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).
Against this backdrop we continue to focus on the importance of dividends and owning quality businesses in the equity portfolio, characterised by solid earnings, good financial management and the ability to pass on cost increases to customers. These businesses are best placed to navigate the current environment. In bond portfolios, we continue to focus on the bonds of high quality businesses that are close to maturity, which offer an attractive level of return and typically exhibit a low level of risk.
30th September 2023
Cappuccino Commentary
A relaxed read on the issues of the day
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).
Against this backdrop we continue to focus on the importance of dividends and owning quality businesses in the equity portfolio, characterised by solid earnings, good financial management and the ability to pass on cost increases to customers. These businesses are best placed to navigate the current environment. In bond portfolios, we continue to focus on the bonds of high quality businesses that are close to maturity, which offer an attractive level of return and typically exhibit a low level of risk.