Executive Summary

  • Global equity markets continued to perform reasonably well through August, despite renewed geopolitical tensions at the end of the month.
  • The Iran war remains the dominant external risk, with renewed fighting at the end of August pushing Brent crude back above $90 a barrel and raising fresh concerns about inflation and interest rates.
  • UK economic data has been more encouraging than expected, with GDP growing by 0.4% in the second quarter and consumer and business confidence improving.
  • Andy Burnham’s new government has received an initially positive response from businesses, although the Autumn Budget will be crucial in determining whether the government’s spending commitments can be reconciled with the UK’s difficult fiscal position.
  • UK, European and Asian equities continue to offer better relative value than the United States, while U.S. market valuations remain demanding.

Iran: The War Is Not Going Away

The Iran war continues to be the most important geopolitical issue affecting financial markets. August initially brought some hope that the conflict was becoming more manageable, with oil prices falling below $90 a barrel as shipping through the Strait of Hormuz gradually recovered and markets became more comfortable with the possibility of a prolonged but contained conflict.

That optimism was badly shaken at the end of the month.

On 31 August, the United States launched attacks on Iranian rocket launchers on Larak Island, close to the Strait of Hormuz. Iran responded with attacks on U.S. military targets in Jordan and elsewhere in the region. The renewed fighting immediately pushed Brent crude back above $90 a barrel, with prices rising by more than 3% during the day.

This is important because the Strait of Hormuz remains one of the world’s most strategically important energy routes. Although oil flows have recovered from the extreme disruption seen earlier in the year, they remain well below pre-war levels. The Bank of England estimates that oil prices had averaged around $100 a barrel for several months following the initial disruption, compared with an average of around $68 over the previous decade.

The market reaction demonstrates just how quickly the Iran conflict can change the economic outlook. When oil falls, investors begin to anticipate lower inflation and lower interest rates. When fighting resumes, the opposite happens: oil rises, inflation expectations increase and the likelihood of interest-rate cuts falls.

This creates a particularly difficult environment for central banks. They cannot control the price of oil, but they have to prevent a temporary energy shock from becoming embedded in wages and other prices.

For investors, the lesson remains the same as in previous months. The conflict may eventually end, but it is becoming increasingly clear that we cannot rely on repeated announcements of imminent peace. Markets have repeatedly responded to optimistic statements about negotiations, only for fighting to resume. The most sensible approach remains diversification rather than attempting to predict the next headline.

UK: A Better Economy, But Difficult Decisions Ahead

The UK economy produced a surprisingly strong set of figures during August. GDP increased by 0.4% in the second quarter, following growth of 0.6% in the first quarter. Services were the main contributor, while business investment also increased. GDP per head rose by 0.4% during the quarter and was 1% higher than a year earlier.

This is encouraging, particularly given the difficult international environment. However, inflation remains a concern. UK CPI inflation increased to 2.9% in July from 2.6% in June, with higher housing and household costs contributing to the increase.

This leaves the Bank of England in a difficult position. At its July meeting, the Bank held Bank Rate at 3.75%, although three members of the nine-person Monetary Policy Committee voted for an increase to 4%. The Bank expects inflation to rise further later this year as higher energy costs continue to work through the economy.

For now, financial markets expect Bank Rate to remain at 3.75% for the remainder of 2026, although the possibility of a rate increase has increased.

Andy Burnham: A New Government and New Market Risks

Andy Burnham’s first full month as Prime Minister has been relatively positive from a market perspective. Business and consumer confidence have improved, with surveys showing the strongest services growth for six months and consumer confidence reaching a two-year high.

The new government has also introduced measures designed to support domestic businesses, including a 20% reduction in business rates for pubs, social clubs and live music venues. The government has also emphasised greater certainty for businesses, increased investment and a closer relationship between government and the private sector.

The initial market reaction has therefore been relatively benign. However, the bigger test will come with the Autumn Budget.

Burnham has inherited a difficult fiscal position, with high government debt, substantial debt-servicing costs and a number of expensive policy commitments. The government has promised measures including support for social care, housing and the cost of living, while also maintaining its commitment to fiscal rules. At the same time, the cost of government borrowing remains elevated, partly because of persistent inflation and the continuing impact of the Iran conflict on energy prices.

The October Budget could therefore be considerably more important for markets than the change of Prime Minister itself.

If Burnham and Chancellor John Healey can demonstrate that increased investment and spending can be funded without undermining fiscal credibility, the effect could be positive for UK assets. However, if markets conclude that spending commitments are incompatible with the government’s fiscal rules, we could see higher gilt yields and pressure on sterling.

At present, we believe the new government has the opportunity to improve business confidence, but it will need to demonstrate fiscal discipline to maintain investor confidence.

Global Equities Context

Global equity markets remained remarkably resilient during August despite the continuing Iran conflict. The MSCI World index reached a record high during the month, demonstrating that investors have become increasingly accustomed to geopolitical uncertainty.

U.S. markets continued to perform well, with the Nasdaq gaining around 4% during the month and the S&P 500 also making progress. However, the composition of the gains remains a concern. Technology and AI-related companies continue to account for a significant proportion of market performance, leaving investors exposed to a relatively narrow group of companies.

Outside the U.S., the investment case remains more attractive in our view. UK and European companies continue to trade at substantial valuation discounts, while Japan and India retain strong structural growth characteristics.

The important development is that global markets no longer need U.S. technology companies to provide all of the growth. Earnings participation is becoming broader, which should benefit diversified portfolios over the longer term.

Central Banks: Inflation Is Making the Decision Harder

Central banks have been hoping that the inflationary consequences of the Iran war would prove temporary. Unfortunately, the renewed fighting at the end of August makes that assumption more difficult.

The Federal Reserve is facing a particularly difficult decision. Inflation remains above target and energy prices are rising again, while the labour market has shown signs of weakening. The Fed therefore has to decide whether the inflationary effect of higher oil prices is temporary or whether it risks becoming embedded in the wider economy.

In the UK, the situation is similar. Inflation rose to 2.9% in July, while the Bank of England expects the energy shock to push inflation higher later this year.

This is why interest rates may remain higher for longer than investors expected at the beginning of the year. The good news is that inflation caused by an external energy shock should eventually subside if energy prices stabilise. The risk is that it takes longer than expected.

Other Viewpoints

Cash

Cash remains attractive while interest rates are around current levels, but the uncertainty surrounding future rate movements makes the decision more complicated.

At 3.75%, cash still provides a useful return with very little capital risk. However, investors holding substantial cash for the long term should consider the risk that inflation continues to erode its real value, particularly if rates eventually fall.

Fixed Interests

Bond markets have become more difficult again as inflation expectations have risen. The prospect of interest-rate cuts has diminished, while the possibility of rates remaining higher for longer has increased.

Nevertheless, yields remain considerably more attractive than they were for much of the previous decade. We continue to believe that high-quality fixed interest investments have an important role to play in diversified portfolios, providing both income and diversification.

The key risk is that prolonged energy inflation keeps yields elevated for longer than expected.

Alternatives

Gold has remained well supported despite periods of profit-taking during the month. Geopolitical uncertainty, concerns over government debt and doubts surrounding the future direction of the U.S. dollar continue to provide support.

Commodity markets remain dominated by oil and the Iran conflict. Other commodities, particularly fertiliser and industrial materials, are also being affected by disruptions to global supply chains.

We continue to regard real assets as a useful hedge against the type of inflationary and geopolitical risks that have become increasingly common.

UK Shares

UK equities continue to look attractive. The FTSE 100’s exposure to global companies means that its performance is not closely tied to the relatively modest growth of the UK economy.

Energy, mining, financial services and pharmaceutical companies account for a significant proportion of the index, providing exposure to global rather than purely domestic growth.

The combination of relatively low valuations, international earnings and improving investor confidence continues to make UK equities one of our preferred markets.

US Shares

U.S. equities continued to rise during August, but the underlying concerns remain.

The Nasdaq gained around 4% during the month, demonstrating that investor enthusiasm for technology and AI remains strong. However, valuations remain high and market concentration remains a significant risk.

AI investment continues to provide a powerful source of growth, but investors are increasingly asking whether the enormous sums being invested will ultimately produce sufficient profits to justify current valuations.

We remain positive about the long-term potential of AI, but that does not necessarily mean that today’s prices represent good value.

European Shares

European equities remain attractive relative to the U.S. and continue to benefit from lower valuations.

The region is, however, more exposed to the consequences of the Iran conflict through energy prices. Renewed increases in oil and gas prices could put pressure on European consumers and manufacturers.

Nevertheless, the valuation discount remains significant enough for us to retain a positive long-term view.

Asian Shares

Asian markets remain mixed but continue to offer significant long-term opportunities.

Japan benefits from corporate governance reforms, improving shareholder returns and structural changes to corporate balance sheets. India continues to stand out because of its demographics, infrastructure investment and growing domestic consumer market.

China remains more difficult to assess. Its economy continues to face structural challenges, particularly in property, but its position as a major manufacturing and technology economy means that we continue to believe it deserves a place in diversified portfolios.

Emerging Markets

Emerging markets remain particularly sensitive to the direction of the U.S. dollar, commodity prices and global interest rates.

The weaker dollar seen during parts of the year has supported capital flows into emerging markets, while commodity exporters have benefited from higher energy and raw-material prices.

However, the renewed rise in oil prices creates a significant distinction between commodity-producing countries and those dependent on imported energy. Selectivity therefore remains important.

Highlights & Risks

Highlights:

  • Global equities remain resilient despite continuing geopolitical uncertainty.
  • UK economic growth has been stronger than expected, with GDP increasing by 0.4% in Q2.
  • UK, European and Asian equities continue to offer attractive valuations relative to the U.S.
  • Gold and other real assets continue to provide valuable diversification.
  • Fixed interest remains attractive for income and portfolio diversification.

Risks:

  • Renewed fighting between the U.S. and Iran could cause another significant oil supply shock.
  • Higher energy prices could push inflation higher and delay interest-rate cuts.
  • The UK’s Autumn Budget could create volatility in gilts and sterling if investors question the government’s fiscal position.
  • U.S. equity valuations and concentration remain elevated.
  • Prolonged geopolitical uncertainty could weigh on global economic growth and corporate earnings.