August is traditionally a more muted period for markets, however global equities rose 6.3% over the month despite mixed global economic data. US, Japan and China equity markets rose strongly.
The Coronavirus surge in certain states in the US appears to be levelling off, whilst some emerging market countries continue to suffer. Tensions between US and China remain elevated, with various tit for tat measures implemented between the two superpowers in August. It appears unlikely that we will see a breakthrough before November’s US Presidential election. There is also an impasse in the negotiation of a new US fiscal package, which is not good for US household income as the unemployment benefit has dropped significantly. As we move past the Democratic and Republican conferences and into the main battle for the US presidency, there is a possibility that a new package may not be delivered. In a recent speech Jerome Powell, the US Federal Reserve chair indicated the central bank will now look to achieve an inflation rate averaging 2% over time. This subtle change of language suggests that the central bank will allow short term overshoots of the 2% inflation target.
Against this backdrop, US markets reached another new all time high during the month, driven on by large growth technology companies. Apple Inc’s share price rose 26% during the month and contributed to 26% of the total S&P 500 rise of 7.1%. It also became the world’s first $2 trillion company by market cap. Technology stocks have momentum, but some technology company price charts (and valuations) appear exponential and unsustainable long term.
Meanwhile Brexit rumbles on, with a deal between the UK and EU appearing to be far from certain. UK stocks continue to lag their international peers, although quality companies and those with share price momentum continued to outperform during August. Sterling rose against other currencies, which has a negative impact on the internationally based FTSE 100. The FTSE All Share returned 2.4% over the month compared to the FTSE 100 rising 1.8% over the same period.
Within UK fixed income markets the yield on the UK 10-year Gilt rose from a low of 0.07% to a high of 0.37% during the month. As a result, the FTSE Actuaries index of UK Conventional Gilts fell by 3.1% whilst the IBOXX UK index of Sterling Corporate debt lost 0.9% over the month.
In Europe government support schemes helped keep unemployment steady and fuel an increase in new car registrations, Positive sentiment surveys indicated that the manufacturing rebound is ongoing and the MSCI Europe ex-UK index rose by 3.1%.
Chinese equities increased 5.4% over the month, with economic data suggesting that the Chinese economy was continuing to recover, albeit at a slightly more moderate pace. Elsewhere in Asia the rise in the number of daily new Covid cases in India, Indonesia, the Philippines and South Korea remains a cause for concern. The MSCI Asia Pacific ex Japan returned 3.1% and MSCI Emerging Markets 2.2% over the month.
Chief Investment Officer