August was another positive month for global equity markets, with technology and Artificial Intelligence (AI) stocks leading the recovery from July's sharp correction. Strong corporate earnings and continued investment in AI infrastructure renewed investor confidence, helping major equity markets move closer to their highs.
However, beneath the positive market performance, concerns continued to build. The disruption around the Strait of Hormuz remained unresolved, inflation risks persisted and the U.S. government debt surpassed US$40 trillion. The combination created an increasingly unusual market environment where equities continued to rally while bond investors began questioning the long-term sustainability of America's growing debt burden.
AI and Technology Lead the Market Recovery
The sharp technology correction in July increasingly appears to have been a reset rather than the end of the AI investment cycle. The earlier sell-off removed some of the excessive leverage and speculative positioning that had accumulated around semiconductor and AI-related stocks, while recent corporate earnings restored confidence in the underlying fundamentals.
Major technology companies continue to invest heavily in AI infrastructure, supporting demand for semiconductors, memory chips, data centres and computing capacity. Strong earnings and continued capital expenditure from the technology giants helped drive the sector higher once again.
However, the July correction remains an important reminder that strong long-term themes can still experience significant short-term volatility. The AI story remains intact, but valuations and portfolio concentration will become increasingly important as the market moves into the next phase of the investment cycle.
The US$40 Trillion Question
The more concerning development during August came from the bond market.
U.S. government debt surpassed US$40 trillion, bringing renewed attention to the country's growing fiscal deficit and rising interest burden. The problem is not simply the size of the debt, but the enormous amount that needs to be continuously refinanced as existing bonds mature.
Long-term Treasury yields have risen as investors demand higher returns to absorb the growing supply of government debt. At the same time, technology companies are increasingly turning to the debt market to finance massive AI infrastructure investments. The U.S. government is therefore competing for capital at a time when global demand for financing is rising sharply.
The U.S. Treasury attempted to calm the market by increasing its buyback operations for long-dated government bonds. While the move helped reduce pressure on yields temporarily, it also raised an uncomfortable question: why does the Treasury need to intervene in the bond market at this stage?
The buyback does not solve the underlying problem of rising government debt. It simply highlights the growing difficulty of refinancing an increasingly large debt burden. Investors are beginning to worry that the U.S. may eventually need to rely on lower real interest rates or a weaker currency to manage its fiscal position.
The U.S. debt issue is not the only source of concern for global bond markets. Developments surrounding the Japanese yen have also added another layer of uncertainty.
Japan holds one of the world's largest pools of overseas assets, including a significant amount of U.S. government bonds. Any intervention to strengthen or stabilise the yen could potentially require Japanese institutions to reduce overseas investments and bring capital back into Japan.
This could increase selling pressure on U.S. Treasuries and other global bonds, particularly at a time when the U.S. government is already issuing and refinancing large amounts of debt.
Concerns over coordinated intervention between the United States and Japan have therefore created jitters in bond markets. The unwinding of the yen carry trade could also trigger significant capital movements, adding further volatility to global interest rates.
Gold Rallies on Fiscal Concerns
These concerns helped gold recover during August.
After the sharp correction earlier in the year, gold rallied as investors reassessed the outlook for the U.S. dollar, interest rates and government debt. A weaker dollar and lower Treasury yields provided immediate support, but the more important driver was the longer-term concern surrounding fiscal sustainability.
The situation around the Strait of Hormuz also remained a significant source of uncertainty. While markets have become more accustomed to the disruption, restricted oil flows continue to affect energy prices, shipping costs and inflation expectations. A prolonged disruption could keep energy prices elevated and complicate the outlook for central banks. Higher oil prices increase inflation while also reducing consumer purchasing power and corporate margins, creating the risk of slower growth alongside persistent inflation.
Gold therefore faces competing forces in the months ahead. Higher inflation and interest rates could be a short-term headwind, while rising government debt, fiscal uncertainty and long-term pressure on major currencies continue to support its broader investment case. The direction of oil prices and global bond yields will be crucial in determining which force dominates.
Portfolio Performance and Positioning Strategy
The portfolio delivered a strong performance in August, with the Cash portfolio returning +4.55%, CPF-OA +3.15%, and SRS +4.55%. The recovery was mainly driven by Gold, U.S. equities and technology stocks, which benefited from the renewed market rally following July's sharp correction.
The strong rebound reinforces the importance of staying invested through periods of market volatility. Our diversified positioning allowed the portfolio to participate in the recovery while avoiding excessive concentration in any single market or sector.
Looking ahead, we remain constructive but increasingly selective. Technology continues to offer attractive long-term opportunities, while gold remains an important portfolio diversifier amid growing concerns over U.S. government debt and the long-term outlook for the U.S. dollar. However, the unresolved disruption around the Strait of Hormuz and the risk of persistently higher interest rates mean that markets could remain volatile.
As the threat of increasing interest rates become higher over time, I am prepared to position the portfolio to hold positions that will benefit from higher interest rates such as banking and finance and Singapore equities. In the meantime, our bond positions are already in short term bonds, which is the ideal place to be in the face of an increasing interest rate environment.
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