July 2025 Market Overview
Another strong month, quarter & year, across the board, for most assets & asset classes.
The S&P500 staged an incredible rally from the April 2nd “liberation day” tariffs, which continued into June. The broad expectation is that geopolitical risks (wars in the middle east, Ukraine-Russia) are contained, and unlikely to spill over, whilst macroeconomic data (growth, inflation) remains either at trend or well behaved.
Fiscal policy has remained generally expansionary (sizeable budget deficits everywhere) which supports spending and spills over constructively into corporate profits, and monetary policy has generally eased in most geographies alongside the improvement (decline) in inflation.
Global shares
European equities largely took a breather, from a strong run, this month, finishing flat to down. The expectation that Europe will materially increase defence spending has boded well for investment (building + construction) as well expenditure in the region more broadly. Korean equities have been something of a standout, with tech/semis/chips leading the way.
Australian shares
In the local market, believe it or not, the Energy sector had the strongest returns, led by Santos receiving a bid from ADNOC (the Abu Dhabi National Oil Company) in combination with private equity. The initial involvement of the US in a strike against Iranian nuclear facilities temporarily saw oil spike well above $80bbl, before the ceasefire was called. US policy also turned more constructive on the outlook for nuclear, which saw uranium related plays rally more broadly.
Investment Outlook
The main issue moving forward is whether “cracks” are emerging in US labour market data. Initial jobless claims (for unemployment benefits) are rising, and continuing claims are elevated. That means once you lose your job, it’s quite hard to get another one. With personal income growth slowing, the expectation is that the unemployment rate will grind higher from here.
The term premium (a risk premia embedded in longer duration government bonds) has followed this general pattern of movement and suggests to us that government bonds are much more attractively priced than they used to be, and as such we are overweight (have more than normal) given the elevated economical and policy uncertainty.
We also note that for the first time in many years (see overleaf) the yield on government bonds (here the US 10 year) is ahead of the of the earnings yield of the S&P500, and broadly equivalent to the return on savings, as proxied by the anchor of nominal GDP growth.
Whilst we think “trade deals will be done”, they will largely be symbolic (don’t really achieve much) and the risk is always there that negotiations go poorly, leading to high profile diplomatic spats, that see us return to a more punitive state, like that of early April.
As has been much the same comment for some month now, we think the elevated yields on lower risk defensive assets (cash, credit, government bonds) compensate us well, to be patient, and to wait for dislocations that will almost inevitably arise in time.
EWK Investment Committee
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