The week that was …
Economic round-up
Energy costs push up UK inflation
UK inflation accelerated to 2.9% in July as energy costs increased. While this marked a rise from June’s reading of 2.6%, it was in line with forecasts for the month from a Reuters poll of economists. Read more from the FT here
Surprise jump for UK services
Britain’s services sector picked up unexpectedly in August, rising to a six-month high. The S&P Global Flash UK Services Purchasing Managers Index (PMI) rose to 52.8 from 52.1 in July, which was above all the forecasts in a Reuters poll that had pointed to a fall to 51.8. Companies cited improving domestic conditions and rising consumer confidence. Read more from Reuters here
UK jobs market stabilises
The UK jobs market showed signs of stabilisation in June. Earnings grew at 3.5% over the three months to June, with public sector wages rising 6.1% and private sector wages up 2.8%. The number of job vacancies fell to its lowest level in more than five years as smaller businesses cut back on recruitment. Read more from the BBC here
UK retail sales fall back in July
As had been widely expected, UK retail sales fell back in July after enjoying a boost from the hot weather and football World Cup over the previous month. Retail sales volumes dropped 0.5% from June – in line with economists’ median forecast – while annual sales growth slowed to 1.6%. Read more from Reuters here
US services offsets manufacturing weakness
Strong growth in US services offset some weakness in the manufacturing sector in August. The S&P Global Flash Services PMI rose to 56.8 in August – the highest level since December 2024 – but the manufacturing equivalent dropped to a five-month low of 53.2, as supply disruptions weighed on sentiment. Read more from Reuters here
Japan Q2 growth disappoints
Japan’s economy expanded 1.1% on an annualised basis over the second quarter of 2026 – significantly underperforming expectations of 2% growth, and down from the 2.1% posted in the previous quarter. Softer domestic demand offset strong exports. Read more from CNBC here
Japanese inflation at 2026 high
Driven by higher energy costs, Japan’s headline inflation rate hit 1.9% in July – the highest level this year. Core inflation, which strips out prices of fresh food but includes energy, was in line with expectations, coming in at 1.8%. Alongside energy, fresh food prices also saw a sharp spike, increasing 7%. Read more from CNBC here
Markets round-up
Bessent intervenes in US long bond market
Treasury secretary Scott Bessent’s attempts to prop up the US bond market were not enough to offset concerns over Washington’s $40tn (£29.3tn) debt burden and smouldering inflation. On Wednesday, the US Treasury department revealed plans to “at least double” its purchases of long-term government bonds, but the rally quickly fizzled. Read more from the FT here
US stock indices end jittery week higher
The main US stock indices closed higher on Friday but showed declines for the week. The week was characterised by investor jitters over fluctuating government bond yields and a lack of clarity on progress in the Middle East. Read more from Reuters her
Oil price edges upwards
Oil prices moved higher last Thursday after treasury secretary Scott Bessent said the US would impose the toughest sanctions in history against Iran, adding: “We are going to collapse this regime.” Brent crude futures rose 2.4% to close at $93.78 per barrel. Read more from CNBC here
Japanese investors turn to foreign assets
Japanese investors ‘net bought’ more than ¥5tn (£23bn) of foreign equities and long-term bonds over the two weeks ended 15 August, compared with net sales of more than ¥300bn in the prior two weeks, according to Ministry of Finance data. This suggests investors took advantage of the yen’s sharp rally after July’s joint US-Japan currency intervention to buy overseas assets at favourable exchange rates. Read more from CNBC here
“Two-thirds of the revenues of listed companies in the MSCI Europe index actually come from outside Europe – way more than people appreciate. It is an export-driven market.
Selected equity and bond markets: 14/08/26 to 21/08/26
| Market | 14/08/26 (Close) |
21/08/26 (Close) |
Gain/loss |
|---|---|---|---|
| FTSE All-Share | 5805 | 5833 | +0.5% |
| S&P500 | 7786 | 7674 | -1.4% |
| MSCI World | 5030 | 4970 | -1.2% |
| CNBC Magnificent Seven | 441 | 434 | -1.5% |
| US 10-year treasury (yield) | 4.70% | 4.74% | |
| UK 10-year gilt (yield) | 5.05% | 5.06% |
Investment round-up
Top wealth managers increase market share
The top 10 wealth management firms in the UK by DFM client numbers served 89% of the market in 2024/25 – up from 70% in 2022, according to the FCA’s latest Wealth Management Survey Report. The regulator also found the market share held by the 10 largest firms by assets under management has remained broadly stable, albeit falling by three percentage points over the period from 62% to 59% of assets.
UK retail fund sales nudge higher in Q2
UK retail net fund sales swung back into positive territory in the second quarter, driven by strong net inflows into offshore strategies. The ISS MI’s Pridham Report showed retail net sales of close to £5bn for the quarter, reversing the £4bn-plus of outflows seen in the first quarter, while total gross sales soared to more than £90bn.
Vanguard launches FTSE ETFs
Vanguard has launched three FTSE Ucits ETFs: a global all-cap fund, a global small-cap fund and an all-world ex-US fund. The ETFs will list on the London Stock Exchange, Deutsche Börse, Euronext Amsterdam, Borsa Italiana and the Six Swiss Exchange.
Two funds flagged in Franklin Templeton AoV report
Share classes in 15 of 17 Franklin Templeton funds have delivered overall value to investors, according to its latest Assessment of Value (AoV) report. Only three funds – FTF Franklin US Opportunities, FTF Templeton Japan Equity and FTF ClearBridge UK Smaller Companies – were deemed to deliver value but with some actions or enhanced monitoring required, with performance ranked as ‘not satisfactory’.
ETFs see further net inflows in July
New data from analyst ETFGI has indicated the exchange-traded fund industry in Europe gathered net inflows of $57.94bn (£42.72bn) in July. This brings year-to-date net inflows into European ETFs to $323.59bn.
Geopolitics high among adviser concerns
Wealth managers and advisers are expecting geopolitical shocks, high government debt and inflation to pose significant risks to fixed income markets over the next year. Almost half (45%) of those surveyed by Nedgroup Investments said geopolitical instability and energy price volatility were the greatest risks, but there were also concerns over government issuance (44%) and persistent inflation and interest rate volatility (42%).
… and the week that will be
Eyes on US borrowings …
The Treasury Department’s efforts to calm markets by doubling buybacks for long-dated debt has offered only brief relief, with yields rebounding towards the end of last week. In an environment where forward guidance has effectively been shelved, investors will now be scrutinising US Federal Reserve chair Kevin Warsh’s comments at the Jackson Hole Economic Symposium, which starts on Thursday, to see how he communicates policy. Read more from Reuters here
… and Nvidia earnings
Bellwether semiconductor group Nvidia reveals its widely-anticipated fiscal 2027 Q2 earnings on 26 August. The results come at a critical juncture for the Jensen Huang-led company, as investors weigh concerns over a possible slowdown in artificial intelligence spending, ongoing export restrictions on the sale of advanced chips to China and stiff competition from rivals such as Advanced Micro Devices. Read more from Yahoo Finance here
The week in numbers
US economic growth: Consensus expectations on the second estimate of US GDP over the second quarter of 2026 has the US economy growing at an annual rate of 1.5%.
US inflation: The July reading of the US PCE price index, the Federal Reserve’s preferred measure of inflation, may give some insight into the future direction of US interest rates when it is published on Tuesday.
US consumer confidence: Consensus forecasts have the US consumer confidence index edging up from 90.8 in July to 90.9 for August.
In focus: Zone in
Listening to senior voices in the current US administration, investors would be forgiven for believing they should give Europe’s stockmarkets a miss. The region is in the grip of a migrant crisis, delivering anaemic growth, in hock to wokeism, with regulation squeezing the juice out of the corporate sector … and yet European equities keep delivering the goods, outpacing their US counterparts since the start of 2025.
The view that European economies are sluggish and weak while the US remains a powerhouse does not bear very much scrutiny. The US economy grew at an annualised rate of just 1.5% in the second quarter of 2026 – versus aggregate growth for Eurozone economies of 1.2% – and yet momentum is heading in opposite directions, with the US slowing and the Eurozone speeding up.
Nor does Europe have many of the challenges now facing the US, which has looked increasingly fragile as its debt burden tips over $40tn (£29.3tn) and long-dated bond yields have ticked higher. Europe still has structurally lower borrowing costs and fewer inflationary pressures while, according to Eurostat data, the aggregate debt-to-GDP ratio for the Eurozone is 88%, compared with 123% for the US.
There is a similar misreading on European equities, which have delivered a stronger historic performance than their gloomy reputation might suggest. As Fidelity European fund manager Marcel Stotzel points out, even with the AI boom, the growth of China and the development of India, European equities have kept pace with other regions over the past 25 years.
“How can you have a continent that has had so many crises and sub-par GDP relative to the rest of the world, and yet where the stock exchange index has actually performed in line with the rest of the world?” he adds. “The simple answer is that two-thirds of the revenues of listed companies in the MSCI Europe index actually come from outside Europe – way more than people appreciate. It is an export-driven market.”
Either the market does not believe European banks have genuinely improved or it does not think this environment they are in can last.”
More recently, however, it has been domestic companies doing most of the heavy-lifting – particularly the financials and defence sectors. Banks have been the powerhouse of European markets over the last couple of years, with the MSCI European Banks index rising 75% in 2025 and up another 24% over the year-to-date.
The recent reporting season delivered bumper results for the sector as, overall, Factset data showed 73% of European financial companies beat expectations on earnings. Stand-out performers included BNP Paribas, which saw net profits climb 33%, while those of UBS were up by 17%.
This strength has been driven by higher trading revenues amid significant market volatility, but also by higher interest rates in the wake of the Iran war. While European markets are often seen as a casualty of higher energy costs, the resulting hike in borrowing costs has helped support margins for its banking industry.
Stotzel continues to back the sector, observing: “It is one of our biggest overweights. It is the only subsector in Europe that is still below its long-term 20-year average in terms of multiple. Either the market does not believe banks have genuinely improved or it does not think this environment they are in can last.”
He also argues banks are likely to be one of the biggest beneficiaries of AI. Artificial intelligence has long been seen as one of Europe’s weak spots – it has no Silicon Valley equivalents, with ASML its only real player in the semiconductor industry. Yet it has plenty of lower-profile beneficiaries that may start to be recognised as AI matures. Banks may be one and smaller companies may be another – both as providers of key elements in the value chain and as users of AI.
George Cooke, manager on the WS Montanaro Europe (ex-UK) Small and MidCap Fund, offers the example of TechnoProbe, a world leader in ‘probe cards’ – chemical-electrical devices used for semiconductor testing. He also holds Melexis, which designs, develops, tests and markets advanced integrated semiconductor devices.
This has led to a significant variety of outcomes in the IA Europe excluding UK sector, where the weakest fund is down 1.6% over three years and the top fund is up 119%.”
Being a lower-profile AI player may start to be an advantage over the remainder of 2026. The Financial Times reports that European ETFs saw a month of positive net flows in July for the first time since the US-Iran conflict began at the end of February. BlackRock described this as “evidence of anti-momentum allocations” away from volatile chipmaker stocks – in other words, Europe may be the first port of call for investors looking for shelter.
That said, Europe still has its fair share of basket cases – not least a grim auto sector, with companies facing stiff competition from Chinese electric cars and poor progress on electric-charging infrastructure. Volkswagen is down 29.5% for the year-to-date, for example, while Mercedez Benz is down 27.0%. Meanwhile, with the exception of Richemont, luxury goods have also been a tough place to invest. LVMH is down 29.6%, year to date, while Hermes is down 25.2% and Christian Dior is down 31.9%.
This has led to a significant variety of outcomes in the IA Europe excluding UK sector, where the weakest fund is down 1.6% over three years and the top fund is up 119%. Any fund with a quality growth or smaller companies tilt has struggled.
Indeed, investors have been as uninterested in smaller companies in Europe as everywhere else around the globe. A small resurgence at the start of the year quickly ebbed as the Iran war drove up borrowing costs. As a result, Cooke believes this is where true value is to be found today, with smallcaps trading at an unprecedented 4% discount to larger stocks.
One final theme that could significantly drive European markets in the year ahead is energy, defence and infrastructure spending. The Iran war has galvanised European governments to speed up electrification plans and reshore key manufacturing operations. Many fund managers are supporting this area –Cooke through companies such as Kitron and Terna Group; for Stotzel, it is through Siemens Energy.
European stockmarkets offer investors real choice and diversity. There are areas of high and low growth, a range of sector themes, fantastic success stories and pockets of real weakness. It is a natural home for those looking to ease concerns associated with the concentrated US and Asian markets.
Read more on this from the FT here
In focus: The Q factor
The ‘quality’ factor has been a surprising weak spot in markets of late, with some of its key sectors – including consumer staples and healthcare – enduring a dismal run of performance. Quality managers, particularly those with a purist interpretation of their speciality, have languished at the bottom of the performance tables. Is there any sign of a revival?
It briefly looked as if a revival might be underway in July. As the AI trade wobbled, areas such as healthcare and consumer staples stocks picked up. Any recovery was short-lived, however, and quality continues to lag behind other styles. The MSCI World Quality index was some five percentage points behind the broader MSCI World over 2025, and trails by around 170 basis points so far this year.
Indeed, research from St James’s Place indicates the underperformance may be even more extreme, with momentum investing delivering gains of 36.7% over the past 12 months, compared with just 3.1% for value investing, while quality investing has fallen 8.6%. “While different investment styles have historically moved in and out of favour, the current divergence between momentum, value and quality is unusually pronounced,” it adds.
That would suggest some revival in quality is due, with valuations for quality companies low by historic standards. Nevertheless, it is difficult to make a compelling case for either consumer staples or healthcare in the current environment and the performance of quality managers has, to some extent, depended on their definition of quality.
“Unlike value or momentum, there is no single agreed academic definition of quality,” points out Nick Millington, head of systematic index solutions at Aberdeen. “Different studies use different measures and, in 2021, we rebuilt our quality factor from the ground up.
“We tested seven candidate themes, kept the five that genuinely added value and, importantly, applied them differently by region, because ‘quality’ looks different in emerging markets compared with developed markets such as the US. In back-testing, that redefined factor improved the quality signal in every region we run.”
In general, those who have been willing to incorporate companies with some cyclicality – managers such as Rob Lancastle at JO Hambro Global Opportunities or Christopher Rossbach at J Stern World Equity Stars – have fared better than those who adopt a purist approach.
For his part, Nick Clay, manager on the Redwheel Global Equity Income fund, has suggested some of these traditional quality sectors may not revive as “disruption is now too pervasive for ‘quality for quality’s sake’ to remain a workable approach”.
“Traditional approaches to quality lean heavily on what has gone right so far,” he argues. “Strong historic profitability, high returns on capital and long records of growth are treated as robust markers of future resilience. Yet the corporate landscape continues to shift under our feet. Two extra ingredients are essential: valuation and a repeatable way of judging whether disruption is temporary or permanent.”
Quality could well revive as investors tire of the AI trade but investors should be careful not to assume it will look exactly as it has before. Disruptive forces are at work in the global economy and competitive advantages can be quickly eroded. Some flexibility may be needed.
