August was a tale of two halves as both stock and bond markets started off relatively strong, but a mid-month reality check broke the positive spell for these markets.
Despite increasing risk to economic growth and the threat of a potential global recession, major central banks reaffirmed their commitment to bringing inflation under control. As a result, most global stock and bond markets ended the month in negative territory due to the ongoing inflationary issues and the expectation of further interest rate rises.
At the time of writing, Liz Truss was confirmed as the new Prime Minister of the UK, removing some of the heightened political uncertainty the UK has faced this year. While Global markets will take note of this, decisive policy action is needed to overcome the geopolitical and economic concerns that have accumulated since the start of the year.
Energy is a key area of focus, with the war in Ukraine driving high energy bills for UK households, and in turn lowering consumer confidence and spending due to a lack of uncertainty over the costs they may face over the coming months.
Though it has just been announced that there are plans to cap consumers’ energy bills at around £2,500 for the next 2 years, only time will tell whether the newly formed Truss government can deliver on their bold plans to spur economic growth and increase energy independence.
UK data for July, released in August, showed little change in the labour market with unemployment staying at 3.8%, 0.2% lower than pre-pandemic levels and within 0.1% of the lowest levels in 50 years. The manufacturing sector continued to grow, but the pace slowed ever so slightly from the previous month and fell short of estimates. The service sector also grew, albeit at a slightly lower rate than forecasted. Consumer Price Inflation (CPI) rose, increasing from 9.8% to 10.1% year on year (yoy).
Data coming out of the Eurozone was slightly more negative but painted a similar overall picture to the UK. Inflation increased from 8.6% to 8.9% yoy in line with expectations, as a substantial reduction in gas flows from the Nord Stream 1 pipeline sent European energy prices to record highs. Eurozone manufacturing also shrank in July based on August’s data, but it wasn’t all doom and gloom as services grew at a greater rate than economists forecasted, and unemployment levels remained unchanged at 6.6%.
There was more positivity in the figures from across the pond, where data released for the US in August showed July’s inflation figures dipping from 9.1% to 8.5% yoy, coming in below estimates. US manufacturing grew but at a lower rate than the previous month, but unexpectedly, the US service sector reaccelerated, growing more than the previous month and significantly higher than estimated as strong business activity eases recession fears.
The US labour market, a key focus for policy makers, continues to ooze confidence with 528,000 jobs added in July, double the 250,000 jobs expected. As a result, US unemployment improved by 0.1%, falling to 3.5%.
This accompanied with the lower-than-expected inflation figures provided a mixed month, with markets at first expecting a slowdown in the rate of interest hikes and a more positive outlook ahead. However, Jerome Powell, Chairman of the Fed, confirmed the stance regarding interest hikes and the need to regain control of inflation which caused markets to give up their positive start to the month.
Most share markets delivered negative returns in August, with Japan (+1.0%) the only exception, helped by the yen weakness.
Emerging Markets (0.0%) and Asia-Pacific (-0.5%) remained relatively flat for the month, outperforming their developed market peers. The FTSE-100 and FTSE 250 both finished the month down (-1.9% and -5.5%) respectively, while the US (-4.2%) and Europe (-5.3%) ended the month down their Central Banks signalled an ongoing need to keep increasing interest rates to help bring inflation back in line with targets.
Sterling weakened against most major currencies as the threat of a prolonged recession dampened expectations of the Bank of England’s appetite to raise interest rates sharply in tune with other major central banks.
The pound weakened considerably against the US dollar (-4.72%) as the Federal Reserve committed to sustained hikes to bring inflation back down to its now distant 2% target.
Sterling weakened against the euro (-3.02%) as the European Central Bank indicated it would undertake larger interest rate hikes in the face of record inflation. Of the more prominent global currencies, sterling performed best against the Japanese yen (-0.44%) in August, with the Bank of Japan continuing to hold firm on their stance to keep interest rates low to support a recovering economy.
Investment type performance breakdown
In our Original Plans, we saw the increasing recessionary risks and record levels of inflation result in negative returns across all major asset classes in August. Shares (-0.8%) and property (-1.4%) were down, while an outlook of increasing interest rates had a notable impact on bonds (-2.75%). We saw a similar performance in our Ethical Plans, with shares (-1.5%) and bonds (-3.5%) ending the month in negative territory. However, Ethical Plans mildly underperformed Original Plans owing to their higher tilt towards growth assets that were negatively impacted by rising interest rate expectations in the second half of August.
Summary with Plan details
Following a positive July, August was a negative month for all our Investment Plans in both Original and Ethical themes, and Plans with higher levels of bonds underperformed Plans with higher levels of shares and property. Financial markets continue to exhibit elevated volatility against a very uncertain economic backdrop, as indicated by large asset price changes from month to month, and even day to day.
Our Investment Team continues to actively monitor the financial markets and their impact on your Plan, and we are ready to act in your best interests to events as they unfold. We are continually evaluating new market information and the key drivers in markets to help keep your Investment Plan on track.
It’s important to remember that it’s normal for markets to go up and down, and periods of volatility are to be expected when you invest. As always, we continue to look for opportunities to position your investments with the goal of protecting your money and achieving your long-term objectives.
Please remember the value of your investments can go down as well as up, and you could get back less than invested. Past performance is not a reliable indicator of future results.