Monthly Market Insights - August 2023
Market Overview: August 2023
Market Performance 1st – 31st August 2023 (in GBP Total Return)
FTSE 100: -2.50%
S&P 500 (USA): -0.13%
FTSE Europe Ex UK: -2.40%
Topix (Japan): -1.89%
MSCI Emerging Markets: -4.72%
Asset prices declined across the globe in August, with interest rate policy and inflation remaining the key focal points for investors. In the US, we saw a small town in Wyoming take centre stage: Jackson Hole, which annually hosts a much-anticipated symposium for central bankers. The three-day conference – and concluding speech from US Federal Reserve (Fed) Chair Jerome Powell – invoked a much calmer response from US markets compared to the volatility after the same event last year. With global economic data providing mixed messages, markets still hold a level of uncertainty about what’s next and how policymakers will respond. UK economic growth proved more resilient than widely expected given the sharp increase in interest rates, but it remains unloved relative to its developed market peers and couldn’t escape the market drawdown. The sharpest pain for investors was in China, which suffered another property sector slowdown, while faltering consumer confidence heightened fears that China could fall into a deflationary spiral.
Hopes of a ‘soft landing’ for the US, with eyes firmly on the Fed’s next move:
Market nerves were settled after Jerome Powell’s Jackson Hole speech where he said the Fed was “prepared to raise rates further”. Which was much more in tune with market thinking, prompting a more positive response compared to last year. When Powell spoke at this event in 2022, markets panicked. The Dow Jones index sank by 1,000 points and the S&P 500 fell by 3% after he warned that “pain” was ahead for US households.
US Economic Highlights:
US consumer price index (CPI) inflation increased by 0.20% to 3.2% for the year to July, according to the US Department of Labor. This was lower than economist forecasts of 3.3%. Encouragingly, core US inflation (stripping out more volatile components such as food and energy) dipped to a 12-month rate of 4.7% in July, down from 4.8% in June.
One potential underlying cause for the increase in inflation came from producer prices rising in July – with the headline producer price index (PPI) rising 0.3% month-on-month, above consensus expectations for a 0.2% increase, the first tick up since June 2022. However, the underlying trends show that PPI inflation is reverting to its pre-pandemic run rate.
This activity has given some investors hope that the US economy is stabilizing and supports the Fed achieving a ‘soft landing’ – with the economy achieving a more sustainable and stable growth rate, without experiencing a sharp downturn or recession.
UK Economic Highlights:
CPI inflation increased by 6.8% for the year to July, down from 7.9% in June, according to the Office for National Statistics. This was the lowest inflation rate since February 2022, and further away from the peak of 11.1% set last October.
With the Bank of England’s rate hiking activity well flagged in advance, markets had a muted reaction to the decision to raise interest rates by a further 0.25% to 5.25%, the highest level for 15 years.
However, UK core CPI inflation rose by 6.9% in the 12 months to July 2023. This was slightly higher than economist forecasts of 6.8%. Core CPI components are typically more ‘sticky’ on average, and could cause headwinds for the Bank of England on the journey to its 2% inflation target.
The UK’s gross domestic product (GDP) increased by 0.2% for the April to June quarter, up from 0.1% for the previous quarter and the best quarterly GDP reading in more than a year, according to the Office for National Statistics. Growth was boosted by a recovery in car manufacturing and a strong month in June for overall productivity.
Challenges in Chinese Markets:
The hot topic in China continued to be its troubled real estate sector, as two major developers – Evergrande and Country Garden – announced severe financial difficulties in August, which threatened to impact the wider sector and economy.
The filing from Evergrande Group, which defaulted in 2021 following a liquidity crisis, came one day after China’s securities regulator notified the company’s Chinese branch that it was being investigated for suspected disclosure violations. Evergrande is the world’s most indebted property developer, with more than $300bn (£236bn) in liabilities.
Pain was also felt in the country’s level of trade, as imports dropped 12.4% in July year-on-year, much worse than the 5% fall economists had expected. Exports also fell at a faster than expected rate, contracting by 14.5%, after June’s 12.4% fall.
China officially dropped into deflation territory in July, with a year-on-year CPI inflation reading of -0.3%. The drop in consumer prices heightened fears that the world’s second-largest economy could fall into a prolonged period of deflation, if not remedied. This fall, however, was smaller than the 0.4% that economists expected.
The China Securities Regulatory Commission proposed several measures to stimulate investment, but fell short of regaining investor confidence overall. The measures included cutting trading costs, supporting share buybacks, and encouraging long-term investment. Furthermore, focus is on the development of equity funds, with plans to extend trading hours and improve the attractiveness of listed companies.
Summary:
Green shoots of cautious optimism emerged on the hope that central banks are getting on top of inflation, and as a result, the US market posted relatively flat returns at the broader level. With the US being ahead of the curve in terms of monetary policy and combating inflation, eyes remain on the Fed and achieving their ‘soft landing’, which will in turn shape the direction for US market returns in the months to come.
The UK and Eurozone made a good step in the right direction for reducing inflation, with readings at their lowest level since before Russia invaded Ukraine. However, this has done little to buoy investor optimism, given concerns over a potential recession are more prominent than in the US. Recent economic trends suggest both the Eurozone and the UK are making headway to avoiding this scenario, but, for the moment, investors appear unwilling to rule out the possibility.
August saw China lose gains from the previous month, with share prices weighed upon by the weaker economic outlook. China’s economy officially fell into deflation territory in July, as the post-pandemic recovery faltered. While China’s policymakers are beginning to make efforts to stimulate the economy, we are yet to see the material measures needed to boost investor confidence. Therefore, share prices are likely to trade at a discount until then.
RISK WARNINGS
The value of stock market investments will fluctuate in value both up and down and investors may not get back the original amount invested. Past performance is not a reliable guide to future performance. Reference to a particular investment does not constitute a recommendation to buy or sell the investment. Forecasts are meant as a guide and should not be relied upon as an accurate indicator of future performance. If you have any concerns or questions about how anything mentioned in this blog post may affect your own personal circumstances please speak to Coldrey Wealth Management or another suitably qualified professional / independent financial adviser.