The biggest impact on financial markets in August came from the rise in the central bank policy rate at the Bank of Japan which changed from 0.1% to 0.25%. The 0.15% increase in the policy rate is hardly sufficient to materially change investment decision making inside Japanese board rooms, but the impact on global market sentiment was much more profound.
As a currency where the interest rate has been 0.5% or less since 1995, the Japanese yen is woven into the fabric of the financial system. So, with signs this could be ripe for change, it is another source of ‘cheap money’ being removed from the system, making investment decision making ever more sensitive to the cost of financing.
Meanwhile, US economic data over the month sent some mixed signals. Despite some weaker indicators in the manufacturing sector and labour market early in the month conjuring fears of an imminent recession, we then saw lower than expected inflation figures and signs of ongoing strength with the US consumer offering hope of cuts to US interest rates.
Equity markets ended the month higher, supported both by the bond market’s expectation of a large fall in US interest rates over the coming 6 – 12 months but also (and more importantly) the corporate earnings results season showed few signs of an imminent slowdown.
Taking a step back, the bond markets are expecting aggressive rate cuts ahead and weak commodity markets imply lower demand for natural resources, both of which show slowing economic growth. Meanwhile, equity markets are holding up well overall but there are some significant changes beneath the surface with a broader suite of companies, across different market segments now performing well, including smaller companies. There will be reconciliation between these views which will lead to bouts of market volatility ahead.
As such, we believe it is makes sense to keep the balanced approach to portfolios that we have been following for the last several months, staying close to our long-term strategic allocations. This balance includes both cyclical and defensive sectors, together with exposure to key investment themes like AI and the energy transition.
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