Stock markets whipsawed over the summer holidays. Fears of overheating consumer spending, a US debt downgrade, and nasty Chinese economic data wiped almost $3 trillion off global stocks by the middle of August. However, positive inflation data and a well-received speech by the Federal Reserve chair restored some confidence, and markets made a tepid recovery. Stocks ended the month down across the board. There were some bright spots; the energy sector rose on higher oil prices, while the US eked out a positive return thanks to the stronger dollar.
The Bank of England hiked rates for the 14th time in a row, though governor Andrew Bailey told MPs that interest rates are now close to their peak. UK inflation eased down to 6.8% in the latest reading, but remains higher than in the US or Europe. There were signs that higher rates were finally having an effect, with house prices down around 5% from their 2022 peak – or about 11% in inflation-adjusted terms. Retail sales also dropped sharply, though this could be distorted by the wet weather.
The UK economy received a retrospective boost when the Office for National Statistics said it had underestimated performance during Covid. Compared to earlier estimates, GDP fell less in 2020, and rose more in 2021, which makes today’s economy 1.7% larger than previously thought.
The government said it netted £2.6 billion from inheritance tax since the start of the new tax year, with this summer recording the highest monthly total on record. The record figures demonstrate the value of CPN’s IHT service, which can help optimise tax efficiency because eligible investments are exempt from the 40% tax.
All eyes were on the Rocky Mountains in Wyoming, where central bankers gathered for their annual summer jolly at Jackson Hole. Every word at the event is analysed for clues as to where interest rates could go, and last year the Federal Reserve chair Jay Powell sent markets into a tailspin with a hawkish speech. This year’s speech was better received, and Powell reiterated that the Fed’s policy was data dependent, with a bias to tighten if core inflation remains elevated.
US economic data came in hot, with strong job creation, wage hikes, and consumer spending. Headline inflation ticked up to 3.2% after a multi-month decline, with core inflation at 4.7%. Markets are currently pricing in a small rate hike later this year, before a gradual reduction throughout 2024 and beyond. US stocks ended the month down, but our S&P and Nasdaq funds eked out a positive return thanks to the strong dollar.
Eurozone inflation remained largely flat at 5.3%, with core inflation at the same level. Unemployment dropped to 6.4%, a record low since the creation of the currency bloc. European stocks struggled over August, as Italy imposed a surprise windfall tax on banks’ interest income, wiping billions off the country’s largest banks’ share prices.
In Denmark, the government said the country avoided recession solely due to the performance of one company, Novo Nordisk, the maker of blockbuster weight loss drugs Ozempic and Wegovy. After a multi-year rally, Novo Nordisk’s share price spiked another 20% in August on more good medical test results. The Danish healthcare giant is the largest holding in our European Quality fund, which we added earlier this year.
Chinese markets had another rough month. The world’s second largest economy officially entered deflation as prices dropped -0.3% compared to a year ago, while retail sales and business inflation both dropped below expectations. A rebound seems unlikely given surveys show household confidence remains weak. Real estate was the weakest sector, as cash-strapped developers delayed bond payments. The trouble prompted Beijing to unleash stimulus to rekindle demand, by relaxing deposit requirements and cutting lending rates.
In Argentina, the right-wing populist Javier Milei won a shock victory in the primaries ahead of the presidential election. He promised to “take a chainsaw” to public spending, “burn down the central bank”, and introduce the US dollar as the national currency. His victory sent the Argentine peso plunging, and the central bank responded by hiking interest rates to 118% and devaluing the official exchange rate. Our new Latin America fund is unaffected by the turmoil, because it excludes stocks listed in countries that impose capital controls.
Japanese GDP came in better than expected, helped by strong exports. Core inflation rose to 4.3%, but after decades of “noflation” the Bank of Japan has given little sign it will raise rates. The stock market in Tokyo was resilient, rising 0.4% in yen terms.
The hopes of an “immaculate disinflation” which drove the mini-rally earlier this year were probably over-optimistic. As we wrote last month, investors need to remain vigilant to the many risks, and August’s volatility highlighted those risks. Even though inflation pressures are receding, tail risks remain, and it is likely central banks will have to maintain restrictive policies beyond 2023. Meanwhile, China’s pickle will inevitably weigh on the global economy, given the country contributes almost a third of global growth. We believe that investors should remain well diversified with a focus on quality.