10/09/20192 mins
Monthly Commentary – August
Hurt by renewed trade hostilities between the US and China, the world’s stockmarkets declined in August. As investors registered their concerns over the implications for the global economy, bond yields fell sharply.
Hopes that the US-China trade truce would hold were dashed as the US imposed additional tariffs on $300 billion of Chinese goods. There was, however, a slight reprieve when this was postponed until after the holiday season. China retaliated with new tariffs, prompting President Trump to order US companies “to immediately start looking for an alternative to China”. The practical implications of this decree were unclear. On top of that, China allowed the yuan to fall below the symbolic level of CNY7 to the dollar, prompting fears of competitive currency devaluations.
As bond yields moved in and out of inversion (a strong, though not infallible, signal of recession), the world’s central bankers gathered at Jackson Hole in Wyoming. Jay Powell, chair of the Federal Reserve, reiterated that the US central bank would act to prevent recession. This was not enough, however, to appease President Trump, who took to Twitter to ask, “Who is our biggest enemy, Jay Powell or Chairman Xi?”.
The oil and gold prices performed inversely over the month, with gold gaining as oil fell. Gold is one of our favoured contrarian positions and has benefited from the growing economic concerns.
In equity markets, Latin America was the weakest region. This was on fears about the global outlook and in response to an election upset in Argentina, where the populist presidential candidate Alberto Fernández established a clear lead in the first round of voting. The UK was also weak, as Boris Johnson took steps to suspend parliament, apparently increasing the likelihood of a no deal Brexit. The UK’s GDP declined by 0.2% in the second quarter, the first contraction in seven years. Asian markets underperformed too, hurt by the heightened trade tensions and despite additional stimulus pledges from China. The Japanese market was more of an exception; although all markets declined over the month, Japan’s safe haven status allowed it to remain relatively unscathed.
Sector returns reflected markets’ more nervous tone, with traditionally defensive sectors such as utilities and consumer staples performing best. Cyclicals such as energy, financials and materials were the biggest losers. Despite the gloom, US retail stocks offered some bright spots on the back of better consumption data and encouraging earnings reports from a several large retailers.
We hold Target, one of the largest US discount retailers. Although traditional ‘bricks and mortar’ retailers have fallen out of favour with investors in the face of fierce online competition, we believe that some retailers can adapt and thrive in the long-term. Target looks well positioned to do this. It is investing in its physical and digital stores to maintain its strong competitive position. Its second quarter results demonstrated that these efforts are increasing sales and improving profits margins. The shares finished the month 24% higher – rewarding our faith in this overlooked stock.
Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.
Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.