Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
US equities reached new highs again in August. Market worries over the outcome of the Federal Reserve’s annual Jackson Hole symposium were ultimately allayed by Chair Jerome Powell. Powell struck a cautious note in his statement, stating that while the US economy had made progress on some important targets – specifically on inflation - tapering too aggressively could derail progress at a sensitive time, reiterating a desire to see further progress in the labour market. The comments were consistent with expectations that tapering could begin this year, but were broadly perceived as dovish. The boost to sentiment overshadowed worries over Hurricane Ida and the Covid-19 Delta variant.
The Fed stated more specifically that “provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year." All Federal Open Market Committee participants assessed that the economy had made progress toward the maximum-employment and price-stability goals since last December, although most participants believed that “substantial further progress” toward maximum employment had not been achieved yet. The bipartisan infrastructure deal of roughly $1 trillion passed in the Senate. The deal includes $550 billion in new federal investments in physical infrastructure, spread over five years. The infrastructure bill now moves to the House for approval.
Financials, especially diversified financials such as Goldman Sachs, Blackrock and Morgan Stanley, performed well as revenues for major investment banks returned to (or surpassed) pre-pandemic levels. Communications services – including giants such as Google parent Alphabet, Facebook and Netflix - were also amongst the strongest performers after announcing strong earnings at the end of July. Energy companies lagged the index.
European equities gained in August, supported by a positive Q2 earnings season and ongoing economic recovery from the pandemic. The Delta variant of Covid-19 continued to spread but most large eurozone countries have now vaccinated around 70% of their population against the virus.
Information technology was among the strongest performers with semiconductor and semiconductor equipment firms continuing to benefit from high demand. Other top performing sectors included communication services and utilities. Consumer discretionary saw a negative return. Luxury goods stocks came under pressure amid suggestions that China could seek greater wealth redistribution, which could hit demand for luxury products. Consumer staples also underperformed amid weakness in beverages groups.
Annual inflation in the eurozone was estimated at 3.0% in August, up from 2.2% in July. The European Central Bank had said in July that it would tolerate any moderate and transitory overshoot of its 2.0% inflation target. The eurozone composite purchasing managers’ index for August slipped to 59.5 from its 15-year high of 60.2 in July. Slower manufacturing production growth was mainly linked to supply chain constraints. (The PMI indices, produced by IHS Markit, are based on survey data from companies in the manufacturing and services sectors. A reading above 50 signals expansion). The European Commission’s economic sentiment index also slipped but remained at a high level.
UK equities rose over August. Small and mid cap (SMID) equities performed very well as they continued to be a sweet spot for M&A activity. In contrast, the wider UK market lagged other developed regions as global asset allocators remained indifferent towards UK equities as a whole.
There was some encouraging data around interest in UK equities from domestic UK investors, in addition to the ongoing M&A interest of overseas buyers. However, according to the latest Bank of America global fund manager survey, global asset allocators remained uncommitted, despite the signs of growing interest earlier in the year.
A headline-grabbing bid for the UK-based aerospace and defence equipment supplier Meggitt – at a 71% premium – proved a talking point. Commentators noted the persistent and pervasive discount across multiple sectors and individual UK listed stocks – see What does Meggitt’s bid premium tell us about UK shares?
Mid cap industrial stocks were an important overall contributor to UK equities in August, and the sector was the best overall monthly performer. This was driven by both internationally focused stocks (not just Meggitt, but a number of other globally diversified mid cap aerospace and defence stocks performed well too) as well as the domestically focused industrial areas.
Asian equity markets were up in August in the context of a global economic recovery, favourable economic data and upbeat earnings reports. Nonetheless, delta variant outbreaks at the start of the month weighed on markets.
The Philippines, Thailand and India’s equity markets were the strongest performers in August. Indian equities, which returned 11%¹ , were the largest contributors to regional performance, underpinned by strong fiscal support, solid macroeconomic data, a large increase in Initial Public Offerings (IPOs) and an improving vaccination programme. The utilities and communications services were notable outperformers, while the materials, consumer discretionary and healthcare sectors lagged.
Chinese equity markets remained flat and underperformed the broader region after the country imposed new lockdown restrictions to tackle the worst wave of Covid-19 cases since the first outbreak in March 2020. Markets were also impacted by a shift in focus of Chinese regulatory authorities as more sectors, like medical cosmetics, chips and online gaming came under scrutiny. China’s manufacturing sector shrunk for the first time since April 2020, with the Caixin manufacturing Purchasing Manager’s Index (PMI), coming in at 49.2.
The energy and materials sectors performed best as markets priced in the potential strengthening of cyclical stocks in the post-pandemic world. Hong Kong equity markets lagged, as export and retail sales volume growth slowed, and composite Consumer Price Index (CPI) inflation rate increased.
August saw emerging market (EM) equities outperform the world. Europe, Middle East and Africa (EMEA) performed the best, followed by emerging Asia and Latin American. South Asia - the Philippines and Thailand - led returns, with only Argentina surpassing them thanks to the outperformance of its main constituent, Globant. At the other end of the scale, Pakistan, Brazil and Korea lagged.
Central banks in Latin America have been raising interest rates to avoid currency pressure as supply chain shortages, growing domestic demand for goods and rising prices lead to inflation. South Korea also became the first major Asian economy to raise interest rates.
The Delta variant weighed on EM markets particularly in Asia, where the Chinese government imposed lockdown measures to combat its worst virus outbreak since the beginning of the pandemic. However, at the annual Jackson Hole meeting Jerome Powell, the chair of the US Federal Reserve (Fed), reassured that it is in no hurry to raise interest rates, which helped push EM equities at the end of the month.
Indian equity markets outperformed the broader EM region, buoyed by the outperformance of the utilities and communication services sectors, and was the biggest contributor to EM’s performance. Year-to-date, Indian equities are up by more than 20%² as they benefit from rising global liquidity, despite concerns of a third Covid-19 wave increasing.
Argentina posted the strongest returns in the Latin America region, followed by Colombia and Mexico, while Peru and Brazil pared gains. Most Latin America region sectors posted positive returns, with IT leading while consumer discretionary lagged on performance the most. 25% of Mexico’s total oil production (421,000 barrels per day) was lost after a fire on an offshore platform. There were signs of a more dynamic recovery in Colombia after the country’s central bank revealed higher than expected economic growth for the first half of the year (9.1%). Peru’s underperformance was largely down to the political backdrop of President Castillo taking office and growing political noise.Back To News & Insights