Highlights
- August was a volatile month for global financial markets, with monetary policy expectations, corporate earnings and geopolitical developments driving sentiment.
- Technology shares recovered following Nvidia’s earnings announcement, which provided further evidence of strong demand across the artificial intelligence ecosystem.
- Federal Reserve Chair Kevin Warsh’s Jackson Hole address increased expectations of a September interest rate rise, triggering a sell-off in global government bonds.
- Diversification supported the OCM portfolio suite, with positive contributions from defensive and income-generating assets helping to offset weakness elsewhere.
- Following strong performance so far this year, we have taken profits and reduced equity exposure within the OBI Volatility Managed portfolios to help limit near-term downside risk and volatility.
A Volatile Month for Global Markets
There was little sign of the traditional summer lull in August as investors navigated sharp swings in market sentiment. Strong corporate earnings provided support, but concerns about rising government bond yields, the outlook for interest rates and renewed geopolitical tensions created a more challenging backdrop as the month progressed.
Technology shares recovered during the first half of August after coming under pressure in July. Nvidia’s earnings report highlighted continued demand for the infrastructure supporting artificial intelligence, helping to address some of the concerns surrounding the sector’s recent capital expenditure.
The resulting recovery lifted US and Asian equity markets towards record highs during the early weeks of the month. It also contributed to positive performance across the OCM portfolio suite, with the portfolios outperforming their respective benchmarks.
However, sentiment became more cautious later in August. Higher energy prices renewed concerns about inflation, while comments from the Federal Reserve led investors to consider whether US interest rates might need to rise again. These developments placed pressure on fixed-income markets and contributed to a more volatile end to the month.
Strong Performance So Far This Year
The OCM portfolio suite has delivered positive performance so far this year, creating a strong buffer against the respective benchmarks.
Diversification has continued to support returns, with different regions, asset classes and investment styles contributing at various points during the year. This has allowed the portfolios to participate in periods of positive market sentiment while limiting their reliance on any single company, sector or region.
Monetary Policy Uncertainty
No major global central bank held a formal policy meeting in August, leaving investors with limited new guidance on the direction of interest rates. Nevertheless, monetary policy remained a central focus throughout the month.
Renewed tensions in the Middle East pushed energy prices higher and increased concerns that central banks could be forced to tighten policy to contain inflation. Sentiment across government bond markets has also become increasingly fragile as public debt continues to rise.
US government debt exceeded $40 trillion during the month, highlighting the fiscal challenges facing policymakers. Higher debt levels can lead to increased bond issuance, placing upward pressure on yields as governments compete for investor capital.
A clearer signal on monetary policy came during the Jackson Hole Economic Policy Symposium in the final week of August. Federal Reserve Chair Kevin Warsh’s keynote address attracted particular attention following criticism of the central bank’s limited forward guidance under his leadership.
Chair Warsh reiterated that inflation remains too high and indicated that policymakers may need to act if progress towards the Federal Reserve’s 2% target continues to stall. Investors responded by assigning a greater probability to an interest rate increase in September.
The market reaction was significant. Government bonds sold off across several regions, pushing yields to multi-decade highs and tightening financial conditions. This created a difficult backdrop for fixed-income investors towards the end of the month.
Fiscal policy is also likely to remain a source of uncertainty as the US midterm elections approach. With the conflict involving Iran and higher fuel costs weighing on public sentiment, the Trump administration may introduce additional measures to support households or stimulate economic activity.
While such measures could provide short-term economic support, they may also increase existing concerns about government deficits, debt issuance and the longer-term sustainability of the US public finances.
Renewed Geopolitical Tensions
Tensions between the US and Iran resurfaced during the final days of August, with both sides resuming military strikes while tanker traffic through the Strait of Hormuz remained subdued.
Under growing pressure to find a way out of a conflict that has reached the six-month mark, President Trump announced a shift towards greater economic pressure. The US threatened further sanctions in an attempt to discourage other countries from conducting business with Iran.
The effectiveness of these measures remains uncertain. Countries including China have previously found ways to continue purchasing Iranian oil despite international restrictions, potentially limiting the impact of further sanctions.
Energy markets are coming into sharper focus as winter approaches. European natural gas storage levels are close to historic seasonal lows, leaving the region more exposed to disruption or an increase in demand.
Greater demand for natural gas during the winter could push prices higher if countries struggle to meet even relaxed storage targets. A further rise in energy costs would place additional pressure on households already facing higher bills and slower wage growth. It could also increase calls for government support at a time when bond markets are particularly sensitive to higher borrowing and spending.
Looking Ahead
Our medium-term outlook remains constructive, but strong gains during the first eight months of the year have created an opportunity to lock in profits and reduce near-term risk within the OBI Volatility Managed portfolios. The Long Hold portfolios will remain fully invested, consistent with their focus on long-term fundamentals and their ability to withstand periods of short-term market volatility.
As we approach the final quarter of the year, we continue to monitor geopolitical developments, monetary and fiscal policy, energy markets and corporate earnings carefully. We will adjust the tactical portfolios further if our outlook changes or new opportunities arise.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment. OCM Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (FCA Registration No: 418826) OCM Asset Management is a trading name of OCM Wealth Management Limited
