The US Federal Reserve has made it clear that it is determined to ensure that the inflation rate is reduced to its two percent goal by bringing supply and demand back into balance and that it will take whatever steps necessary to achieve this, including further increases in interest rates.  The Bank of England has adopted a similar approach and raised its interest rate to 1.75% in August in spite of the expectation that the UK economy would go into recession later this year. PMI data for August reflected a larger than expected decline in the manufacturing component of the PMI, while the services PMI was relatively stable at levels consistent with moderately positive growth. This decline in manufacturing output for the first time since May 2020, flowed through to the overall UK economy which shrank between April and June as businesses and households felt the impact of component shortages and rising prices.

In spite of the negative outlook at a macro level, recent results from companies in our portfolio and associated industries have indicated that they have been able to partially withstand these inflationary pressures by implementing appropriate business strategies. However, companies reliant on imports have had a material headwind caused by the 4.8% decline in August of the pound against the US dollar. The last time the pound had a similar decline against the dollar was in October 2016, in the aftermath of the Brexit vote.

Global equity markets were under pressure as a consequence of the rise in interest rates by the BOE and other central banks.  This was evident in the 4.3% decline in the MSCI Index in August.  In the US, the S&P 500 Index declined by a similar amount, down by 4.2%, wiping out some of the gains made in July. The Dow Jones Industrial Average was down by 4.1% with the tech heavy Nasdaq Composite declining by a slightly larger 4.6%.

The UK markets responded in a similar manner with the FTSE 250 index declining by 5.5%, while the AIM All-Share Index declined by 4.2%.  The FTSE100 held up reasonably well, declining by only 1.9% as did the Fledgling Index which declined by 0.2%.   The market value of our investment portfolio declined by 6.7% and, after paying expenses, the NAV per share was down by 7%.

During the month we acquired shares in Impax Asset Management.  Cash comprised 11.6% of the portfolio at month end.