Monthly Commentary | Aug 23

August proved to be a tough month for investment returns. Bond returns were around flat as moves higher in interest rates resulted in capital losses largely negating the monthly income accrual from fixed income. Deteriorating government fiscal positions and a resulting increase in government bond supply has weighed on yields. Unfortunately, the good times for bonds in terms of capital gains from falling yields keep getting pushed further into the future. Here and offshore an improving inflation profile remains the key to lower rates, but we may need to wait longer for validation.

After two positive months equity markets uncharacteristically suffered a dint in optimism as the persistence of inflation appears to be giving more truth that “inflation is no one’s friend”. Markets had been running with the “glass half full” outlook looking forward to cuts in cash rates and falling yields. August however experienced some shift in focus to rising cost pressures challenging profitability, weakening demand, and higher borrowing costs which resulted in a broad market decline.

The markets want to move forward but there seems to be increasing thought that we won’t necessarily return to the “pre-covid world” in which inflation was typically in a very narrow range. The increased prevalence of supply shocks, deglobalisation, climate change, the energy transition and shifts in demographics mean either steeper supply curves or more variable supply curves. While this doesn’t mean that the inflation target can’t be achieved on average over the medium, it does mean that inflation is likely to be more variable around Central bank targets which may mean more volatility in financial markets. Of course, volatility doesn’t capture the trend just the magnitude and isn’t necessarily bad for returns. The fund is widely diversified across sectors and strategy and in a healthy market there is positive or upward price volatility as well as downward which can present opportunities.