August was another good month for financial markets. The key equity and fixed income asset classes delivered positive returns for investors. Low volatility and improving economic data in the US, Europe and the UK helped drive markets higher.
The key factor driving returns in the month was the cut to interest rates from 0.50% to 0.25%, a record low. This was accompanied by a return of the Bank of England’s bond-buying programme (known as ‘quantitative easing’) and aimed to head off any uncertainty and economic weakness post the Brexit referendum vote in late June.
The move benefitted both risk assets and fixed income assets. Domestic equities, as measured by the FTSE All Share, rose 1.9% in the month, with small and mid-caps returning 2.9% and 2.8% respectively.
The weakness in sterling in August, albeit at much lower levels than earlier in the summer, helped boost the returns of overseas assets. Equity markets outside the UK generally outperformed, with Asian markets delivering the strongest returns over the month. The Asia Pacific region (ex-Japan) rose 3.2% while the Japanese market ended the month up 2.4%.
Generally, August was an extremely calm month for equity investors, and US equities saw the fourth narrowest August trading range since 1928. Trading volumes were also low.
Fixed income lagged equities, but delivered small positive returns in the month. Unsurprisingly, UK gilts benefitted from the Bank of England’s interest rate cut, rising 2.8% in August. The best performer was the ultra-long duration UK Index Linked Bond market, which delivered a 9.4% return.
Overseas government bonds also delivered small positive returns for investors, but this was driven predominantly by the weakness in sterling. While the government bond markets struggled, riskier debt thrived and both the high yield and local currency emerging market debt markets rose more than 3% in the month.
The key negatives for investors came from the commodities sector, with both the spot gold price and broad commodity indices falling in August. However, the falls were small compared to the gains made from the markets this year.
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