• Economic data worse than expected
• Recession fears hit financial markets in early August
• Investment policy unchanged

July was a volatile month as markets responded to significant economic and political events. Softer inflation and labour market data from the US increased expectations of rate cuts, leading to a shift into small-cap stocks and other interest-rate-sensitive asset classes like REITs and bonds. The Bloomberg Global Aggregate Bond Index returned 2.8% in July, outperforming global equities (MSCI AC World: +1.2%). Overall, the strong performers from the first half of the year became relative underperformers this month as investors rotated out of big tech into lagging sectors. This shift was partly driven by mixed interpretations of earnings reports from the "magnificent seven". Following an impressive run since late last year, investors have grown increasingly concerned about the pace and timing of artificial intelligence (AI) revenue and its implications for ongoing investments in AI infrastructure.

Since the end of April, US economic growth data has generally been disappointing, but the July employment report seemed to be the proverbial straw that broke investors’ back at the beginning of August. The report revealed significant downside surprises, with nonfarm payrolls increasing by only 114,000 and the unemployment rate rising to 4.3%. This shifted growth concerns to recession fears, with some investors arguing that the Federal Reserve has delayed rate cuts for too long, potentially steering the US economy toward a recession. The situation worsened at the start of this week. Tokyo’s Nikkei 225 plummeted 12.4% in a single day, erasing a year’s gains, while the yen surged 3% against the dollar. This dramatic currency movement led to the unwinding of the popular yen-carry trade, creating a feedback loop that affected global financial markets.

Despite the current market volatility, there are reasons to remain optimistic, even if the near-term selling is not finished yet. The market's previous long-term surge makes the recent pullback more understandable in a broader context. While sharp declines in equity prices are concerning, historical data shows that pullbacks and corrections are a normal and healthy part of any bull market. Not long ago, the market anticipated rate hikes to combat inflation, but now, with only a slight slowing in the job data, there is a belief that the Fed will suddenly implement significant rate cuts. While we will closely review upcoming data, we currently consider the repricing of rates based on an imminent recession to be premature. Our base case is for a soft landing for the US economy, with growth bottoming around 2% and further moderation in inflation. Despite some high-profile earnings misses, the earnings season has been relatively positive, with corporate profit margins remaining solid, suggesting that companies have little reason to start cutting jobs. Retail sales and personal consumption expenditure show that rather than declining, consumer spending is slowing from high levels. Overall, households are in solid financial standing, with positive real income growth. Barring a stronger job report for August, recent data has strengthened the Fed's confidence that inflation is on a sustainable downward trajectory. We believe it is almost certain that the Fed will cut rates before the end of the third quarter, with additional cuts likely in November and December

That said, we believe the economic and corporate outlook remains largely unchanged, and as a result, we are maintaining our overweight position in equities.

Please find attached our last Asset Allocation Update for August.