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August proved to be a difficult month for equity markets as volatility returned. For UK investors, all the major countries / regions recorded losses, with Europe and North America fairing better than Asian and emerging market countries. It was a disappointing month but equity markets have surprised so far in 2023, delivering some very attractive returns in spite of the choppy economic conditions. Interest rate hikes in the US and the UK during August pushed bond prices down, offering little comfort during a period when equity markets also declined.

Following a regulatory clampdown 2 years ago, the Chinese property sector was the subject of renewed attention in recent weeks as it continues to hamper China’s ambitions for a smooth rebalancing of its economy. China’s post-covid re-opening has been a mixed bag, but lacklustre data in July indicated weak household and business confidence and an economy that is struggling to reignite. In response China’s central bank, the PBOC, dropped interest rates but investors were underwhelmed, which led to lower share prices. China’s issues cast a shadow on the wider region and consequently on the whole, Asian equities and emerging markets (of which Asia constitutes a significant portion) also struggled. The exception to this was Japan, where growth supported share prices and relative to other countries in the region it was a strong performer.

In the US, the government saw its debt downgraded, as a major credit agency expressed concern over the excessive spending of the US government to support an economy that is looking quite rosy. In theory, the downgrade should increase the cost of borrowing for the US government but while it prompted political debate there was barely a flicker of a reaction in bond markets. The US labour market is being watched closely by investors, as signs of strength / weakness will influence the Fed’s decision on interest rates, but the August data did not bring any surprises. Fewer new jobs were created than expected, but unemployment fell and workers’ wage packets were in good shape, rising 4.4% compared to the previous year. Inflation, currently 3.2%, has fallen more quickly in the US than the UK but continues to concern the US central bank (Fed). Jerome Powell, the Fed chairman, confirmed the Fed would not shy away from raising interest rates further if they felt it was warranted. Powell’s comments prompted a fall in bond prices as investors factored in the potential for higher interest rates.

In the UK, interest rates increased by 0.25% at the start of the month to 5.25%. Although inflation has begun to recede from peak levels, a tight labour market has contributed to strong wage inflation (~8%) and the Bank of England will have this in mind when considering the path for interest rates over the coming months. Economic growth in the UK and continental Europe was fairly flat, with similar pressures weighing on the continent to those we are seeing in the UK (inflation falling more slowly than expected, tight labour markets, high wage inflation).

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July was a positive month for equity markets, with investors hopeful that resilient economic growth and falling inflation may yet mean that central banks are able to bring inflation down without engineering a painful recession. This environment provided a favourable backdrop for most assets and regions, delivering investment returns that have been welcomed by investors.

UK equities ended the month on a positive note, with corporate earnings holding up and inflation finally beginning to roll over. Inflation has been a thorn in the side of the Bank of England, recently prompting more aggressive tactics with a 0.5% interest rate hike in June. July’s inflation report indicated an easing in inflationary pressure and although the UK is not out of the woods, the lower inflation number allowed the BoE some breathing space to deliver a more modest 0.25% hike in early August. Overall, the UK economy performed better than expected by many economists at a time when rising interest rates have continued to pile pressure on household budgets. UK government bonds performed well relative to those of other major economies during the month.

Global equities, largely driven by US stocks, performed well as inflation continued to fall more quickly than predicted, giving investors hope that the Fed would soon announce an end to its programme of interest rate increases. With headline inflation in the US falling to 3% and interest rates at 5.25%, markets are not predicting the Fed will feel compelled to instigate another rise in September.

In Europe, economic growth data improved, largely driven by France and Spain. This data together with the prospect of a pausing of interest rate hikes in September, provided support to the region’s equity markets despite a deterioration in business confidence. Energy and materials businesses were among the winners, while IT and utilities lagged.

However, it was the strong performance of Chinese equities that led to strong returns for the Asian and emerging markets regions, with the latter up nearly 5%. Support from the PBoC (China’s central bank) and the anticipation of further initiatives have helped to pique investors’ interest. Meanwhile Japanese equities remain a strong performer for 2023 although performance in July was a little more subdued, largely a result of currency fluctuations driven by the Bank of Japan’s interventions in the bond market.

Overall, financial markets have been buoyed by the possibility that inflation can be tamed without the need for too many more interest rate hikes and without significant damage to economic growth.

June was a positive month for equities on the whole, with a number of regions rebounding from losses in May. In the US and Europe inflation numbers have continued to fall from their highs, although in the UK inflation is proving more stubborn. The Bank of England responded by increasing interest rates 0.5% during the month and the European Central Bank announced a 0.25% increase. In the US, the Fed is likely to be much more cautious about raising interest rates from this point and may be able to take a breather in the coming months to allow the impact of previous rate hikes to be monitored.

The latest data showed some modest growth in the UK economy during April, helping to support hopes that the UK will avoid recession in 2023. This was mainly driven by services and provided a welcome boost to the UK equity market. Retail sales of summer clothes and other seasonal items also contributed. Headline inflation remained at 8.7%, well above the target level of 2%. Core inflation, which is a measure of inflation that excludes food and energy (both of which tend to be quite volatile) increased, prompting the Bank of England to take swift action, raising interest rates by 0.5%, which was more than expected. The fight to quell inflation in the UK continues.

The US equity market was up during June, primarily driven by some of the very largest companies, which dominate both the US and global markets. The Fed paused on interest rates, choosing not to hike during the month. This, combined with government agreement to raise the debt ceiling, was good news for US equities. Investors continue to keep a close eye on the job market to gauge the health of the US economy and although unemployment did rise, the number of jobs created was strong, reassuring investors that the labour market has been resilient even as inflation has dropped sharply.

In Asia, Chinese equities made gains during June despite some underwhelming performance in the industrials sector and disappointment over the strength of the post-covid recovery. This recovery continues to be patchy and may require further support from government or the central bank. Elsewhere, it was the Latin American countries that led in emerging markets. Brazil’s growth has surpassed expectations, while inflation has also provided a pleasant surprise being lower than expected. Brazilian equities have been strong performers, inflation data came in below market expectations at 3.94%. Brazilian equity markets were up 16.1%, with energy stocks among the star performers during the month.

The month of May saw a real mixed bag of returns within equity regions, and the same was true within fixed income and alternative assets. The best performing equity region was the US, delivering +3.1% in sterling terms, while Asia ex-Japan declined -4.9%. Alternative assets such as infrastructure, commodities & property were all in negative territory to varying degrees, while gold returned +0.5%. Fixed income saw government bonds, investment grade corporates and high yield deliver negative returns. We shall discuss below what the drivers were across the different asset classes and regions.

US equity markets delivered positive returns during May from a sterling investors perspective, as the dollar strengthened over the month. There were mixed signals coming from the US over the period – economic data remained broadly positive, but there was the looming prospect of a US government default, in relation to the US debt ceiling, which made investors nervous. At the same time, the Federal Reserve (Fed) raised interest rates by a further 0.25%, as expected, bringing the rate to 5.25% from 5%. Enthusiasm over Artificial Intelligence (AI) boosted technology stocks. Fervour around AI and the potential boom for related technologies drove chipmakers higher. This was in stark contrast to the energy and materials sectors, which sold-off, on the back of a weaker demand outlook.

European and UK equity markets were weak over the month (down -2.3% & -3.1% respectively). Just like in the US, most sectors in Europe posted negative returns, the exception was information technology driven higher by semiconductors. Also relating to the positive outlook for the sector based on the future potential growth stemming from AI. This was despite better than expected data coming from Europe over the month – inflation falling and the purchasing managers index remained above the 50-level reading (53.3), indicating continued growth in business output. The UK market declined around -3.0%, with the energy sector and basic materials the worst performers. Again, just like in Europe & the US, technology was the only sector to post a positive return, though financials were flat over the period. As forecast, the Bank of England (BoE) announced a further 25bps hike in interest rates, bringing the base rate to 4.5%. UK economic data was better than forecast and we are seeing signs that inflation is starting to decline though core inflation is proving much higher than forecast and came in at 6.8%, which is the highest since 1992. This was one of the main reasons for driving the UK market lower.

Japan had a strong month which was partly driven by positive economic data and also many companies in the region announcing increased dividend pay outs and share buys backs. Foreign travel has also been picking up and tourism spending is back to pre-Covid levels. Asia & China had a challenging month. Recent economic data coming out of China has been disappointing and there are signs that demand has been declining. The broader emerging markets were also weak on the back of this.

Global bond markets were generally weak – government bonds, investment grade bonds and high yields all sold-off to varying degrees. The main drivers were the rate hikes that were implemented by central banks and inflation proving generally stickier than anticipated. Our positioning towards short, dated investment grade bonds helped preserve capital, whereas the longer dated, long duration parts of the fixed income market were the most negatively impacted.

April saw equities in the western hemisphere deliver positive returns, with the UK Equity market delivering the strongest return of +2.5%. Resilient economic data was the main driver for the positive returns. While the emerging markets were generally weak, delivering negative returns, notably we saw weakness from the Chinese stock market.

UK equities had a strong month. Financials were the top contributor, driven in part by the banking sector, which saw a recovery as the fears around the health of the US banking sector began to subside. The oil price rallied over the month, after Saudi Arabia announced a surprise decision to cut production, driving positive returns for the large cap diversified energy sector. Domestically focused sectors surprisingly held up well, given the fact that inflation and wage data was stronger than forecast, leading to increased probability of further interest rate rises. However, this part of the marker has seen a significant drawdown over the last 12/18 months, the resilience could be an indicator that a lot of the bad news expectations are baked into process. Inflation was more persistently stubborn failing to fall below the 10% level which was the market expectation, instead coming in at 10.1% (the expectation was for 9.2%).

European equities also had a positive month delivering +2.0% return. We saw a range of corporate earnings coming out from European companies that were generally better than forecast, which was the primary driver. At the same time inflation is starting to recede. On a forward-looking basis the Eurozone Purchasing Managers Index (PMI) came in a 54.4, a 12-month high. A reading above 50 indicates economic expansion.

Emerging markets delivered negative returns for the month, as renewed US-China tensions arose. These concerned Taiwan, as well as potential new restrictions from the US government in relation to direct investments in China. China was the worst performing region, for the above-mentioned reason. However, the macroeconomic data coming out was much better than expected, seeing Q1 GDP growth and improved export performance.

Bond market returns for the month were mixed. UK and global government bonds delivered negative returns, while UK and global corporate bonds were positive. Markets are anticipating further near-term rate hikes from the Fed (in the US), Bank of England and the European Central Bank (ECB). UK government bonds (Gilts) were the worst performer, as economic activity was more resilient than expected and inflation surprised to the upside. Corporate bonds were positive as yields tightened. Markets recovered from the broad-based sell-off we saw post the events surrounding Silicon Valley Bank (SVB), Signature Bank & Credit Suisse. Investment grade bonds and high yield bonds delivered positive returns.

Commodity markets recorded negative returns for April. Agriculture, industrial metals and energy were the worst performing sectors. OPEC made a surprise decision to cut the production of oil by one million barrels a day. However, this did not stop the decline in the price of crude or Brent oil.