Monthly Comment - August 2023

After a commendable performance in the previous month, the equitymarkets surrendered most of their gains in August, due to thin trading volumes andapprehensions about prolonged higher interest rates, triggering a wave of profittaking that pulled down global stocks. Despite this, support levels have remainedresilient as investors continue to exhibit interest in capitalizing on market declines.The 10-year US Treasury yields have experienced a significant surge of over 100basis points in the past half-year, driven by escalating borrowing demands and,more recently, the downgrade of US government bonds to AA+ by Fitch Ratings.This action echoed a similar downgrade by Standard & Poor's in 2011, promptedby concerns over mounting deficits.The global economy is experiencing a noticeable slowdown, with global growthfalling below trend levels and further decline expected due to weak PMI data. Themanufacturing sector is contracting, new orders are depressed, and previouslystrong services momentum is fading, which particularly exposes businessservices. Despite a decrease in global inflation due to lower goods prices, theservices component remains problematic, and labor markets are tight. Centralbanks maintain a hawkish stance, but most tightening is likely behind us, with LatinAmerican central banks first to pivot to rate cutting. Fiscal concerns add to thevolatility of government bond markets and upward pressure on yields.In the US, business activity continues to moderate, as indicated by the ISMManufacturing Survey being in contraction for nine consecutive months, whileservices show modest growth entering Q3. The labor market remains tight, butbusiness surveys and reduced working hours suggest cooling employment.Inflation in July was moderate, but a deteriorating growth outlook, hawkish centralbanks, and rising yields weigh on stock markets, particularly affecting smallercompanies.Headline inflation slowed in July, but core inflation remained stable, and severalservice components are sticky. The latest PMI survey shows fading price pressure,potentially leading to a recession. The labor market shows signs of cracking, withrising unemployment and wage growth, maintaining pressure on the Bank ofEngland to maintain its hawkish stance.The Eurozone is experiencing a sharp slowdown in growth, led by Germany, andmacroeconomic data continues to disappoint. This may lead to less ECBtightening, and a September ECB rate hike is no longer fully priced in by ratemarkets. August CPI data will be crucial for the ECB's decision on whether topause.Macro data indicates significant growth slowdown, with the Manufacturing PMI atits lowest since 2009 and the Services PMI at a historical low outside of the Covidcrisis. This highlights the downside risk to GDP, which was already sluggish in Q1.Inflation has also declined, but rising rents will add to domestic price pressures incoming quarters, explaining the SNB's maintenance of its hawkish stance.The worsening economic landscape in the US and Europe, combined with thepersistently hawkish stance of central banks, is poised to dampen investorsentiment. This trend is mirrored in the Global PMIs, with a significant downturnobserved in the Services component. In Germany, the IFO German BusinessClimate Index has nearly reverted to its 2022 nadir, while the GFK ConsumerConfidence Index is mired in negative territory. Despite mounting indicators ofeconomic strain, investors are once again pinning their hopes on a much-anticipated policy shift to bolster risk assets. Anticipations for the initial FederalReserve rate reduction have been advanced from July to June 2024, followingsubpar US job openings in July and a decline in consumer confidence in August.Conversely, China is manifesting some positive signals, albeit in the short term,following a tumultuous spell for its economy and financial markets. Feebleeconomic activity and escalating issues in the property market have adverselyaffected corporate, consumer, and investor confidence. Although the Politburo hasissued several guidelines to address these challenges, the enactment of specificmeasures by government authorities is typically gradual and fragmented. Investorsmight have been anticipating a more dramatic, comprehensive solution, which wedeem improbable. The amalgamation of multiple, targeted interventions, coupledwith an equity market that, in our assessment, appears undervalued, historicallyattractive valuations, and a resurgence in corporate earnings, all augur well for thefuture.While negative news linked to the property market and shadow banking sector isunlikely to dissipate rapidly, the roll-out of government stimulus measures shouldprovide a boost to the equity market. Although the MSCI China Index is currentlylagging the MSCI World, we observe that technical indicators are trending towardsa more optimistic outlook.The enthusiasm for Japanese equities has somewhat waned, with the MSCI JapanIndex remaining stable over the past ten weeks.Overall, the global economy is facing challenges from various fronts, includingslowing growth, contracting manufacturing, fading services momentum, andinflationary pressures. Central banks' hawkish stances, volatile government bondmarkets, and fiscal concerns add to the complexity of the situation. It will be crucialto monitor macroeconomic indicators, central bank decisions, and fiscal policies inthe coming months to navigate these challenges.