Monthly Commentary – August 2021

As investors adjusted to the prospects of a tightening of central bank policy and growing risks for Chinese businesses, the world’s equity markets rose in August.

Following the US authorities’ full approval of the Pfizer-BioNTech Covid vaccine, hopes rose for an acceleration of vaccination programmes and, consequently, the economic recovery. Meanwhile, various countries considered providing booster shots for those most vulnerable.

The closely watched central bankers’ symposium at Jackson Hole produced few fresh clues as to the speed and timing of the withdrawal of accommodative monetary policy. Most major central banks continue to argue that inflationary pressures will prove to be temporary. We, however, see strong cost-push and demand-pull drivers of price increases that show no signs of imminently abating.

In recent months, China’s authorities have increased their scrutiny of several sectors, most notably technology. This comes as the Chinese government reprioritises its social goals, with measures to restrict online gaming imposed in August. In the US, the Securities and Exchange Commission ramped up pressure on the overseas listings of Chinese companies. Hong Kong listed shares entered a bear market during the month, having fallen 20% from their previous peak. This decline was exacerbated by the increased regulatory pressure and the looming default of highly indebted property developer Evergrande.

The mounting concerns about the Chinese property sector contributed to a sharp fall in the price of iron ore, as did production curbs ahead of the Winter Olympics in Beijing. As a result, materials was the weakest sector in August. Financials produced the best returns for the month.

The poorest performing regions were Latin America and the UK, in part because of their exposure to mining companies. Japan made the largest gains. This came as Yoshihide Suga, the prime minister, announced that he would not stand in his party’s upcoming leadership elections, fuelling speculation that his successor might ramp up economic stimulus.

Among our best performers in August was UK engineering services firm Babcock. This company plays a critical role in supporting the UK’s defence capabilities. Its new chief executive is working to turnaround poor profitability by streamlining the group and improving operating performance. Babcock is steadily disposing of non-core segments to refocus on its strongest businesses, bolstering the balance sheet in the process. In August, the company made progress with this strategy, announcing the sale of Frazer-Nash Consultancy at an attractive price. We believe that Babcock’s determination to transform has not yet been fully recognised by many investors.

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.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.