The increased tension surrounding North Korea was arguably the biggest influence on market sentiment in August, triggering a subtle flight to safety among financial markets. August was also no exception to the usual political deadlock, including further instability in the Trump administration and the ongoing Brexit comings and goings between the UK and European Union negotiators.
Although volatility during the month was low, the above backdrop was slightly more favourable to safe-haven assets, as evidenced by a rise in gold prices, up 4% and hitting a one-year high, and a slight outperformance of government bonds over equities in local currency terms. For sterling investors however, exposure to overseas assets not denominated in sterling was rewarded due to the weakness from the pound.
Among equities, emerging markets have now outperformed developed markets for an 8th month in a row, supported by strong Chinese and Brazilian equities. Conversely, in the developed world, Europe ex UK and Japan posted small negative returns for the month as a whole. At a sector level globally, the performance gap between technology and energy moved another 5% and is now an extraordinary 37% year-to-date.
Within fixed income, UK gilts were the best performer, with emerging market debt assets also benefiting. More broadly, developed world government debt outperformed corporate debt following a flight to safety and a reduced likelihood of interest rate rises in the short term in the developed world.
Looking Forward – the Bigger Picture
Going forward, we face an interesting situation whereby market optimism appears pegged to an elderly economic expansion. To provide some perspective, the earnings growth that has propelled markets in the last year has been driven by a narrow subset of the investment universe, being mostly attributable to profit margin expansion among financials and energy companies. This could easily prove to be cyclical and therefore a possible mean-reverting phenomenon.
With stretched valuations and general optimism among market participants, the landscape notably remains challenging for valuation-driven investors like ourselves. We therefore emphasise the need to remain patient and wait for attractive long-term opportunities to emerge. We continue to maintain healthy cash levels while favouring pockets of opportunity that we deem complementary in a portfolio context.
