Fed Chair, Jerome Powell, reaffirmed that inflation remains enemy number one at the Jackson Hole Symposium. It was acknowledged that price pressures disproportionately affect lower income groups and that achieving the price stability mandate will likely require a period of below-trend growth and a deterioration in labour market dynamics. Furthermore, it was reiterated that the FOMC needs to see a meaningful deceleration in inflation and that prematurely easing policy, would have undesired consequences according to historical records. Such discourse caused undesired consequences for markets as the FTSE All-World Total Return USD Index and the FTSE World Broad Investment-Grade Bond Index retreated 3.6% and 4.1% in August respectively.
While it is certainly welcomed that US inflation surprised to the downside in the July print (+8.5% year-on-year vs. Bloomberg consensus of +8.7%), overall price pressures remain untenably high and some distance from the Fed’s desired target of 2%. The Fed will likely keep monetary policy on a tightening path as they attempt to quell the demand-side of the economy to be in better alignment with supply-side factors. Tightness in the natural gas market has severely hampered growth expectations, particularly in the UK and European regions where escalating utility costs are negatively impacting corporate margins and household income statements. In similar vein to the Fed, the Bank of England is set to become the first major central bank to sell bonds to stem inflationary pressures as the UK grapples with double digit inflation.
Other noteworthy events that occurred during the month include the continued relief over US student debt for another four months and a 1% excise tax on stock buybacks after December 2022. The former may well have undesired consequences for inflation prints before year-end and we will be watching this closely as unanchored inflation expectations will almost certainly be met with an even tighter monetary policy stance.
On the emerging markets front, China continues to display mixed signals with easing on the monetary policy side amid well contained inflation levels, although lockdowns prevent a sustainable uptick in economic growth at this juncture. At this stage, we remain cautious, but we expect opportunities to emerge in the coming months.
We remain cautious about the returns for global equity markets as supportive monetary and fiscal policy that helped propel equities last year continues to fade. Developed market consumption expenditure is expected to be more muted amid lower savings rates, subsiding government transfer payments, and as real disposable income is eroded by inflationary pressures. Accordingly, we continue to lower the overall fund beta to be less exposed to market risk. We believe inflationary pressures will dissipate toward the end of the year as we assume supply chain bottlenecks will likely unwind as trading conditions normalise. Increasing headwinds for consumer demand will also likely add to disinflationary pressures as high staple prices such as food and energy erode real consumption expenditure prospects. Moreover, more favourable base effects will likely assist in lowering year-on-year CPI prints toward the end of the year.
The USD Global Growth and Balanced Fund fell 2.7% and 2.3% respectively, behind the Morningstar peer groups which saw a decline of 2.1% and 2.2% for each respective fund. While defensively positioned, the marginally higher fixed income weighting was a relative detractor to performance. Nevertheless, both funds remain in the first quartile year-to-date and over a one-year period. Our most defensive offering, the Sterling Asset Management Fund, declined 2.3% amid a structurally higher fixed-income structure. Overall, we continue to remain vigilant by keeping the overall fund beta at lower levels compared to the majority of last year amid a highly volatile and uncertain economic environment.