Despite ending on a positive note, August was a poor month for markets overall. Following five successive months of gains, the US S&P 500 experienced its worst month since February, while the Nasdaq 100 recorded its largest decline this year. Asian and global stocks also succumbed to their biggest monthly losses since February. Bond markets were more resilient but still saw slight losses overall as mixed economic data meant continued uncertainty about the direction of interest rates.
End of interest rate rises in sight?
The short term performance of asset prices largely remains at the mercy of the trajectory of inflation and the level of interest rates required to bring it back down to desired levels. With a healthy return available on cash risk free, at least in nominal terms, investors demand more from their investments, and this factor continues to weigh on markets. However, there has been growing anticipation that the US central bank, the Federal Reserve, is now nearing the end of its cycle of raising interest rates, which should slowly relieve the pressure.
This is why recent market action has revolved around the contradictory ‘bad news is good news’ theme. Strong economic data would reflect greater inflationary tendencies, so when cracks start to appear such as recent disappointing US economic growth, job openings and consumer confidence the markets anticipate less restrictive conditions and asset prices rise. It’s a fine line, though. At the extreme end of the scale of potential outcomes a severe recession is certainly not good – for share markets at least – which is why a mild economic downturn is possibly the most benign scenario, rather than a harsh one or, counterintuitively, no downturn at all. As it stands, September may bring a pause in interest rate rises for the Fed, or may even mark the end of hikes altogether, though markets are presently erring on the side of one more, perhaps in November.
View on the major markets around the world
In the UK there is a greater chance of recession with the economy broadly flatlining so far this year. However, the economy has shrunk less and bounced back faster during the pandemic than previously assumed according to revised figures from the Office for National Statistics. Performance has been sufficiently robust to give the Bank of England plenty of food for thought at its next meeting to decide interest rates on 20th September. The judgement will be a difficult one with inflation pressures lingering, the UK economy so far largely withstanding the strain of higher rates, but some recession warning signs flashing and house prices now firmly in a downtrend.
Further afield, this month brought another round of difficult economic data for China. Although the economy is growing after Beijing relaxed its strict anti-Covid restrictions in December last year, hopes that a more robust recovery is around the corner are looking increasingly forlorn. A hesitant consumer and flagging manufacturing are being compounded by ongoing difficulties in the property sector where there is significant oversupply. China has been a major driver of growth across Asia for over twenty years, so investors are worried that a continued slowdown could derail growth elsewhere in the region.
In contrast, the Indian market provided a small pocket of positive returns in emerging markets and equities more broadly, perhaps benefitting from investor flows away from the more troubled Chinese market, while the energy sector fared relatively well too as oil prices climbed.
Although investors should be aware past performance is not a reliable indicator of future results, here are the top and bottom ten Investment Association (IA) funds and sectors* for August 2023:
The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for August 2023: 31/07/2023 to 31/08/2023. Onshore and retail open-ended funds only.
*There are several thousand funds on sale in the UK. The Investment Association divides these into about 45 sectors, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds.
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