August was a positive month for equity markets. While major equity indices wound up with similar percentage gains, they differed in the amount of volatility experienced along the way. The US was relatively calm, as earnings season finished up. There were the usual earnings beats and misses by individual companies, but for the market overall it was uneventful.
In emerging markets there was more volatility. In China, which constitutes over one third of the MSCI Emerging Markets index, the government began asserting more control and influence over the private sector. This increased control manifests itself in a variety of ways (restrictions on business, concessions, special monetary contributions to the government, etc.) but is generally considered to be unfriendly to outside investors in Chinese stocks. Many commentators observe that emerging market stocks trade at much lower valuations than US or developed market stocks, considering some recent events we think the reasons for that valuation gap are self-evident.
The fixed income markets were calm throughout the month, as interest rates and credit spreads remained fairly stable. This is in sharp contrast to earlier in the year when the bond market experienced a sell-off on increased inflation expectations. Inflation is still a hotly debated topic, but the bond market seems rather sanguine about the risk of persistent inflation. Traditional economists believe inflation to be a monetary phenomenon while behavioral economists believe it to be as much a psychological phenomenon. We think they both have a point. Our view is that the monetary base continues to expand and the effects of that are felt throughout the economy, so people are noticing rising prices. However, those effects may not show up in traditional inflation measures.
