Global Market Insights: August 2023

World markets summary:

In what was a volatile month, very few asset classes provided positive returns in August, with the exception of oil. August is a notoriously tricky month for investors and this past month proved no exception. Worries ranged from the stuttering Chinese recovery and ongoing problems for its property sector, stubborn European inflation, a sharp slowdown in Germany, high UK wage growth and, until the last week, strong US growth. An ill-conceived tax surcharge on Italian bank profits did not help matters either. 

Market liquidity is typically low in August, which contributed to the volatility. Central banks draining money from the system as quantitative easing continues to unwind also contributed to the lack of liquidity in August.

Amidst the risk-off environment, which typically sees popularity for equities wane and other asset classes being seen as safer havens, equities fared worse than government bonds, and the S&P 500 and Nikkei 225 fell less than other markets. Chinese shares suffered the most due to the negative news flow earlier in the period.  

As August wore on, there were increasing signs of the Chinese authorities becoming more aggressive in their efforts to re-accelerate the economy since the Q1 2023 recovery has faltered. This, as well as ongoing data releases pointing to a reduction in the core rate of inflation, should aid sentiment. September has historically been another tricky month for investors but looking further out, our analysis leads us to believe the easing of inflationary pressures will lead to less aggressive central banks which, in turn, will be beneficial for financial markets, including both equities and bonds.

Our in-depth views on:

Our weightings are based on sterling as a base currency.

United Kingdom (UK)

The UK market performance was muted with all markets down. Unusually in a market downturn, small and mid-capitalisation companies outperformed large-capitalisation companies.

August saw the Bank of England (BoE) raise interest rates by 0.25%, marking the 14th consecutive increase as the central bank continues to battle high inflation. The BoE also stated that they believe inflation will fall from 6.8% to 5% by the end of the year, which are similar to views we have expressed in prior commentaries throughout 2023. On the inflation front, the headline number was unchanged this month at 6.8%. Looking forward, as base effects continue to come into play, the number should fall. However, one risk to this analysis are gas prices, which have started to rise again in the last few months.

On the economic data front, the standout number was UK wages ex bonuses, which increased 7.8% in Q2 2023, the most on record and much higher than market expectations, with the biggest increase seen in finance and business services. However, the unemployment rate unexpectedly jumped to 4.2% and job vacancies continued to climb. The unemployment rise may provide some comfort to the BoE as they continue their fight to bring down inflation.

Elsewhere in the UK, the economic data continued to deteriorate. The services Purchasing Manager’s Index (PMI) showed the UK in contractionary territory for the first time since January 2023, whilst manufacturing and retail sales declined much worse than expected. However, there was a welcome, albeit unexpected, improvement in consumer confidence.

Despite the weak data, UK company valuations remain near their historic lows, and once we see a peaking of the interest rate cycle, we think the UK market should start to improve.

United States (US)

In terms of August’s performance, and in contrast to the UK, large-capitalisation companies performed better than small and mid-capitalisations, however both were still down in August. The Russell 2000 was down over 5% during August.

Economic data was generally strong in August until the last week where the Job Openings and Labour Turnover Survey (JOLTS) showed that job openings contracted much more than expected, to the lowest level since May 2021. At the same time, the US unemployment rate moved up to 3.8% in August. This was largely due to more people coming back to the workforce, with the labour force participation rate increasing to the highest rate since February 2020. The JOLTS data will be encouraging for the Federal Reserve System (the Fed) as it may help to rein in wage inflation which could signal the end of the interest rate hiking cycle. Most investors are not expecting an interest rate rise at the September meeting. This is likely to provide comfort given that housing affordability has continued to decline,  with 30-year mortgage rates reaching 7.31% in August, the highest level since 2000. The Fed are likely to continue to talk ‘tough’ to leave the door open should they need to raise them again.

The one potential challenge to this is that Core Personal Consumption Expenditures (PCE) price pressures, the Fed’s favoured inflation gauge, were broadly similar to the prior month. The data suggests that the progress on lowering inflation has been slower than what the latest Consumer Price Index (CPI) release had indicated and the core PCE rate remains uncomfortably high.

In terms of the other economic data, the Producer Price Index (PPI) increased the most since January 2023 earlier in the month, retail sales came in much stronger than anticipated and consumer confidence came in higher than expected.

While the JOLTS data may signal the end of the interest rate increases, the strong economic data earlier in the month likely indicates that interest rates will have to stay higher for longer.

Europe

Shares fell across the region as a result of general equity weakness, a slew of weak economic data from Germany and inflation which did not fall as expected despite the dull economy. Investor sentiment in the region was further impacted due to a decision by the Italian Government to impose a tax surcharge on what they considered to be excessive bank profits. Although the plan was very quickly watered down, some damage to sentiment remained. German industrial production fell more than expected, as did retail sales. The Economic Sentiment Indicator in Germany fell to the lowest level this year whilst the Eurozone Composite Purchasing Managers Index hit a 33-month low as it remained below the key 50 level which indicates economic expansion. Bright spots were sparse but included Spanish consumer confidence rising to the highest level since October 2021 and German factory orders rising by a whopping 7%.

European equities have seen an abrupt change in sentiment as the economy has stalled after a strong run and investors seeing it inextricably tied to the fate of the Chinese economy. With many parts of manufacturing now well into a downturn, inventory reductions underway and Chinese policy support ramping up, we could see a recovery at some point in the next few months. For this to translate into a strong run for shares, we will need to see inflation fall further and monetary conditions to ease somewhat. 

Asia and Emerging Markets

Negative economic news flow from China dominated for most of August, although the last week saw relief in the form of both better data on the manufacturing front and more concrete steps (pun intended!) to alleviate stress in the beleaguered property sector, the stock market and the economy in general. Moves ranged from cutting interest rates, reducing stamp duty on equity trading for the first time since 2008, and relaxing rules pertaining to property purchases. Investors have been fretting that the Chinese authorities have not done enough post COVID-19 to ‘unleash animal spirits’ in the economy, so these latest bolder moves are welcome and have inspired a nascent rebound. 

Despite the late rebound, Chinese equities were still the poorest performing of the major Emerging Market indices although it should be said that the weakness in equity prices was widespread. In relative terms, India suffered less but markets as diverse as Brazil and Korea joined the malaise. 

With the Chinese now signalling and enacting stronger support for the economy and markets, and with increasing evidence of slowdowns in the West, we see potential for good relative performance in the final quarter of 2023 from Emerging Markets.

Alternatives

Commodity prices were broadly flat but oil prices finished up again despite a correction in the last two weeks of August. Oil prices are being supported by supply discipline, with expectations that Saudi Arabia will extend its voluntary one million barrel per day cut into October. Russia have also signed with the Organisation of the Petroleum Exporting Countries (OPEC+)  to cut exports in September which again will act as a support to the oil price. Both OPEC+ and the International Energy Agency (IEA) are depending on China to shore up demand via its oil imports after a weaker than expected recovery so far. Demand remained high in the US as activity has generally remained stronger than expected.

Gold prices were volatile staging a recovery in the last two weeks of August and ended down around 1%. This means that gold has now detracted around 5% year-to-date as may have been expected given the upward move in real interest rates.

The average investment trust discount in the alternatives space currently sits at 16%, reflecting the impact of higher interest rate mark ups. 

Property

In the UK, the Nationwide House Price index fell 5.3% year-on-year, which was worse than expected as housing affordability remained strained. The latest Royal Institution of Chartered Surveyors (RICS) Residential Market Survey also showed that house prices have to fall further to bring demand back in line with supply. For starters, the net balance of surveyors reporting that prices have risen over the past three months fell to its lowest level since early 2009.

As mentioned above, there were encouraging actions taken to ease the Chinese property market. These included the state banks lowering interest rates, a reduction to existing mortgage rates, and lower down payment requirements for deposits on houses.

Fixed Income

August was another volatile month in fixed income markets as 10-year bond yields rose significantly in the US, rose a little in the UK and Japan, fell a tad in Germany and declined meaningfully in China. It is noteworthy that the UK two-year Government bond (gilt) yields fell even as 10-year yields rose and in the US two-year yields were only fractionally higher despite a big move up in the 10-year.

Despite the risk-off environment, high yield bonds delivered modestly positive returns whilst investment grade corporate bonds marginally outperformed Government bonds. 

Until the last week, August was proving to be a very challenging month for investors in government bonds as strong economic data in the US combined with stubborn CPI in the Eurozone and elevated wage growth in the UK all impacted investors. Central bank utterances also tended to encourage investors to think that interest rates will stay higher for longer. However, within the last few days of August, we have had the US Q2 2023 Growth Domestic Product (GDP) data revised down, a significantly lower jobs openings number and a big fall in consumer sentiment, the economic indicator that measures how optimistic consumers feel about their finances and the state of the economy. These numbers rekindled hopes that ‘higher for longer’ might not necessarily be the case, and hence, a big rally in yields took place.

We remain convinced that falls in core inflation will continue across the West and that both inflationary expectations and yields will fall over the intermediate term. We remain positioned for this whilst recognising that the recent rally in commodity prices could cause some volatility at the headline level. 

Learn more…

Market liquidity: Indicates how quickly an investment can be sold without impacting price.

Quantitative easing: A tool used when a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity.

Quantitative tightening: A tool applied by central banks to decrease the amount of liquidity or money supply in the economy.

Base effects: Inflationary base effects are when inflationary changes are caused considerably more by how prices behaved in the previous year, rather than it being particularly due to what is happening now.

For more industry terms and definitions, visit our glossary here.

Important Information

All Index data figures are sourced by Morningstar and correct as at 31 August 2023 unless otherwise stated.

The value of investments or any income arising from them may fluctuate and are not guaranteed. Past performance is not necessarily a guide to future performance.