US small companies demonstrated significant resilience this month, leading to an impressive rally in the small-cap sector. Our small-cap funds capitalized on this momentum, delivering robust returns of 6-8% within just a single month. This performance underscores the agility and potential of smaller enterprises in navigating the current market landscape.
In contrast, the technology sector faced a correction, with tech stocks declining by 5%. This pullback reflects ongoing market adjustments after a prolonged period of growth in the sector, highlighting the volatility and sensitivity of tech stocks to market shifts.
Meanwhile, the Chinese market continued to struggle, experiencing a 3% decline driven by disappointing economic data and a reduction in interest rates, which further eroded investor confidence. This downturn in China is indicative of broader economic challenges and uncertainty in the region.
Earlier in the week, the US Federal Reserve provided a clear signal that a rate cut could be imminent if inflation remains at its current levels. This potential easing of monetary policy served as a catalyst for a market rebound, particularly after the recent correction, as investors interpreted it as a positive sign for future economic conditions.
Japan Flash Crash
In early August, global equities were rocked by a flash crash, with Japan's Nikkei 225 index experiencing its worst day since the 1987 crash, plunging 12.4%. This severe drop was triggered by a combination of factors, including a modest rate hike by the Bank of Japan—the second in 17 years—escalating geopolitical tensions, disappointing US tech earnings, and weak US job growth data. The yen's sharp rebound, fueled by expectations of further rate hikes, particularly hurt Japanese exporters, with major companies like Toyota, Honda, and Sony seeing significant declines. Despite the initial panic, markets began a strong recovery as economic data improved, led by the US, and the Bank of Japan signaled no further rate hikes, stabilizing investor sentiment.
We've witnessed several flash crashes over the past decade, often exacerbated by robo-trading, and this time was no different. However, flash crash is usually not a point of too much of a concern long term as they tend to recover quickly in the next few weeks. In this case, the Japanese stock market has recovered most of the fall and has recovered to the previous trending levels. Our portfolio is down -0.28% for August as of this writing thanks to our minimal exposure to Japan.
Portfolio Performance
The portfolio experienced a minor correction this month as the recent tech rally took a pause. Specifically, returns were -0.33% for Cash, -2.04% for CPF-OA, and -0.46% for SRS. This slight downturn aligns with the short-term correction I anticipated in the previous newsletter. As I highlighted then, the market had reached elevated levels, particularly within the tech sector, where valuations had become stretched. This correction, therefore, was not only expected but also necessary as part of the market’s natural self-correcting mechanism.
When stock prices rise too quickly, especially in a concentrated sector like technology, the market often adjusts itself to prevent unsustainable growth. The correction we observed last month and probably this money is a classic example of this process. It's important to emphasize that this pullback is not a cause for concern regarding a larger downward trend. Instead, it serves as a healthy recalibration, allowing the market to reset before continuing its upward trajectory. I remain confident that this correction is short-term in nature and that the portfolio is well-positioned to benefit as the market stabilizes and resumes growth.
For the fund factsheet, visit the link below:
https://drive.google.com/open?id=1FlDRuvbuXGLG-VXFlxpub3HeYWn3gawH&usp=drive_fs
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