The period saw broadly neutral returns from equities. Bond markets were able to offer some positive returns, in light of relatively benign economic data. The major themes of Brexit and US/North Korea were largely
ignored by investors.
The last couple of months saw little progress in the UK’s Brexit negotiations with the European Union, with the same sticking points of the free movement of people and the ‘divorce bill’ being rehashed in the press on a daily basis. These points are reported to be holding up the very substantial talks that will be needed to work out the fine detail of what the relationship will eventually look like. This culminated in Theresa May's Florence speech where she attempted to clarify certain aspects but not others. It could have done just enough to unblock the stalled divorce talks.
Britain wants a translation siting period aimed at bridging the gap between leaving the EU in March 2019 and beginning the new trading relationship. May envisages this lasting around 2 years.
European equities declined during the period. Economic data remained robust, but the strength of the Euro during
the month presented a headwind for shares. The biggest laggard was Spanish equities, this was due, in large measure, to
the terrorist attacks in Barcelona and Cambrils.
Overall however the region continues to show signs of stable growth with the recent Economic Sentiment Indicator increasing to its highest level since July 2007.
Equities remained very flat over the period.
President Trump’s handling of the North Korean crisis has been criticised for his attempts to use economic measures to exert influence on other Asian nations, particularly China, threatening to cut off trade with any country that does business with North Korea. Previous Presidents have managed to separate security issues from trade issues and co-operate on the one, whilst competing on the other. Mr Trump’s determination to link the two is a departure from historical US policy and it is unclear how the US stands to benefit from it, given that more than a quarter of US exports go to Asia.
Japanese equities ticked up over the period and economic news was mostly positive with GDP rising 1.0% (quarter on quarter), the strongest result in two years.
In political news, Prime Minister Abe appeared to recover somewhat from a series of scandals over the past few months which have called into question the stability of the Abe Government and implementation of the “Abenomics” economic reform agenda. Following a cabinet reshuffle in late July economic data exceeded expectations and inflation achieved a small, but welcome, tick upwards, offering hope that Abenomics is indeed starting to work. Abe also dissolved parliament and called for a snap election recently, seeking a mandate to stick to his tough stance toward a volatile North Korea and an aim to rebalance the social security system.
Emerging market equities were positive and they continued to experience positive inflows. August saw a lessening of the influence of emerging tech giants in aggregate market returns and broader market participation from other sectors, notably financials. Larger capitalisation companies slightly outpaced smaller and mid-size companies.
Among specific countries South Korea was the laggard with the KOSPI falling as political tensions weighed on market sentiment following Trump’s promise to meet any North Korean threat to the US
with “fire and fury” and a threat to “totally destroy” the country.