Global focus shifted to the Middle East during August, with the UK and US withdrawal from Afghanistan and
the unexpectedly swift takeover by the Taliban. Putting aside the potential political fallout, Afghanistan has
a large population but little impact on global growth, with what natural resources the country does have
largely inaccessible. As always, we warn against panicked reactions to such events, however troubling, but
this is certainly a new source of geopolitical risk to consider.

Across our funds and portfolios, we completed our quarterly tactical asset allocation (TAA) review over the
month and remain broadly positive on risk assets, particularly cheaper equity markets including the UK, Europe
and Japan. Most of our target positions are unchanged, with a moderate de-risking in bonds by moving more
positive on investment grade and less so on high yield. While investment grade spreads versus government
bonds offer a reasonable yield pick-up and bring credit quality to our portfolios, we feel recent moves in highyield
spreads make these bonds relatively less rewarding for their level of credit risk, although we remain
overweight.

Equity markets – somewhat exhaustingly, with 12 new peaks for the S&P 500 in a single month – continue to
break records, and it is worth stopping to contemplate just how strong a year 2021 is turning out to be, despite
the lingering presence of Covid. The S&P hit its 53rd closing high in August and is now up around 20% over the
year; to put the rarity of such a run into context, only 1964 and 1995 saw more than 50 new highs by the same
stage. This has come without a 5% correction and, on average, these occur three times a year; the last third of
2021 would have to be volatile indeed to maintain this pattern.

Within these almost daily records, market leadership does look to be shifting and there is evidence the cyclical
and value boom that has largely powered this year’s rally may be running out of steam. Concerns about Covid
variants and economies failing to hit aggressive growth expectations have stopped the value rotation in its
tracks, with investors trimming exposure to cyclical, value and small-cap stocks and moving back into the familiar
embrace of technology, growth and large caps. While the market looks to be approaching a mid-cycle phase,
however, we would again caution against overreaction: some pushback against the reflation trade was inevitable
after such a strong recovery and there may be another leg up in value to come as we head into the autumn,
particularly as many growth sectors remain prohibitively expensive.

For now, sentiment is certainly moving against emerging markets and commodities as concerns around growth
increase. Bank of America’s (BofA) recent fund manager survey found just 27% of respondents expect the global
economy to improve and these figures seem to indicate ‘peak boom’, with growth and inflation expectations
falling and an overwhelming majority of managers, 84%, believing the US Federal Reserve will taper bond
purchases this year.

Evidence for this came in minutes from the Fed’s July meeting, released mid-August, as well as chair Jay Powell’s
subsequent speech at the annual Jackson Hole symposium, which both paved the wave for tapering but made
it clear that any such activity would not be a precursor to rate hikes. Powell said the pace of recovery has
surpassed expectations, with output exceeding its previous peak after only four quarters, less than half the time
following the Great Recession. Against this backdrop, he reiterated the Bank’s ‘substantial further progress’ test
for inflation has been met, signalling tapering can begin, but there is still ‘much ground to cover’ before any rise
in rates would be considered.

‘The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal
regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more
stringent test,’ he added. Yet again, Powell devoted part of his speech to tamping down inflation fears, after
prices rose at the fastest pace since 1991 to 4.2% in July. He acknowledged pressure on prices is higher than the
Bank prefers but maintained the spike is due to pandemic-related factors weighing on the global supply chain.

In contrast to 2013’s taper tantrum, when former Fed chair Ben Bernanke’s announcement of future reductions
in bond purchases sparked a selloff, Powell appears to have done enough to keep the plates spinning for now,
preserving the view that his goals align with investors’: growth fast enough to boost jobs and corporate profits
but not inflation. The confirmation of a long path toward rate rises also looks to have been behind much of the
shift back to technology stocks; considering the value of these long-duration assets depends largely on future
earnings, a low interest rate environment is preferable.

In the UK, meanwhile, July inflation figures showed a welcome drop, with CPI back down to 2% from 2.5%,
although comments on the reasons behind this varied from technical base effects, with the July 2020 reading
skewed lower by the first slackening of lockdown conditions, to easing of supply chain constraints and falling
spending after the more recent unlocking. The latter would support the transitory inflation argument but
appears to run counter to recent Bank of England forecasts predicting the level could hit 4% by the end of 2021.

To reiterate, we remain confident inflation, while potentially more persistent than originally thought, will fall
away in the medium term as base effects diminish and pent-up demand is spent. For higher levels to become
embedded, wage price inflation would usually have to play a central role and, apart from certain high-growth
areas of the tech market, it is difficult to see much upward pressure here for now. It should also be remembered
that central banks have effectively been walking a tightrope between inflation and deflation since the global
financial crisis and if they ultimately fall off, they would prefer to do so on the inflationary side than the
potentially more damaging deflationary side.

Recent events in Asia have further reiterated our warning last month against sweeping ‘global recovery’ type
comments. Coming into 2021, Asian economies looked to be far ahead of the West in terms of Covid recovery,
first into and first out of the crisis, but the picture has swiftly changed and many have turned from leaders to
laggards. Several Asian countries delayed vaccine rollouts, having dealt with the outbreak so effectively in 2020,
and we are now seeing new waves of the virus and renewed lockdowns as a result.

Developments in China are particularly interesting against this backdrop, with the state aggressively reining back
certain sectors, including large tech and alternative finance as well as education. President Xi Jinping appears to
be reacting to concerns that the Communist Party is losing influence over areas of the economy and society as
a result of the free market, which has clearly spooked investors.

As ever, this kind of panic selling often represents a buying opportunity for long-term investors – with Chinese
equities now at a 30%-plus discount to the US – but it will be increasingly important to consider what type of
businesses are viewed favourably by the government; those that widen the wealth gap seem fundamentally at
odds with a regime attempting, at least nominally, to create an equal society. These events have served as a
useful reminder of political risk in China; as we wrote recently, emerging markets will always present
opportunities for investors, but remain an asset class where politics matters at least as much as economics.

Japan presents a similar picture in terms of Covid, with the country’s strong response in 2020 giving way to a
slow vaccine rollout that has choked off burgeoning domestic recovery, at least for now. While the country
managed to stage the delayed Tokyo Olympics successfully, domestic growth remains sluggish with the country
under a continued state of emergency.

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice.