Monthly markets review - August 2021
A look back at markets in August when global equities advanced with US shares hitting new highs.
- Global equities gained in August, supported by a well-received speech from Federal Reserve chairman Jerome Powell at the Jackson Hole symposium. US equities were among the top gainers.
- Global sovereign bond yields rose in August (i.e. prices fell) while high yield corporate bonds saw positive returns.
- Commodities fell with the energy component underperforming amid some worries over oil demand.
Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
US equities reached new highs again in August. Market worries over the outcome of the Federal Reserve’s annual Jackson Hole symposium were ultimately allayed by Chair Jerome Powell. Powell struck a cautious note in his statement, stating that while the US economy had made progress on some important targets – specifically on inflation - tapering too aggressively could derail progress at a sensitive time, reiterating a desire to see further progress in the labour market. The comments were consistent with expectations that tapering could begin this year, but were broadly perceived as dovish. The boost to sentiment overshadowed worries over Hurricane Ida and the Covid-19 Delta variant.
The Fed stated more specifically that “provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year." All FOMC participants assessed that the economy had made progress toward the maximum-employment and price-stability goals since last December, although most participants believed that “substantial further progress” toward maximum employment had not been achieved yet. The bipartisan infrastructure deal of roughly $1 trillion passed in the Senate. The deal includes $550 billion in new federal investments in physical infrastructure, spread over five years. The infrastructure bill now moves to the House for approval.
Financials, especially diversified financials such as Goldman Sachs, Blackrock and Morgan Stanley, performed well as revenues for major investment banks returned to (or surpassed) pre-pandemic levels. Communications services – including giants such as Google parent Alphabet, Facebook and Netflix - were also amongst the strongest performers after announcing strong earnings at the end of July. Energy companies lagged the index.
European equities gained in August, supported by a positive Q2 earnings season and ongoing economic recovery from the pandemic. The Delta variant of Covid-19 continued to spread but most large eurozone countries have now vaccinated around 70% of their population against the virus.
Information technology was among the strongest performers with semiconductor and semiconductor equipment firms continuing to benefit from high demand. Other top performing sectors included communication services and utilities. Consumer discretionary saw a negative return. Luxury goods stocks came under pressure amid suggestions that China could seek greater wealth redistribution, which could hit demand for luxury products. Consumer staples also underperformed amid weakness in beverages groups.
Annual inflation in the eurozone was estimated at 3.0% in August, up from 2.2% in July. The European Central Bank had said in July that it would tolerate any moderate and transitory overshoot of its 2.0% inflation target. The eurozone composite purchasing managers’ index for August slipped to 59.5 from its 15-year high of 60.2 in July. Slower manufacturing production growth was mainly linked to supply chain constraints. (The PMI indices, produced by IHS Markit, are based on survey data from companies in the manufacturing and services sectors. A reading above 50 signals expansion). The European Commission’s economic sentiment index also slipped but remained at a high level.
UK equities rose over August. Small and mid cap (SMID) equities performed very well as they continued to be a sweet spot for M&A activity. In contrast, the wider UK market lagged other developed regions as global asset allocators remained indifferent towards UK equities as a whole.
There was some encouraging data around interest in UK equities from domestic UK investors (according to the Investment Association), in addition to the ongoing M&A interest of overseas buyers. However, according to the latest Bank of America global fund manager survey, global asset allocators remained uncommitted, despite the signs of growing interest earlier in the year.
A headline-grabbing bid for the UK-based aerospace and defence equipment supplier Meggitt – at a 71% premium – proved a talking point. Commentators noted the persistent and pervasive discount across multiple sectors and individual UK listed stocks – see What does Meggitt’s bid premium tell us about UK shares?
Mid cap industrial stocks were an important overall contributor to UK equities in August, and the sector was the best overall monthly performer. This was driven by both internationally focused stocks (not just Meggitt, but a number of other globally diversified mid cap aerospace and defence stocks performed well too) as well as the domestically focused industrial areas.
Top performers in the latter group included the support services sub sector and a number of the SMID construction and materials companies. These areas of the market performed well despite signs of some slowdown in UK domestic industrial activity over the summer.
Resources sectors – including energy and basic materials – lagged as a result of weaker commodity prices. Sterling fell back over the month, although remained one of the best performing developed market currencies in the year to date.
Japanese shares made gains in August, despite growing worries over Covid-19. Throughout the pandemic, Japan has consistently seen a lower infection rate than most developed countries but is now facing a more serious test as infections are picking up rapidly. Although the mortality rate remains low, there are growing concerns over hospital capacity. Public criticism of the government’s response has therefore ratcheted up again, and the approval rating of Prime Minister Suga and his cabinet has declined precipitately. The inconsistencies in government policy were particularly stark in August with successive extensions in the state of emergency, in an attempt to restrict social activity, while simultaneously hosting the Olympic and Paralympic Games.
Although equity investors were still digesting a very positive set of corporate results for the most recent quarter, sentiment was impacted in August by the announcement from Toyota Motor of production cuts over the next two months. This is mainly due to the global shortage of semiconductors. Elsewhere for corporate Japan, order trends and capital expenditure plans look strong and the initial estimate of GDP for the June quarter is likely to be revised up in early September.
Following the conclusion of the Olympics, a clearer political timetable seemed to emerge, with the ruling Liberal Democratic Party (LDP) announcing its leadership contest will be on 29 September, to be followed by a general election in October. However, on 3 September, Prime Minister Suga announced his intention to resign without contesting the LDP leadership election. This surprise decision introduces some additional uncertainty over the next few months although, at this stage we would not expect any change in policy direction.
Asia (ex Japan)
Asia ex Japan equities recorded a positive return in August as rising vaccination levels and declining infection rates helped many markets in the region recover from a Covid-19 sell-off. Investor sentiment has also been boosted as the global economic recovery gathers momentum. Thailand was the best performing index market in August as Covid-19 infection rates declined and the government announced the reopening of restaurants and shopping malls.
The Philippines and India also achieved robust growth in August, with all three countries achieving double-digit gains and strongly outperforming the index. India’s stock market rally comes on the back of an ultra-easy monetary policy by the country’s central bank and the injection of a significant amount of extra liquidity to stimulate the economy following the Covid-19 crisis. Malaysia, Taiwan and Indonesia also achieved positive performances in August and outperformed the index.
Chinese equities were flat overall in August amid concerns over increased regulation. Meanwhile, official data showed factory activity grew at a slower pace in the month, suggesting a slowdown in the country’s economy. Pakistan was the worst-performing index market as political upheaval in neighbouring Afghanistan weakened investor sentiment towards the country, with fears that violence and unrest could spill over into Pakistan. Equity markets in Hong Kong, South Korea and Singapore were also slightly lower in August.
Emerging market equities registered a positive return in August. This was despite a mid-month sell off on concerns over the spread of the Delta variant of Covid-19 in Asia, and as the dollar strengthened amid concerns over Federal Reserve tapering. Argentina, aided by strong performance from Globant, was the best-performing market in the MSCI EM index.
Thailand and the Philippines recorded strong gains, amid optimism towards economic reopening and a recovery in tourism following the announcements of an easing in lockdowns. India posted a robust return, with sentiment boosted in part by the recent stream of initial public offerings, as well as the easing in crude oil prices. Malaysia and Indonesia both finished ahead of the MSCI EM index. The emerging European markets of Hungary, the Czech Republic, Poland and Greece all outperformed, as did Colombia.
Pakistan, Brazil, where domestic concerns dragged on market performance, and South Korea, where weakness from DRAM prices weighed on several large index stocks, were the only markets to finish in negative territory. Chinese equities were flat on the month as uncertainty over regulatory action continued to dampen investor appetite. The government re-imposed lockdown restrictions in some cities in August although these began to be eased towards month-end.
Global bond yields rose in August. While there were signs of slowing growth momentum and ongoing concerns over the Covid-19 Delta variant, inflation and the withdrawal of monetary policy support were the main focus of markets.
The Federal Reserve’s Jackson Hole annual symposium took place toward month end. Bond investors exhibited some nervousness ahead of the meeting, at the prospect of an announcement on asset purchase tapering. However, Fed Chair Jerome Powell’s comments were perceived as dovish overall.
The US 10-year yield was eight basis points (bps) higher at 1.31%, having twice come close to 1.38% during the course of the month. Data showed still healthy levels of expansion, but with momentum moderating. US consumer price inflation remained elevated in July, but rose more slowly.
The UK 10-year yield was up from 0.57% to 0.62% due to a move on the last day of the month. European yields pushed a bit higher, the German 10-year yield rising from -0.46% to -0.38%, while Italy’s increased from 0.63% to 0.71%.
For corporate bonds, investment grade made small negative returns, in line with government bonds. High yield made steady gains, mainly due to coupon income, as spreads (the level of yield above similar maturity government bonds) held in. High yield did well following the news from Jackson Hole, the US market in particular, which reversed earlier widening. Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.
Emerging market (EM) government and corporate bonds (US dollar-denominated) made positive returns, led by high yield. Asian bonds had their strongest month since last November. EM currency performance was mixed against the US dollar, with a number of Asian currencies performing well, but weaker performance in Latin America.
Convertible bonds benefitted from the positive equity background as global equities moved higher. The Refinitiv Global Focus index, which measures balanced convertible bonds, gained 0.7%. After a seasonal downturn in July, the primary market for convertibles swung back into action and more than $7 billion of new convertibles found strong interest. Valuations in convertible bonds cheapened across all regions, especially in Europe.
The S&P GSCI Index recorded a negative return in August, driven by a sharp decline in the energy component of the index as a spike in the Delta variant of Covid-19 in many parts of the world threatens to slow the recovery in demand for oil. Energy was the worst-performing component, with sharp falls in the price of crude oil and Brent crude. Heating oil and Gas oil also declined, but the falls were less pronounced. The price of natural gas, however, achieved a strong gain in August; the only sector in the energy component that gained in the month.
The precious metals component of the index also declined, following a strong fall in the price of silver. Gold achieved a very small price increase during the month. The livestock component recorded a small gain in August, with higher prices for feeder cattle and lean hogs. The price of live cattle was slightly down in August. The agriculture component also recorded a small gain in August, with higher prices for sugar, coffee and cocoa offsetting weaker prices for corn and soybeans. The industrial metals component also achieved a modest overall gain, with a strong gain in the price of aluminium offsetting declines in the prices of copper, lead and zinc.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.