August proved to be a disappointing month for investors, after an exceptionally strong July, with both global equity and bond markets falling during the period. The month started promisingly with risk assets supported by encouraging economic data from the US that showed a strong labour market and a bigger-than-expected decline in inflation. This led to a growing belief that not only the US economy could be heading for a ‘soft-landing’ but also that the US Federal Reserve may not have to raise rates so aggressively to ‘tame’ inflation. Sentiment then changed in the second half of the month when focus shifted to the further deterioration of Europe’s energy situation (with record high electricity prices in most countries), increasing the prospect of much slower economic growth and even higher inflation (stagflation) and higher interest rates. A rather toxic mix! This was then exacerbated by what can only be described as very hawkish comments from US Federal Reserve chairman Jerome Powell, at the annual Jackson Hole gathering towards the end of August, where he recognised that getting back to price stability would “likely require maintaining a restrictive policy stance for some time” and “the employment costs of bringing down inflation are likely to increase with delay”. This increased interest rate expectations sharply, upsetting both bond and equity markets.
Global equity markets (-3.0%) were down on the month. In sharp contrast to the prior month, the US equity market (-4.0%) fell the most due to its higher weighting to the technology sector. This was closely followed by Europe ex UK (-3.9%) given concerns over growth for the region. Emerging markets equities (+1.2%) was the only area to buck the negative trend. In terms of style, the interest rate sensitive growth stocks (-4.6%) underperformed the more value / cyclically (-2.7%) oriented equities, as inflationary concerns pushed bond yields higher. This was to some extent also reflected in sector performance, with information technology (-5.6%) and real estate (-5.4%) two of the worst performing areas. At the other end of the spectrum, energy (+2.4%) was once again the strongest area, despite the sharp fall in crude oil prices, and financials (-1.9%) also performed well on a relative basis being supported by higher interest rates.
Within fixed income markets, there was no real ‘place to hide’ as concerns over higher central bank interest rates, inflation and economic growth meant both government bonds and credit fell over the period. Looking at the detail, global government bond prices fell (-2.3%), on higher interest rate expectations as did global investment grade credit (-2.9%). At the riskier end of the credit spectrum, global emerging market debt (-1.2%) and global high yield (-1.5%) were also weak during August.
In terms of real assets, property markets fell sharply especially when compared with equities over the month, with the global REITs index down -6.4% over the period, due to the combination of higher interest rates and slower economic growth expectations. In comparison, global listed infrastructure (-2.1%) proved once again its more defensive qualities and outperformed property and equities. Commodities (+0.1%) were overall flat on the month, however, this masked big divergences in the underlying subsector performance. Crude oil (-7.9%) and industrial metals (-2.7%) fell on the back of global demand concerns, while at the same time gold (-2.9%) was weak as a result of a stronger US dollar and higher interest rate expectations. While continued supply concerns as a result of the Russia / Ukraine war supported both agricultural (+3.6%) and natural gas (+11.0%) prices.
|INDEX||END JULY VALUE||END AUGUST VALUE|
|DJ Ind. Average||32845.13||31510.43|
|£ Base Rate||1.25||1.75|
This month’s values quoted as at 31/08/2022. The above values are sourced from Bloomberg and are quoted in the relevant currency.
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