Investment Update – August 2024

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You can find a written summary below and a downloadable pdf for more details

What happened in markets?

The month began with a bang as weak US economic data and yen strength prompted an aggressive sell-off in Japanese equities, although few regional equity markets emerged unscathed. This bout of volatility was amplified by lower summer trading volumes. However, global equities regained their poise in the second half of August finishing the month 3% higher (in USD terms), and even Japan reversed most of its losses. Fears over rising US unemployment saw defensives rally, with sectors such as healthcare and consumer staples in demand.

A weak US jobs number was the main driver behind a bond rally as fears over a US recession and the resulting impact on global growth dragged yields lower. However, even as global equities recovered in the second half of August bond yields remained lower than at the start of the month. Oil prices falling by 5% over the month may have been a factor, as well as inflation data remaining well behaved, opening the door to a potential 0.50% cut in US interest rates in September.

The Bank of England cut UK interest rates to 5% in a finely balanced decision which saw the Banks Chief Economist vote against the Governor. With inflation receding rapidly in 2024 this seemed a sensible first step, even if services inflation remains too high for comfort. With UK growth improving, there may only be a short window of opportunity to lower rates further. Rises in the energy price cap will also put upward pressure on headline inflation over the rest of the year.

What did we do in the funds?

During periods of extreme volatility the best plan of action is usually to do nothing, unless you have significant amounts of cash to deploy. However, we did marginally increase global high yield bond exposure by adding to the BNY Mellon Efficient Global High Yield fund across the VT Esprit range. We think yields over 7.5% are difficult to resist, particularly in an environment where inflation is falling, interest rates are moving lower, and economic growth is modest but positive.

We have additional exposure to high yield bonds through a global strategic bond fund, which enjoys a flexible go anywhere approach to global bond markets depending on where the manager sees most value. The fund is currently split between government bonds, high quality corporate bonds and high yield bonds.

Elsewhere, we introduced Montanaro UK Income into VT Esprit Careful Growth following a spell of weakness by UK smaller companies. The initial wave of excitement around UK assets following Labour’s victory has waned in recent weeks, and this move brings the fund in-line with the other VT Esprit funds. This was funded by a reduction in the iShares UK Equity Index which tracks the FTSE All Share.

What is the outlook?

A packed economic calendar at the end of the month saw the Japanese central bank raise rates to 0.25%, the Fed all but confirmed a September rate cut, and the Bank of England reduced interest rates from 5.25% to 5% in a finely balanced decision. The Bank of England was careful not to let markets run away with the idea that this was the first in a quick succession of rate cuts, but we expect them to cut rates at least once more before the end of the year. Services inflation and wage growth remains problematic, but we expect further progress in each of these areas.

The US economy appears to be slowing, although a stronger-than-expected Q2 GDP report was at odds with recent economic data releases. However, central banks have room for manoeuvre and a further deterioration in economic data, and the labour market in particular, will put pressure on the Fed to act more decisively in September with a larger 0.50% rate cut not out of the question.

The US earnings season has been mildly positive, despite some high-profile misses by Tesla and Microsoft. We now await Nvidia’s results at the end of August for further evidence of the longevity, or otherwise, of the AI fuelled rally in semi-conductor stocks. Beyond the summer we have the distraction of the US presidential election, where the odds of a Trump presidency have fallen slightly in recent weeks.

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Written by:
Charlie Lloyd
Head of Investment, Skerritts

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