Market Overview

Summary of world markets in August

Last month’s enthusiasm for risk assets dissipated as Jerome Powell, US Federal Reserve Governor, poured water on any hope of a “dovish pivot” on interest rates. Developed market equities gave up their early gains to end the month firmly in the red. Core sovereign bond yields rose sharply as it became clear that central bankers would continue to tighten the monetary screws. The weak pound and concerns about rising debt added to the pressure on UK gilts. With the exception of natural gas, commodity prices were broadly weaker in response to fears of recession.

Global growth continued to show signs of slowing, with weakness spilling out from manufacturing sectors into service industries. The ongoing zero-COVID policy in China added to the pressure on global economic activity. Elevated inflation rates around the world continued to be of primary concern, particularly in the UK and Europe where the price and supply of energy remained the critical question. Indeed, the German Finance Minister warned of a “gigantic shock” looming for the country. Goldman Sachs gave a stark warning that UK inflation could soar above 22% next year if energy prices continue their upward spiral. The UK economy contracted by 0.1% in the second quarter, the first shrinkage since lockdown.

The Bank of England raised the base rate by 0.5% – the largest single increase in 27 years – to leave borrowing costs at 1.75%.  This was the sixth consecutive hike.  The Bank expects headline inflation to peak at just over 13% in October and to remain at elevated levels throughout much of 2023.  It also projected a recession from the fourth quarter of 2022.  At the Jackson Hole Economic Symposium, US Federal Reserve Governor Powell left the door open to another significant rate hike, noting that a period of slower growth and rising joblessness would be tolerated in the interests of fighting inflation.  By the same token, the ECB pointed to the need for further rate hikes to fend off the inflation problem.  In contrast, the People’s Bank of China cut rates in response to a worsening property slump and ongoing COVID-19 lockdowns.

As oil and gas companies announced record profits, anger about the forthcoming changes to the energy price cap intensified.  Meanwhile, the Conservative Party was preoccupied by the leadership contest.

Sterling took a battering over the month, losing almost 5% and extending its losses against the mighty US dollar to more than 14% this year.  The euro also fell to a new two-decade low against the US dollar, dipping below parity.  Meanwhile, hawkish rhetoric from the US Federal Reserve helped to push the greenback to a twenty-year high.

Global equity indices fell by around 4%, although the total return picture from overseas equities was much brighter when translated into sterling terms, owing to the currency’s weakness versus the US dollar.  European and US markets led to the downside, while the returns from Asian and emerging market indices were flat to positive. The main UK equity index was relatively resilient (although still negative), with the energy, tobacco and financials sectors helping to buoy the market.  However, fears about the consequences of high inflation, rising costs and a looming recession took their toll on smaller UK companies, and this saw the mid-cap index registering a steep fall. Style wise, “value” outperformed “growth” in most markets.

It was a particularly brutal month for UK gilt investors, with the total return of the broad index registering a decline of over 7%.  10-year yields rose rapidly towards the 3% threshold, barely pausing for breath on the way.  Adding to the pressure, data showed that overseas holders of UK debt have been exiting their holdings against the backdrop of a cost-of-living crisis, rampant inflation and speculation that the new Prime Minister would ramp up borrowing. In credit markets, investment grade bonds fared slightly better, but still registered material losses.  High yield bonds also lost ground but outperformed their higher quality counterparts.

Despite the fall in global equities and bonds, AM&A’s Model Portfolios posted mostly positive performance over the month.