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Silly season arrived in August as market volatility ramped up on very little material news-flow; the month began in dramatic style with some heavy market falls as investors became spooked by concerns over a US recession. This was based on a disappointing US jobs data release which caught investors off-guard. Low trading volumes during summer holidays across many major markets accentuated the impact on prices.

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However, the dip in investor confidence was short-lived and by the end of the first week investors were back to believing there will be a soft landing for the US economy and the rally in risk assets resumed.

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A key positive over the month was increasing evidence that US inflation appears to be under control. Figures released at the end of August saw the US Personal Consumption expenditure price index (The Federal Reserve’s favoured measure for inflation) showing a reading of 2.5% for July, in line with expectations. This followed on from the much-awaited Central Banker conference in Jackson Hole where Fed Governor Jerome Powell provided the news investors have been waiting for in saying “the time has come” to begin cutting rates – and the first cut should come at the September meeting.

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Whilst the Bank of England had made its first cut in interest rates in over four years on 1st August, they may take a wait and see approach from here. The Bank of England’s chief economist, Huw Pill, said the UK isn’t out of the woods yet in terms of inflation and that markets shouldn’t expect more imminent rate cuts.

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Turning to economic growth, UK GDP has grown by +0.6% in the second quarter which totals +1.3% overall in the first half of 2024. The main driver of growth during the second quarter came from the service sector. In more good news, well if you like high tax receipts, income tax receipts in July were the highest in 16 years at £32.7 billion – this is probably the highest ever recorded, however, records only began in 2008.’

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In the US the US Bureau of Economic Analysis revised second quarter GDP estimates from an annualised 2.8% to an annualised 3% - consumer spending was again a key driver, which helped convince investors that a soft landing is the likely scenario. However, what we have learned this month is that a US soft-landing is very much priced in, and markets will not take kindly if recession concerns increase. With uncertain US economic data, a UK budget focused on tax increases and a US presidential election to “look forward” to in the Autumn, then more market volatility is on the cards. However, as we have seen this month sitting through periods of volatility is often the best approach.

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Market Watch

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It was certainly a bizarre month for stock markets, and although it was precipitated by concerns of a potential US recession it was wild swings in the Japanese market that highlighted the skittishness early in the month, as August started with a near 20% fall in the Topix and Nikkei over about two days. The unwinding of the Yen carry trade was blamed – essentially borrowing in Yen due to ultra-low rates and using the proceeds elsewhere. However, fears over a US slowdown were the catalyst and other markets caught the downdraft, but not in such a severe way. The first Monday in August was painful for a day then normal service resumed as we saw a swift(ish) rebound and the Japanese market regained most of the losses by the end of the month and most global indices ended August in positive territory with the MSCI World Index up by 1.9%.

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In August there appeared to be more evidence of a rotation away from leadership of the US tech behemoths. Bloomberg’s “Magnificent seven” index of the largest tech companies has fallen by 10% since its peak in July whilst 70% of stocks in the S&P 500 have increased over the same period.

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For the record, Hang Seng was the best performing of the major markets last month gaining almost 4% and despite the seeming woes in China, it is up nearly 10% in 2024. In fact, double digit returns are par for the course this year with equities.

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Over to the bond markets now and despite the first UK base rate cut, the yield on the 10-year gilt rose slightly during August. It paid 3.97% at the start of the month and on Friday offered 4.01%. Markets are not convinced that the UK fight against inflation has been won yet. In contrast the US bond markets reacted positively to strong hints at a September cut with the 10-year treasury now paying 3.9% compared to 4.03% a month ago. Elsewhere, the yield on the 10-year Japanese Government Bonds fell sharply, possibly due to the market turmoil at the start of August and now has a yield of 0.89% from 1.05% a month earlier.

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In commodity markets Gold started August at $2494 an ounce and finished at another new record of $2527 on the back of expected rate cuts. It did hit $2560 at one point. The price of a barrel of Brent started August at $80.72 and finished at $76.93.

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In currency markets the Pound rose 2.13% against the US dollar as the gap between the cost of UK and US borrowing rose to the highest level for the year. The pound fell 0.85% against the Yen and was flat against Euro. The latest Economist Big Mac Index data released a month ago comparing the price of the ubiquitous burger globally. Using this methodology the pound is currently 3.6% overvalued versus the US dollar compared to only 0.4% in January 2024. With the dollar falling in August, it’s likely that overvaluation has increased. The Taiwanese dollar is the most undervalued on this basis being 59.9% cheap and the Swiss Franc the most overvalued by a whopping (or maybe a Whopper) 41.8%.

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Fund Watch

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Turning to funds now and it’s fair to say August was a mixed bag. There was no discernible trend. 'Property Other' topped the open-ended fund tables with a return of 2.4% - clearly a UK rate cut has helped this sector. The High Yield Bond sector also made an appearance in the top five delivering a return of 1.16% - although not directly impacted by the BoE rate cut, it won’t have hindered bonds in this space.

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At the foot of the tables, North American Smaller Companies propped all others falling 3.33%. Of course, the US dollar falling more than 2% against sterling hindered returns both for this and the USD Government Bond sector that fell 1%. The latter sector offset Chairman Powell’s rate cut comments with a weakened dollar. Even a strong Hang Seng couldn’t stop the China sector featuring in the bottom five in August.

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Looking at individual funds and the lack of trend was evident here too. The Kernow Navigator fund topped the tables with an excellent return of 8.35% in August. This long, short all cap UK equity fund is small but has had a strong 2024 up about 15%. Elsewhere in the top ten, Brazil (despite banning X formerly known as Twitter) funds feature twice – maybe the weak US dollar is having an impact? Newly launched Blackfinch NextGen Infrastructure makes a top ten appearance for the first time – clearly a beneficiary of rate cuts. Japan, Israel, Gold, and bonds all feature – it really feels like the most random top ten seen in 2024!

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The worst performing funds were equally random with solar, Japan, US Treasuries, China, US Small Cap and Eastern Europe featuring. All with different drivers though arguably the weak US dollar was at fault partially for the US treasuries and US small cap falls.

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Turning to investment trusts and like the open-ended world, property had a strong month. Investment trusts have more property sectors than OEICs due to more niches so seeing two property sectors in the top five isn’t necessarily a surprise. Property UK Residential topped the tables with a gain of 7.5% and alongside Property UK Healthcare, Infrastructure, and Leasing could be considered beneficiaries of the recent rate cut. For the record, the PRS REIT topped the trust tables with a 16% return.

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Manager watch

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August is notoriously quiet for fund manager meetings and this year was no exception! When speaking to managers it feels like China currently polarises opinion the most. Multi-asset specialists Ruffer remain cautious and in a recent meeting highlighted risk of a deflationary spiral in China (not very cheerful). However, Fidelity China Special Sits manager highlighted that with the China market trading at a 60% discount to the US this provides opportunities for long-term investors who can look through the current economic doom and gloom. 

The numbers…

N.b. the fund sectors exclude money market funds, markets are in local currency, and investment trusts exclude VCTs.

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Important Information

This document is produced by Fairview Investing Ltd, an independent research consultancy. The content is for information purposes only and does not constitute financial advice. The commentary or research provided do not constitute a personal recommendation to deal. Any statements, opinions, forecasts, and figures are made by Fairview Investing (unless otherwise stated). They are considered to be reliable at the time of writing but may be subject to change.

Fairview Investing accepts no legal responsibility or liability for the content of this material. The contents of the document are not to be re-produced or circulated without the express permission of Fairview Investing Ltd.

Fairview are independent investment consultants sitting on the Investment Committee of EXE Capital Management.

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