What’s happened in markets?

FTSE All Share 0.40 4.19 4.05 1.43 5.91 5.28 4.34
Euro Stoxx 50 -1.23 4.05 3.03 -10.63 -6.41 6.44 4.84
S&P 500 -1.16 7.58 8.85 -10.40 -2.60 14.93 13.73
Japan Topix 1.08 4.83 7.40 1.51 7.68 12.73 6.98
MSCI Asia Pac. -1.30 1.03 0.75 -16.89 -16.58 4.22 2.34
MSCI Emerg. Mkts. -1.47 2.67 0.38 -16.74 -16.05 3.55 1.62
Jo’burg All Shares -1.08 3.32 2.86 -2.74 10.71 12.82 8.55
UK Gov’t Bonds -2.15 -0.68 -6.18 -15.34 -17.60 -5.39 -1.36
US Gov’t Bonds -0.70 0.17 -0.90 -9.24 -10.25 -1.78 0.54
Global Corp. Bonds -1.19 0.97 -0.19 -11.44 -12.35 -1.32 1.43
Emerg. Mkt. Local -2.44 2.82 -0.84 -12.09 -14.35 -3.97 -1.36
Figures in the respective local currencies as at the end of trading on 19/08/2022.

The week of 15 August was another interesting one on the US economic front. Data continued to be mixed but was supportive overall, with initial jobless claims down and the Philadelphia Fed Business Outlook, a gauge of factory activity in the US mid-Atlantic region, surprising on the upside for August. However, existing home sales fell for a sixth consecutive month, dropping 5.9% to a seasonally adjusted annual rate of 4.81 million in July, the lowest since May 2020, reflecting the impact of Federal Reserve (Fed) tightening.

On the policy front, Fed members seemed to differ on the next base rate hike, with expectations of 50 or 75 basis points at the Fed meeting in September. There was agreement, however, on the current inflationary pressures and that it is too early to declare victory over rising prices, meaning the case for tightening remains strong despite the lagged impact it may have.

In terms of UK economic data, it was a grim week. The August index score for UK consumer confidence from data provider GfK plunged to its lowest level since comparable records began, nearly 50 years ago, as the cost-of-living crisis stoked concerns over personal finances and economic prospects.  Consumer price inflation was announced on Wednesday 17 August and surged to 10.1% for July (from 9.4% in June).  This exceeded economists’ expectations and is the first time it has reached double digits in over forty years. Finally, on Friday 19 August, UK retail sales volumes picked up slightly by 0.3% in July, significantly higher than economists’ expectations, but continued to show longer-term signs of consumers cutting back in the face of soaring inflation.

The cost-of-living crisis is also affecting mainland Europe and inflation continues to rise. The situation is exacerbated by a number of issues: rising gas prices, affecting Germany in particular and drought conditions drying up rivers that, in turn, hamper distribution.

A slowing Chinese economy and US interest rates expected to end the year in the 3.50 to 3.75% range give no signs of the global economic situation easing.

In terms of corporate news, the final few companies reported and again results were mixed. Walmart and Home Depot earnings were strong, painting a healthy picture of the US consumer, but Target and Deere disappointed, cooling market enthusiasm.

In other news, president Recep Tayyip Erdogan of Turkey continued his attempts to assert himself as a key middleman in negotiations with president Vladimir Putin, after he held talks with Ukrainian and UN officials. It is now six months since Putin started his “special operation” in Ukraine.

On a lighter note, Manchester United became the latest “acquisition target” of Elon Musk when he joked on Twitter about buying a stake from the Glazer family.

In markets, growth stocks (+5.7%) were slightly ahead of value (+4.8%) over the last 30 days but continued to lag over the longer term. There was little difference in performance between large capitalisation (+5.2%) and small capitalisation (+5.4%) stocks. In terms of sector, utilities (+9.9%) led, but energy (+8.2%) was not far behind, despite oil (-8.0%) continuing to struggle in the face of recessionary fears. Communication services (-0.8%) continued to lag and was the only sector in negative territory over the last 30 days. Developed markets (+5.6%) continued to outperform emerging markets (+1.9%), both in the short and longer term.

Bonds have done reasonably well with yields falling further, but it is worth noting that this trend is beginning to reverse. Investment grade credit (+0.8%) has outperformed government bonds (+0.4%), given rising yields on the back of the prospect of more hawkish central banks.

Sterling weakened against the US dollar on the back of runaway UK inflation and the fall in UK consumer confidence. The US and UK yield curves continued to invert further.

Latest Consensus Forecast
UK GDP (QoQ) -0.1
UK PMI 52.1 51.0
UK CPI (YoY) 10.1
EU GDP (QoQ) 0.6
EU PMI 49.9 49.0
EU CPI (YoY) 8.9
US GDP (QoQ) -0.9 -0.9
US PMI 56.7
US CPI (YoY) 8.5

What’s happened in portfolios?

It remains a fairly challenged environment for equities with clear headwinds present. We feel it is a good time to lock in the relative gains from our value position and tilt our equity positioning towards quality focused strategies. To put this in perspective in terms of our positioning, we’ve been rotating slightly to reduce our slight overweight to value to benefit from quality positions, which should fare better in this high inflation environment where you need more pricing power. For example, having a bias to US large cap quality defensive stocks via our increasing holding in the iShares Core S&P 500 ETF and Morgan Stanley Global Brands has been encouraging to performance.

Within fixed income, the significant upward shift in yields, on the prospect of more hawkish central banks, has made fixed income more attractive. Our investment grade credit holdings have outperformed our government bond holdings.

Real assets remain attractive as an alternative to fixed income and with some inflation protection. In particular, we want to highlight our niche position in defensive direct real estate with Empiric Student Property, which released an impressive first-half net asset value (NAV) up 10% and better than expected earnings per share, driven by a recovery in occupancy rates.

Alternative strategies continue to provide a credible diversifier within portfolios. Princess Private Equity published its half-year report with NAV down 7.5%, largely due to market volatility, but it has compared favourably to public markets.

What’s happening this week?

23 August • EU S&P Global PMI (August) | 23 August • UK S&P Global PMI (August) | 25 August • US Initial Jobless Claims