Late summer sunshine for investors

August saw strong performance across most major equity markets, as consumers returned to shops and restaurants, and took off on their summer holidays. It was a welcome sign that the economy could still operate within the constraints of the pandemic and investors responded with enthusiasm.

The US and Japan led the way. The MSCI Japan Index was up 7.9%, while the S&P 500 returned 7.2% over the month, bringing the year-to-date return (to 31 August) to 9.7%. This is an incredible result bearing in mind that the first three months of the year saw a fall of more than -20% – the return between the depths of the March crash and the end of August has been over 56%. This compares very favourably with UK equities, where the MSCI UK Index is down by -20.3% over the year to date, despite a positive showing of 1.5% in August. (All figures including income, calculated in local currency, source Thomson Reuters Eikon/Datastream.)

As always, please keep in mind that past performance is not a guarantee of future performance and you may get back less than you invest.

The trouble with government bonds

A feature of markets in recent months has been a sharply diminishing return from government bonds. Gilts were a substantial underperformer in August – down by -3.2% – and US Treasuries were not far behind on -1.1%. While bonds are often weaker when equities do well, year-to-date returns are also negative in a year when equities have experienced sharp volatility, showing a deeper weakness.

Bond yields have been very low for some time – since the 2008 global financial crisis, in fact. This situation has been made worse by further interest rate cuts as central banks combat the economic impact of the COVID-19 crisis lockdown. We don’t see any reason for interest rates to rise significantly in the near future, and nor do we see much potential for a capital gain on bonds.

These circumstances have led us to add gold to our funds and portfolios. Given that bond yields remain subdued, we think that it’s a good alternative for diversifying risk. Gold prices have risen during the crisis thanks to the asset’s perceived status as a ‘safe haven’, and we believe that the recovering economy, low interest rates and higher inflation could continue to support prices.

Equity focus benefits performance

Coutts funds and portfolios were well positioned to benefit from market moves in August. We boosted our overall equity holdings as the market recovery took hold, with a bias to the US and Japan - two areas that did well last month.

Our more growth-oriented strategies saw most of the benefit. A typical Growth portfolio was up 2.8% in August, while Balanced portfolios were up by 1.1%. Year-to-date performance remains negative, but a globally diversified approach – allowing us to focus on the areas with the most potential for gain – has gone a long way reducing the impact of local stock market falls.

Cumulative returns calculated on sterling basis, including fees, charges and income to 31 August 2020. These data are based on composite performance, individual portfolio monthly returns are asset-weighted based on their respective asset values at the beginning of the month. Peer group returns provided by Asset Risk Consultants (ARC); end-August data represents ARC estimate. Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up and you may not recover the amount of your original investment. Sources: Coutts & Co, ARC. September 2020.

Government bonds had a bad month, but our preference for financial credit, emerging market debt and corporate bonds reduced their overall effect on performance. It did have an impact on Defensive portfolios, which have a significant exposure to gilts and fell by -0.5% in August. However, they’ve proved more resilient in the face of equity market falls in 2020, especially during the sharp drawdown earlier in the year, and are ahead of the more growth-oriented portfolios over the year so far.

As ever, you should remember that past performance is not a guarantee of future returns. Prices can go down as well as up and you may not get back as much as you invested. For further context on long-term performance, please see the charts at the bottom of this article.

Cautiously positive for the rest of the year

Our analysis of the underlying investment data suggests that a global economic recovery is firmly in place. After a period of adjustment, business and consumers are returning and finding new ways to transact.

We believe this trend will continue, although we are alive to the possibility of a rising second wave of coronavirus infections and the significance for markets of any future lockdowns. And in the longer term, we believe that more effective treatments will emerge, providing a backdrop for economies to thrive once more.

Past performance should not be taken as a guide to future performance. Portfolio performance figures are composite returns from the actual portfolios of all clients calculated in sterling, shown on a total return basis and quoted net of all fees. For the composite portfolio performance calculation, individual portfolio monthly returns are asset-weighted based on their respective asset values at the beginning of the month. Benchmarks represent a static mix of equities and bonds in proportions relevant to each strategy. Source: Coutts & Co, September 2020.