World Markets Summary:
September, often a tough month in financial markets, once again proved to be a tricky month for markets. Equity market volatility, as measured by the Volatility Index (VIX) lulled investors into a false sense of security as it reached its lowest since pre-pandemic levels. This was short-lived, as a series of inflation data releases and central bank meetings restored volatility to a five-month high. Bond market volatility offered a similar story and naturally resulted in a relatively poor month for both equity and bond returns.
Inflation largely eased across the major regions in September, which provides less incentive for interest rates to rise, and yet some bond yields increased to their highest levels in a decade or more. The increase in yields stemmed from the expectation that a continuation of this disinflation, especially at a headline level, is by no means a given. In fact, it is very unlikely, especially in the face of strong commodity inflation, demonstrated by the oil price increasing close to 10% in September to register a 25% rise in the last three months.
Looking at our regional outlook, the larger proportion of fixed mortgage rates in the US relative to Europe and the UK is delaying the impact of interest rates. However, student loan repayments have just recommenced and excess savings are in a much weaker position and are soon to be depleted. Late payments on US auto loans have risen to reach 2008 levels and may be reflective of a broader weakening of the US consumer. We therefore continue to believe US growth will disappoint and valuations are too elevated. UK and China remain two of our areas of conviction and both provided positive data in September. UK business investment and consumer confidence picked up despite the drop-off in overall numbers. Meanwhile, Chinese industrial profits came out higher than expected and signs of stabilisation in the property market may signal the start of government stimulus working through the economy.
Our in-depth views on:
Our weightings are based on sterling as a base currency.
United Kingdom (UK)
The UK inflation data released for September came in better than expected at 6.7% (vs 7% expected) primarily due to a slowdown in food inflation and a decline in the cost of accommodation services. In similar fashion to July 2023 when we saw data come in better than expected, markets rallied on the news with both the FTSE 100 and FTSE 250 up over 1% on the day. As a result of this inflation print, the Bank of England voted not to increase interest rates at their September meeting, the first pause in nearly two years. It is worth noting that it was a tight vote as five out of nine voted for no change, so we may not be completely out of the woods regarding potential future hikes.
UK economic data as a whole continued to deteriorate with Gross Domestic Product (GDP) shrinking 0.5% month-over-month in July 2023, reversing the 0.5% growth in June. Meanwhile, industrial production fell sharply and the Royal Institution of Chartered Surveyors (RICS) UK Residential Market Survey showed that the vast majority of real estate agents are selling fewer houses and expecting house prices to keep falling. Consumer confidence in the UK did come in better than expected however, retail sales rose less than expected.
Services, which had been holding up earlier in 2023, also fell much more than expected pointing to the second consecutive month of contraction and the sharpest contraction since January 2021. Manufacturing did increase to 44.21 coming in better than expected with the reading pointing to a slower albeit still significant decrease in manufacturing.
The main positive out of the UK this month was that we have now seen two consecutive quarters of a pickup in business investment. This is encouraging given how depressed investment levels have been since the Brexit vote and represents a meaningful step-change.
United States (US)
Both the Nasdaq and S&P 500 struggled in September, with the US being one of the worst performing markets in the month as bond yields continued to climb higher.
Similarly to UK peers, the Federal Reserve (Fed) also opted not to hike interest rates in their September meeting despite inflation accelerating for the second month in a row. Investors are still expecting one more raise later this year. In a post-meeting press conference, Fed Chair Jerome Powell declined to say whether a “soft landing” is the Fed’s base case scenario. He said “ultimately, this may be decided by factors that are outside our control”. This was not taken well by the market reflecting that, as many believe, the market is currently priced for perfection – i.e. a soft landing (soft landing or raising interest rates enough to slow the economy and reduce inflation without causing a recession). There was some encouragement in the inflation data in late September with Core Personal Consumption Expenditures (PCE), the Fed’s favoured inflation gauge, coming in better than expected at 3.9%, although this does still remain significantly higher than the 2% target.
US data continued the trend of being more robust than developed market peers during September with Producer Price Index (PPI) higher than expected, alongside both retail sales and Institute for Supply Management (ISM) services also being stronger than expected. The University of Michigan consumer sentiment measure in the US was also better than expected.
There were some signs of weakness in the US with the National Fraud Intelligence Bureau (NFIB) Small Business Optimism index decreasing in August, and the number of small business owners expecting better business conditions over the next six months declining. US excess savings have now mostly been spent (more so than in the UK or Europe) and student loan payments are set to resume in September. We believe this will lead to a sharp slowdown in consumer spending in the coming months.
Europe’s economic data from September paints a somewhat bleak picture. The German manufacturing Purchasing Managers’ Index (PMI) declined further to 39.61, remaining far below 50, which signifies the point between expansion and contraction. This marked the fifteenth consecutive month of contraction within the manufacturing sector. More broadly, the Economic Sentiment Indicator in the Eurozone fell less markedly than expected, but still equated to the lowest reading since November 2020. Unsurprisingly, the deteriorating economic data led to a fall in markets, with the German market down by 3.51% and the French market dropping 2.37%.
Following the European Central Bank’s decision this month to hike interest rates for the tenth consecutive time from 4.25% to 4.50%, there has been widespread uncertainty as to whether rate rises have now come to an end. German consumer price inflation dropped significantly to 4.5% from the previous month 6.1%, which is the lowest figure since the outbreak of the Ukraine war. However, disinflation was not ubiquitous, with Spanish inflation jumping from 2.4% to 3.2% to provide fresh impetus for the higher for longer rate scenario.
Despite economic uncertainty, cyclical stocks have performed well, suggesting that there is an exaggerated level of optimism priced into equity valuations. However, ongoing challenges arising from the Chinese economy may lead to a period of outperformance from defensive stocks in the coming months.
Asia and Emerging Markets
In September, Asia’s stock markets grappled with multiple challenges. A strengthening US dollar, global growth concerns, and deteriorating economic conditions cast shadows over the region. Notably, Korea and Thailand faced substantial market losses, each around 5%, while the Philippines and India managed to eke out slight gains.
China navigated through these headwinds with relative resilience. Signs of economic improvement emerged in August 2023, as industrial production and retail sales exceeded expectations. Industrial profits data rebounded significantly, surging by 17.2% year on year in August after a 6.7% decline in July 2023. Moreover, inflation conditions showed positive trends. However, underlying economic uncertainties persisted due to weak overseas demand and the continued property market downturn. Hong Kong kicked off the month on a robust footing but ended with a 4.2% loss, primarily driven by mounting concerns surrounding debt defaults and persistent issues involving property developers.
Across the region, Japan faced a 2.8% market loss despite a low-rate outlook. Factory activity fell for the fourth consecutive month, though business confidence remained strong. Korea experienced an unexpected 4.62% loss, with political concerns over democratic erosion weighing on the market despite no significant economic shocks. Thailand experienced a 5.19% loss, driven by declining industrial production and the central bank raising interest rates to 2.50%. Vietnam also saw a 3.2% loss as the central bank issued Treasury Bills, a short-term financial instrument issued by the government, to manage liquidity, and Manufacturing PMI entered contraction territory.
On a brighter note, India’s stock market saw a slight 0.42% gain, buoyed by hosting the G20 Summit and positive manufacturing trends, with Q3 2023 business confidence showing an encouraging uptick. The Philippines emerged as the top performer, closing with a 1.71% stock market gain, as the central bank held its benchmark interest rate steady despite hints of a potential off-cycle rate hike.
In September, oil prices exhibited significant volatility, surging by 25% since June 2023 end, surpassing $90 per barrel, and hitting year-to-date highs exceeding $97 per barrel. This rally was driven by extended supply cuts from Russia and the Organisation of the Petroleum Exporting Countries (OPEC+) partners and robust Chinese manufacturing, bolstering demand. Nevertheless, oil prices tapered off towards month-end due to uncertainties surrounding a potential US government shutdown and pressure from a stronger US dollar. Despite this, we anticipate no policy alterations from OPEC+ in October, with Saudi Arabia and Russia’s sustained supply cuts expected to bolster the market.
Gas prices in the US and EU experienced even more substantial month-on-month increases compared to oil. US gas prices rose due to heightened demand and reduced production, while European gas prices fluctuated as winter approached, reflecting unease caused by tight global gas supplies. The dispute over scheduled Australian Liquefied Natural Gas (LNG) facility shutdowns added further volatility to natural gas markets.
In contrast, metals faced challenges during the month. Gold slipped below $1,835 per ounce, marking its lowest point in seven months, influenced by a robust US dollar and elevated Treasury yields. Similarly, silver reached nearly one-month lows due to the Fed’s hawkish stance, concerns about a potential US government shutdown, and worries surrounding industrial demand.
UK five-year mortgage rates dropped below 6% for the first time since July 2023, but still remain near 14-year highs. This is naturally reducing the demand for houses and prices are consequently falling rapidly. House prices declined at a lower than expected pace in September, continuing at the rate of -5.3% on a yearly basis, as witnessed in August 2023. This is the fastest pace of decline since 2009 and even in London home prices have now fallen 4% in the last year.
In China, there were reasons for cautious optimism as the stimulus measures announced last month moderated the decline in house prices somewhat. New home sales among the 100 largest real estate companies fell 29.2%, up from a 33.9% decline in August 2023 on a yearly basis, after September sales grew close to 18% compared to August.
US mortgage rates remained above 7% for the duration of September and the average 30-year fixed rate mortgage has now climbed to 7.31%, the highest since 2000. Recent data suggested pending home sales dropped 18.7% in August on a yearly basis, as the inability to transfer existing more palatable mortgage rates to a new home has led to a rapid decline in property transactions.
September saw very divergent outcomes across the globe and the yield curve. 10 year bonds rose strongly in the US and Europe, with the US 10 year hitting its highest level in 16 years, the German 10 year reaching a 14-year high and the Italian 10 year at a decade high. However, the UK was a different story, with 10-year bond yields trading flat for the month. The US two year increased over the month, finishing just above the 5% mark. Meanwhile, the UK two year dropped markedly to approach 4.6% and given the 10 year is at 4.4%, the sustained period of yield curve inversion may be coming to an end.
Whilst a large number of central banks have substantially raised interest rates over the last 12 months, they remain at -0.1% in Japan. Pressure continues to mount on the central bank to raise rates, with the anticipatory 10-year government bond yield hovering near 10-year highs. The yield surpassed 0.75%, even after the Bank of Japan bought 300 billion yen worth of bonds in an effort to bring down yields. This activity from the central bank is unsustainable and continues to weaken the yen, leaving us to believe that the Bank of Japan will soon conclude that the prudent action is to increase interest rates.
Overall bond performance was negative for September in the face of rising yields, but high yield bonds continued their outperformance over investment grade bonds. Credit spreads are now more expensive and given the economic backdrop, it is more crucial than ever to scrutinise where we are exposed within the high yield segment. At this juncture we remain tilted towards the short end of the yield curve given the yield premium on offer at a lower risk.
1 Figures below 50 indicates a contraction in activity whereas figures above 50 indicates expansion.
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All Index data figures are sourced by Morningstar and correct as at 30 September 2023 unless otherwise stated.
The value of investments or any income arising from them may fluctuate and are not guaranteed. Past performance is not necessarily a guide to future performance.