I’m Neil Birrell, Premier Miton’s Chief Investment Officer. Thanks for reading ‘Market Watch’, our monthly summary of the key events in financial markets.
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August – in brief
- There is always economic data being released, but August was less exciting.
- The UK and Chinese economies continue to be a worry.
- August wasn’t a good month for bond and equity markets, but what goes on within them is important to consider.
Not quite “all quiet on the economic front”
Looking at economic data has become a pastime for many, not just economists and investors, as inflation, interest rates and the potential for recession have hit the headlines in all forms of media around the world.
The main protagonists in forming a country’s economic policies are governments and central banks. Typically, governments set the policy and manage central spending and taxation, but the central banks control monetary policy, which in its simplest form means influencing how much money there is in an economy and how much it costs to borrow. That is, in essence, setting interest rates, although it also includes how much physical cash (notes and coins) there are in circulation.
In most developed counties and regions, central banks are independent (including the US, UK and EU), in others, notably China, the central banks are government bodies. But they have two tasks in common; set interest rates and control inflation. Therefore, their actions and comments are in the spotlight.
Overall, the economic data, whether it related to economic growth, employment or inflation, through the month was mixed, with no clear trend emerging. By and large the central banks had the month off, with no policy meetings of the Bank of England, US Federal Reserve (Fed) or European Central Bank taking place. We have the excitement of those coming up in September.
However, the Fed had its annual Jackson Hole Economic Symposium, where policy makers and economists from around the world meet. The only real “take aways” were the comments from the Chair of the Fed regarding how long interest rates may stay high, which is a change from how high they might go. This change of tack suggests we are very close to, or at, peak US interest rates. My view is that the length of time rates stay high is more important than the peak rate, as that has a more lasting impact. Time will tell!
Focusing on the UK
Through August the UK economy provided a contradictory story line.
The economy was stronger than predicted in the second quarter of the year, consumer confidence improved and government borrowing was lower than expected. All good news.
But the Purchasing Managers Indices (PMI) fell to their lowest level since 2021. These are surveys of the spending intentions of a broad range of companies across different industries and are generally considered to be good, forward-looking indicators of how an economy might do, as they do show real time economic activity. Not such good news.
The rate of inflation is slowing but it still grew by an annual rate of 6.8% in July, more than three times the Bank of England’s target of 2 per cent. It is likely that a lot of that is being driven by on-going strong wage growth. Good news for those receiving the increases, but not good news for those who aren’t.
Stronger than expected economic activity and rising prices and wages mean greater tax revenues for the government, which means they have to borrow less. However, the state of public finances is such that this is only scant relief. Good news, although only marginally.
So, what does all that mean? Probably, that means interest rates need to go up a bit more, and stay up for a while, until inflation is under control. Also, that economic activity will slow, wage growth will slow and the consumer will remain under pressure with some falls in house prices likely. Does that mean recession? Possibly, although most predictions are for a mild one. Yet again, time will tell.
Is the Chinese economy a problem?
For the government of China and its central bank, the People’s Bank of China; yes, the economy is a problem. It came out of COVID lockdown at some speed, but that stalled as the property sector, which is a large and important part of the economy, came under pressure, with property companies going bust. As the economy is effectively controlled by the state, it can take action to ease the pressure and provide support, which it is.
As the second largest economy in the world, after the US, Chinese demand for imports and the provision of exported goods is very important. So, we need to be aware of events in the east.
What went on in the markets?
The prices of financial assets such as company shares and bonds have been driven by macro-economic factors (economic growth, inflation, interest rates, employment etc) for some time now and that continued to be an influence in August. The mixed data led to poor returns overall. It is worth noting that August is a quiet month for trading and with trading volumes low, prices can be more volatile and susceptible to low levels of trading activity.
Global bond markets, measured in sterling, were down over the month, but remain up over the year so far and continued to display sharp moves up and down in reaction to events and data. Equity (or stock) markets had a poor month, in sterling terms, as well as across the board. China and Hong Kong were noticeably weak and the UK was worse than other European markets. US markets were also lower. However, this must be set in the context of the year so far being strong, with the exceptions of the UK and China amongst major markets.
The measures used here are the relevant indices for each country, such as the FTSE 100 Index for the UK, which represents the share prices of the 100 largest companies in the UK. Similarly, the S&P 500 Index in the US. It is important to look at what is happening within those markets and indices.
In the UK for example, yet again, small and medium sized companies did worse than the large ones. This has been a feature during 2023 and provides great opportunities for the active investor. It is similar in the US, where the giant technology and communications companies have done well, whilst the rest have lagged.
Investing is all about spotting opportunity and avoiding disappointment; that has never been more the case.