Emerging markets lead the charge
Emerging markets rose 7.5%, boosted by a 10% surge in China, where government support for chipmakers, alongside an acceleration in AI spending and product rollout from some of the country's biggest technology names, fuelled the rally. US shares staged a comeback to close 4% higher, although the region has still underperformed year to date for sterling-based investors due to a weaker US dollar. Elsewhere, Japan and Europe rose by 2.8% and 2.3% respectively, while the UK main index lagged, up 1.6%, and small caps advanced by 3.1%.
Gold's strongest run in three decades, and silver plays catch-up
The gold price is on course for its best return in more than three decades, with the latest move a gain of 12% over the month. Yet this was eclipsed by the moves in the silver price and the shares of mining companies, with silver gaining 18% and the Jupiter Gold and Silver fund an eye-catching 29%. The fund is a core holding across our standard portfolios, investing in the bullion of both precious metals along with related mining shares.
Silver has a dual function as both a monetary and industrial metal, and is currently facing supply constraints due to strong demand from solar panels and its applications in AI and other high-end technologies. Relative to gold, its price remains extremely undervalued, having lagged considerably; only now is it approaching the historic high of $49.45 per ounce, which was set back in 1980.
A shutdown in Washington, stagnation at home
Politics took centre stage once again. The US government shut down at midnight on the last day of September, after Democrats and Republicans were unable to reach an agreement on how to keep it funded. In France, President Macron's latest choice for Prime Minister, Sébastien Lecornu, lasted less than a month before resigning, having failed to gain agreement on the budget. In common with his predecessors, he proved unable to find a viable compromise across the political spectrum.
The UK economy continued to stagnate, recording zero growth during the month of July. One bright spot was the services PMI, which rose to a 10-month high in the largest monthly gain since March 2021, indicating that growth in the service sector is recovering. The Bank of England left interest rates unchanged at 4%, following a cut of 0.25% in August to support the weakening economy. While rates are still likely trending lower over the long term, policymakers reiterated that they are in no hurry given the still elevated level of inflation. The Consumer Price Index remained uncomfortably high at 3.8% in August for the second consecutive month, and with the uncertainty created by the Autumn Budget, scheduled for 26 November, the sixth rate cut in the cycle may have to wait until 2026. Sticky inflation, alongside concern over the fragile state of public sector finances ahead of the Budget, helped to push 30-year gilt yields to their highest level since May 1998.
The Bank of England's stance was in sharp contrast to the US, where Chairman Jay Powell's Jackson Hole speech signalled a long-awaited pivot toward growth concerns and a more accommodative stance. This was confirmed in early September, as policymakers delivered the first cut of 2025, lowering interest rates by 0.25%. The August employment report painted a clear picture of a cooling economy: employers added just 22,000 jobs, far below consensus expectations, while unemployment rose to 4.3%, its highest level in nearly four years, giving policymakers cover to join the rate-cutting trend happening elsewhere. Government bond yields closed lower, as attention shifted from upside inflation risks to downside growth risks in the US economy.
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
What history says about cutting rates at all-time highs
The shift in US monetary policy triggered an immediate move higher in global equities, and the strength of the reaction shows how confident investors are about easier monetary conditions going forward, despite ongoing inflationary concerns. The historical evidence lends some support: when the Federal Reserve has cut rates with stocks at an all-time high, the US equity market has almost without exception closed higher one year later, with an average gain of 15%. This does not preclude a correction between now and then, but it does support the view that any sell-off should be treated as a potential buying opportunity rather than a reason for alarm.
The Fed cutting rates with the US stock market at an all-time high, inflation in the region of 3% and a fiscal deficit set to remain above 5% of GDP for the foreseeable future marks something of a departure from previous cycles. It lends credibility to the thesis that inflation is the least painful way for Western politicians to balance the fiscal books. A 1970s-style combination of high inflation and loose monetary policy therefore remains a possibility. In this environment, the outlook for real assets becomes increasingly attractive, where the winners would be commodities and precious metals, along with oil and mining companies. Precious metals have taken an early lead, but we would not be surprised to see a revival across the commodity and energy spectrum from here.
As a result of the recent recovery, the US equity index is even more concentrated in terms of mega-cap dominance than it was at the start of the year, and valuations have returned to historically high levels. The price-earnings multiple is back at 23X, well above the long-term average of 16X and in the top 5% of readings since 1985. History tells us that stocks trading at these valuations rarely deliver the returns needed to justify their price tags. Robust diversification is essential to reduce risks linked to over-dependence on the fortunes of US mega-cap stocks. In sector terms, we continue to expect a change of leadership, where the high-valuation growth stocks that flourished in the era of falling rates may underperform, while value-orientated stocks such as cyclicals, industrials and financials, along with small caps, take over the baton.
Inflation may prove the least painful way for Western politicians to balance the fiscal books.
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. 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.
Within equities, our preferred regions are the UK, Japan, Asia and emerging markets, supported by broader diversification across real assets and bonds.
The United Kingdom
UK equities remain under-owned despite their recent strong performance. While the domestic backdrop is challenging, three quarters of the index's revenues are derived abroad, and thus a resilient global economy is supporting returns. While there is much focus on the level of UK public sector debt to GDP, the private sector has reduced its debt ratio from 145% in 2011 to just 74% today. The market offers solid balance sheets, a high yield and valuations that remain low by international standards, supported by accelerating takeover activity. The cheapest valuation opportunities exist further down the market capitalisation spectrum, where the small-cap discount stands at a 25-year high.
Japan
Japan offers strong diversification benefits, with the lowest correlation of the developed markets, and remains desynchronised in economic terms. The Bank of Japan has maintained an ultra-loose policy stance, even though inflation is above 2%. The yen has depreciated significantly as a result, boosting the competitive position of the export sector, while Japanese equities remain cheap at 14X earnings. Recent reforms have delivered results: shareholder returns are rising, with buybacks at record levels, while corporate profits have doubled since 2012. Investing in an undervalued currency offers potential for additional gains for the sterling-based investor.
Emerging markets
Emerging markets are the best performing region this year. After a decade of poor performance, the gap with valuations in the developed world has widened, leaving the region offering 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, with monetary and fiscal policies as stimulative as they have ever been, and the corporate sector reaping the rewards of 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 and silver
We continue to own gold as essential portfolio insurance. Gold is resuming its role as the global reserve asset as a result of higher geopolitical risk, rising inflationary expectations and deteriorating fiscal trends, with central banks diversifying away from dollar assets. For gold mining equities, current prices are having a transformative effect, translating into record profit margins and the highest growth rate of any sector. Relative to the price of bullion, the sector would need to outperform by a further 30% to return to 2020 levels, yet profit margins are double what they were then, balance sheets are much stronger and shareholder returns much higher. In the latest quarterly results, producers generated around 50% more free cash flow than consensus expectations. Despite this, the sector 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.
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