At a glance
- After interest rates rose from near 0% to around 5% in developed countries, major central banks have now signalled rates will plateau soon, in line with our core view. While this could have brought some relief to the market, restricted supply in the oil market, with OPEC+ extending production cuts until the end of the year, led to oil prices rising by 8%.
- This revived market volatility as investors feared that inflation could rise again. Government bond yields rose as a result, especially in the US and Europe, as inflation fears re-emerged.
- However, higher oil prices are also a financial squeeze for households, corporations and countries importing oil. This ultimately magnifies recessionary risks, resulting in waning demand, which is why we think a meaningful rebound in inflation is unlikely. This is also why we think bond yields are unlikely to rise much further. Rather, on a 12-month view, we expect lower bond yields.
- Meanwhile, major equity indices lost around 3-5% in September, with the interest-rate-sensitive tech-oriented Nasdaq underperforming (-5.2%), while the S&P 500 was down 4%. In Europe, the German DAX lost 3.9%, given slowing economic activity, and the French CAC 40 fell by 2.7%. Given its exposure to the energy sector, the UK FTSE 100 outperformed, closing the month 2.2% higher.
How we’re positioned in flagship portfolios
- September’s backdrop has been a headwind for our investment strategy, as most equity and bond markets have fallen in tandem. In addition, we typically carry more exposure to the US and less exposure to energy-sensitive countries (UK) or sectors (energy), which has also impacted performance recently.
- Despite the short-term and likely temporary market developments, we believe our portfolios are well-positioned for the long-term and the prevailing near-term backdrop.
- Our more cautious tactical views have started to bear fruit For instance, despite their falls in September, our position in high-quality bonds outperformed equities (where we carry less exposure than we would normally; we also carry less exposure than normal in risker credit markets).
- The rise in bond yields in September notwithstanding, we continue to think that government bonds are attractive, as are low-volatility equities. A further slowing of economic activity will likely support both.
- Given the multiple developments in September, we decided to act in our portfolios. As interest rates have peaked in the Eurozone and are close to peaking in the UK, we added EU and UK government bonds to our portfolios.
- We also closed our Asia-Pacific, including Japan, equities exposure, because the outlook in China deteriorated further (weaker-than-expected rebound, lack of stimulus and a worsening property sector crisis), and prices already reflect Japan’s rebound. What’s more, economic data suggest that dividend cuts are less likely in the US, and so we rebalanced our high-dividend position towards the broader market.
- More generally, we continue to allocate less than normal to US equities and, more markedly, Eurozone equities. But within the US and the Eurozone markets, we continue to hold low-volatility stocks.
What we’re watching
- The US Congress managed to avoid a government shutdown, for now. In practice, the Congress have just kicked the can down the road as the short-term deal keeps the government funded until mid-November. Negotiations in Washington will continue and likely remain rife until mid-November given a fragmented political landscape. We do not think it will have a meaningful impact on sentiment until then, but should a shutdown occur, this could have a temporary impact on economic activity, depending on its duration.
- It’s worth noting that this is a different problem than raising the debt ceiling a few months ago (which, although resolved, could have put the US at risk of a technical default). During the shutdown, the US Treasury has cash to serve its debt but no right to spend it domestically as there is no funding bill. Hence, US Treasuries are theoretically not at risk.
- The longer the shutdown lasts, the greater it weighs on growth as consumer income, spending and confidence. This reduces the odds of a final rate increase by the US Federal Reserve (Fed).
- This week will also see the releases of key economic indicators for the Fed and markets such as US economic activity (the ISM purchasing managers’ indices, some of which already released) and data on the labour market (jobs openings, job creation and unemployment rate), though in a shutdown it’s not clear whether these data will be released.
Past performance is not a reliable indicator of future returns.
Data as of 29/09/2023. The Yield and P/E figures for stock markets respectively use 12m forward dividends and earnings divided by the index’s last price. For bond markets, the yield to maturity is used.
Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material or guarantee the accuracy or completeness of any information herein, nor does Bloomberg make any warranty, express or implied, as to the results to be obtained therefrom, and, to the maximum extent allowed by law, Bloomberg shall not have any liability or responsibility for injury or damages arising in connection therewith Note: Past performance is not a reliable indicator of future returns.