Monthly markets review – August 2022

The month in summary:

Developed market equities resumed their declines in August as it became clear that further substantial interest rate rises may be needed to tame inflation. Emerging market shares posted a modest gain. Bond yields rose, meaning prices fell, with the UK underperforming other major markets.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.


US equities declined in August after Federal Reserve (Fed) chair Jerome Powell said the US central bank would need to keep monetary policy tight “for some time” in a bid to tackle soaring inflation. This dashed market hopes that further interest rate rises would be more modest and led to sharp falls in share prices and volatile trading throughout the month. 

US Congress passed the Inflation Reduction Act which aims to reduce inflation by curbing the deficit, as well as investing in domestic sources of clean energy.

US inflation, as measured by the consumer price index (CPI), increased by 8.5% year-on-year in July, down from 9.1% in June. The US jobs market remains strong with non-farm payrolls growing by a larger-than-expected 528,000 in July.

By sector, information technology, healthcare and real estate experienced some of the sharpest declines. Energy stocks achieved a robust performance amid ongoing strong demand and a curtailment of supplies following Russia’s invasion of Ukraine.

Semiconductor stocks were particularly weak in August amid rising inventories of some types of chips, as well as some ongoing supply-chain issues. Consumer durables stocks also saw significant declines in the month as rising prices prompted consumers to cut back on household items.


Eurozone shares fell in August amid ongoing worries over inflation, particularly in the form of high gas and electricity prices. In the MSCI EMU index, energy was the only sector to post a positive return, while underperforming sectors included real estate, healthcare and information technology. Some pharmaceutical stocks were hit by worries over potential liabilities related to US litigation around heartburn drug Zantac.

The energy crisis across Europe intensified amid worries over supply and high costs. Russia said it would halt the Nord Stream 1 pipeline, which supplies natural gas to Germany, for three days from 31 August (as of early September, the pipeline has not reopened). Meanwhile, several of France’s nuclear reactors were offline for longer than expected after maintenance. Further upward pressure on power prices has come from this summer’s drought as low water levels on the Rhine have affected the delivery of coal to coal-fired power plants.

Inflation continued to rise in the eurozone with annual consumer price index (CPI) inflation estimated to be up 9.1% in August. Industrial producer prices for June were up 35.8% in the eurozone compared with June 2021. Minutes from the European Central Bank’s (ECB) July meeting indicated that policymakers remain concerned about inflation and that a further rise will come at the meeting in September.


UK equities fell over the month. A number of large cap equities held up relatively well led by the energy and banking sectors, in line with the trend seen since the beginning of 2022. Major oil companies are anticipated to benefit from an ongoing inflationary/stagflationary economic environment, while banks are seen as a beneficiary of higher interest rates.

Consumer focused areas underperformed. This is amid fears that rising energy prices and interest rates will severely pressure the consumer, with UK households facing an income squeeze on multiple fronts in coming months. Fears around the outlook for the domestic economy more widely – and the country’s fiscal position – were also reflected in a very poor performance in sterling, although in the context of continuing strength in the dollar.

Political uncertainty weighed on sentiment. The resignation of UK prime minister (PM) Boris Johnson has put a block on further major policies being introduced until a new leader of the ruling Conservative Party is elected. As a result, questions remained over how any new PM might support consumers and businesses amid an intensifying energy crisis.

In addition to consumer exposed areas performing poorly, traditionally economically sensitive ones (due to growing fears around recessionary outcome in many developed economies), and those parts of the market offering high future growth potential (due to higher rates) also lagged. These factors combined drove a poor performance from UK small and mid cap equities over the period.

The Office for National Statistics estimated that the UK economy contracted by 0.6% in the month of June, after 0.4% growth in May. A dip was expected given the extra bank holiday to celebrate Her Majesty the Queen’s Platinum Jubilee. However, consensus expectations were too pessimistic, forecasting a contraction of -1.3%, which would have been more in-line with past Jubilees.


The Japanese stock market rose in the first half of August driven by strong quarterly results and an anticipated peak in US inflation. The yen resumed its weakening trend against the US dollar, after the brief reversal seen in the second half of July.

Investors were generally optimistic over some early signs, or hope, that US inflation may soon be approaching its peak. Conversely, but equally encouraging, are signs that Japanese inflation may be becoming entrenched at a moderate, but sustainable rate, after decades of deflation. Nationwide consumer price data released in August showed core inflation (excluding only fresh food) had edged up again to 2.4% in July.

The first estimate of GDP growth for the second quarter was also released. The quarter-on-quarter annualised rate of 2.2% was slightly lower than consensus expectations but the detailed breakdown was interpreted more positively with some resilience in consumption and capital expenditure. 

Aside from macro data, the main influence on individual stocks came from the results announcements for the March to June quarter, which were completed in August. Although profit momentum slowed from the previous quarter, overall results were again ahead of expectations and profit margins appear to have remained resilient so far, despite increasing cost pressures. With many companies having made conservative forecasts for this fiscal year, there is scope for upward revisions around the next quarterly results announcements.

Asia (ex Japan)

Asia ex Japan equities were weaker in August with declines in Hong Kong and South Korea offsetting gains in India and Indonesia. Hong Kong was the weakest market in the MSCI AC Asia ex Japan index in August amid losses among Chinese carmakers. Vehicle deliveries suffered from supply chain disruptions and weak consumer confidence, undermining the corporate earnings outlook. Shares in South Korea also ended the month in negative territory as concerns over the outlook for interest rates and fears over recessions in many of the major world economies weakened investor sentiment.

Singapore and Thailand both ended the month in negative territory. Shares in China were flat in August on concerns over rising interest rates, as countries around the world battle soaring inflation. The alarming spread of Covid-19 throughout China also weakened sentiment, prompting fears of further lockdowns as the country continues to pursue a policy of zero-Covid. Investor sentiment was also weakened after new data released during the month showed that factory activity continued to contract in the world’s second largest economy following strict Covid-19 lockdowns and a record heatwave during the summer.

Thailand, India and Indonesia all achieved modest gains and ended the month in positive territory. Gains achieved in Malaysia and the Philippines were more muted.

Emerging markets

Emerging market (EM) equities posted a marginally positive return in August, significantly outperforming developed markets. This was despite weakness towards month-end as global recessionary fears increased, and as the US Federal Reserve (Fed) maintained a hawkish tone.

Turkey was the best performing market in the EM index, delivering double-digit returns. The central bank issued a surprise interest rate cut during the month, despite inflation near 80%. Brazil outperformed as opinion polls narrowed ahead of October’s presidential election. Thailand and Chile also finished ahead of the index, as did India which benefited from improved macroeconomic data releases, including an easing in inflationary pressure. Despite weaker oil prices over the month, both Saudi Arabia and Qatar outperformed.

China delivered a small positive return, but slightly underperformed the index. While monetary and fiscal policies announced during the month were supportive, a resurgence in Covid-19 infections prompted further lockdowns, and macroeconomic data continued to point to sluggish domestic demand.

Hungary underperformed as the central bank hiked interest rates again – this time by 100bps to 11.75% – and raised the required reserves ratio from 1% to 5%. Taiwan and Korea both lagged the index with currency weakness weighing on returns against a backdrop of ongoing hawkishness from the Fed and concerns about global growth. Geopolitical tension, as US Speaker Nancy Pelosi visited Taiwan despite protests from Chinese authorities, was a further drag on Taiwan’s performance.

The Czech Republic and Poland were the weakest EM markets, negatively impacted by the deteriorating outlook for energy supply. Not only has the European gas crisis escalated but local coal shortages in Poland ahead of winter threaten the country’s power production. Coal is the main fuel for Polish power production and the government’s ban on Russian imports came into effect in August.     

Global bonds

Government bond yields rose sharply, meaning prices fell, as inflation remained elevated and central banks reaffirmed a commitment to reining in price increases.

The Federal Reserve (Fed) held its annual conference at Jackson Hole against a backdrop of multi-decade high consumer price inflation (CPI) across major economies. While concerns of an economic downturn are rising, Fed Chair Powell nevertheless stuck to a hawkish message.

Powell said the Fed would not “pivot”, or shift course from raising rates, though the US may see slower growth for a “sustained period”. Data, particularly the labour market, has so far been remarkably resilient, although the housing market continued to deteriorate. The US 10-year Treasury yield rose from 2.64% to 3.13%, with the two-year rising from 2.90% to 3.45%.

The UK gilt market underperformed most other global government bond markets. Inflation hit 10% in July, which was higher than the market expected and raised expectations of a faster pace of rate hikes. Political uncertainty and the much anticipated fiscal response to the energy crisis also weighed on the market. The Bank of England (BoE) raised interest rates by 0.5% to 1.75% at the start of the month.

Like the Fed, the BoE is prioritising the need to curb inflation. Governor Andrew Bailey predicted the UK will fall into a long recession later this year. The UK 10-year yield increased from 1.86% to 2.80% and the two-year from 1.72% to 3%.

In Europe, inflation remained high and members of the central bank’s executive board, speaking at Jackson Hole, said policy would need to remain tight for an extended period. Germany’s 10-year yield rose from 0.82% to 1.53%.

Corporate bonds saw negative returns though US investment grade (IG) and euro high yield outperformed government bonds. (Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade).

In emerging markets (EM), corporate bonds saw modest positive returns led by high yield. Local currency and hard currency sovereign bonds were generally weaker. EM currencies were mixed versus the US dollar.

Convertible bonds protected well against the equity market headwinds with the Refinitiv Global Focus index shedding just -0.5% in August. The month saw US$7 billion in new convertible bonds coming to the market which translates into a relatively normal month in terms of new issuance. Despite the previous lack of supply since the start of the year, convertible valuations continue to be cheap, reflecting the general ‘risk off’ mood within the market.


The S&P GSCI Index recorded a negative performance in August, driven by weaker energy and precious metal prices. Energy was the worst-performing component of the index, with sharply lower prices for unleaded gasoline, crude oil and Brent crude offsetting prices gains for natural gas and heating oil. Within the precious metals component, the price of silver was sharply lower, while the decline in the price of gold was more modest. Within the industrial metals component, there were significant price falls for nickel and aluminium, while declines in the price of lead and copper were more muted. Conversely, the price of zinc increased during August.

Agriculture was the only component of the index to achieve a positive result in August, with sharply higher prices for corn, coffee and cotton. The price of wheat, cocoa and sugar also rose in the month.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.


Read The Original Article