The long hot summer on the European continent seems to have caused a melt up in the region’s stock prices. In euro terms, prices rose 7pc having posted gains of 10pc in July as the inventory cycle, allied to China’s state imposed growth dictum, suddenly improved sentiment towards beleaguered exporters. However, globally, the World MSCI rose just 1.6pc in August, held back by a 20pc slump in China’s stock market. The still cautiously positioned Fund, seemingly preferring a wet campsite in Wales to the sizzling hot beaches of the Mediterranean, managed to post a gain of 0.9pc in August and so broke a five month losing streak.
As outlined in our recent commentary, we continue to eschew the scintillating returns on offer from the weakest or most cyclical businesses and are disinclined to chase a market which has risen more than 60pc over the last five months on a change in collective social mood. Instead we prefer the rock-steady assuredness of Treasuries and Bunds allied to a belief that short term interest rates will remain unchanged for the foreseeable future.
There have been no substantive changes made to the portfolio. In August, our 30 year government bonds made up the majority of the Fund’s gain, with our Treasuries contributing 43 basis points (bps) and our Bunds 11bps. Further gains, amounting to 20bps, were had from our Altria corporate debt and 10bps were gained from our Short Sterling option packages. However, interest rate expectations in Australia hardened in August and our positions cost the fund 24bps.
Most other investors, of course, remain enthralled at the prospect of a vigorous and sustained economic recovery. But with the follies of the financial sector now transformed into public sector debts, to be paid off by higher taxes and cuts to public expenditure, we fear that animal spirits outside the City are unlikely to prove so exuberant. History still suggests that such counter-trend price movements ultimately fail under the extravagance of their audaciousness. Time will tell.