August was a month of two halves for equity investors. With much of the developed world on vacation market volatility is often reduced and traded volumes can be more modest than normal. In the first two weeks of August markets rose. As those who read our commentaries know a core belief is that movements in equity prices depend to a large extent on global money supply which has been greatly distorted by central banks in recent years. Many market participants had continued to expect a supportive monetary policy outlook from the head of the world’s most important central bank, even as quantitative easing has reversed to quantitative tightening. Complacency of markets was punctured by the Federal Reserve Chairman, Jerome H. Powell, in his speech at the Jackson Hole conference. We’d encourage investors to read the short speech verbatim. Three key lessons were laid out all relating to; the bank’s job in manging inflation, preventing inflation expectations becoming embedded in society, and not stopping measures to cool inflation too early. Notably absent were references to employment
Bond markets have been indicating a risk-off environment for some time. Equites being quasi-perpetual investments ought to attract investors that are very forward looking and who can look through periods of economic stress. In practice however, emboldened by an ultra-lose monetary policy there is little doubt that many view the asset class purely speculatively. More than double the total number of shares in issue in Bed Bath and Beyond for instance, traded in a single day during the month: an average holding period of less than half a day.
We would anticipate that the Global Equity Income strategy would perform relatively better than the market in such an environment. The global index (FTSE All World) fell 3.6%, and high dividend index declined by 2.7%. Pleasingly, on a relative basis at least, the model Global Equity Income portfolio decline was more modest at 1.2%.
Trading activity was minimal. The best performing stocks held during the month were BP (+6.9%), Admiral (+5.9%) and Hannover Re (+4.8%). The worst performing stocks held during the month were National Grid (-6.9%), J&J (-6.9%) and Microsoft (-6.7%).
There are several ways that inflation will eventually permit more dovish central bank policies. The most likely near-term outcome however is for inflation to be tamed by the central banks removing liquidity from the world. This will continue to be put pressure on asset prices.