market equities, with the MSCI Emerging Markets index returning a positive 2.6%.

The gold price extended its rally during the period, surpassing $1,900 per ounce (oz) and eventually hitting a record $1,945.16/oz, beating the previous high set in September 2011 of $1,921/oz.

(All performance figures in sterling terms and rounded to one decimal point, unless otherwise stated)

*Currency hedging of foreign investments removes the risk of currency fluctuations affecting the returns on your investment. Under normal circumstances, in the Cirilium Blend Portfolios we currency hedge our foreign bond holdings.

Performance review

May was another month of positive July was a generally positive month for the Creation portfolios, thanks to the continued rise in risk assets like equities and bonds, as major economies continued their slow unwind of lockdown measures, with the occasional tightening as coronavirus hotspots appeared.

Equities in general performed well, but the strength of sterling meant that while underlying equity markets generated strong local currency returns, including in the US, when this was translated back into sterling the returns were relatively muted from a UK investor point of view.

Manager performance added value to the portfolios in July, particularly among the US growth strategies, which delivered strong returns, compared with the more value-orientated strategies (those that focus on companies where the share price is cheap relative to corporate fundamentals such as book value, earnings per share and dividends per share) that continued to underperform. The alternatives exposure provided steady returns, while our fixed income managers also performed well during the month.

In terms of portfolio activity, we reduced our overall exposure to emerging markets in favour of European equities as part of our strategic asset allocation process. This is where we regularly analyse a range of investment assumptions, optimise the results in relation to the risk profiles of the portfolios and then implement any necessary changes.

We also sold our holding in the Merian Systematic Positive Skew strategy, due to the closure of the fund, while we reduced our holding in the PIMCO Dynamic Bond Fund to take advantage of the recent rally. During the month we also initiated a new position in the Quilter Investors Global Equity Growth Fund, managed by Fidelity. This is a fund that has demonstrated a strong ability to add value from stock picking and sector allocation, and whilst it increases our exposure to the ‘growth’ style (a focus on companies expected to deliver strong earnings growth in the future) it has achieved good returns without over-reliance on US technology stocks, which makes it stand out amongst its peers.


There are currently three main areas we are focused on as we move towards the end of the year, the most pressing of which is the prospect of a second wave of coronavirus cases causing further disruption globally.

Headline data showing rising new coronavirus cases has been alarming, although breaking down the US data shows that current hospitalisations and deaths are not nearly as high as in March and April. Hospital utilisation therefore appears to be far from capacity, which indicates states will be reluctant to impose more draconian lockdown measures as they seek to aid the economic recovery. This is key for equity markets, which have so far remained relatively sanguine. Provided the situation does not deteriorate further in the US, markets still retain the potential to drift higher from here, powered by the wave of liquidity pumped into the global financial system by the major central banks.

Meanwhile, the US dollar sell-off witnessed in July has had a meaningful impact on unhedged overseas equity returns. Our view is that this currency weakness has been a function of the decline in US interest rates and the relatively weaker potential US growth trajectory. As the US grapples with coronavirus outbreaks and potentially more onerous or longer lockdowns.

The key beneficiary of this has been the euro, which has rallied materially versus the US dollar. Ironically this risks curtailing European growth given the strong focus on exporting for European corporates, as with costs in euros and revenues in US dollars their profit margins may come under pressure. The weaker dollar is also supporting commodity prices, in particular gold and silver, which are benefiting from low real interest rates (which reduces the opportunity cost of owning a non-income-producing asset).

The US presidential election, meanwhile, is also starting to generate more attention as we move closer to November. We believe the race is likely to be closer than the polls currently suggest (they show a clear advantage for Joe Biden) and would expect that a close result in favour of either side will be disputed due to the likely large scale use of postal votes, which are more susceptible to errors or fraud. Any such prolonged uncertainty would likely be bad for markets.

A key issue will also be the result of the Senate elections. Currently Republicans hold the Senate, while Democrats hold Congress – but if the Democrats can take control of the Senate, this opens up the possibility of a Democrat “clean sweep” where they would control Congress, Senate and Presidency (if Biden is elected). This raises the likelihood that Biden could push through his campaign promises such as increasing the corporate tax rate – which would be unambiguously bad for US equities.

Sacha Chorley

Portfolio Manager

Stuart Clark

Portfolio Manager


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