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Our market summary
August was broadly positive for global markets with global equities up 2.0% in US dollar terms. However, the strength of the pound against the dollar saw this reduce to 0.4% for sterling-based investors. Investor sentiment was supported by strong corporate earnings alongside a more dovish stance from the US Federal Reserve (the Fed) in the face of weakening US labour market data. Trade tensions also eased slightly, with the US extending tariff pauses with China and reaching agreements with other countries. Elsewhere, equity valuations are still elevated, especially in the US, suggesting limited room for disappointment. Therefore, diversification across regions and asset classes remains key to managing risks from inflation and trade-related slowdowns.
US
US equities were also up by 2.0% in US dollar terms, driven by strong Q2 earnings and expectations of Fed rate cuts. However, this equated to a loss of 0.1% for sterling-based investors due to the weakness of the dollar. Alongside positive earnings, business surveys improved. Materials and healthcare outperformed, while technology lagged due to concerns over measurable financial returns from AI implementation.
Europe
European equities saw small gains and ended the month up by 1.2%. Returns were driven by strong economic data, which showed a pick-up in business activity and signs of economic expansion. Energy and consumer discretionary sectors led the way, while IT and industrials underperformed. French political uncertainty weighed on European equity returns, with the main French index down following the announcement of a no confidence vote in the government.
UK
UK equities gained 1.1%, supported by energy, telecoms, and basic materials. Technology declined, mirroring global trends. Inflation rose to 3.8% prompting increased caution from the Bank of England around the pace of future rate cuts, after cutting its policy rate by 25 basis points. There were further signs of internal dissent (four members of the Monetary Policy Committee voted for no change) with signs of a weakening UK jobs market complicating the backdrop.
Emerging markets
Emerging market equity returns were again affected by the weaker US dollar, with a 1.6% gain in US dollar terms equating to a 0.6% loss for sterling-based investors. Returns were driven by Latin America and China. Brazil shrugged off US tariffs, supported by currency strength and easing inflation, while China, up 2.8%, benefited from extended tariff pauses and chip supply expansion plans. Taiwan and Korea underperformed due to tech weakness and tax concerns.
Fixed income
Fixed income markets were mixed in August. US Treasuries gained 1.0%, driven by Fed rate cut expectations and weaker labour data, and the yield curve steepened amid concerns over the independence of the Fed. In the UK, gilts were down 1.1% with inflation surprises and fiscal worries pushing yields higher. Meanwhile, global corporate bonds, up 0.7%, outperformed global government bonds (up 0.3%), supported by strong earnings and tightening spreads.
Performance review
In August, the Monthly Income and Monthly Income and Growth Portfolios delivered returns of 0.3% and 0.4%, respectively. Both portfolios were ahead of their Investment Association (IA) performance comparators.
Equities were the main positive driver of performance as corporate earnings reports beat analysts’ expectations, and the Fed held open the prospect of a September rate cut. Japanese equities were the standout performer over the month and despite strong returns from the US, dollar weakness dampened returns for sterling-based investors.
Within fixed income, our higher yielding alternative names fared the best. Meanwhile, returns were mixed from our alternatives holdings with our infrastructure trusts giving back some recent outperformance.
The performance figures shown refer to past performance. Past performance is not a reliable indicator of future performance. The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Performance summary
Portfolio activity
Trading activity on the portfolios was muted over the month, limited to rebalancing following market drift and investing cashflows. We made no changes to our tactical positions or manager line up.
Investment outlook
Volatility has calmed down over the summer months as equity markets have continued to climb, although there has been more action in bond markets. This has happened despite persistent geopolitical tensions and a sweeping overhaul of US trade policy. Meanwhile the US dollar’s precipitous decline has paused. We have a nagging concern that investors are a little too complacent, but the optimists have generally been correct so far.
Tariffs posing headwinds
August saw the full activation of the US administration’s new tariff regime and the average US tariff rate has risen above 18%, the highest since the 1930s. It is unclear who will pay for this – US consumers, US businesses, or international exporters to the US – but the impact is starting to show in higher producer price inflation. This could pose headwinds to corporate earnings, raise consumer price inflation, and makes us question how sensible it would be for the Fed to reduce interest rates to the extent currently priced by the market.
Trump keeps politicking
There was focus on the Fed through August as President Trump sought to fire Governor Lisa Cook. Trump’s decision was due to alleged mortgage fraud committed by Cook but the market has refocused on the possibility of a non-independent central bank. Should President Trump manage to gain control of the Fed, markets will need to grapple with the uncertainty of President Trump’s decision making versus his desire for lower rates and less regulation.
Focused on diversification
Our enthusiasm is tempered by the disconnect between valuations and underlying risks, and we continue to monitor economic data and policy developments closely. While we are modestly overweight equities, we remain focused on diversification and are mindful of position sizing as the risk of unexpected events catching us out seems high in the current climate.
Helen Bradshaw
Portfolio Manager
CJ Cowan
Portfolio ManagerSolutions
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