August Wrap Up: Markets Broaden as Inflation Persists

“AI is still the engine, but August reminded us the car has four wheels” 

August was another reminder that markets rarely move on one story alone. AI remained a powerful driver, but the month also showed signs of broader equity leadership, stubborn inflation, rising bond yields, and ongoing pressure on policymakers. For investors, the message was fairly clear: growth assets can still perform in a tougher rate environment, but diversification remains essential as markets adjust to a world where rates may stay higher for longer.

August kept reinforcing the same themes we’ve been seeing all year: stronger growth, stubborn inflation, and a market slowly accepting that rates will stay higher for longer. The good news is that equities were finally driven by more than just the AI heavy tech names, which is encouraging. A continuation of this trend would be welcome. And yes, we’ll say it again: diversification is still king.

Growth assets held up nicely despite geopolitical uncertainty, market intervention attempts, and the annual Jackson Hole talkfest, where top central bankers, finance ministers, and leading economists gather to debate long-term global economic issues and signal future monetary policy shifts. The S&P 500 rose 2.8%, the Nasdaq 3.7%, and emerging markets rose 2.7% (as measured by the MSCI Emerging Markets Index in NZD terms). AI is still the engine, but last month showed us that the market can move forward even when tech takes a breather.

Rates continued their climb, with the US 10-year Treasury yield closing at 4.72% and the 30-year Treasury yield at 5.25%. Global yields are high and still rising, but at these levels long-term bonds are starting to look interesting again. Short duration has been the right place to hide for years; eventually the market will decide yields are “high enough” and rotate into longer-dated securities, but perhaps not just yet.

The NZD spent most of the year wrestling with the 60c mark. It flirted with breaking through in August before fading as the USD followed rates higher. Now that winter is behind us, and honestly, it wasn’t that bad, regional strength and seasonal tailwinds might make those overseas holidays a wee bit cheaper by year end.

US debt is now USD 40 trillion. The first trillion took 200 years; the most recent trillion took 155 days. August saw various interventions in both bond and FX markets, none of which worked. The real message is that policymakers are increasingly worried about the level of prices and the ability of governments to pay back debt.

Jackson Hole delivered exactly what everyone expected: not much. The only real takeaway was that inflation is still too high, which was enough for markets to nudge yields higher. This might simply be markets adjusting to life with less US Fed hand-holding, a detox from years of overly generous forward guidance.

Back home, NZ inflation remains outside the target band. The 25-basis-point OCR hike in early September surprised absolutely no one, and further hikes before year-end look likely. A neutral rate around 3.25% seems to be where consensus is settling.

We continue to position portfolios around long-term structural themes rather than short-term noise. Mega-trends like ageing populations, AI, and geopolitical instability point toward higher inflation, higher rates, and shifting supply chains. Allocations to real assets, such as gold and other inflation-friendly exposures, help protect wealth in these environments. AI has driven a lot of recent returns, but leadership is broadening. The AI story is far from over; it’s just moving beyond a handful of sector-specific stocks.

Markets love to obsess over one thing at a time, whether it is FX intervention, yield-curve control, or Trump’s economic D-Day, but long-term investors need portfolios that can weather all of it. Diversification remains the only true free lunch, even for the smartest managers.

Mat Young

HO Asset Management, ASB

This material provides general information only. This material is not a financial product recommendation or an offer or solicitation with respect to the purchase or sale of any financial product in any jurisdiction.

Interests in the ASB KiwiSaver Scheme and ASB Investment Funds (Schemes) are issued by ASB Group Investments Limited, a wholly owned subsidiary of ASB Bank Limited (ASB). ASB provides administration and distribution services for the Schemes. No person guarantees interests in the Schemes. Interests in the Schemes are not deposits or other liabilities of ASB. They are subject to investment risk, including possible loss of income and principal invested. For more information see the ASB KiwiSaver Scheme Product Disclosure Statement or the ASB Investment Funds Product Disclosure Statement available from this website and the register of offers of financial products at https://www.disclose-register.companiesoffice.govt.nz/ (search for ASB).