June 2023 asset class review and August 2023 asset returns review
August was a dreary month in a few ways. Matching the UK’s below-average temperatures, global asset market sentiment cooled into the end of summer. This translated into a 1.3% global equity drop in sterling terms, reversing a big chunk of July’s gains.
The damper mood marked a change from what had been a fairly supportive environment for most of the spring and summer. Factors blamed for the pullback have been present for some time but became slightly more visible: persistently high interest rates and a flattish global economy. Although economic data from Europe and China brought yet more disappointment, central bankers once again reaffirmed their commitment to inflation busting.
The table below shows the full set of sterling index returns for August.
Asset class returns as at 31st August 2023
US stocks fell by in dollar terms but were basically unchanged in sterling terms, thanks to the pound’s slight decline against the dollar. A late rally was needed to get back flat levels too, after some mid-month volatility which saw the S&P 500 fall nearly 5% from peak to trough.
Sentiment recovered thanks to some stronger-than-expected earnings forecasts for the technology sector, as well as a mild cooling of the US labour market. Gains in the much-watched US non-farm payroll slowed, and unemployment rose to 3.8% of the available workforce (most because that potential workforce increased). Still, that is the highest level since early 2022. Markets hope this means lower inflation ahead, and hence an interest rate let-off, but there are still signs of a shortage of workers in the American jobs markets and, as yet, the data is unlikely to change US Federal Reserve Chair Jay Powell’s self-reported preference for higher interest rates. US companies and the overall economy are still strong – and the heralded ‘soft landing’ still looks on the cards for the world’s largest economy without needing lower short-term rates. Over-excitement about the potential for lower rates has been investors’ biggest pitfall this year.
On the other end of the spectrum, Emerging Market (EM) equities were August’s worst performers, with the MSCI EM index dropping 4.7% in sterling terms. China once again dominated the narrative; its economic and political disappointments have been a running theme for the year. However, the announcement of further government policy support for the ailing property sector toward the end of the month helped to shore up headline stock indices. All in all, though, foreign investors dumped around $12 billion in value of Chinese stocks in August, causing meaningful losses across wider EM indices. As we also wrote last week, headline figures disguise a fair amount of underlying variation. Indian equities actually performed better than all developed markets, thanks to its booming economy and some capital reallocation from China.
Closer to home, markets were also choppy. The UK and Eurozone both recorded stock market losses of 2.5% in sterling terms. Britain’s housing market also took a hit, with Nationwide reporting a 5.3% year-on-year fall for August. The UK labour market is showing clear signs of deterioration, which – together with sharply higher mortgage rates – mean house prices could fall further into the autumn. It also means that inflation pressures continue to ease, but not as quickly as the Bank of England (BoE) would like. Policymakers tell us interest rates will stay higher for longer to squash wage pressures, despite a clearly weakening economy. It is unclear how much of this is just expectation management, though, as UK rates probably do have some room to fall in the not-too-distant future.
Europe’s economic difficulties continued. Business sentiment surveys were well below expectations in August, while inflation was stubbornly high at 5.3% year-on-year. German inflation came in even higher, at 6.4% for the year to August, leading investors to bet on another rate rise from the European Central Bank (ECB) in September. This is despite dire business confidence numbers from the continent’s largest economy. The manufacturing slump has now spread to the services sector, and economic bright spots are few and far between in the near term. The only real positive for Europe is that its equity valuations have not been elevated as much as those in the US – particularly after recent relative performances – and therefore stand to gain when investors start feeling confident again.
Fortunately, markets on the whole have taken these challenging conditions in their stride. Persistent inflation and a possibility that short rates will remain ‘higher for longer’ have rocked capital markets before; bond yields remain towards their recent highs yields and this impacts valuations in other assets like equities.
Yet, the bond price falls (the inverse of yield rises) through August were mild, considering the background conditions. In the UK, the gilts market saw overall prices fall a little more than other government bonds, but yields actually rose slightly less. The impact on the whole stock of gilts of a rise in yields is greater than for other bond markets because the average bond maturity is longer (the average time to maturity is nearly 13 years compared to less than nine years in Europe and less than eight years in the US).
The US notably saw its Fitch credit rating decline last month, but with only a small impact on its bonds. Likewise, the discussion over high long-term government debt (as we covered last week) had the potential to hurt bond markets, but investors seem not too concerned for the moment.
Oil prices bottomed in June and have been squeezing higher amid supply cuts from OPEC+ members. Crude oil dipped during mid-August but ended the month on a strong note. Wider energy prices (gas and electricity) were relatively stable after July’s push higher. Industrial metals experienced a weaker trajectory over the summer but also managed to rally somewhat into the last days. Interestingly, agricultural commodities continued to slide gently.
Certainly, oil’s squeeze higher might become a concern for other asset classes as it could push up input costs and reignite an inflation spiral. But the year is progressing much better than feared, with robust company earnings and a base-effect-led down-trend in inflation.
Seasonally, September is the month least likely to be good for investors but at least warm weather has finally reached Britain.
The text is taken from The Tatton Weekly and is provided by Tatton Investment Management. The information in this document does not constitute investment advice or a recommendation for any product and investment decisions should not be made on the basis of it.
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