UK
Share prices in the UK fell in August, in common with most developed
markets, as investors focused on the possibility that a slowdown in the US
might weigh on the global economy. Those worries were exacerbated after the
Bank of England (BoE) lowered its forecast for UK economic growth. In a gloomy
long-term forecast, the BoE noted that tight credit conditions and the prospect
of large spending cuts by the coalition government would dampen growth. There
were, however, some positive surprises on the economy. Retail sales, business
confidence and mortgage lending all beat expectations. Retail sales rose by
1.1%, the strongest pace seen since February. There was also some good news on
the corporate front. Prudential Insurance reported that operating profits in
the first six months of the year rose by an impressive 41%. A surge in M&A
activity was another positive development for the market. Anglo-Australian
miner BHP Billiton reported a doubling in first-half profits and launched a
hostile takeover bid for PotashCorp, a Canadian fertiliser company. BHP
Billiton anticipates that that the adoption of Western-style diets by Chinese
consumers will lead to increased demand for fertiliser and thus boost potash
prices. HSBC also announced its intention to buy a controlling stake in
Nedbank, South Africa's fourth-largest lender, in order to bolster its presence
in Africa.
| Index | £ | € | $ | Local |
| FTSE All-Share | -0.22% | 0.14% | -2.08% | -0.22% |
US
Poor economic news overshadowed positive news on corporate earnings in
August. As fears mounted that signs of slowing growth might be a prelude to a
double-dip recession, the Dow Jones Industrial Average suffered its first
negative August for five years. The first blow to sentiment was dealt by poor
news on employment; the US economy added just 12,000 new jobs in July. The
second came from very weak data on the housing market. Sales of new homes
plunged to a record low while sales of existing homes fell to their lowest
level in over a decade as a tax credit for homebuyers expired. Some of the
difficulties facing America's consumer-facing companies were illustrated by a
fall in like-for-like sales at Burger King. Its customer base is shrinking as
unemployment benefits expire and new jobs fail to materialise. Kraft and Pepsi
also reported weak sales, blaming a fall in confidence among low-income
consumers. Meanwhile, discount retailer Wal-Mart, reported a fall in same-store
sales for a fifth consecutive quarter. There was, however, some good news in
August, particularly a burst of M&A activity, which provided a welcome
distraction from America's lingering economic malaise. A high-profile battle
for 3Par, a data-storage company, saw Hewlett-Packard taking on arch rival
Dell. While HP beat Dell's initial bid, the market expects Dell to respond with
an improved offer. Chip-maker Intel, meanwhile, reached an agreement to buy
McAfee, which makes anti-virus software, for more than $7bn.
| Index | £ | € | $ | Local |
| S&P 500 | -2.70% | -2.12% | -4.51% | -4.51% |
Europe
European markets fell in August, led by Ireland and Greece, as worries about
a global 'double-dip' recession mounted and concerns over sovereign debt
returned. Shares in Dublin tumbled by some margin, making Ireland the weakest
performer among the world's developed markets after Standard & Poor's cut
its rating of the country's debt by another notch. This reflected concerns
about the country's banks, particularly Anglo-Irish Bank, which lost €8bn in
the first six months of this year and remains dependent on state support. A
profit warning from Irish building materials group CRH, which sent its shares
down to their lowest level since 2003, also weighed on investor sentiment.
Elsewhere, Spanish unemployment rose to 20.3%, the highest figure seen in a
eurozone country since the adoption of the single currency. This prompted Prime
Minister Zapatero to suggest he might reverse some of the cuts in
infrastructure spending announced earlier this year. The struggles of Ireland,
Greece and Spain were in stark contrast to the relative success of Germany,
where exports are booming helped by the weak euro. German luxury car producer
BMW reported its biggest profit in more than two years in August. BMW's sales
in China have doubled this year. Other German companies are asking employees to
work longer hours to help meet higher demand and German unemployment has shrunk
to almost pre-crisis levels. For the eurozone as a whole, second quarter GDP
data was a stronger-than-expected 1.0%. This was largely down to German GDP
quarter-on-quarter growth of 2.2%, the strongest quarterly reading since
re-unification.
| Index | £ | € | $ | Local |
| MSCI Europe ex UK | -2.69% | -2.11% | -4.51% | -3.16% |
Japan
August was another poor month for investors in Japan. By the end, the Nikkei
225 Index had dipped below the key 9,000 support level, putting it firmly in
bear-market territory. While Japanese shares look cheap on most conventional
measures, the appreciation of the yen threatens the competitive position of
Japan's exporters, who play a dominant role in the country's economy and
stockmarket. The yen benefited in August from renewed worries about a
double-dip recession in the US. The seriousness with which Japan's business
leaders view the yen's strength was made clear by comments from senior car
executives. Honda's chief financial officer complained that its Japanese-built
vehicles are not economically feasible at an exchange rate of 85 yen or less to
the dollar. Nissan announced it would transfer some of its production to Korea
to protect itself from the rising yen, and Panasonic revealed its intention to
move part of its plasma display production to Shanghai. In response to growing
pressure, the Bank of Japan expanded a bank-loan programme by ten trillion yen,
and Prime Minister Kan announced a ¥920bn stimulus package. Investors, however,
were unimpressed - as the month drew to a close, the Nikkei continued to
fall.
| Index | £ | € | $ | Local |
| Japan Topix | -0.35% | 0.24% | -2.21% | -5.25% |
Asia Pacific
In local currency terms, developed Asian markets fell in August - but not as
far as those in the West. Investors were concerned that a double-dip recession
in the US could potentially slow growth in China and the rest of Asia. Still
the month's data showed that economic growth across Asia generally remained
robust; Singapore's economy grew at a blistering 17.9% pace in the second
quarter of this year. The city-state's government cut the number of people who
can borrow to buy second properties from 80% to 70% in an attempt to discourage
speculation and cool its runaway residential property market. It also increased
the stamp duty levied when a second home is sold within three years of its
purchase. The Reserve Bank of Australia held interest rates at 4.5% in August,
but retail sales were surprisingly strong, suggesting that consumer demand was
not nearly as subdued as had been feared. The main point of interest, however,
was the country's general election, which resulted in a hung parliament. In
Hong Kong, Li & Fung's HK$7bn bid for Integrated Distribution Services
Group, which would give the distribution company a network in mainland China,
was the latest example of corporate activity in the territory.
| Index | £ | € | $ | Local |
| MSCI Asia Pacific ex Japan | 0.25% | 0.85% | -1.62% | -0.93% |
Emerging Markets
Emerging market indices fell in August - albeit to a lesser extent than
their developed market counterparts. Despite optimistic talk of 'decoupling'
earlier this year, emerging markets once again proved vulnerable to rising
concerns about the US recovery. Only a handful of minor markets bucked the
negative trend. Chile, Columbia and Peru performed well, but this was eclipsed
by a fall in the heavyweight Brazilian market. The most notable outperformer
was Thailand, where the market approached a 34-month high thanks to an easing
of political tensions and expectations of strong economic growth. News that
China passed Japan to become the world's second-largest economy was another
highlight of the month, but in a timely reminder that economic growth doesn't
necessarily translate into stockmarket returns, China's market fell. Indeed,
despite China's rapid ascent to economic dominance, Shanghai has been one of
the world's worst-performing markets this year. M&A activity was a feature
across emerging markets in August; Korea National Oil Corp made a hostile
£1.9bn bid for UK oil explorer Dana Petroleum; Chinese car manufacturer Geely
completed its acquisition of Volvo from Ford; and India's largest miner,
Vedanta, announced an agreement to acquire a 51% stake in Cairn India.
| Index | £ | € | $ | Local |
| JP Morgan EMBI | 1.59% | 1.92% | 2.48% | 2.48% |
Government Bonds
Government bonds gained and their yields moved steadily lower on the back of
weak economic news, particularly from the US. Government-bond yield curves
flattened in the UK, Germany, the US and Japan, as long-dated bond yields
declined faster than shorter maturities. In the US, ten-year treasury yields
fell below 2.5% against the bearish economic backdrop, as manufacturing,
housing and employment data all proved weaker than expected. In the
index-linked sector, UK index-linked gilts performed broadly in line with their
nominal counterparts.
| Index | £ | € | $ | Local |
| JP Morgan Global Government All Stocks | 4.08% | 4.70% | 2.14% | 2.05% |
Corporate Bonds
Corporate bonds gained in August, although investors became more risk
averse, resulting in a widening in yield spreads versus government bonds.
Intermittent setbacks were quickly followed by investor moves to buy on dips.
Overall, the positively-received disclosures on the stress tests for European
banks', coupled with decent results from the sector, helped various financial
issues to lead the corporate bond market higher. In company news, Old Mutual's
issues rallied strongly after it sold its US insurance operations and announced
plans to use the proceeds to pay down debt. The high yield and investment grade
markets continued to see a flow of new issuance, which was generally greeted
with reasonably strong demand. However, most new issuance was in the US, while
Europe was quieter on this front. The only euro-denominated, investment-grade
deal of note was from Renault's finance arm, RCI Banque. As elsewhere, M&A
activity was felt in corporate bond markets. Reynolds Group made a largely
debt-financed $6bn offer to buy Pactiv, a US consumer packaging company.
| Index | £ | € | $ | Local |
| FT Actuaries All Stocks | 4.40% | 5.02% | 2.46% | 4.40% |
Emerging Market Bonds
Emerging market bonds rose overall in August even as most risk assets fell.
Faster economic growth and sound financial systems, along with lower levels of
debt across the developing world, have attracted investors to emerging market
debt since early last year. For some investors higher-rated emerging market
bonds looked attractive, as safe-haven assets like US treasuries offered some
of the lowest yields on record. However, investors were discriminating. A
steady drip of disappointing data on the US economy encouraged them to prefer
higher-quality issues from the outperforming markets of Brazil, Malaysia and
Indonesia, which generated modest positive returns over the month. In contrast,
lower-rated debt issued by the governments of Venezuela and Argentina fell.
Issuance levels were relatively low in August, normally a fairly quiet period
reflecting summer holidays in key trading centres in Europe and the US.
| Index | £ | € | $ | Local |
| JP Morgan EMBI | 1.59% | 1.92% | 2.48% | 2.48% |