By Mark Barnes, head of investment research (Americas) and Christine Haggerty, global investment research
Equity markets were broadly higher in August, propelled by a late-month resurgence in risk appetite. But this impressive finish belies the powerful risk-off tensions on display for much of the month.
Those tensions rose with mounting worries about the rampant Delta variant, stubbornly high inflation (particularly in the US) and related uncertainties about the Fed’s policy response. Market anxieties culminated in a sharp ‒ yet short-lived ‒ downdraft across global markets mid-month.
But sentiment turned bullish in the final weeks, as a growing chorus on Fed officials signaled a more vigilant stance on the recent surge in inflation, which it views as transitory, while remaining committed to its low-rate policies and focus on job growth. The US 10-year Treasury yield ticked lower as inflation concerns eased, relinquishing most of its earlier gains.
Regional relative returns (TR, LC, rebased) vs US 10-year Treasury yield (%) ‒ August 2021
Source: FTSE Russell / Refinitiv. Data as of August 31, 2021. Past performance is no guarantee to future results. Please see the end for important disclosures.
This bipolar behavior is best illustrated in the stunning late-month rebounds in emerging-market and small-cap stocks to the top of the performance rankings from the bottom of the list only weeks earlier.
The FTSE Emerging index rose 2.8% in for all of August, and along with Japan and the US, outperformed the FTSE Developed index gain of 2.6%. At its trough in mid-August, the EM index had been trailing by more than four percentage points.
Small-caps enjoyed a similar renaissance. Though the Russell 2000 still lagged the Russell 1000 by 70 basis points in August (up 2.2% vs 2.9%, respectively), its late-month sprint significantly narrowed that gap, which had been as wide as 3.4 percentage points just 10 days earlier.
The small-cap comeback was more pronounced elsewhere, as shown below. Based on our global factor data, Size (smaller-cap) built on its strong YTD and 12-month outperformance in Asia Pacific ex Japan, EM and the UK in August, while upholding its lead in the US and Europe.
Size ‒ Regional Size factor returns relative to local market (LC, rebased)
Source: FTSE Russell. Data through August 31, 2021. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
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