A quiet month on the surface, a shifting one beneath
Global equities continued to grind higher, rising a further 0.5% in August. Markets in the US and the UK once again recorded new highs, advancing by 0.2% and 1.5% respectively. Small-cap stocks finally showed signs of life with their strongest relative performance in nine months, surging 5%. This segment of the market is typically more interest-rate sensitive and has significantly underperformed in recent years. Elsewhere, European markets rose 1.5%, while Asia closed 1% higher, driven by a 3% gain in China.
Noisy data, and a pivot at Jackson Hole
Data in the US remains noisy, which makes gauging the true direction of the economy a challenge. Second-quarter GDP was revised upward to 3.3% from the initial 3% estimate, with business investment showing particular strength, reflecting the boom in AI-related spending. Yet consumer sentiment painted a different picture. The consumer confidence index dropped to 97.4 in August, but the expectations index fell further to 74.8; historically, readings in the 70s and below signal a higher risk of recession. July's employment data also confirmed that a slowdown is underway, with further downward revisions to the May and June figures showing the weakest growth since 2011.
Inflation held steady at 2.7%, raising hopes that the US Federal Reserve could cut rates more aggressively through the second half of the year. Markets interpreted the combination of sticky but cooling inflation and softer employment as supportive of lower interest rates. The central bank kept rates on hold in August, but Chairman Jay Powell's Jackson Hole speech signalled a pivot toward growth concerns and a more accommodative stance ahead. This was confirmed in early September, as policymakers delivered the first cut of 2025, lowering interest rates by 0.25%. The bond market reacted decisively, with US Treasury yields moving sharply lower, while the US dollar continued to weaken, falling to its lowest level in over three years.
The bond market delivers its verdict on the public finances
The UK economy remains fragile, with growth for the three months to the end of July standing at a paltry 0.2%. The Bank of England lowered interest rates from 4.25% to 4%, as expected. However, a further tick up in inflation to 3.8% from 3.6% meant that market expectations for future rate cuts were scaled back for the second half of the year. Towards the end of the month, attention turned to the forthcoming Autumn Budget, which has been delayed until 26 November. Commentators appeared to engage in a race to publish the bleakest forecast, with the think tank NIESR leading with talk of a £50bn "black hole". The result was that more domestically focused stocks sold off, with the small and mid-cap indices notably underperforming large-cap, more globally focused names. Government borrowing costs spiked to 27-year highs as investors bet that the Government will need to borrow more as the economy slows. Yields on the 10-year and 30-year bonds rose to 4.65% and 5.7% respectively, the highest levels since May 1998.
After a strong start to the year, European markets have stalled in recent months; the region has struggled to make new highs since May. Slower growth, downward earnings revisions and political uncertainty have created a headwind. France finds itself in need of a new Prime Minister once again, after the incumbent François Bayrou lost a vote of no confidence after just nine months, having failed to agree essential spending cuts. He succeeded Michel Barnier, who managed just four months. A continued muddle-through, characterised by political stalemate, therefore looks likely. In Britain, the Deputy Prime Minister resigned after underpaying stamp duty on a second home, a breach of the ministerial code. Neither government needs to face voters for a while, but both are in difficulty as their policies have failed to stimulate growth, while deteriorating finances have prompted a run on long-term bonds.
Gold on course for its strongest year in three decades
Gold has remained one of the main beneficiaries of the excessive level of government deficits and outstanding debt in the West. The price surged by a further 5% to new highs and is on course for its strongest annual showing in more than three decades. The share price gains in the miners have now moved ahead of the gold price, after several years of lagging, along with the price of silver, which surged a further 8%. The US has just added silver to its list of critical minerals, underlining its investment case as both a precious metal and a strategic industrial material facing structural supply constraints going forward.
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
Lower rates ahead, and the risks of easing too soon
Markets have enjoyed a powerful move higher so far this year and it would not be surprising to see a pullback at this point. However, the overall environment for risk assets remains positive, hence we would view any such weakness as a potential buying opportunity. The US Federal Reserve has resumed its policy easing cycle, despite core inflation running a full percentage point above the official target. Leadership in many markets has started to switch to more recovery-orientated stocks in anticipation of a cyclical upswing, a trend likely to extend to small and mid-cap stocks should it continue.
Lower interest rates are clearly good news for markets over the next 12 months. The White House has made no secret of its desire for a significant reduction from current levels and is likely to use the opportunity to replace Jay Powell with a much more dovish alternative when his current term expires next May. The risk is that easing aggressively at this stage of the cycle could prove counterproductive, more likely to stoke inflation and a further sell-off in the bond market. The winners in this case would be commodities and precious metals, along with oil and mining companies.
As a result of the recent recovery, equity valuations in the US have returned to historically high levels and trade at a significant premium to multiples in other major markets. History tells us that stocks trading at these valuations rarely deliver the returns needed to justify their price tags. A strategy based on buying undervalued assets has proved the best way to ensure superior returns over the long term and argues for a more globally balanced approach to asset allocation.
The market is telling the Government exactly what it thinks of the country's fiscal position.
It is a welcome change to see the UK moving up the leader board this year. Despite a moribund economy and much gloom over the current direction of policy, UK plc is in much better shape. Listed companies are less reliant on the domestic economy, with over 70% of FTSE 100 revenues derived from overseas, falling to a still significant 50% for mid-cap stocks. Moreover, while there is much focus on the level of government debt to GDP, the corporate sector has reduced its debt ratio from 145% in 2011 to just 74% today.
The opportunities for active long-term investors are expanding globally, supported by a broadening out of growth drivers away from excessive concentration on a handful of mega-cap technology stocks in the US. Within equities, our preferred regions are the UK, Japan, Asia and emerging markets.
The United Kingdom
UK equities remain undervalued and under-owned despite their recent strong performance. The market offers exposure to global earnings, solid balance sheets, a high yield and valuations that remain low by international standards, suggesting there is still value to be unlocked. This is supported by the level of takeover activity, which has continued to accelerate. The cheapest valuation opportunities exist further down the market capitalisation spectrum, where the small-cap discount is standing at a 25-year high.
Emerging markets
Emerging markets are the best performing region this year and offer an attractive combination of historically undervalued valuations, an improving economic backdrop and stronger profits growth. Chinese equities are back in a bull market at last. Monetary and fiscal policies are as stimulative as they have ever been, and the economy is reaping the rewards of a highly productive workforce and large-scale investment in value-added sectors such as electric vehicles, engineering and, increasingly, AI.
Bonds over cash
While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. From an income perspective, yields are now attractive in both absolute and real terms relative to the level of inflation. Bonds also provide diversification in the case of slower growth but will not protect portfolios from the possibility that inflation remains higher for longer, with the exception of index-linked bonds. Upside may also be capped by concerns over the sustainability of government debt, as policymakers lack the will to cut spending.
Diversification beyond bonds
The current environment argues for broader diversification, including inflation hedges such as energy and commodities and geopolitical hedges like gold, in addition to recession hedges such as government bonds, alongside core holdings in equities. As well as reducing risk, incorporating additional asset classes allows us to capitalise on wider opportunities that exist outside of traditional equities and bonds.
Conviction in gold
We continue to view gold as essential portfolio insurance. We have held the view for some time that gold is resuming its role as the global reserve asset as a result of higher geopolitical risk, rising inflationary expectations and deteriorating fiscal trends. This is driving a powerful bull market, where multiple pockets of global capital, led by central banks, are diversifying away from dollar assets into gold as a safe monetary asset. For gold mining equities, current prices are translating into record profit margins and the highest growth rate of any sector in the broader equity market. Despite this, the sector currently trades at a reasonable multiple of 12X earnings.
Capturing the upside, controlling the risk
Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while also effectively controlling risk, to dampen volatility and smooth the path of returns. This is the discipline our clients have come to expect, and the one we believe best serves the long-term stewardship of capital.
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 →