Monthly Investment Briefing: Navigating the Storm

Global markets during August…

Not unlike the recent weather, global markets navigated a mixed backdrop in August, with equities largely resilient despite rising volatility in sovereign bond markets and mounting policy uncertainty. Gains across the US, UK and Europe were underpinned by a solid corporate earnings season and encouraging macro data, yet overshadowed by concerns over fiscal sustainability, central bank independence, and trade tensions moving forward.

A lawsuit involving Governor Lisa Cook added to concerns about governance and the ability for the FED to remain independent throughout Trump’s presidency.

Slowing growth need not derail profits…

Developed market equities advanced modestly in August, supported by a stronger-than-expected corporate reporting season despite tariff inflation concerns. Roughly three-quarters of S&P 500 companies beat earnings forecasts, reinforcing investor optimism that slowing growth need not derail profits. Purchasing Managers’ Indices (PMIs) in Europe and the US also signalled momentum, particularly in manufacturing. However, global bond markets faced renewed pressure as governments increased long-dated issuance, pushing yields to multi-year highs.

UK equities outperform…

UK equities outperformed with the FTSE 100 hitting a record high of 9,321. This strength was helped by commodity-exposed and industrial equities together with currency tailwinds. Yet underneath the equity rally warning signs persisted. Gilt yields rose sharply as investors fretted over fiscal credibility and the long-term impact of elevated borrowing. The Bank of England cut interest rates to 4% early in the month, citing slowing domestic demand but retained a cautious tone given still-sticky inflation. Growth data painted a mixed picture with manufacturing in contraction, and consumer confidence subdued. All this combined with the looming budget in Autumn, which looks to bring further concern around the level of taxation already burdened on the UK workforce, and the effect on the fiscal deficit.

Questions over Fed independence emerged…

The S&P 500 rose 2% in August, though sentiment was tempered by labour market revisions showing weaker job creation than previously reported. This increased expectations of a September Federal Reserve rate cut. At the same time, questions over Fed independence emerged as President Trump escalated attacks on the central bank, with senior economists warning of “serious danger” if political pressure continues. A lawsuit involving Governor Lisa Cook added to concerns about governance and the ability for the FED to remain independent throughout Trump’s presidency.

Trump’s trade policy in the spotlight again…

Trade policy also returned to the spotlight with a landmark ruling; the US Court of International Trade found Trump’s recent tariffs on European imports to be unlawful, raising hopes of de-escalation in transatlantic tensions. Markets initially welcomed the decision, though the prospect of further political interference left investors cautious. The president is of course appealing against this ruling, citing potential ‘financial ruin’ as the US may be forced to refund tariff revenue which has provided a much-needed boost to balance the books.

Bond markets across Europe mirror the UK and US…

Continental European equities gained 1.2% over the month, supported by robust PMI readings, and eurozone unemployment falling to a record low of 6.2%. German and Italian industrial output surprised to the upside, suggesting resilience despite tighter financial conditions. However, across the channel, French political turbulence weighed on investor sentiment, contributing to underperformance in French equities

Bond markets across Europe mirrored the UK and US with yields rising as governments ramped up debt issuance. Reuters highlighted that France and Germany, together with the US, significantly increased long-dated bond supply, exacerbating volatility and raising questions about fiscal sustainability, considering increased spending in key areas.

Portfolio Activity…

After months of strong performance, we decided to trim our exposure to Polar Capital Technology after a top-up purchase in the nadir of the tariff announcements. We also sold the Trium ESG Emissions Improvers fund following a strong rally, as we felt we have better ideas within our Alternative allocation. We have also bought ServiceNow, a US cloud-computing platform, as well as Union Pacific, the largest US railroad operator with the profits from the Polar Capital sale after recent pullbacks.

Outlook…

Equity markets continue to find support in corporate earnings and resilient data but elevated bond yields, legal and political challenges to trade policy, and central bank pressures, suggest volatility ahead. We always welcome periods of volatility as they provide opportunity for our price targets to be met on the companies we actively research. We will be closely monitoring September’s Fed decision, UK fiscal developments, and European political risks, as they will be critical in the durability of this summer’s rally.

James O’Hara- Investment Manager