Our multi-asset investment experts review August’s markets and the impact they have on multi-asset portfolios, as well as what investors can expect going forward.
Top 3 investment trends
1. Volatility (briefly) returns to the market
August 2024 was a relatively turbulent month, with the VIX index (a barometer for market volatility) briefly reaching levels last seen just before the covid outbreak in March 2020. The initial catalyst for this was a weak US jobs report, which showed an increase in the unemployment rate to 4.3 per cent. This raised fears that the US may be heading for a recession and sparked some volatility in global markets.
One of the most impacted markets was Japan. The “yen-carry” trade, a popular position in markets that relies on Japanese rates being low, began to unwind as the Bank of Japan increased rates and expectations for US interest rates fell. The Japanese TOPIX index fell by -12.2 per cent in JPY terms on August 5 with other less pronounced sell-offs occurring across global markets. However, after better economic data and dovish central bank messaging, calm quickly returned and markets rebounded. Despite the heightened volatility, most equity and bond markets finished positive for the month.
2. Central banks position for rate cuts
Several key central banks either cut rates or signalled their readiness to do so in August 2024. At the start of the month, the Bank of England (BoE) lowered its base rate from 5.25 per cent to 5 per cent, marking its first interest rate cut in over four years. This was after headline CPI figures fell to the bank’s 2 per cent target in May and remained at that level in June, despite sticky services inflation.
Despite volatility at the start of the month, most equity markets closed in positive territory
Core inflation fell to 3.2 per cent in the US, and dovish remarks in Fed Chair Jerome Powell’s Jackson Hole speech and the latest Federal Open Market Committee (FOMC) minutes solidified investors’ conviction that rate cuts in the US are now imminent. Eurozone inflation fell to a three-year low of 2.2 per cent in August, with European Central Bank (ECB) economists and board members stating they were open to another rate cut in September. This helped sovereign bonds post another relatively strong month.
3. Gold continues to glitter while Nvidia’s lustre fades
Gold continued to perform strongly, reaching all-time highs in August 2024. The precious metal rallied, initially driven by safe-haven flows in the middle of the month ahead of US inflation data. Growing market expectations of Federal Reserve interest rate cuts and US dollar weakening pushed the gold spot price up, finishing August with a 2.3 per cent gain. This brought year-to-date returns to 21.3 per cent, placing gold among the top-performing major asset classes.
In contrast, Nvidia’s stock fell by 8 per cent after hours following its earnings call, despite reporting record-breaking revenue of $30 billion for the second quarter. This figure represented a 15 per cent increase from the previous quarter and 122 per cent year-over-year growth. Investors were still underwhelmed, as the company’s forecasts for the third quarter were only slightly above consensus expectations, rather than the significant beats the market has become accustomed to.
How did we position portfolios against this backdrop?
Growth assets
Despite the initial market volatility at the start of the month, most equity markets closed in positive territory for August 2024. Emerging Market equity and Japanese equity were the exception, with the latter being hit particularly hard by a surprise rate hike from the Bank of Japan at the end of the month.
Given this backdrop, our overweight positions in North American and European equities, specifically our allocation to European banks, contributed positively to returns. Our active trading during the volatility also meant that our overweight position in Japanese equities, now a closed position, was also a positive contributor to returns.
Defensive assets
August 2024 was another positive month for fixed income markets as expectations for further rate cuts were confirmed. Any fears of a growth slowdown in the US have since eased and are further supported by dovish Fed commentary which has set expectations for a September rate cut.
In the UK, the BoE voted to cut interest rates by 0.25 per cent for the first time in four years on August 1. Our overweight position in Gilts was a positive contributor this month as global yields moved lower on rate cut expectations, although this trend meant that our short position in Japanese government bonds detracted from returns, and we have since trimmed our underweight position.
Gold has continued to outperform other commodities in a context of economic and geopolitical
Alternative assets
Alternative assets continued to deliver positive performance in August 2024, driven by our gold holding. Gold has continued to outperform other commodities in a context of economic and geopolitical uncertainty, reaching new all-time highs.
Market outlook and positioning: What do we believe happens next?
From an active asset allocation perspective, we continue to prefer equities as they have the potential to perform well in a disinflationary macro environment where more interest rate cuts are expected.
We expect US equities to continue outperforming EM equities, given the economic slowdown in China
We remain overweight US and European equities, whilst having an underweight in Emerging Market equities. Despite recent volatility, US equities have maintained their strong valuations as companies have continued to deliver robust earnings, albeit slightly below market expectations. We also expect US equities to continue outperforming EM equities, given the economic slowdown in China. In Europe, company valuations remain attractive, with our allocation to European banks providing extra diversification.
Regarding our fixed-income allocation, we have two key tactical asset allocation positions: short Japanese government bonds and overweight UK Gilts. Essentially, we believe that Japan is at the start of its hiking cycle given increasing inflationary pressures. In the UK, inflation is falling and whilst UK growth has started to recover, it is still relatively weak compared to other developed economies. Given this, we believe our Gilt position would benefit from the greater likelihood of more potential rate cuts from the BoE, compared to the Fed.
