Cracked China, Scorched or Flooded Earth, Ample Liquidity
In a month where the Delta variant occupied more column inches than macro-economic data, the withdrawal from Afghanistan grabbed the headlines in the second half of August. Otherwise, for financial markets, it felt like a relatively quiet summer month.
The debate over whether inflation is transitory or not rumbled on but continued to alert investors to the unattractiveness of most bond markets. Financial market pundits eagerly awaited the annual Jackson Hole Symposium at the end of the month for any signs of a change in the US Federal Reserve Bank’s monetary policy. The news from Fed Chairman Powell that asset purchases (aka quantitative easing or QE) would be scaled back, but that did not mean a rise in interest rates anytime soon, was hardly a dial-mover for those of us that are not journalists or day traders. There’s plenty of liquidity in the system judging from money supply data.
China’s regulatory clampdown in pursuit of income equality served to remind investors that it is not a democracy. For those investors tempted to dive into Chinese equities after their drop, catching falling knives is a dangerous sport. It may be fine for those index investors who see an opportunity to bank a relative outperformance from being ‘underweight’ the index, but for rational investors for whom indices meanlittle compared to meaningful objectives, is the risk worth the investment? Not yet in our opinion. When the authorities are so prominent in financial markets, asset values need to be discounted relative to other markets to identify appropriate risks versus potential returns. Our exposure to Chinese equities has been and continues to be minimal.
Earlier in the month, the publication of the United Nations (UN) Intergovernmental Panel on Climate Change (IPCC) made it clear that human causation of climate change is undeniable. Events around the world throughout August only served to remind us of that impact.
Moving on to what did well and what didn’t deliver in August, courtesy of the following graph from The Daily Shot:
The UK equity market as represented by the FTSE 250 topped the charts rewarding those investors, like ourselves, who had focused on the relative attractiveness of UK stocks, especially in the mid-sized company space.
Rather underlining our earlier comment, bonds proved largely unrewarding. For those followers of growth and value labels, growth came out on top, aided by some impressive earnings from fast growing companies. We see value in growth companies that consistently deliver impressive cashflows and earnings within themes that will be in demand for years to come. Once again, currencies exhibited low volatility, industrial metals did better on the whole, although gold was lacklustre and oil gave back some its recent gains.