August can often be an unusual, sometimes unpredictable month for investments. Because a lot of investors go on holiday, trading volumes tend to be quite low and the markets can often be affected by small, less significant, events.
This August turned out to be rather interesting. There was the usual, expected volatility in stock markets and the UK slightly outperformed other developed markets.
However, emerging market equities were the stand-out performers. They outperformed developed markets, with a 2% gain in August and further small gains in September so far. This performance was particularly impressive, given the recent increase in geopolitical tensions fuelled by North Korea’s missile tests, which (as one would expect) hit developing markets in Asia harder than most.
The increased tensions resulted in safe-haven assets, like government bonds, doing quite well. For example, UK government bonds recorded their second-best month this year.
Reasonable performance for Nutmeg portfolios
Nutmeg portfolios produced positive returns across all risk levels in August. Medium-risk portfolios generated a gain of around 1%, while the higher-risk portfolios (with their higher exposure to emerging markets) delivered a gain of about 1.2%.
Our equity allocation generated the bulk of the returns, particularly from UK and emerging market equities. Furthermore, the positive performance of the US dollar against the pound helped higher-risk portfolios.
Portfolio changes: it’s all about emerging markets
In our medium and higher-risk portfolios we recently switched our emerging market equity exposures away from lower risk (low volatility) stocks to a higher risk, broad, exposure to emerging markets.
After five years of significant underperformance versus developed markets, we believe that stocks in developing economies are likely to outperform over the years ahead.
This month’s customer question comes via a call to our customer support team: “With the strengthening euro, is Nutmeg considering an increase in European holdings?”
We’ve been intentionally underweight in eurozone equities this year as we believe there are better opportunities offered elsewhere, for example Japanese and emerging market equities. These markets have outperformed Europe since the French elections in April.
While the European economy is recovering, we’re not convinced of its strength. It’s also worth bearing in mind that when the euro appreciates, European equities generally tend to underperform, as export earnings get hit by the stronger currency.
We constantly re-evaluate our positions so, if our view changes, we can modify our euro area exposure easily.
About this update: this update was filmed on 11 September 2017 and covers figures for the full month of August 2017 unless otherwise stated. Data sources: Bloomberg and Macrobond.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.
Other blogs you might like:
Shaun Port
Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.Other posts by Shaun Port
