IG Investments: August market review

August is traditionally a slow month in the financial markets, but this year it saw increased geo-political tension, and large moves in currencies. Read on to find out how your investments were impacted.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
inv-august

Headline asset class statistics for August (GBP returns):

Equities: FTSE All Share 1.4%, S&P 500 2.6%, MSCI World 2.4%, MSCI Emerging Markets 4.6%
Fixed Income: UK 10-year Government Bond yield: 1.03%
Currencies: GBP/USD -2.2%, GBP/EUR -2.7%, GBP/JPY -2.4%
Commodities: Gold 6.5%, Bloomberg Commodity Index +2.7%

Review

Markets were rudely awakened from their summer lull when heightened tension between North Korea and the US escalated to the point where the pariah state launched a missile over northern Japan. Despite this unwelcome turn in diplomatic relations, equity markets were actually fairly unmoved by the event with the Japanese Nikkei index down less than 1% on the day. Steve Bannon, formerly Donald Trump’s chief strategist (and one of several Trump insiders to depart this summer), seemed to let the cat out of the bag when he was quoted in an interview saying, “until somebody solves the part of the equation that shows me that ten million people in Seoul don't die in the first 30 minutes from conventional weapons… there's no military solution here, they got us." More sanctions seem the most likely course of action for now.

Equities

The lack of movement in equity markets has persisted all summer, with the S&P 500 sitting in a trading band of just 2.9% over the past three months. This extraordinarily low volatility has certainly made some investors complacent, but in itself it does not necessarily follow that a rise in volatility will lead to market weakness. Conversely very low equity volatility has made the VIX volatility index more sensitive as any moves off a low base have a large percentage impact. For example on 8 August the VIX index spiked by 44%, but the S&P 500 fell by just 1.4%. 

Fixed Income

Fixed income markets continue to offer investors rather meagre prospective returns, with the UK 10 year Gilt yield back down to 1% (see chart below), but credit spreads (a measure of the compensation you receive for taking on company default risk) in High Yield bonds did widen slightly to 3.9%.

Aug review

Bonds still have a role to play in your allocations as they add diversification to portfolios, acting as a shock absorber when equity markets are weak. Once the next recession eventually arrives, it could well be deflationary which would see bond yields reach new lows. Holding bonds would add value in such an event. 

Currency

Sterling weakened against most currencies, which helped lift equity returns into positive territory. However it is the strengthening Euro which has made headlines over the past three months with nearly all newspapers running stories of airport foreign exchange outlets (which always offer terrible value to travellers) offering parity or worse against the euro. However, when compared with the yen and the dollar, sterling has not really moved. 

The euro really started to appreciate after European Central Bank President Mario Draghi said in June that the ECB’s asset purchase programme may end, signalling a shift in policy to traders. The euro’s recent strength will be causing concern at the central bank, which has expanded its balance sheet to a record size to try and stimulate reflationary conditions in the eurozone economy. It would come as no surprise if Draghi now softens his language at the ECB meeting on 7 September.

Alternatives

Commodities in general have actually been very lacklustre. Brent Crude oil is down -15.8% year to date, while the more diversified Bloomberg Commodity Index (which includes precious metals) is off -6.9%.

Safe haven assets are performing much better, with gold rallying 6.5% in August and decisively breaking through the $1,300 mark. Year to date gold is up +13.7% in USD, +9.8% in GBP but just +1.8% in EUR.

IG Smart Portfolios

Client's portfolios are positioned cautiously with respect to fixed income, with an underweight to duration.  This means that if interest rates do rise, then short-term losses in the portfolios will be modest. Equities are still the asset class of choice for now, and there is scope to raise the equity allocations a bit higher if an attractive opportunity presents itself.

In the alternatives space, the portfolios have an allocation to gold, which has been performing well. 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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