After three consecutive months of positive performance, equity markets declined after the end of the month, with the global index losing around 1% in euro terms.
August is known to be a rather complicated month for equities. Historically, low trading volumes lead to price volatility. In this sense, August was true to form.
However, the return of volatility on the markets is not only due to low seasonality. A two-fold wave of worrying news also hit the headlines: the Chinese economy’s struggle to pick up again and a relatively sharp rise in sovereign rates. Let’s take a closer look.
At the beginning of the year, China catalysed hopes of global growth; the reopening of its economy was expected to revive consumption, particularly through the savings that households had accumulated during the long months of lockdown. However, the figures published this month continued to disappoint, both in terms of retail sales and industrial production. The real estate crisis and the huge losses of the property developer Country Garden, which ended up being removed from the Hang Seng stock index, are also a source of concern, not to mention the collapse of Evergrande in the United States, already at the centre of a default crisis in 2021.
The rise in US sovereign rates is the other source of concern, based on fears that the Fed would keep its key interest rates higher for longer. The situation of a rampant public deficit in the US (which triggered a downgrade of the US government’s credit rating) fuelled speculation around the level of the neutral interest rate (r-star), which would now be higher and would push the Fed to continue to raise rates in order to establish a truly restrictive monetary policy. These fears pushed US 2-year and 10-year yields to levels of nearly 5.10% and 4.35% respectively, before they fell again by nearly twenty basis points on these two maturities.
As a result, higher interest rates have raised doubts as to the long-term aspect of already high valuations on the equity markets. This year’s increase has been driven exclusively by multiple expansion, which means that prices have risen but corporate earnings have not improved. When this phenomenon is combined with rates that continue to escalate, the question becomes even more difficult.
However, at the annual Jackson Hole symposium, Fed Chairman Jerome Powell gave himself plenty of room for manoeuvre in terms of future rate hikes, indicating that they will be applied if necessary. He painted an encouraging picture: monetary policy remains restrictive, the rebalancing of the labour market is underway, but the fight against inflation has not yet been won. Powell has mainly put an end to speculation around the Fed’s inflation target: it will remain at 2% and the Fed’s monetary policy aims to achieve this as quickly as possible.
It was therefore a complicated month of August, marked by diverse and varied fears. Historically, September is also known for its low seasonality. In a turbulent environment, we continue to recommend a slight underweighting of equities vis-à-vis bonds, which it would be preferable to overweight. Indeed, interest rate levels have become very attractive, with the risk/reward ratio proving favourable in an environment where inflation is falling and a restrictive monetary policy could come at the expense of growth.
In terms of sectors, we continue to highlight the Utilities and Consumer Staples sectors, which can benefit from stable revenues and margins that are much stronger than those of the more cyclical sectors.
Finally, on the fixed income side, we continue to recommend government bonds, especially US government bonds, which can provide the necessary diversification in a phase of the cycle where the impacts of monetary policy are beginning to be felt on growth.
