Full of contradictions, but equities stay firm
Current investment markets are full of contradictions. Equities remain firm and within a few percent of their all-time highs, buoyed by firm economic growth and improving earnings numbers, with the global manufacturing PMI index at a 75-month high. Meanwhile, fixed interest bond yields are falling again. Two highly unstable leaders are playing a game of chicken with a nuclear button, yet there has been no more than a token markdown in prices, often reversed a day or two later.
Broad-based gains despite geopolitical noise
A month of generally supportive economic data lent an underlying bid to stock markets, though the mood was soured on occasions by terrorist attacks in Spain and raised voices from Messrs Trump and Kim Jong Un. Towards the end of the month, the arrival of Hurricane Harvey brought concerns that the reduced supply of oil and gas would lead to price rises.
Developed markets fluctuated between flat and up 2 to 3% throughout August. The US, Europe and Japan all rose by around 2.5% in sterling terms, while the UK put in a more subdued performance of 1.5%. Asia and emerging markets fared better, showing gains of 3 to 4%. Bond markets witnessed the rarity of government bonds rising by more than those issued by companies.
Central bankers rein back as hurricanes and politics complicate the picture
Central bankers reined back on signalling any immediate tightening of monetary policy. The US Federal Reserve board were split over the inflation outlook, with some members concerned about risks to the downside. The UK's Monetary Policy Committee voted 6-2 in favour of holding rates and cut their forecasts for economic growth. The European Central Bank's concern over the strength of the euro, trading at a trade-weighted two-year high, lessened the likelihood of any near-term tightening. A notable exception was the Bank of Canada, raising rates by 0.25% in early September.
This week saw US politicians cobble together a deal for a temporary rise in the government debt ceiling and agreement to fund the government until mid-December. Although largely taken for granted, this action was necessary to prevent both the possibility of the US defaulting on its debt and the shutdown of its government, which, at the very least, would have denied aid to victims of the hurricanes.
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
Contradictions everywhere, complacency unshaken
Current investment markets are full of contradictions. Equities remain firm and within a few percent of their all-time highs, buoyed by firm economic growth and improving earnings numbers. Data released this week showed the global manufacturing PMI index at a 75-month high. Meanwhile, fixed interest bond yields are falling again, with UK and US 10-year bonds yielding 1% and 2.05% respectively. Bond market prices currently imply no chance of a US interest rate rise in September and only a one-in-three chance of a rise before the year end. This move would normally be associated with fears of an economic slowdown, and yet the average yield on a European high-yield bond is a mere 2.4%. To emphasise: that is a return of just 2.4% on junk.
Putting aside geopolitics for a moment, the US is suffering a battering of Biblical proportions. Hurricane Harvey has left damage estimated in the billions of dollars, with the threat of Irma, Jose and Katia still to come. Meanwhile, the west is under attack from multiple wildfires stretching from Washington state to California. While acknowledging the devastation to thousands of households, on an economic level, data over the next few months will need to be viewed with caution. This might lead an already cautious Federal Reserve to postpone further tightening.
We still expect a market correction at some point. We still have no idea when this will happen. Currently we are witnessing two highly unstable leaders playing a game of chicken with a nuclear button, and yet there has been no more than a token markdown in prices, often reversed a day or two later. This gives some indication of the complacency of an investor base comforted by the knowledge that central bank asset purchases are unlikely to finish any time soon, even if the size is reduced slightly around the turn of the year.
The average yield on a European high-yield bond is a mere 2.4%. To emphasise: that is a return of just 2.4% on junk.
As uncertainty over wider geopolitical, meteorological and economic issues continues, we anticipate an interesting and possibly volatile autumn. We are maintaining diversified portfolios with the capacity to take advantage of opportunities when they become available.
Gold exposure delivering strong returns
Our portfolios benefited from their weighting in the Blackrock Gold & General fund, which rose by over 6% in August.
Asian equity income gaining
Our recent purchase of Guinness Asian Equity Income gained 6.7% over the month.
Russia fund performing on higher-risk portfolios
Despite increasing global uncertainty, the Neptune Russia & Greater Russia fund, held on our higher-risk portfolios, put on 10%.
Underweight fixed interest
We remain underweight in fixed interest funds, preferring equities and absolute return funds.
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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