At a glance
- Equities and developed market government bonds both came under pressure at the start of August, before recovering slightly towards the end of the month. However, the poor start proved too much, meaning August ended the five-month positive streak for equity markets. The defensive positioning of our flagship portfolios did cushion the impact of the poor market performance. Given the outperformance of bonds over equities, portfolios with a lower equity weighting fared better.
- The market optimism of July went downhill in August. We saw a Fitch Ratings downgrade of the US, continued commitment from central bankers to keep interest rates higher for longer, a weakening outlook for the Eurozone economy, and China’s ongoing struggle to boost its recovery. All of these contributed to subdued equity markets.
- Across the month, we saw negative performance from US, European and UK equities. Chinese equities also continued to underperform, which detracted from our flagship portfolio performance somewhat, but our diversified approach to Asia-Pacific equities limited the impact, with Japan faring better. While US Treasury yields rose in August (but eased toward month-end), we continue to see value in holding US government bonds as they offer a cushion that could protect should the economic outlook deteriorate.
- Despite August’s souring of market’s mood, there was a late rebound last week. Moderation of inflation and economic data, particularly for the labour market, buoyed investor confidence that the peak in interest rates is within reach, in line with our base case.
How we’re positioned in flagship portfolios
- Relative to our long-term strategic allocation, we still hold more high-quality bonds, less high-yield credit, and fewer equities. Within equities, we remain invested in low-volatility stocks in the US and Europe.
- This tactical positioning is moderately conservative. It outperforms during periods of economic downturn as investors seek lower-risk investments. Conversely, it underperforms during periods of growth where higher-risk investments are popular, as we saw in the first half of this year. With this approach, we aim to mitigate losses should economic conditions worsen.
- However, the main driver of returns is our longer-term strategic allocation. We base our approach on global diversification across asset classes, geographies, and investment styles. This approach is performing better than those more heavily focused on European or UK domestic markets, as these have underperformed US equities this year.
- Our fund selection balances growth vs. value styles. As with our tactical approach, this balancing act has been a drag on performance during the equity market rally this year, which we expect to reverse.
- Conversely, our stock selection – a global portfolio of quality companies with solid fundamentals – continues to outperform.
- Our flagship portfolios are the sum of all these parts working together and complementing each other.
- We will communicate any changes to our positioning in our upcoming Counterpoint at the end of September.
What we’re watching
- September will be an interesting month for central bank meetings. First, we think the European Central Bank will increase interest rates by a quarter of a percent (to 4.5%) before the end of the year – although we’re not sure if it will happen in September or October.
- Second, the US Federal Reserve (Fed) will likely hold interest rates at 5.25-5.5% but will release its latest rate projections. So, we’ll see if it sticks to the June commitment of one final increase this year.
- Third, we think the Bank of England will raise rates by a quarter of a percent (to 5.5%) as inflation, although decelerating, remains well above the 2% target, at 6.8%.
- Lastly, the Bank of Japan will likely hold rates at -0.1% despite rising price pressures.
- Before that, we’ll see releases of economic activity data in the Eurozone with the Purchasing Managers’ Index (5 September), followed by the US (6 September), and then China’s international trade data (7 September).
Past performance is not a reliable indicator of future returns.
Market Performance
Cumulative Total Returns (Local Currency) | 1W | 1M | YTD | 1Y | 3Y | 5Y | Yield | P/E Ratio |
STOCK MARKETS | ||||||||
World Large & Mid Cap | 2.5% | -2.2% | 14.6% | 14.3% | 21.6% | 42.5% | 2.3% | 16.3 |
US | 2.7% | -1.3% | 18.8% | 15.0% | 29.2% | 62.9% | 1.6% | 19.5 |
Eurozone | 1.3% | -2.4% | 13.8% | 22.2% | 34.5% | 30.6% | 3.7% | 12.0 |
UK | 1.8% | -1.8% | 2.6% | 7.3% | 38.4% | 15.9% | 4.5% | 10.5 |
EM | 1.5% | -4.7% | 4.1% | 1.6% | -4.9% | 11.1% | 3.1% | 12.2 |
Japan | 3.7% | -0.1% | 26.5% | 24.1% | 55.2% | 55.7% | 2.4% | 15.3 |
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BOND MARKETS | ||||||||
UK Government | 0.3% | -0.2% | -4.1% | -9.5% | -30.5% | -20.4% | 4.6% | |
US Treasuries | 0.4% | -0.5% | 0.3% | -1.9% | -15.0% | 0.5% | 4.5% | |
Euro Government | 0.2% | 0.3% | 2.2% | -3.3% | -17.4% | -9.1% | 3.3% | |
Global Corporate | 0.5% | -0.9% | 2.9% | 3.5% | -14.1% | 1.2% | 5.4% | |
Global High Yield | 0.7% | -0.2% | 6.6% | 10.2% | -0.9% | 10.8% | 9.1% | |
EM Sovereign Hard | 0.6% | -1.2% | 3.9% | 6.3% | -14.1% | 1.2% | 8.1% | |
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COMMODITIES (USD) | ||||||||
Gold | 1.3% | -0.2% | 6.4% | 14.3% | -1.5% | 61.5% | ||
Brent Crude Oil | 5.5% | 4.8% | 7.9% | 6.4% | 72.2% | 36.5% | ||
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CURRENCIES | ||||||||
GBP EUR | 0.2% | 0.4% | 3.4% | 0.6% | 4.0% | 5.5% | ||
GBP USD | 0.1% | -1.5% | 4.2% | 9.1% | -5.9% | -2.2% | ||
EUR USD | -0.1% | -1.9% | 0.7% | 8.4% | -9.5% | -7.2% |
Data as of 01/09/2023. The Yield and P/E figures for stock markets respectively use 12m forward dividends and earnings divided by the index’s last price. For bond markets, the yield to maturity is used.
Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material or guarantee the accuracy or completeness of any information herein, nor does Bloomberg make any warranty, express or implied, as to the results to be obtained therefrom, and, to the maximum extent allowed by law, Bloomberg shall not have any liability or responsibility for injury or damages arising in connection therewith Note: Past performance is not a reliable indicator of future returns.