Calm on the surface, uncertainty underneath
August brought a rare respite from volatility. Shares and bonds quietly edged higher, with volatility at its lowest for over a year. In the UK, survey data recorded dramatic rebounds from post-referendum lows, while at Jackson Hole, Federal Reserve Governor Janet Yellen said the case for a US rate hike had strengthened. Across Europe, political uncertainty continued to build ahead of a busy autumn.
Low volatility and a UK survey rebound
Stock-market volatility, as measured by the VIX index, was the lowest for over a year as shares and bonds quietly edged higher. Developed markets rose by between 1-2%, with the S&P 500 briefly making another record high. Fixed interest continued to perform well, buoyed by central bank buying.
The UK witnessed a strong rebound in economic survey data. The same series that caused post-referendum panic the previous month showed record monthly gains, as readings signalled a return to growth in the economy. Unfortunately, the subsequent release of July's weaker manufacturing data took some of the shine off sentiment and the currency.
At the financiers' summer camp in Jackson Hole, Federal Reserve Governor Janet Yellen said that the case for a US rate hike had strengthened over recent months on the back of a solid performance in the jobs market and a better outlook for economic activity. Data from the US remained mixed, but the recent weaker jobs number might just tip the scales in favour of leaving rates alone for September.
A very interesting year shaping up across the Channel
Spain was still unable to decide on a ruling party and would now require a third election, filling the void until the Italian referendum on constitutional reform in October and US presidential elections in November.
Across the English Channel, things were shaping up for a very interesting year, with growing political disquiet with incumbent leaders. The coming months would see an Italian referendum on constitutional reform proposed by Prime Minister Renzi; a failure to gain sufficient votes might be deemed a vote of no-confidence, opening the path for the euro-sceptic Five Star party. In 2017 both France and Germany had political elections. President Hollande currently commanded a record low 10% popularity rating and Chancellor Merkel's party were third-placed in the previous week's local elections. This political uncertainty would at times provoke speculation of an EU break-up and could also influence divorce negotiations with the UK if Eurocrats looked to make an example of those that exercise democracy.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Do not dismiss the prospect of rising inflation
There is currently a complacent view of "lower for longer," whether that applies to growth, inflation or interest rates. The overall level of global debt may well mean that this continues to be the case, but the amount of ammunition that central banks are firing to get growth and inflation higher is without precedent. The fact that it has failed so far is not a reason to dismiss the prospect of rising inflation going forward.
The sharp rebound in UK survey data (the Purchasing Manager Indices) partly reflects the previous month's emotional over-reaction to scare stories over the Brexit vote. It might also indicate a more favourable trading outlook as a result of the weaker currency. More tellingly, it makes Bank of England Governor Mark Carney's immediate "rate cut plus" package look a tad hasty.
Sentiment in the UK has done a "three-sixty," from discounting Armageddon to welcoming this Brave New World outside of Europe. In reality both reactions lack credibility, as little has changed so far. Policies have yet to be agreed and serious negotiations look set for 2017 at the earliest. So, apart from a lower currency and the shelving of some investment projects, any real insight into how our economy adjusts will be months away at the very least.
Sentiment in the UK has done a "three-sixty," from discounting Armageddon to welcoming this Brave New World outside of Europe. In reality both reactions lack credibility.
We made no changes to our portfolios over the month. The rally across equity markets has been stronger than we anticipated, but we expect volatility to pick up going into the autumn.
Bonds offer poor value
We continue to view fixed interest bonds as offering little reward for the risk of capital loss and prefer a combination of property, absolute return funds and equities.
Property as a diversifier
The temporary suspension of dealing in commercial property funds remains in place, although valuations have started to edge higher again. Given the exuberance across other asset classes, we regard property, along with gold, as a useful diversification of risk.
Gold remains a useful hedge
Gold gave back some of the year's gains but remains a useful hedge against the perceived failure of central bank policies and the general uncertainty ahead.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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