Escalating tensions surrounding North Korea’s nuclear ambitions resulted in a flight to gold and other perceived safe assets throughout August and punctured a run in US stocks. But by the end of the month risk assets were doing well too.
Gold, the yen and highly-rated government bonds started out the month on a high after US President Donald Trump waded into a war of words with North Korea. Trump promised to bring "fire and fury" to the state, North Korea mooted missile strikes near the US territory of Guam, and the world grew nervous.
On 10 August 2017 gold hit a two-month high and US stocks sank – a rare dip in an otherwise stratospheric year of gains for indices including the tech-heavy Nasdaq Composite and S&P 500. Even the recently sanguine CBOE Vix Volatility index, an indicator of investor anxiety (or lack thereof), spiked briefly.
That fear was replaced by renewed complacency in the middle of the month, and emerging markets and Asian equities continued to rise. But Japanese equity funds and gold funds still ended up among the top of the pile for the month. Investec Global Gold (GB00B12B5S05) returned the most of any open-ended fund in the calendar month and Japanese equity funds were among the best-performing Investment Association funds, too, mainly due to the performance of the currency. The country’s main index, the Topix, actually fell over the month in local currency terms, but the Investment Association Japan Smaller Companies sector was the second best-performing sector across August.
Ben Yearsley, director at Shore Financial Planning, said: "August was the month of North Korea sabre rattling boosting the price of gold to over $1,300 an ounce and more worries about consumer debt, slowing growth and stagnating wages.
"Are there any quiet months now in world markets? There always seems to be something going on unnerving investors – maybe that's a sign of toppy valuations?"
Mr Yearsley added: "Emerging markets had a good month, with both China and Russia performing well – the Hang Seng was the best performing of the major markets increasing by 2.25 per cent over the month."
The emerging markets story is partly one of recovery – after spending several years in the doldrums between 2011 and 2016 these stocks are still getting their mojo back. But there is more to the rebound, including political change, growing company earnings and the outperformance of tech stocks such as Alibaba (US:BABA) and Tencent (HKG:700).
Chinese stocks have surprised some onlookers, though. Investors might have expected the issues surrounding North Korea to take a toll on the market’s winning streak. Not so – the CSI 300 index was up around 6.2 per cent over the month while the Investment Association China and Greater China sector posted the best average gains of any open-ended fund sector for the month.
China bears point to the latent risks in China’s debt-fuelled economy. But Beijing’s market interventions have resulted in stronger-than-expected growth for the region. Alastair Winter, chief economist at Daniel Stewart & Co, says: "Although official data often seems remarkably in line with Mr Xi’s targets there seems little doubt that China’s economy is still growing much more rapidly than developed economies. The trouble is much of that growth is fuelled by debt (the red bar in Figure 3) that is becoming increasingly difficult to service even by public sector borrowers."
Meanwhile Harvey – the hurricane that tore through Texas at the end of the month – impacted the price of oil. The market was spooked by fears of a US oil shortage following the major storm and raised the price of oil. However, it did not last. The price of West Texas Intermediate oil remains far lower than at the start of the month, at $47.51 per barrel.
Winners and losers
Top-performing open-ended funds over August were Investec Global Gold and Invesco Perpetual Japanese Smaller Companies (GB00BJ04J523), followed by Neptune Russia (GB00B86WB793). The biggest fallers were MFM Techinvest Technology (GB0032832841) and Woodford Equity Income (GB00BLRZQB71).
Renowned manager Neil Woodford has had a bleak few months, too. In August he was punished for his holding in doorstep lender Provident Financial, whose shares lost two-thirds of their value in a single day on Tuesday 22 August following its second profit warning in three months. The previous month saw him licking his wounds from share price falls at AstraZeneca (AZN), AA (AA) and Imperial Brands (IMB), among others. The fund lost 4.01 per cent between 1 August and 1 September 2017.
But Woodford Investment Management urged investors to be patient in a statement in August. "We remain convinced of the attractions of all the companies we mention earlier and believe that their share prices are sitting way below their fundamental value."
Mr Yearsley says: "Don't write Neil Woodford off just yet, but by his standards it is two dreadful months in a row with his three biggest holdings having a torrid time."
Markets in a minute
Style: Growth and quality UP, value DOWN
Assets: Gold UP equities DOWN
Sectors: Mining and industrials UP, banks and telecoms DOWN
Equities: Asia, emerging markets UP, Europe DOWN
Bonds: Gilts UP, high yield bonds DOWN
