Market Review August 2018: August Angst
Since 2008 , August has regularly proved a challenging month for financial markets, this trend continued last month.
Investors had to digest the reintroduction of US sanctions against Iran, new tensions between Turkey and the US and a deterioration of trade talks between the US and China. Most equity markets suffered as a risk off environment took hold, the notable exception being the S&P 500 which was boosted by extraordinarily strong macro data and a general absence of any inflation concerns.
US
Second-quarter GDP growth was stellar, both in magnitude and the nature of growth. The increase in GDP, the value of all goods and services produced in the U.S, bolstered the strongest period of growth since 2014 and led President Donald Trump to call the numbers “amazing” and “very sustainable,” declaring his policies, including the biggest tax overhaul since the Reagan era, a success.
Whilst trade tensions continue to be the elephant in the room, the elephant appears to be relatively restrained at this point as the tensions seem to be having little impact on business sentiment within the US. This coupled with accelerating profit growth suggests that corporate America will continue to benefit from the strength in consumer and business demand, a formula which bodes well for further gains and another robust set of results in Q3.
Europe
In Europe, August provided some further evidence that the soft patch in economic activity seen at the start of the year was temporary. Some rebound in the second half of the year appears likely as most sentiment indicators improved throughout August.
However, as is often the case in Europe, politics overshadowed the strong fundamentals. AsEurope is a very open economy, the region and its stock markets tend to get hit hard when worries about global trade or emerging-market issues arise, with investors tending to shoot first and ask questions later.
While large parts of the global stock markets continuing to trade on elevated valuations despite the recent volatility, Europe continues to be attractively priced. Whilst volatility in the run-up to the mid-term elections in the US can be expected, the eurozone’s strong fundamentals, relative Euro weakness and expected Chinese stimulus offers opportunities for European equities moving forward.
UK
Brexit continues to dominate the UK headlines as the deadline for an agreement approaches.
Many of the headlines over the course of the month suggest negotiations are proceeding reasonably amicably with The EU’s chief negotiator, Michel Barnier, announcing that an agreement on the terms of UK exit could be agreed by early November if both sides are “realistic”. His comments come amid suggestions that a one-off summit of EU leaders could be convened in November to sign off the agreement.
Elsewhere, The Bank of England (BoE) delivered its well anticipated 25bps interest rate rise in August, the last expected hike until the Brexit outcome is clear. Given the increasing likelihood of a relatively soft Brexit, it is possible that more rate hikes may be on their way next year.
On the economic front, GDP growth for the second quarter came in at 1.5% on an annualised basis, which was in line with expectations but a bit lower than the BoE’s forecasts.
With Brexit uncertainty likely to persist until the deal is signed, opportunities for investment in the UK continue to present themselves as UK equities continue to offer a greater yield than those available in other developed countries (gross dividend yield c 3.7% versus 2.7% for the Global Equity Index, as at 29 July 2018).
Emerging Markets
Trade tensions and a strong dollar continued to dominate the headlines in emerging markets throughout August.
These trade tensions appear to be already affecting trade and output in China. Exports to the US from China fell 2.5% in August and fixed asset investments came in much weaker than expected, rising only 5.5% on the year for July.
In contrast, the signs of stress were more evident in Turkey. The country was already in a difficult situation since the beginning of the year due to a widening of its current account deficit to 6% of GDP. This already fragile situation deteriorated further at the start of August after the US decision to increase tariffs on Turkish steel and aluminium imports as a consequence of the imprisonment of a US citizen in Turkey. The Turkish central bank has not acted with sufficient force to support the currency. The lira is now down 42% against the dollar since the start of the year and is at an all-time low on a real effective exchange rate basis.
In the context of trade tensions and a potential balance of payments crisis in Turkey, emerging market assets sold off in August. But the market is differentiating between regions. The MSCI EM index fell 0.5% compared to a 4.1% fall in the main Turkish stock index.
While trade uncertainties may continue to weigh on emerging market economies and markets, there are also reasons to be optimistic, as shown by the trade deal reached between the US and Mexico on 28 August.
Global overview
All in all, the economic data for August points to a global economy that is still growing above trend, which should support corporate earnings globally. But geopolitical headlines continue to create considerable volatility around this generally positive trend.
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