Financial markets experienced a highly volatile month, characterised by significant fluctuations in both equities and bond markets.
Volatility
August was a highly volatile month for financial markets, characterised by significant fluctuations in both equities and bond markets. The month began with turbulence due to economic data and disappointing earnings from tech companies like NVIDIA. The Bank of Japan’s rate hike led to a sharp sell-off in Japanese equities and broader global market volatility. The US dollar strengthened significantly, impacting global markets. Additionally, ongoing concerns about China’s economic growth, particularly in the property sector, contributed to market instability.
The Chinese economy
Despite a volatile start, markets began to recover in the latter half of the month, aided by positive US labor market data. Domestically, large-cap equities saw marginal gains, while small-cap equities suffered due to weak commodity prices. Emerging markets also struggled, reflecting China’s economic challenges. Despite attractive valuations in emerging markets compared to developed ones, the ongoing deflationary slowdown in China’s economy is expected to continue hindering growth in the short to medium term.
From an asset allocation perspective, bond markets are showing signs of steepening yield curves as peak rates have passed, with the US Fed recently cutting cash rates. However, the Chinese equity market has lost about 50% of its value since its peak and faces its fourth consecutive year of negative returns. Despite government stimulus measures, significant structural reforms are needed to stabilize the property market and broader economy. Consequently, a cautious approach to emerging markets is advised, given the structural headwinds and challenges in China.
Precious metals & bond yields
In 2024, while iron ore and oil prices have declined due to slower global economic activity, precious metals like gold and silver have rallied. This rally is driven by geopolitical risks, persistent inflationary pressures, and declining bond yields and US cash rates. As bond yields have moved lower, precious metals have benefited, though future appreciation may be limited. Despite some volatility and negative economic data, the overall outlook remains positive, with central banks expected to cut cash rates further, supporting both growth and defensive assets. Investors are advised to maintain a higher bias towards growth and global assets.
