Market Opinion - September 2022

Market Opinion - September 2022

September proved to be another challenging month for global equity markets, following the difficulties experienced in August. Emerging markets joined the downward trend, underperforming developed markets for the first time in several months. The actions of major central banks in response to persistent inflation caused further turmoil, resulting in a global risk-off sentiment.

In Europe, markets ended the month in the negative territory, primarily driven by inflation. Inflation reached a higher-than-expected level of 10%, driven by rising wholesale energy prices and the increasing cost of food, alcohol, and tobacco. In response, the European Central Bank raised interest rates to their highest level since 2011. On the political front, Italy is on track to elect its first female prime minister, signaling a shift to the centre-right for the country.

The UK market experienced a decline as the new government led by Liz Truss announced policy changes aimed at stimulating the country's economy. These changes included support for households and businesses affected by rising energy costs, as well as several tax cuts. Concerns over fiscal policy announcements led to a record low for the sterling against the dollar, intensifying investor apprehension. The Bank of England responded by raising interest rates by 0.5% to their highest level since 2008. However, there was a slight positive note as inflation slightly dropped for the first time in almost a year, surpassing inflation forecasts.

In the US, macroeconomic headwinds persisted, causing a decline in equity markets. Despite an initial positive start driven by anticipation of key inflation data, the outcome showed higher-than-expected inflation, leading to a decline in US equities. The Federal Reserve maintained its hawkish stance by implementing the anticipated 0.75% interest rate increase. Similar to other major central banks, this decision weighed on growth expectations and renewed concerns of a potential recession. Although there was a minor rally towards the end of the month, it was not sufficient to spark a full recovery.

Asian markets also faced downward pressure in September due to the global risk-off sentiment. Chinese equities declined, despite lower-than-expected inflation. The challenging environment for technology stocks affected both Korean and Taiwanese markets, with the currency of the latter reaching its lowest level in 13 years. Indian equities, which had shown strong performances previously, faltered due to low rainfall impacting food prices and consumer price inflation. Japan and Australia also experienced difficult months in the Pacific region.

Emerging markets as a whole underperformed developed markets, ending a period of outperformance. Broad macroeconomic volatility and currency weakness were the primary drivers of this decline. Latin America exhibited more resilience compared to other regions, with Mexico, Indonesia, and Peru performing relatively well. Within the EMEA region, the CE3 countries (Czech Republic, Poland, and Hungary) lagged due to their vulnerability to the Russian-Ukraine conflict.

Fixed income markets faced challenges in September, particularly in the UK with the introduction of new government policies. The chancellor's budget impacted government bond yields and dampened investor sentiment towards UK assets. To address this, the Bank of England committed to purchasing long-dated government bonds to protect UK credit and households. Corporate bonds, especially sterling credit, also experienced negative returns.

The focus on Environmental, Social, and Governance (ESG) issues remained prominent. The EU engaged in critical negotiations centered around the "Fitfor55" package, which aims to reduce greenhouse gas emissions and transform the economy. Reaching an agreement on this package became a significant objective for the European parliament and member states, known as "the triologues."

In summary, September witnessed a challenging month for global equity markets, with emerging markets underperforming developed markets. Central bank actions, high inflation, and persistent macroeconomic headwinds contributed to the overall negative sentiment. Regional markets experienced varying degrees of decline.

Continuing into October, global equity markets faced continued volatility and uncertainty. Here's a snapshot of the key developments during the month:

Global Market Volatility: Equity markets experienced heightened volatility as investors grappled with a combination of factors, including concerns over inflation, tightening monetary policies, and geopolitical tensions. Market sentiment swung between risk-on and risk-off modes, resulting in erratic price movements.

Inflation Concerns Persist: Inflation remained a significant concern for investors and policymakers worldwide. Consumer prices continued to rise in many economies, fuelled by supply chain disruptions, labour shortages, and elevated energy costs. Central banks closely monitored inflation data and took appropriate measures to address the situation.

Central Bank Actions: Central banks across the globe took steps to address inflationary pressures and normalize monetary policies. The U.S. Federal Reserve announced further interest rate hikes to curb inflation, while the European Central Bank maintained a cautious stance, closely monitoring inflationary developments.

Geopolitical Tensions: Geopolitical tensions continued to impact markets. The Russian-Ukraine conflict remained a source of concern, with occasional escalations causing market jitters. Trade tensions between the U.S. and China also resurfaced intermittently, adding to uncertainty.

Tech Sector Challenges: The technology sector faced headwinds as regulatory scrutiny intensified. Governments worldwide scrutinized the market dominance and data practices of major tech companies, leading to potential regulatory changes and legal battles. This uncertainty weighed on the tech sector's performance.

Energy Market Volatility: Energy markets experienced heightened volatility, driven by supply disruptions and concerns over global energy security. Rising oil prices and geopolitical tensions in key oil-producing regions contributed to market fluctuations and added pressure on inflationary pressures.

Earnings Season: October marked the quarterly earnings season for many companies. Market participants closely watched corporate earnings reports for insights into the overall health of businesses and the impact of various macroeconomic factors on their performance.

Climate Change Discussions: Climate change and sustainability remained key topics of discussion. International climate conferences and policy debates continued, emphasizing the urgency to address environmental challenges and transition to cleaner energy sources. Companies and investors increasingly focused on Environmental, Social, and Governance (ESG) factors in their decision-making processes.

Overall, October witnessed a volatile and uncertain market environment characterized by inflation concerns, central bank actions, geopolitical tensions, and sector-specific challenges. Investors remained vigilant and adapted their strategies accordingly to navigate through the evolving market conditions.