This month’s update has three main themes: a rotation away from AI-led growth stocks, renewed pressure from higher bond yields and oil prices, and continued support for commodities, particularly gold. Despite the volatility, our overall view remains constructive, with diversification still central to portfolio positioning.
Since our last dispatch in July, global equity markets have been volatile but are slightly higher than they were this time last month. Late July brought a sharp rotation out of AI and growth stocks, followed by an early-August rebound and a mid-August pullback as bond yields and crude oil prices rose.
Global equities faced a multi-trillion dollar sell-off in AI-linked equities in late July, with technology and growth underperforming, while energy and other cyclicals rallied. On Wall Street, style rotation was extreme, with the Russell 3000 Value Index outperforming Growth over the month.
Outside of the US, performance was more resilient: the MSCI World ex-US Index advanced, buoyed by strength in the UK, Australia and parts of Europe. Overall, the period was defined by a growth-to-value rotation, a sharp early-August rebound, and a late-August growth scare from bond yields and oil prices, leaving global indices only modestly changed but with significant intra-period volatility.
Over the same period, commodity markets were volatile but generally firmer. Energy prices initially surged as renewed Middle East tensions and attacks on shipping routes pushed Brent crude above US$100 a barrel and WTI above US$92. July’s broader commodity performance was weaker, however, with thermal coal, aluminium and lithium particularly soft, while copper prices — after a significant rally throughout the year — were broadly flat.
Conditions improved in August. Supply constraints, geopolitical risk, weather concerns and strategic stockpiling supported commodities, with industrial metals generally gaining. Gold displayed the clearest two-stage pattern. It fell sharply on 23 July, as higher oil prices revived inflation and rate concerns. It then rallied strongly throughout August, supported by a weak US dollar, Treasury debt concerns, safe-haven demand and renewed technical buying.
As far as seasonal movements are concerned, Wall Street’s S&P 500 Index has just entered what has usually been its weakest stretch of the year. Since 1990, average monthly returns for August and September have been -0.49% and 0.72%, respectively. That said, “buying the dips” has worked for some time, and Q4 has often brought a stronger rebound. In fact, the final quarter of the year has generally delivered a return of around 4%, although actual outcomes have varied substantially and past seasonality is not predictive.
The calendar is not a catalyst. Market drivers are the events that happen within any given month, such as corporate earnings, central bank policy decisions, economic data releases or geopolitical developments. The name of the month itself has no bearing on market direction.
For example, the recent surge in global bond yields — driven by geopolitical tensions, inflation fears and fiscal sustainability concerns — has shaken market and investor sentiment. The 10-year US Treasury bond yield climbed to around 4.74%, its highest level since 2007, while the 30-year bond reached 5.33%, a 19-year high. Stalled US-Iran talks and oil prices above US$90 a barrel have once again fanned inflationary worries. However, US bond yields have pulled back modestly after the US Treasury announced an expanded debt buyback.
Similarly, inflationary fears have pushed global bond yields up across the developed world, with some markets pricing in tighter central bank policies. And contrary to what commentators were initially predicting, the pathway towards falling interest rates is now slightly blurred.
Following six months of consolidation, the price of gold has surged from its mid-July low to its current price of US$4722/oz, decisively reclaiming its 200-day moving average. Technical buyers have returned to the market following the US Treasury’s recent bond buyback announcement and a weaker US dollar ahead of publication of inflation data this week and the forthcoming annual Jackson Hole Economic Policy Symposium.
The fundamentals and technicals now appear more supportive for gold, attracting renewed buyer interest. Goldman Sachs have a year-end gold price target of US$4,900/oz.
Diversification is always important, particularly during periods of uncertainty. We therefore remain positive on equity markets, specifically US equities, which we believe offer an attractive combination of quality, exposure to AI and resilience to ongoing economic volatility.
Furthermore, we favour Asia and the emerging markets. We believe these markets provide international exposure to strong profit growth linked to the AI buildout, while in some cases still trading below their 10-year average forward price-to-earnings multiple. However, these regions can be very volatile in nature.
European stocks are also regaining investor interest, as stronger corporate earnings and diversification away from volatile AI stocks improve the region’s appeal. Similarly, the UK’s FTSE 100 Index is relatively defensive against global shocks, owing to its sustainable exposure to healthcare, consumer staples, energy and mining stocks. Equally, sterling can be volatile and affect overall performance.
Finally, we believe a new commodities supercycle may be commencing. A structural shift is beginning to reshape the world and its commodity markets: AI, digital infrastructure, electrification, defence and strategic security are all likely to increase demand for key resources, tightening supply-demand balances and supporting higher commodity prices. This makes the asset class increasingly interesting from an asset-allocation perspective.
Overall, global equity markets remain our asset class of choice, even though global headwinds continue. We expect some volatility over the coming weeks, but the fundamentals remain positive for equities, and we expect a rally in the final quarter of the year.
