August Market and Economic Update

The month saw a marked divergence in performance between developed and emerging market equities. Whilst the former responded positively to signs of a resolution to the Greek crisis, emerging markets were weighed down by mixed economic reports and continued volatility in local Chinese equity markets. The commodity sector, led by oil, was particularly weak given concerns over the ongoing Chinese economic slowdown and excess production. Quality corporate and government bond indices ended the month firmer, whilst global high yield bond indices recorded small losses on account of their exposure to the oil and mining sectors.

Economic overview

• Major developed-market Central banks have added more than US$7 trillion in liquidity since 2007 to the global economy to try to stave off the worst effects of the banking crisis. This stimulus may have helped to prevent a severe downturn in activity, but it has also prevented a normal default cycle and has contributed to a potential state of ‘secular stagnation’ of low growth and low inflation.
• Now that the US Federal Reserve has ended its asset-purchase programme, the flow of liquidity is likely to reduce, though the pace of reduction will probably be pacified by the stimulative policies being pursued within the Eurozone as well as Japan.
• The recent increase in bond and currency market volatility highlights investor uncertainty over how these two forces will play out.

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