Insight

August 2023 MPS Market Review

August 2023 MPS Market Review – Data to 31/08/2023

Market review - August 23
  • Stock market momentum stalled in August as the weakness of the Chinese economy, and the strength of the US, proved an unsettling mix for investors.
  • Looking first to China, the persistent challenges in the housing market coupled with the ongoing malaise from its manufacturing (and export) sector is weighing heavy on economic performance.
  • Hopes of an imminent turnaround also appear forlorn, as the absence of any material stimulus is keeping consumer confidence on the back foot.
  • Whilst such conditions retard global growth expectations, and can deliver short-term blows to market sentiment, ironically, such weakness may prove just what the doctor ordered.
  • With the globe’s major central banks articulating the peak in interest rates is nearly upon us (or perhaps even arrived), a Chinese inflationary impulse would prove destabilising to such claims, threatening further rate hikes.
  • Given the ‘disinflationary’ impact of Chinese malaise, therefore, market anxieties more likely reside with the impressive run of US economic data.
  • US strength might seem at odds with weakening sentiment, particularly as resilient growth has been a source of cheer so far this year, however, markets might be starting to fear such economic resilience could reignite inflationary pressure.
  • This narrative is supported by the relief markets enjoyed in the latter stages of the month following a round of weaker economic releases.
  • Specific evidence of this was found in the ‘Quits’ rate and Job Openings’, which fell at an accelerating rate in August.
  • This trend suggests ebbing confidence within the labour force and informs wage demands may follow suit.
  • A moderation in wages, and its prospective impact on demand and inflation, would likely prove crucial in the US Federal reserve’s decision to pause on interest rate hikes.
  • There is, as always, a tightrope for policy makers to walk here, aiming to see off the menace of inflation, whilst also preventing a more malignant economic downturn.
  • This is an unenviable task, however, for now, our anticipation is that ‘graduated’ weakness within the (strong) jobs market and fading inflationary pressure means US interest rate policy is at or near its peak.
  • It is this combination, of modest growth and less hawkish monetary policy, which remains the centrepiece of our own, marginal preference for equities.
  • For this to remain our core view, however, a resumption of falling inflationary prints is required.
  • Falling inflation would support consumer spending power whilst also extending central banks the flexibility to be more accommodating with interest rate policy.
  • Fortunately, weaker energy prices (year over year), healing supply chains, soft housing markets and growing cracks in the (still firm) labour market, suggest fading inflation can remain a core expectation and, therefore, supports a modest risk-taking investment strategy. 
  • We must remind ourselves, however, that forecasting inflation is a notoriously tricky exercise.
  • Should we see more persistent or reaccelerating inflation than currently anticipated, and should it lead to hawkish surprises from the ajor central banks, then recessionary risks would re-emerge.
  • In such an environment one would expect equity markets to endure a more difficult period; not least given the impressive recovery in share prices this year.
  • Investors should brace themselves for further volatility on this basis, but we would again argue all may not be lost for equity investors in such a setting.
  • Of most comfort would be the hope any such recession wouldn’t be as severe as more recent episodes.
  • This more benign view hinges upon the apparent absence of major economic imbalances i.e. corporations and households don’t (in aggregate) appear to be shouldering quite so much leverage as in prior, more devastating recessions.
  • We should also remind ourselves that having moved off the zero bound, there are now some interest rates to cut! Such policy options might prevent a more pernicious downturn and prove sufficient to reignite economic and investor enthusiasm.
  • The prospect for an A.I. led productivity boom may also soothe re-emerging inflationary concerns though, admittedly, A.I. does seem a slightly more longer-term theme.
  • Recognising the outlook remains uncertain, however, as well as our philosophical belief in the need for humility when investing, MPS portfolios strive to seek appropriate levels of diversification to meet the investment challenges ahead.
  • Relative to stocks for example, high quality corporate and government bonds might offer a more defensive return profile in the face of less encouraging growth outcomes, particularly given the increase in yields observed over recent months.
  • Alternative asset classes also assist Invesco in its efforts to help diversify portfolios in a more troubling period for stock markets.
  • Stay safe, stay well, and please get in touch if you wish to discuss any part of the Invesco MPS strategy further.

Asset class returns (%)

  1M 3M 6M YTD 1Y 2Y 3Y 4Y 5Y
UK -2.59% 0.95% -3.42% 2.46% 4.96% 5.96% 34.49% 17.56% 18.02%
US -0.08% 5.92% 9.41% 13.42% 6.41% 11.73% 42.55% 58.05% 73.26%
Europe -2.39% 1.98% 1.05% 9.46% 15.82% -0.14% 27.54% 27.84% 34.68%
Japan -0.39% 2.98% 5.81% 7.58% 6.79% 2.71% 19.03% 19.46% 18.54%
Asia ex Japan -4.95% -0.05% -2.83% -2.03% -8.45% -14.97% -2.47% 8.15% 8.19%
Emerging Markets -4.70% 1.35% -0.76% 0.12% -6.70% -13.38% 2.34% 6.89% 9.29%
UK Government Bond -0.44% -0.09% -2.41% -3.18% -9.46% -27.26% -28.58% -26.85% -18.76%
UK Investment Grade Bonds -0.16% 1.08% -0.40% 0.93% -1.30% -19.82% -17.80% -14.71% -5.49%
Global High Yield Bonds (GBP) 0.34% 2.46% 3.42% 5.86% 6.56%  -4.22% 4.02% 5.21% 10.50%

Standardised rolling 12-month performance (%)

  Aug 2022
-
Aug 2023
Aug 2021

Aug 2022
Aug 2020

Aug 2021
Aug 2019

Aug 2020
Aug 2018

Aug 2019
UK 4.96% 0.96% 26.93% -12.59% 0.39%
US 6.41% 5.00% 27.58% 10.87% 9.62%
Europe 15.82% -13.79% 27.73% 0.23% 5.35%
Japan 6.79% -3.82% 15.89% 0.36% -0.77%
Asia ex Japan -8.45% -7.12% 14.70% 10.89% 0.04%
Emerging Markets -6.70% -7.16% 18.14% 4.44% 2.24%
UK Government Bond -9.46% -19.66% -1.81% 2.42% 11.06%
UK Investment Grade Bonds -1.30% -18.77% 2.52% 3.77% 10.81%
Global High Yield Bonds (GBP) 6.56% -10.11% 8.60% 1.14% 5.03%

Past performance is not a guide to future returns.

Source: Bloomberg, as at, 31st August 2023. All returns sterling based. UK = FTSE All Share, US = S&P 500, Europe = FTSE World Europe ex UK, Japan = Topix, Asia = MSCI Asia Pacific ex Japan, EM = MSCI Emerging Markets, Gilts = FTSE Actuaries Govt All Stocks, UK IG = IBOXX Markit GBP Liquid Corporate Large Cap, Global High Yield Bonds = IBOXX Global Developed Liquid High Yield (GBP Hedged).

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  • Views and opinions are based on current market conditions and are subject to change. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.