Multi-Asset Market Review

Market Review

• Japan leads in August as several stock markets post new highs
• Global equities post strong returns over one, three and five years
• Gilts down slightly in August but fixed income broadly higher year to date

Global equities ground marginally higher in August, delivering 0.5% in sterling terms and extending their positive start to the second half of the year. Apart from gilts, fixed income delivered solid returns, too. All the Liontrust Multi-Asset funds delivered positive returns.

Japan led equity markets by some margin in August, delivering 4.8% in sterling terms. Japan has staged a notable recovery since the nadir it plumbed in April after the Liberation Day tariff announcement. We have ranked Japanese equities a positive four out of five tactically since the third quarter of 2023 and it has been a positive contributor to performance. Japan’s much needed structural reforms seem to have begun to lead to their intended corporate efficiency and governance improvements. It has also moved out of the deflationary environment it was in for two decades into an inflationary one, motivating domestic investment. Despite the significant revaluation, we currently maintain an overweight in Japanese equities, including small caps.

Other positive performances in August included UK stocks returning 1.5% and Europe ex-UK 1.4% in sterling terms. Emerging markets and Asia ex-Japan slipped -0.7% and -0.5% in sterling terms, while the US was flat. Year to date (YTD) our overweights to emerging markets and Asia ex Japan have been a positive contributor as they have outperformed global equities.

The US recorded new all-time highs in August on strong corporate earnings, investor optimism and expectations of more accommodative monetary policies. Year to date, the US has been the poorest performer though, returning 3.2% in sterling terms while all these other regions have delivered returns close to or exceeding double digits. Europe ex-UK has led with returns YTD of 16.8% in sterling terms, followed by the UK (15.5%), emerging markets (10.8%), Asia Pacific ex-Japan (10.2%), and Japan (9.5%).

Over the YTD, our tactical positioning versus the US has enhanced the performances of our funds and portfolios, although an underweight in Europe ex-UK has detracted from overall performance. However, we raised our ranking for Europe ex-UK from negative to neutral in our most recent (third quarter) Tactical Asset Allocation review.

Global fixed income markets have also been strong YTD. Developed market high yield bonds were a leading performer in August, returning 2.0% in US dollar terms, and have been so YTD with a return of 12.7%. Although we are broadly neutral on fixed income, we give a four out of five Tactical Asset Allocation rating to global high yield bonds, which have been a significant contributor to the performance of our funds and portfolios.

Events in August

As investors return to their desks after their summer holidays and pore over their news digests for August, they won’t read about markets moving at the same breathless pace seen in some months of this year. August last year saw markets gyrate in thin volumes, but this year it was quieter. Markets still edged higher, and several stock markets, including the US and Japan, made new all-time highs.

A period of marking time is no bad thing: it gives earnings a chance to catch up when markets rise. There has been a lot of noise in the news flow this year, both in terms of geopolitics and economic data. The advantage of hindsight is that investors can rationally analyse what impact this news may or may not have had on the longer-term direction of markets.

One observation is that so far it does not appear to have been a year to follow the old adage of ‘sell in May and go away, don’t come back until St Leger Day’, which suggests staying out of stocks until the famous horse-racing event held mid-September. Quarter to date figures (1 July to end-August) show that global and UK equities are up 5.6% and 6.0% respectively. One-, three- and five-year data also tell a compelling story, with global equities up 14.3%, 44.3% and 85.3% respectively in sterling terms.

There was a raft of economic data throughout August. On the positive side, US inflation in July was unchanged at 2.7%, perhaps affording the Federal Reserve room for a rate cut, which was greeted positively.

Economic data can often constitute ‘noise’, contradicting other data and even the same data can be interpreted differently. It can create dramatic reactions in markets, but these are often over swiftly, depending on their nature, duration and the extent of their effects.

The President’s unresolved swathe of tariffs remain a potentially significant issue: while the shock and awe they generated earlier this year has dissipated, we believe their full effects have yet to be seen, and reduced anxiety now increases the risk of negative surprises later.

Overall, however, we remain positive on the outlook for markets as we believe market fundamentals remain constructive and, on balance, the global economy continues to move forward, inflation has fallen, consumers continue to spend and consequently companies are generating good revenues. The strong performances of global equities over one, three and five years outlined above illustrate the benefits of avoiding knee-jerk reactions and the temptation to divest in the face of bad news where it is unlikely to have long term ramifications.

We are aware of the challenges facing markets and maintain a watching brief, but investors could take comfort from putting in place investments with diversified strategic allocations that are designed to insulate against shocks and which focus on the fundamentals such as attractive valuations that are rewarded by markets over the longer term.