Neil Birrell, Premier Miton’s Chief Investment Officer, provides a monthly summary of the key events in financial markets.
For information purposes only. Any views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
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August – in brief
- If you blinked, you missed it – financial markets recovered quickly from the volatile conditions at the start of the month.
- Economic growth is muted, but inflation is as well.
- Central banks have plenty of scope to cut interest rates and we are at a point when they could start coming down quickly.
Manic Monday
The start of the month was dominated by the sharp falls in share prices around the world. This followed slightly disappointing US employment data and a change of policy announced by the Bank of Japan. It came as there were concerns over the strength of the world economy, the US in particular. The resulting moves in equity markets (Japan fell nearly 12.5% in a day) and currencies, especially the Yen, were fierce.
As I commented last month, a confluence of factors when investors were relatively relaxed and positive on the outlook changed the mood quickly to a negative one. The summer is traditionally quiet in financial markets, with lower trading activity than normal. This can accentuate market moves.
However, moods can change quickly for the better as much as for the worse. The next set of US employment data, a few days later, was better than hoped. The Bank of Japan calmed investor nerves. Subsequent data on economic growth and inflation also helped stimulate a recovery in prices.
That is all fine, but the volatility does create stresses in markets, meaning money can be lost (and made). It does show, as always, it is important to focus on the long term, not the short term.
The Japanese equity market: Nikkei 225 Index 1 July 2024 – 2 September 2024
Source: Bloomberg, 01.07.24 – 02.09.24. Past performance is not a reliable indicator of future returns.
The world economic outlook, while not exciting, looks fine
The global economy grew at 2.7% in 2023. Forecasts for this year and next suggest growth will be lower than that, around 2.5% or just below.
Through the last decade, following the recovery from the global financial crisis, growth was around 3% per annum, then COVID hit, resulting in a sharp recession and recovery. Growth of around 2.0% – 2.5% is not very exciting. While we have not gone near recession; we are not in boom times either.
However, very recently we have seen some signs that the world economy is weakening a little. Indicators that give a guide to what the future could hold are very useful.
One of those is the Purchasing Managers Indices (PMI), which is a survey of businesses around the world across different industries to acerating their spending intentions. If they are spending, or increasing spending, it would be seen as a positive sign and vice versa.
The global service sector bounced strongly after the COVID period and has remained positive since then.
However the manufacturing industry PMI did not follow suit until more recently, and after a brief spell indicating economic expansion, it has now fallen back to a level that indicates those companies’ spending intentions are not supportive of decent economic growth.
Clearly, these are just two data points in a sea of others, but they are looked at closely.
Inflation has not been the problem we thought it might be
The spectre of inflation loomed large in 2022 and 2023, but it has fallen away this year. Global goods, food and energy inflation are around or even below pre-pandemic levels.
Although, as the PMI’s would suggest, inflation in the service sector remains more elevated. Slowing economic growth should help it fall further.
Overall, while we can’t call victory in the battle with inflation, it is fair to say that the risks to inflation rising sharply again are lower than they have been since the COVID recession.
Pulling that all together
To tackle recession, central banks such as the US Federal Reserve (Fed), Bank of England (BoE) and European Central Bank (ECB) put up interest rates quickly and kept them high.
The BoE and ECB have already started cutting rates, as have many other banks around the world, but the Fed is yet to act.
However, at their annual economic symposium in Jackson Hole in August, the Chair of the Fed gave the strongest of hints that they would start the path downwards at their meeting on 18 September.
The key here is; with inflation muted and looking like it will stay so, and with economic growth subdued, the central banks have plenty of room to act to provide stimulus to their economies.
So, overall, whilst the economic outlook is not exciting, it is far from worrying and it could get better. Not a bad place to be!
Is that all good for my investments?
Macro-economic factors, such as those discussed above have been important in driving most asset classes (bonds, equities, property, and gold amongst others) for some time and that is likely to continue to be the case through the early stages of a phase of interest rate cuts.
It would be supportive of bonds, equities, and property, and possibly less good for gold.
But, back to where I started: while the short term could be volatile, as we saw in August, the long term should be rewarding.