While the European Football Champions have now been comprehensively determined, albeit not in England’s favour, we had another week of seemingly placid market returns as they remain decidedly undecided about economic events and potential future outcomes. The MSCI All Country World Index was down -0.5% in GBP terms, while leading markets included the UK and the US. Chinese equities continued to sell off heavily, with MSCI China returning -4.7% for the week, dragging the wider Emerging Market index lower.
China has been giving investors cause for concern for some weeks now. Economic activity in the Middle Kingdom has been slowing, as illustrated by the closely watched “credit impulse” which peaked last year and has been declining for the year to date. This measures public and private credit creation and tends to foreshadow economic activity. As a response to this, last week the People’s Bank of China cut interest rates in order to inject more stimulus into the economy. China’s economic health is very important to the global reflation narrative, and the YOU Investment team together with other investors will be monitoring developments here closely.
Another key focus for markets has been the start of Q2 earnings season in the US, that kicks off this week as the large US banks have announced. The largest US companies are expected to reveal year-on-year earnings per share growth of +63%, which is the largest jump since the emergence from the depths of the 2008 crisis. What is different this time is that the S&P index of large US stocks is at an all-time-high and is trading on a very expensive multiple of 31x earnings. Should these lofty earnings expectations disappoint, there is potential for a market upset.
It has been widely documented that humans (i.e. investors) are more psychologically averse to dashed expectations and losses than they are to upside news, a feeling readers will no doubt be all too familiar with this morning.