Fears eased as the data steadied
Following strong gains in July, August began with a sharp pullback, as fears of a sharper slowdown in the US economy were triggered by a series of weaker data. Nonfarm payrolls showed that significantly fewer jobs had been added in July, and the ISM survey recorded an unexpectedly sharp downturn in manufacturing activity. Fears were eased as subsequent releases showed a more resilient picture, with retail sales, weekly jobless claims and small-business optimism all better than forecast. Growing expectations that the Fed would cut rates in September helped lift equity markets back into positive territory by month end and fuelled a 2% gain in bonds.
Tech corrects while gold makes history
In regional terms, UK equities advanced 3.2%, led by an impressive 6% surge in small caps. Japan and Europe rose by 2.3% and 2.1% respectively. Equities in both the US and Asia closed 0.5% lower, while emerging markets declined by 2%, driven by a 4.1% fall in China. Gold continued to outperform both equities and bonds, recording a new record high. For the first time ever, a bar of gold is now worth a cool one million dollars. The oil price rose initially as tensions increased between Israel and Iran, before selling off along with other industrial metals on weaker economic data in the US and China.
The move lower in bond yields was accompanied by a rotation in sector trends. The big US technology stocks suffered a correction following a series of underwhelming earnings reports. Alphabet revealed it was yet to receive any commercial benefit from its heavy spending on AI applications. Amazon also disappointed on heavy AI spending, its share price hit further by news that Warren Buffett had sold half of his stake. Microsoft shares fell as cloud revenue missed estimates, and while Nvidia beat expectations, its forecasts lacked the wow factor investors have become used to. A number of high-profile analysts questioned whether large-scale AI investments will pay off any time soon. The mega-caps clouded what was a generally positive US earnings season elsewhere, with overall earnings growth in excess of 13% for the second quarter. Prospects for a cut in interest rates gave new life to small caps and a broad range of value stocks in economy-sensitive areas such as banks and real estate.
Divergent policy moves, and a first cut at home
It was a busy period for central banks, where divergent policy moves added to volatility. The Federal Reserve held rates steady while giving strong signals for a cut in September, a decision that came prior to the release of US unemployment data showing an unexpectedly sharp slowdown, prompting some to argue the central bank had made a policy error by not cutting. To compound the sense that the Fed may have waited too long, the Bank of England announced its first rate cut, following similar moves among European central banks in recent months. Subsequent rhetoric from US policymakers was more soothing, with Fed Chair Jerome Powell confirming an imminent cut in interest rates. Elsewhere, the Bank of Japan finally hiked rates for the first time since 2007.
The UK economy expanded by 0.6% in the second quarter, in line with expectations and continuing its recovery from last year's mild recession. The unemployment rate fell to 4.2% from 4.4%. The Consumer Price Index held steady at 2% in June for a second month and ticked up slightly to 2.2% in July. More importantly, wage inflation continued to decelerate, slowing from 5.8% to 5.4%. Consumer sentiment hit its highest level in three years, an encouraging sign for retailers and travel companies. Next upgraded its profits, Frasers Group and Dunelm issued positive trading updates, and NatWest and Barclays performed strongly as profits came in significantly ahead of forecasts. Shares in property platform Rightmove were also strong on the back of a £5.6bn bid from Rupert Murdoch's Australian REA Group.
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
First or second quartile over every key period
We are pleased to share that all of our standard portfolios have had a strong start to the year, significantly outperforming their respective benchmarks and in doing so achieving first or second quartile over all key periods of one, three, five and ten years, as at the month end for both July and August.
The Fed prepares to join the easing cycle
After more than two-and-a-half years of interest-rate hikes aimed at taming inflation, the US Federal Reserve is finally set to follow other major central banks across Europe and the UK and reduce rates at September's meeting. Markets are now expecting policymakers in the US, the UK and Europe to push through faster rate cuts over the coming year. The US economy and labour market are clearly cooling, and the downside risks to growth have increased, but the Fed now stands ready to act and has plenty of scope to ease policy from current levels.
The recent broadening out of sector leadership is a welcome shift for active managers such as ourselves. As rate cuts proceed and markets anticipate a boost in growth, investors will increase their focus on areas of the market most likely to benefit from the stimulus, allowing small caps and value shares to continue to catch up to their growth peers in performance terms.
The broadening out of sector leadership is a welcome shift for active managers such as ourselves.
Equities outside of US mega caps remain attractive given an environment of stronger growth, gradual policy easing and improving corporate fundamentals. On a global basis our standard portfolios are overweight the UK, Japan, Asia and emerging equity markets.
The United Kingdom
UK equities remain our highest-conviction call. Economic data has surprised to the upside, inflation has been subdued and a stream of bids for cheap companies has continued to highlight the value in stocks. This should allow further scope for UK equities to continue to close the valuation discount relative to their global peers. The market is currently valued at ten times earnings; historical data from Liberum dating back to 1927 shows that when valuations are below 10X, returns in the following three to ten years have averaged around 14% per annum, and from starting valuations of 10–15X around 9–10%.
Japan
Japan remains attractive both in valuation terms and on improving fundamentals. A decade of shareholder-friendly reforms is enhancing corporate returns and profitability. At the same time, inflation has finally reignited in the economy, allowing businesses to raise prices and wages for the first time in decades.
Emerging markets
The US monetary policy outlook is likely to be most supportive for emerging markets, where equities are benefiting from stronger domestic demand and growth. India is taking steps to become an alternative manufacturing hub for global trade, with a low cost of labour, investment in infrastructure and a pro-business environment, and economic growth is accelerating towards 8%. Action by the Fed also provides greater flexibility for the region to initiate its own policy easing cycle without fear of negative repercussions for its currencies.
Bonds over cash
While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. 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.
Gold and commodities
Alternative assets such as gold and commodity stocks offer an additional source of diversification, allowing us to hedge against inflation and other potential risks and to capitalise on wider opportunities outside of traditional bonds and equities.
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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