August lived up to its reputation as a quiet month for global markets. Rich countries have steadily reduced restrictions, enabling economic activity to surge back. The UK and US now seem to be just past the peak rate of growth, though the expansion remains strong. For investors, bad news mostly came from emerging markets; both from China, where the communist party is continuing its crackdown on various sectors and from the Middle East, where the US withdrawal from Afghanistan has raised uncertainty.
The UK economy is still rebounding strongly but has been constrained by supply chain disruption caused by staff having to self-isolate. Companies have been forced to cut lower margin products from distribution networks. For example, restaurants are removing bottled water from menus. The flip side has been a boost to wages; lorry driver salaries have spiked 5.7% since February.
Meanwhile, the UK stock market has been a ripe target for takeover bids from overseas investors. Chippenham-based inhaler producer Vectura accepted a bid from Philip Morris, while Coventry-based aerospace specialist Meggitt is in the midst of a bidding war between two US industrial giants, and Morrisons is the subject of a three-way battle between private equity suitors. The takeovers help cement our attitude towards the UK, where we see an attractive combination of growth, quality, and value. This was evident in our Baillie Gifford British Smaller Companies fund, which returned almost 6% in the month.
US inflation remained at 5.3% for the second month running, far above the Federal Reserve’s 2% target. Fed chief Jay Powell used his speech at the Jackson Hole conference to hint that the central bank might begin reducing its bond purchases by the end of this year but emphasised that rates would remain low for a long time. At the start of August, we increased our US exposure, so it was good to see the S&P put in one of the strongest performances of the month.
President Biden notched a political win after the Senate passed his $1 trillion infrastructure plan, with rare bipartisan support. However, the bill’s future was later put into question when Democrats in the lower house tied it to a much broader $3.5 trillion package, which looks unlikely to garner any Republican support. Additionally, the ongoing troubles in Afghanistan have weakened Biden’s political capital.
The latest figures show EU GDP rose by 13.2% compared with the same period last year. The continent’s economic recovery is several months behind that of the US or UK, so it is experiencing faster, earlier growth as businesses reopen.
In an interview with the FT, the EU’s economics chief said that the bloc should avoid its post-2008 policy of forcing countries into austerity to bring their debt levels down. This is good news for our Lightman European fund, which has exposure to European banks that benefit strongly from higher spending and lending.
The chaotic scenes in Afghanistan, where the US is withdrawing its troops after 20 years, had little effect on global markets because Afghanistan has no stock or bond exchanges. For investors, the episode is a reminder of the risks inherent to investing in emerging markets with poorly established property rights or rule of law. Our EM bond fund delivered strong returns, thanks partly to its rules around not investing in countries that impose capital controls.
The Chinese Communist Party continued its crackdown on sectors such as education and video games. It announced a raft of measures designed to benefit the public good, but which leave investors picking up the tab.
Japan held security talks with Taiwan in a show of unity against China’s expansionist rumblings. In Tokyo, the Summer Olympics wrapped up, though Japan did not enjoy the tourism boost that was expected pre-Covid. Despite this, our FTF Japan fund was the best performing fund in portfolios, rising almost 7%.
The turmoil in Afghanistan and crackdown in China provide two useful lessons for investors. Firstly, they are a reminder that in certain markets it pays off to take an active approach, because an active manager can avoid areas with the greatest risk. Secondly, they highlight the advantages of high-quality companies, which have the profitable resiliency and balance sheet strength to navigate an uncertain landscape.