After a sedate summer, August has proved to be a bit more of a challenge for markets as global equities (as measured by the MSCI All Country World Index in GBP) lost -0.2% last week and are now down -1.3% for the month to date.  Japanese equities have massively bucked the global trend this month, rallying +7.2% in GBP as the market cheered the resignation of Yoshihide Suga from the position of Prime Minister following a disappointing initial vaccine roll-out.  We have benefited from our overweight to Japanese Equity and believe many of the reasons we have liked the market are now being given more attention by other global investors.

Market commentators are of course always on hand to offer explanations for the softness in performance we have witnessed this month.  Our view is that it is likely a confluence of factors, after a period whereby equity returns have essentially gone in a straight line up and to the right this year.

Inflation is the most important topic that is being debated, and the debate is likely to rage for longer than most anticipated.  Inflation data is all over the shop (pun intended).  “Core” inflation in the US, which excludes volatile food and energy prices, was up only +0.1% in August, but this was supressed by airline tickets and used cars (which had risen sharply in prior months) rolling over, likely due to the persistent but manageable COVID-19 delta wave in the U.S.  For September to date, used cars are once again looking like a positive contributor, as are energy prices, given the brewing energy shortage we are witnessing in Europe.  Sky-high shipping costs, as well as labour and delivery shortages, across the globe give credence to our view that inflation might stick around a bit longer than expected.  Indeed, the Nespresso capsules which power this update took over a week to deliver for that very reason(!).

Given our steady but pro-active approach, there are already multiple exposures in our portfolios that actually stand to benefit from higher inflation and the resulting higher interest rates, including our short-dated inflation linked bonds, Property & Real Assets and value equities.

Further afield, coffee is not the only thing that has been brewing, as there could be potential trouble on the horizon from the anticipated default by Evergrande, the world’s most indebted property developer.  The Chinese behemoth owes more than $300bn to creditors, including a crucial interest payment due on Thursday.  One of our Absolute Return managers has been buying protection against the consequences of such a default getting out of hand.  As ever, challenges present opportunities.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete.  Unless otherwise specified all information is produced as of 20th September 2021.
© 2021 YOU Asset Management.  All rights reserved.