New highs as central banks begin to signal the road to normalisation
Global equity markets reached new highs in August, as a raft of positive earnings and a broadly dovish tone from the US Federal Reserve offset concerns over the prospect of monetary policy tightening and the ongoing spread of the Delta variant. Gains ranged from 2.5% in Europe and the UK to 4% in Japan and the United States. Emerging and Asian markets dipped mid-month as China toughened regulatory control on domestic technology and education-related shares, but recovered to close up 3.6% and 2.7% respectively.
Positive earnings offset labour shortages and supply disruptions
A shortage of labour and materials continued to act as a drag on growth. Global data reflected a slowdown from the previous high levels of activity, but this remains hard to judge until supply bottlenecks subside. Employment data in the United States surprised with considerably fewer new jobs than had been expected, but with vacancies close to record highs, this continues to suggest a reluctance among many Americans to return to the workforce. Eurozone inflation hit a near-decade high of 3%.
Bonds showed little change except for a slight rise in UK index-linked and emerging market bonds. The bond market remained largely calm, with investors taking comfort from central bank messaging that sought to separate the timeline for tapering bond purchases from any future decision on interest rates.
Tapering approaches, but rate rises remain distant
The US Federal Reserve signalled its intention to start reducing the bond-buying programme this autumn. However, Chairman Jerome Powell continued to stress that the timing remains flexible, with policymakers monitoring economic data and pandemic risks. He also reassured markets that this should not be taken as an intention to raise interest rates any time soon, noting that they have different and more stringent tests in place to determine that outcome.
The European Central Bank raised their projections for future inflation rates, but only the short-term data would trouble their mandated target. Chief Economist Lane stressed that policymakers are determined to keep financing conditions across the 19-nation Euro region favourable and signalled that they would take their time to decide how to conduct bond purchases once their pandemic emergency programme expires. The Bank announced a small reduction in bond purchases, specifically referred to as "recalibrating," not "tapering."
Regulatory intervention creates a mid-month dip
Emerging and Asian markets dipped mid-month as China toughened regulatory control on domestic technology and education-related shares. However, markets recovered to end the month up 3.6% and 2.7% respectively. The sell-off served as a reminder of the regulatory risks inherent in Chinese equities, even as the broader growth story across emerging markets remained intact.
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
Low rates will continue to push investors towards equities
Early September has seen a small pick-up in stock market volatility, with the Delta variant still rising in the US and the Mu variant spreading across 39 countries. The exception has been Japanese shares, which have reacted favourably to PM Suga's resignation.
Strong employment data in the UK prompted talk of a rise in interest rates as early as next February, but with the rise in UK taxes due to take effect from April 2022, we feel that the Bank of England might err on the side of caution. They will probably want to see how much this dampens activity and confidence before imposing additional tightening.
The past few weeks have seen the central banks of the United States, United Kingdom and Europe all introduce the notion of tapering, probably before the year-end, without a consequent collapse in bond prices. The key to this success has been the collective distancing of this proposed withdrawal of liquidity from interest rate policy, with the message that rates will not be changing any time soon. For now, with inflation numbers in the US dipping slightly, investors are happy to go along with this. We remain of the view that fixed interest bond prices do not sufficiently reflect the risk of potential inflation.
Interest rates will remain low, causing investors to seek higher returns elsewhere, most likely in equity markets.
Scant attention has been paid to the imminent elections in Germany. The world's fourth biggest economy will this month see Chancellor Angela Merkel, undeniably Europe's prominent statesperson, replaced by a relative unknown. With candidates from her conservative coalition struggling, the current leader in the polls is a social democrat who, if elected, could lead a programme of fiscal reform in contrast to Germany's historic austerity. We continue to believe that interest rates will remain low, causing investors to seek higher returns elsewhere, most likely in equity markets. This will not prevent volatile markets, or the occasional correction, but it increases the likelihood of investors targeting sell-offs as an opportunity to boost their savings.
Portfolios remain positioned with limited bond exposure and a deliberate balance between value and growth, with minimal exposure to the most expensive US technology stocks and diversification through alternative assets.
Limited exposure to rising yields
Our fixed interest funds continue to have limited exposure to rising yields as we feel that current levels do not offer sufficient reward for the potential risk of capital loss.
A balanced mix with reduced FANG exposure
We are holding a mix of value and growth stocks but have sought to minimise exposure to US-listed technology giants, where valuations have become excessive. We have been researching additional funds to add when markets present an opportunity.
Diversification through alternative assets
Our portfolios diversify risk by investing in a wide range of assets using actively managed funds with sound investment processes. Some examples of these alternative assets are funds invested in gold & silver, infrastructure, agriculture and absolute return strategies.
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.
Make an enquiry →