Market Opinion - September 2023

Market Opinion - September 2023

In a turbulent September, global equity markets navigated through mixed results. European markets contended with decelerating GDP, while robust economic data and a Bank of England interest rate pause buoyed UK equities. Meanwhile, Asian markets experienced an overall downturn, with India being an exception, benefiting from modest inflation and a surge in exports. Although emerging markets equities showcased superior performance compared to global equities, they concluded the month in a downturn. The projection of persistently high-interest rates impacted sentiment in the US and Asia and imposed pressure on bonds.

During the same month, European equity markets experienced a downturn amidst headwinds from a slowing eurozone GDP, even though the energy sector found success amid escalating oil prices, prioritizing value over growth. Communications services and financial sectors witnessed positive performance, contrasting with the technology and consumer discretionary sectors. Despite raising interest rates, the European Central Bank (ECB) indicated a potential pause due to mitigating growth and stabilizing labor markets, as inflation witnessed a slowdown. Revised growth forecasts from the European Commission acknowledged industrial regression, diminishing trade, inflation, and ascending borrowing costs. However, a modest improvement was noted in the flash purchasing managers' composite index (PMI), even though it lingered below 50, signifying business contraction and persisting economic hurdles in the eurozone.

In contrast, UK equity markets witnessed an uplift in September, propelled by unexpectedly robust economic data. A slowdown in UK inflation to 6.7% in August was driven by dwindling food prices and a reduction in air fares and accommodation costs, contrary to anticipations of an increase. The Bank of England (BoE) halted interest rates at 5.25%, concluding a 14-month sequence of increases. Updated data from the Office for National Statistics illuminated a sturdy post-pandemic recovery, with UK GDP exceeding pre-pandemic benchmarks. Furthermore, UK wage growth accelerated at its most rapid pace since 2001, surpassing inflation. Driven by vigorous wage growth and moderating inflation, consumer confidence ascended, reaching its pinnacle since January 2022.

Conversely, US markets concluded September in a decline, with major indices (Nasdaq, S&P, Dow Jones) revealing negative returns amidst apprehensions of persistently high interest rates. The US Federal Reserve maintained interest rates at 5.50%, as predicted, but alluded to additional hikes this year and fewer reductions next year, maintaining a "higher for longer" approach due to inflation threats despite a healthy labor market. An imminent government shutdown was deflected by a US Senate funding agreement until mid-November. US economic data presented varied signals, demonstrating resilience in the labor market but a retraction in the manufacturing sector, and an expansion in the services sector.

Asian equity markets encountered varied outcomes in September, concluding the month generally down. While Thailand, South Korea, Taiwan, and Indonesia sustained losses, India and the Philippines reported positive returns. Concerns in the real estate sector, notably the Evergrande crisis, overshadowed Chinese markets. Although economic indicators like retail sales and industrial production surpassed projections, hawkish signals from the US Federal Reserve influenced sentiment. Japan's equity markets, albeit slightly negative, outperformed regional counterparts, with stable consumer price growth sparking debates on monetary policy. In India, gains were propelled by lower-than-anticipated headline inflation and augmenting exports and imports in dollar terms.

September manifested a superior month for emerging markets equities, outshining global equities, though concluding the month negatively overall. Mixed regional performances were noted: sharp declines in Asia, particularly in Thailand, South Korea, Taiwan, and Indonesia, contrasting with positive results in India. While grappling with Evergrande's issues, Chinese markets exceeded expectations in retail sales and industrial production and reduced unemployment. Latin American equity markets overall declined, with Brazil and Colombia advancing, while Chile and Peru trailed. In Europe, the Middle East, and Africa, markets depreciated, with challenges faced by Saudi Arabia, South Africa, Hungary, and Poland, whereas Turkey, Egypt, and the UAE made slight advancements. Turkey's inflation exceeded expectations, inducing an expected central bank interest rate hike.

September observed bond markets being influenced by expectations of enduring higher interest rates, resulting in government bonds losing ground as yields ascended. US treasuries, German bunds, and UK gilts all reported negative returns. The Federal Open Market Committee (FOMC) retained the US fed funds rate but modified its dot plot chart, omitting two anticipated interest rate reductions for 2024. The Bank of England, with a 5-4 vote, retained interest rates at 5.25%, possibly indicating a peak in borrowing costs. Although the European Central Bank elevated its key rate to 4%, it hinted that it might be the last hike. Lastly, corporate bonds demonstrated varied performance, with high yield surpassing investment-grade bonds. US high-quality bonds and Euro investment-grade bonds weakened, while Sterling Corporate bonds advanced.