July saw a significant rise in equity markets, which more than recovered the sharp losses seen in late May and June.  Central banks eased investor concerns by reaffirming their commitment to low interest rates for the foreseeable future after the Federal Reserve’s comments about tapering its QE3 quantitative easing programme had sparked a sharp sell-off.  The MSCI World index ended the month up +5.2% (and up +12.7% YTD), with most developed and emerging markets participating in the rally except for Japan and the BRIC (Brazil, Russia, India, China) countries, each of which has its own issues.  Despite the Federal Reserve’s effort to calm investor fears of a spike up in interest rates the yield on US Treasuries rose slightly to 2.6%.  However, the yield on German Bunds declined to 1.7%.  In addition, gold jumped up +6.9%, though it is still down -21.9% YTD.  Brent oil was up +5.4%, though still down -2.8% YTD.

US President Obama made his first multi-country visit to sub-Saharan Africa, stopping at South Africa, Senegal and Tanzania and promising greater investment and trade with the countries on the continent.  After a difficult June, South Africa’s JSE All-Share index was up +4.4%, helped by a rise in commodity prices and by the rand stabilising.

South Africa’s neighbour Zimbabwe held general elections at the end of July, with preliminary results indicating that President Mugabe’s ZANU-PF won by a landslide.  The elections passed without widespread violence, which is crucial for the economy to continue on its path to stability.  To the north, the Muslim Brotherhood in Egypt organised a string of protests, some of which were violently suppressed by the army. However, Egypt’s EGX 30 index rallied +12.0% for the month (though still down -2.8% YTD) on hopes that the country’s precarious economic situation will stabilise now.

In Asia, Japanese Prime Minister Shinzo Abe’s coalition won a majority in the upper house parliamentary elections, causing a large surge in the market on hopes that reforms will continue.  However, Japan’s financial markets are starting to price in inflationary expectations into interest rates, causing yields to rise sharply and even leading to the yen appreciating versus the US dollar during the month.  The Nikkei index subsequently fell back down and ended the month down -0.1% (though still up +31.5% YTD).  However, Abe’s reforms are starting to increase growth and inflation for a country battered by more than a decade of deflation and economic stagnation; if Abe can continue with his reform programme, the country may be well positioned for a decent recovery.

China averted a trade war with the European Union over the former’s supposed dumping of solar panels; this provides further evidence that the Chinese government is learning how to resolve its international disputes amicably in spite of its increasing power.  However, China’s economy slowed to an annualised growth rate of 7.5% in the second quarter, and the finance minister stated that GDP growth is expected to slow to 7% for the year.  As mentioned in previous commentaries, the government is intentionally causing a slowdown in investment to transition the economy towards greater consumption.  China is also trying to make the economic system more transparent and less corrupt, as shown by the government’s pursuit of pharmaceutical multinational GlaxoSmithKline for bribery.  The Shanghai Composite index was up a mediocre +0.7% and is still down -12.1% YTD; it is now down more than 60% from its all-time high despite increasing earnings, a sign that it may be near the bottom of its bear market.

Further south, India passed a law to provide cheap food rations to two-thirds of Indians, doing so by ordinance rather than getting Parliament’s approval.  The ruling Congress party has its eye on next year’s parliamentary elections and seems to be intent on ignoring a fiscal deficit that is already 5.1% of GDP in order to get itself re-elected.  The SENSEX 30 index continues to underperform, down -0.3% for the month and -0.2% YTD.

A Russian court convicted a leading government opponent and Moscow mayoral candidate, Alexei Navalny, of embezzlement.  Russia is already notorious for spending an estimated $50bn to prepare and host the 2014 Winter Olympics in Sochi; the original budget of $12bn had already made it the most expensive Winter Games in history.  The situation is probably not helped by Sochi being a subtropical beach resort that is one of the few places in the country where snow is scarce (and Islamist insurgents plentiful). The country’s MICEX index was up +3.4% for the month on higher commodities prices but still down -6.7% YTD.  It is now one of the cheapest equity markets in the world.

In Europe, unemployment in the Eurozone stayed at 12.1% with the number of jobless declining slightly, the first such decline since April 2011.  It is hoped that this will be the beginning of a recovery from the series of financial crises that have plagued the currency union since Greece effectively defaulted on its debts in 2010.  The banking sector slowly continues to deleverage.  However, the International Monetary Fund (IMF) warned that Greece may need an additional €10.9bn in bail-out loans by the end of 2015.  To add to the Eurozone’s problems, the Portuguese foreign and finance ministers resigned from the coalition government due to disagreements over the country’s austerity plan.  It is not clear if the government can continue effectively without their backing; this event sent Portuguese government bonds soaring.  Nevertheless, all major European markets rose substantially, with the FTSE 100 in the UK, DAX 30 in Germany and CAC 40 in France rising by +6.5%, +4.0% and +6.8%, respectively, during the month.

Pope Francis visited Brazil for the first time, attracting crowds of up to 1m.  Brazil’s government could use a prayer from him; its approval rating has fallen by almost half since protests against corrupt and poor services erupted a couple of months ago.  On top of this, the country’s growth rate has slowed to less than 2% as businesses struggle to remain competitive given Brazil’s high inflation rate, poor infrastructure and archaic commercial laws.  In addition, the price of Arabica coffee, one of Brazil’s largest exports, has fallen by more than half over the past two years; there are now demonstrations urging the government to subsidise coffee growers to maintain living standards.  The Bovespa index was up +1.6% for the month but is still down -20.9% YTD.  It is not at mid-2009 levels down 40% from its peak in 2011.

Further north, the US economy grew at an annualised rate of 1.7% in the second quarter, compared to 1.1% in the first quarter when it was heavily impacted by the federal budget sequester.  As the effects of the sequester begin to wear off later this year, growth may rise further.  In addition, the Case-Shiller index of home prices rose by 12% year over year, the biggest rise since March 2006.  Good economic data has fuelled a market surge; the S&P 500 was up +4.9% for the month and +18.2% YTD (and is now at an all-time high).  However, the good news was dampened by the bankruptcy filing of the city of Detroit, one of the US’s largest cities.  The bankruptcy highlights the poor finances of many US states and municipalities.  For example, the state of Illinois has healthcare and pension fund obligations that total more than 500% of tax revenues.  These fiscal problems have been one of the biggest detractors to US growth since the financial crisis.

The correction in May and June was overdue, as markets had been overextended after the prolonged rally since late last year.  July’s strong bounce back showed that the bull market in developed market equities might have some more room to run. While the US and Japanese economies continue to improve, Europe remains stagnant and growth in emerging markets, which have benefited from quantitative easing over the past few years, is generally slowing.  It is thus difficult to see how further rises in equities markets can be justified on a fundamental basis without further improvement in world growth.  But equities may continue to rise in the short-term as fixed income investors rotate into equities to avoid being hurt by rising interest rates.