Investment Update – September 2023
As is usually the case in August, equity markets endured a difficult month, falling by nearly 3%. Emerging Markets and Asia ex Japan performed particularly poorly, reflecting concerns about Chinese growth and its beleaguered property market. Energy was the only sector to post positive returns during the month, with supply disruptions and resilient demand nudging up oil prices by 2%.
Global fixed income had a volatile month, as yields moved sharply higher by mid-August before retreating in the second half of the month. It was also a weak period for real assets, as gold fell 1.5%, industrial metals fell 4%, and agriculture prices fell 3%. Weakness also extended to listed real estate and infrastructure which returned -3.5% and -4.5% respectively.
The US August jobs report pointed to growing slack in the labour market, as wage pressures eased and unemployment jumped from 3.5% to 3.8%. There were also downward revisions to previous reports, indicating that the weaker trend in employment growth remains in place. With inflation continuing to decline quickly, markets do not expect the Fed to raise rates in September.
There are also tentative signs that the UK’s jobs market is cooling, although inflation and wage data remains too high for the Bank of England to ignore. However, recent PMI survey data came in below expectations and showed that the large services industry has flipped into contraction territory, increasing the odds of a sharp slowdown in the coming quarters.
We don’t expect the Fed to raise US interest rates again in this cycle, and there’s even some doubt over the Bank of England and European Central Bank raising interest rates in September. For what it’s worth, we think they will both act in September, but for all intents and purposes, their hiking cycles are over too. The lagged impact of tighter monetary policy means previous hikes are still working their way into the system and central banks have now adopted a higher for longer mantra.
The Chinese authorities will incrementally announce further stimulus measures to rebuild consumer and business confidence and put a floor under the property market. This should spark bouts of outperformance by emerging market equities given that starting valuations are cheap versus other regions of the world. Emerging markets should also benefit from their central banks being able to begin cutting interest rates as inflation levels are lower than in developed markets.
Central banks will have taken a collective sigh of relief at the recent US jobs report, but momentum is a powerful force in labour markets, and once unemployment starts rising it’s difficult to know where it stops. For this reason, we continue to believe that money market funds and bond markets look very attractive, especially as a hedge against falling equity markets should corporate profits start to disappoint. There seems to be a little complacency creeping into equity markets, especially the US, which trades at a significant premium to the rest of the world.
Head of Investment, Skerritts
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Categories: Investment update
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