Monthly Investment Briefing: The Long and the Short of it

August finished better than it felt…

August finished rather better than it felt. Most major equity markets ended the month higher, with the Dow extending its winning run to a fifth consecutive month and the S&P 500 and Nasdaq breaking a two-month losing streak, while Japanese equities recovered an early-August correction to finish broadly flat. And yet almost nothing about the month was comfortable. The driver, for once, sat well away from equities.

It was a bond market month, and a global one. The thirty-year treasury yield pushed up to levels last seen in 2007, Japan’s ten-year yield reached a thirty-year high, and gilt markets moved to price further increases in Bank Rate rather than the cuts that were being discussed at the start of the year. This is a repricing of the long end, and it is being driven by the same factor everywhere: an inflation outlook that will not settle. When the cost of long-dated money rises in every major market at once, it eventually finds its way into every asset priced off it.

Energy remains the common cause. UK inflation rose again in July, driven almost entirely by household bills following Ofgem’s increase to the price cap, though the detail was better than the headline with core inflation steady and services easing. Euro area inflation climbed for the same reason, and it is gas rather than oil that concerns us on the Continent, having received far less fiscal cushioning and with its effect on households still to be felt over the winter. Brent held in the low nineties throughout, the Strait of Hormuz was never far from the conversation, and the month closed with the United States and Iran exchanging fire for the first time in several weeks. Meanwhile the strain is beginning to show in the real economy. In the UK, unemployment edged higher, payrolled employment fell again and vacancies dropped to their lowest level outside the pandemic in more than a decade. That is an unenviable position for any central bank to be asked to tighten into.

Beneath the index levels, the dispersion across markets this year has been remarkable. Taiwan and South Korea have been among the strongest performers globally on the strength of AI infrastructure demand given the size of the sector in their indices, Japan has delivered handsomely in local currency terms though a good deal of that is the weak yen flattering the outcome, and mainland China and India have both spent the year in negative territory. We are watching Japan closely at this point: repeated Yen intervention has done little to arrest its decline, and if the Bank of Japan does tighten further, the currency tailwind that has supported Japanese equities becomes a headwind for exporters. Nvidia’s results late in the month were strong enough to lift sentiment, but semiconductors had been sold off hard in the preceding fortnight as yields climbed, which is the clearest illustration of the point. The difficulty for the AI trade is no longer demand, which remains extraordinary. It is the discount rate applied to it.

Elsewhere, gold recovered with conviction, posting a fifth consecutive weekly gain and reaching its highest level since the spring, a considerable rebound after its worst quarter in more than a decade. For a month that opened with talk of a soft landing and a broadening rally, it ended somewhere rather more familiar: watching the tankers and the long end.

How we have been positioned and where we are going…

We made use of the volatility this month to add some names we had been long stalking. We added Micron after the semi-conductor sell-off to give us some much-needed exposure to the ever-growing AI and Data Centre Capex we are seeing globally. We also added Caterpillar to give us some exposure to the boots on the ground, global industrial exposure, also boosted by growing AI Capex. We also re-added British American Tobacco to diversify our equity exposure and add some yield to portfolios. To fund these purchases, we sold out of Babcock, Bristol Myers Squibb and Walt Disney as we looked to be more positively invested within our Key Themes. In the latter part of August, we gardened portfolios, trimming a lot of the AI beneficiaries and rolling the profits into some of the more unloved, cyclical holdings we have like Intuitive Surgical and AGCO.

Outlook…

We remain cautiously optimistic around future earnings growth and AI capex which has been a significant driver of performance over the last 12-18 months. Genuine earnings growth has been an outlier to what has been described as bubble-like behaviour. However, we have to remain cognisant of the growing risks creeping in to the market. Inflation’s effect on the long-end of the bond market is starting to feed through to equity markets. The energy story isn’t going away – whether it is the Strait of Hormuz or growing need of energy for Data Centre’s – the narrative is only pushing to the upside. This is before the heavily anticipated Super El Nino which looks to seriously disrupt the global climate and food supply towards the end of the year and into 2027, as well as any disruption that comes from the US midterms this Autumn. It is for these reasons that we are sticking to our Strategic Asset Allocation calls and making sure we are smart in locking in profits where we can to ensure we can navigate client portfolios through these challenging markets.