Alex Chappell
6th September, 2024
Blog, IC Insights
August Investment Update
After a brief recess in August our blog schedule now starts back in earnest. Across the next 8 weeks you will receive our quarterly investment update for Q3, our thoughts ahead of the US election, as well as an all-important planning update soon after the budget on 30th October. It’s going to be a busy period, but for now we will look back on what happened in the investment world across the last month or so.
If you had logged in to view your portfolio on 1st August and again on 31st, you would likely be pleased to see a nice steady positive return. That overall outcome hides the reality that it was a volatile month, triggered by a deterioration in US economic data, which up to that point continued to look remarkably resilient. There were points at the start of the month where certain parts of the equity market were down 10% in 3-days, representing a level of volatility that we haven’t really seen since Covid.
Markets went from being positive on the economic outlook, to thinking a recession was looming round the corner. Expectation forecasts for interest rate reductions accelerated from 1-2 reductions in July (0.25% to 0.5%) across the rest of 2024 to 6 or 7 cuts. This saw the bond market rally hard as equities struggled.
As we’ve talked about lots of times in these blogs, markets often under and then overreact. They had underreacted to the chance of a US recession in the first place, and then overreacted when just a few data points showed weakness. As August progressed, and the data looked slightly rosier, equities bounced back, and bonds essentially reverted at the end of August to where they started from.
The good news from our point of view, is that we try to use these overreactions to our advantage. In this respect we made two changes in August, reducing bonds as they performed strongly on the back of the change in interest rate expectations, and then adding back to them very recently now that those expectations have completely reset. So far, those changes have been positive for the portfolios, not to a significant degree, but every 0.1%-0.2% helps over the course of a year.
The chart below highlights three of our portfolios against the global equity market (MSCI World). and our bespoke bond allocation (Sector Portfolio: Fixed Income), which sits as part of our Portfolio range.
It is specifically worth highlighting that the green line (bond portfolio) went up as the red line fell, helping to smooth the journey, especially for lower risk clients who have a larger allocation in the green line.
We will talk more about our forward outlook in our upcoming quarterly investment blog, though suffice to say we generally remain positive from here. Now that interest rate expectations are more reasonable again, bonds represent good value and still offer low-risk income yields of 5-6% per annum. Equities certainly have more uncertainty attached though also continue to pay good levels of income and should be supported as Central Banks continue to cut interest rates.
That said, we are heading into a very busy fourth quarter, with a lot of unanswered questions. Will economic data stabilise or continue to deteriorate? Who will win the US election and what does that mean geopolitically? Will Central Banks deliver by cutting interest rates progressively or will they disappoint markets? All have the potential to be positive or negative, and therefore just like this month, we continue to believe there is a lot of value in being very active in our management of the portfolios.
Just to finish on the UK budget, which continues to be front and centre in a lot of people’s minds. From an investment perspective, it is not a significant risk given the prior announcement that personal income tax rates are not changing. From a planning point of view though it is very different, and our team are already doing a significant amount of work to ensure we are well-prepared to advise you once it is announced. The important message here is that whatever changes are made there is very likely to be a window of time to make any adjustments, so it is a case of waiting to see the detail before making any decisions.
