The trade war between the US and China continued to take centre stage for markets, with both the substance and the timing of any potential agreement in doubt. A new round of tariffs imposed in early August by President Trump was met with equal pushback from China, leading to an equity market correction. The problem here for markets is that there are very few places to hide: bond yields are already at global lows, cash earns you next to nothing, and the US dollar is, by all accounts, overvalued. So, risk-off events are likely to be temporary as eventually investors will seek upside risk in a world awash with low (and even negative) yield elsewhere.
So, while the MSCI All Countries Index dropped 2.6% in August, for the major part of the month it tracked sideways after an initial fall. This speaks to the dynamic alluded to above. The US however continues to outperform the world, in both up and down markets, which speaks to investors desire for earnings visibility and relative stability.
The macroeconomic backdrop remains mostly mixed, with some indicators continuing to point to the impending slowdown, whilst other indicators remain robust; the US labor markets continue to remain relatively tight. The US Initial Jobless Claims report, a precursor to changes in the unemployment rate, remains consistently below 225k, a far cry from the levels of over 500k in the aftermath of the Great Recession of 2008 and has been trending down ever since.
Despite this robustness, the US Treasury market moves reflect fears of economic weakness rather than actual weakness, which is a significant distinction. Importantly, pressure is growing on the Fed to increase the pace at which they cut rates, and it may well be that the impetus of such a monetary policy shift coincides or even pre-empts actual weakness. Accordingly, our view has been maintained that US recession, whilst the probability has increased, is not our base case.
Interestingly, over in the Eurozone, German GDP for Q2 tipped into negative territory coming in at -0.1% (QoQ), sparking fears of a wider Europe-oriented recession on the cards. This economic weakness is of course already reflected by bond yields, with the entire German bond yield curve trading in negative territory. The response from the ECB is of course limited by the fact that official rates are still at their low points and accordingly, monetary policy action is at this stage mostly limited to quantitative easing (QE).
In currency space, the Japanese yen rallied hard against the US dollar, gaining over 3% at one stage before ending the month 2.3% stronger. As a result of Brexit issues, the Pound sterling remains on the back foot, held to ransom by the shifting political tides as the ebb and flow of progress towards or away from a no-deal Brexit plays out.
With equity markets falling in August, our underweight equity position worked for us, and despite the fall we do not believe that this is the right time for us to be increasing our weightings yet as too many uncertainties remain. In particular, the response function of the monetary policy authorities is still crucially uncertain at this stage.
Accordingly, we have not made too many changes to our portfolio positions, being underweight overall equity, with the biggest underweight in Europe. We did close out our thematic financial position though, replaced by broad US equity exposure. In addition, we also shifted some of our value-oriented position (in the Fidelity America Fund) to a more diversified position with exposure to the broader S&P 500.
In the bond space we have maintained our overweight Emerging Market positions whilst overall duration remains slightly underweight given where developed market bond yields have reached.
As noted in previous months, risks for a no-deal Brexit have risen given Boris Johnson’s political travails, and given the complexities of plotting a path forward we retain our neutral position on UK equities and UK currency.
With the drop in global equity markets, we had negative performance across the range of Multi Asset Funds for August, despite bond markets being in positive territory for the month. The Sterling Asset Management Fund did however perform well against the peer group in spite of negative returns, delivering -0.6%. The Global Growth Fund, with its generally higher equity component fell -1.9%.
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