Nutmeg investor update: September 2023

How did global markets perform during August? 

Looking back over August, it was a volatile month, ending up with mostly negative returns for asset classes, with a few exceptions. Most global assets were down on the month, including bonds and equities, with only oil prices experiencing a different path and generating a third month of positive performance. 

Most equity markets ended the month in negative territory, ranging from -1% to -3%, except for Chinese and Hong Kong stocks, both of which were down by over -8%. The first half of the month was particularly challenging, with the S&P 500 down -5% by mid-August, but it recovered somewhat, concluding the month with a modest setback of -1.6%. This downturn was partially offset by the uneventful meeting of central bankers in Jackson Hole during the third week of August. Similarly, British stocks and European equities ended the month slightly negative at around -2.5%. 

On the fixed income front, UK government bonds fell, given concerns about persistent inflation, which raised expectations of sustained higher interest rates.  

The US dollar remained robust, buoyed by the anticipation of higher for longer interest rates in the United States and a volatile market. In contrast, both the pound and the euro displayed relative weakness during the same period. 

Did you make any changes to the portfolios over the course of the month? 

August proved to be an active month for portfolio management, with a particular focus on updating our equity allocation. Previously, we held a slight underweight position in equities, specifically in US and European markets, while concurrently maintaining an overweight position to emerging markets and UK equities. 

During the month, we capitalised on a mid-month pullback in equity markets to remove our slight underweight in equities, taking advantage of a favourable entry point. This decision aligns with the backdrop of positive developments not only on the macroeconomic front, which we discuss regularly, but also at the microeconomic level. The earnings season on both sides of the Atlantic exceeded expectations, underscoring the resilience of many large corporations in the face of a rapidly rising interest rate environment. All these factors, coupled with the continued robust performance of developed market economies, have led us to adopt a neutral equity positioning. 

At the regional level, our prior overweight allocation to emerging markets, primarily motivated by the anticipation of the Chinese economy's rebound after the challenging Covid-19 period, has not unfolded as expected. Given the mounting economic challenges facing China, we believe it was prudent to reduce our exposure, even though certain emerging markets such as Korea, Taiwan, and parts of Latin America are looking more favourable. 

The portfolios are overweight the US – why are markets there performing so well this year? 

It's worth noting that the US market hasn't been outperforming all year – the real upturn began around March or April. The emergence of artificial intelligence had a strong impact on some major US companies like Microsoft and Nvidia, and this had an outsized effect on the indices due to their large weight in those indices.  

Additionally, it's important to acknowledge that the US economy has remained remarkably robust this year. Unemployment rates have stayed impressively low, and the housing market has shown surprising resilience, with a nationwide shortage of homes. With inflation on a declining trajectory since the third quarter of 2022, there's a real possibility that the Federal Reserve can guide the economy to a soft landing as inflation continues to recede, which is generating optimism in the overall economic outlook. 

Given this backdrop and the outcome of recent second-quarter earnings reports from US corporations, we have adjusted our mid-term exposure to US equities.  

The Nutmeg investor update is available as a podcast. Listen to this month’s update below.    

About this update: This update was recorded on 6th September 2023. All figures, unless otherwise stated, relate to the month of August 2023. 

Source: MacroBond, Nutmeg and Bloomberg. 

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 performance and forecasts are not reliable indicators of future performance.