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Please refer to the glossary at the end of the document
In brief
- Market sentiment lurched to concern over employment data as opposed to the outlook for growth
- Investors question whether US technology companies, such as Nvidia, can continue to grow at the same pace
- Government bond prices started to move in a different way to company shares (equities)
August in review
August provided us with the first indication this year that an interest rate cutting cycle may not be as beneficial for equity markets as had been hoped after a prior twelve months of double-digit returns. Global equities generated positive returns overall, in Sterling terms, with the FTSE All-World Index up +0.24% during the period. Whilst the US equity market once again led the charge after a difficult start, the decline in the value of the dollar reduced most of its gains by the end of the month and the S&P 500 Index only rose +0.06%. The performance information presented on this page relates to the past. Past performance is not a reliable indicator of future returns.
Questions continued to be asked about whether the momentum for US technology companies is running out. This was brought to the fore when Nvidia announced it had grown earnings and revenue, albeit at a slower pace than before. Investors tend to look at rates of change in company earnings and revenue as a guide when considering any changes to where they are allocating investments. This shift in the US equity market was felt hardest in the technology driven Nasdaq Index and the smaller companies Russell 2000 Index, with the latter declining -3.76% in UK Sterling.
It wasn’t just in the US where this differential was evident. After a period of outperformance, small and medium sized companies across the board struggled to outperform their larger peers. In the UK the FTSE 100 Index (the biggest 100 companies on the UK stock market) ended the month up 0.87%, relative to the FTSE 250 Index (the next 101-350 companies ) which fell -1.96%. UK small companies had a very strong three months, and the FTSE Small Cap Index leads many of the developed market indices (+4.79%), so it was no surprise that share price volatility caused by the questions about interest rates led to a small decline in company share prices here. The UK economic backdrop remains favourable with Gross Domestic Product (GDP) averaging 0.6% for the last three months, one of the strongest levels of growth across Europe.
After the Japanese equity market (Nikkei 225 Index) led developed equity markets to the first -2% daily fall in over 350 days at the start of the month, encouraging signs could be taken from the fact it was only down -0.18% at the end of August. Japan remains on its structural reform path with lowering government debt and improving shareholder governance. Its market is very sensitive to whether there is perceived risk around the world, with Japanese investors moving money back into Yen during periods of uncertainty. This does make it volatile, as demonstrated during the month when the value of the Yen rose.
In fixed income markets, the heightened volatility was evident pushing yields down and prices up. Government bonds tend to outperform in risk-off environments (where investors are cautious and risk-adverse), and for this short window, this was no different. Worries that US economic growth was slowing due to lower-than-expected job openings was forefront in investors’ minds. On the one hand this dynamic was a positive sign, with bond prices rising as equity prices fell. There has been a higher correlation between bonds and equities in prior months – lower correlation is beneficial as it’s important they play different roles within the portfolio as evidenced during the turbulence in August.
Following this, higher consumer spending was announced for the US along with a positive revision of US GDP growth, the bond market settled.
As months go, August tends to be represented by a lower volume of trading of company shares on the stock market. This month has been no different overall, yet bubbling below the surface there has been some unease as to whether the current levels of monetary policy (interest rates) may lead to a more significant slowdown in growth than is forecast for the market. For now, we remain optimistic that consumer spending is normalising and that stock market returns can remain positive as we head towards the end of the year. We would expect however that there will be heightened volatility around central bank decisions and the week of 16th September is one to watch.
“For now, we remain optimistic that consumer spending is normalising and that returns can remain positive into year end”
Key positioning
- Its pleasing to see the UK market performing after a period of underperformance relative to developed market peers, favouring our positive position here.
- Our smaller holding in the US market was beneficial as it was weighed by the underperformance of large technology companies.
- We remain positive toward Japan despite there being some large moves in share prices recently, we believe it will benefit from a rise in the value of the Yen and underlying structural governance changes happening in corporate Japan.
- The team remain cautious on long dated government bonds, where volatility is driven by the swings in expectations of interest rates. The Team prefer shorter dated bonds where price stability appears greater, and we believe there are lots of attractive yields available although the team will actively monitor this.
