Monthly Market Insights - September 2023
Market Overview
Market Performance 1st – 30th September 2023 (in GBP Total Return)
FTSE 100 +2.40%
S&P 500 (USA) -1.16%
FTSE Europe ex UK -1.13%
Topix (Japan) +1.66%
MSCI Emerging Mkts +1.10%
Positives could be found in September, with interest rate hiking cycles in western economies seemingly coming to an end. However, investors now turn their attention to the expectation that rates may stay elevated for longer than initially hoped, prompting the sale of long duration assets, both in fixed income
and equities. There were brief concerns towards the end of the month of a federal shutdown in the US, as posturing from both political parties sent ripples through markets for the second time this year. An agreement between the two houses of Congress over short-term funding was ultimately signed just minutes before the deadline. Focus also remained on China, as optimism that the country once again offered an attractive investment opportunity were derailed by more drama in the property sector.
Is it now a question of ‘how long’ rather than ‘how high’ with interest rates?
September felt like a turning point for central bank interest rate policy, with both the Bank of England (BoE) and US Federal Reserve (Fed) opting to hold rates steady.
The BoE’s decision to hold rates was decided by a knife-edge Monetary Policy Committee (MPC) vote, with five MPC members voting to pause, while four favoured a further hike.
The European Central Bank (ECB) raised rates a further 0.25%, but there were strong hints that the monetary policy tightening cycle is nearing an end.
While we appear to be getting very close to answering the question of how high interest rates may go, investor attention now turns to how long rates will remain at these elevated levels.
UK inflation provides a welcomed surprise, but the housing market continues to suffer
The BoE’s decision to leave rates unchanged was undoubtedly helped by better-than-expected inflation numbers just 24 hours before the votes were cast.
September’s Consumer Price Index (CPI) inflation reading had been forecast to rise slightly from 6.8% in August, but instead fell to 6.7%.
The toll that elevated rates were having on the UK housing market continued to show with house prices falling by 5.3% from their peak in August 2022, the strongest annual rate of contraction since 2009, according to new data from Nationwide.
The BoE announced that net mortgage approvals for house purchases fell from 49,500 in July to 45,400 in August, the lowest level in six months.
Halifax estimates that the number of first-time buyers will fall by more than 20% this year, forecasting that c.186,000 will purchase their first home this year based on transaction data for the year so far.
A mixed picture on US inflation
US CPI inflation came in ahead of economist forecasts at 3.7%, up from 3.2% in July. Prices rose 0.6% month-on-month, with more than half of the monthly increase driven by an increase in petrol prices.
Core CPI inflation, which strips out food and energy costs, rose 0.3% month-on-month, although the annual rate fell from 4.7% to 4.3%, in line with expectations.
Despite these increases, the Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) index fell to its lowest level in two years. Core PCE, which excludes food and energy, dropped to an annual rate of 3.9% in August, down from 4.2% in July.
China returns to an inflationary environment… just
Recent data published from China showed headline CPI inflation just returned to positive territory in August with a reading of 0.1% year-on-year. China dipped into deflation territory in July, with an annual inflation reading of -0.3%.
Beijing officials continued their efforts to stimulate the economy, reducing the amount of cash reserves banks must hold for the second time this year, in an attempt to boost liquidity.
However, issues in China’s mammoth property sector returned, after Evergrande Group, the scourge of the sector in recent years, saw its shares suspended and its founder/chairman placed under house arrest, adding to questions over the fate of the company as its planned restructure faltered.
Summary
September was a chequered month for equity markets, with technology stocks feeling the brunt of the pain. While the artificial intelligence (AI) boom has seen many companies performing strongly this year, they gave back some of their gains over the month, with signs of weakening demand for semiconductors tempting some investors to sell and lock-in their profits. Returns were much better in the UK, with banks and energy stocks in particular boosting the overall performance of the index.
Fixed income funds were a very mixed bag. Funds focused on short duration bonds were buoyed by the idea that we may be reaching peak interest rates. On the other hand, longer duration bonds suffered as investors accepted elevated interest rates may continue for longer than expected.
Real assets struggled in September as they remain correlated to the longer end of the fixed income market, and as many of the companies in this sector hold high levels of debt. However, positive returns could be found in diversified alternatives funds, once again highlighting their key position in portfolios during periods where fixed income and equity returns become correlated.
RISK WARNINGS
The value of stock market investments will fluctuate in value both up and down and investors may not get back the original amount invested. Past performance is not a reliable guide to future performance. Reference to a particular investment does not constitute a recommendation to buy or sell the investment. Forecasts are meant as a guide and should not be relied upon as an accurate indicator of future performance. If you have any concerns or questions about how anything mentioned in this blog post may affect your own personal circumstances please speak to Coldrey Wealth Management or another suitably qualified professional / independent financial adviser.