Investors are tending to their losses as the final quarter of 2023 commences, following a challenging September which saw global equity markets fall for a second consecutive month. It is also the second month in a row that each of the US's big three indices have posted losses with interest rates being a key factor weighing on market sentiment. The benchmark S&P 500 index fell 5% in its worst month of the year, while the Nasdaq Composite and Dow Jones Industrial Average slipped 6% and 4% respectively.
Economic data over the quarter pointed to a deterioration in the global growth outlook, despite U.S resilience. A notable development was the global services sector, which began displaying indications of aligning with the already sluggish manufacturing sector. The market now holds the view that most major central banks are nearing the peak of the current cycle of interest rate hikes as global inflationary pressures continue to moderate.
In September, central banks in the U.S., Switzerland, England, and Japan opted to maintain their key rates at existing levels. The European Central Bank (ECB) was the sole major central bank to raise rates. The market’s attention pivoted away from the level of peak interest rates, to the duration for which central banks intend to maintain rates at restrictive levels. The prevailing sentiment is leaning towards an extended period of elevated rates, often described as "higher for longer," as a crucial strategy to mitigate persistent inflationary pressures.
However, the messaging from the US Federal Reserve (Fed) was that most of its members anticipate rates remaining elevated for much longer than the market is currently pricing for. As US long-term rates adjusted to the Fed messaging, US 10-year government bond yields rose towards 4.6% – their highest level since 2007.
Developed market equities (MSCI World) declined by -3.4% over the quarter (-4.3% m/m), reducing year- to-date (YTD) returns to 11.6%. Emerging market equities (MSCI World EM) held up relatively better over the quarter, dipping by -2.8% q/q. Nonetheless, the index has posted a rather modest year-to-date gain of +2.2%, with China remaining the biggest drag on EM stocks. Growth stocks continue to outperform their value counterparts, despite a recent quarterly underperformance, growth is up +21.1% YTD vs value’s
As for the "Magnificent Seven" stocks, they also weren't able to deliver returns for their shareholders. The group of mega-cap stocks – made up of Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, powered much of the market's gains over the first half of 2023, but struggled in September. Of the seven Big Tech giants, only Meta and Tesla were able to finish the month in the green. The IT sector overall was one of the weakest areas over the quarter, along with the less influential sectors of real estate and utilities.
Focusing on the U.S., the Federal Reserve’s new dot plot signalled still one additional hike in 2023 and only two cuts in 2024. Comments from FOMC members highlighted how this shift was mostly attributable to solid economic growth. Federal Reserve officials revised their 2023 growth forecast upward to 2.1%, a significant increase from the earlier projection of 1%. As U.S. long-term rates adjusted to the Fed messaging, U.S. 10-year government bond yields climbed toward 4.6%, reaching their highest point since 2007. On the equity side, the S&P 500 ended the quarter down -3.3%, as risk off sentiment took hold.
Eurozone shares fell in quarter three amid worries over the negative effects of interest rate rises on economic growth. However, data released at the very end of the period showed eurozone inflation slowed to a two-year low of 4.3% in the year to September, down from 5.2% in August. This could potentially pave the way for the European Central Bank to put an end to interest rate rises.
UK equities rose over the quarter. The large UK-quoted diversified energy and basic materials groups outperformed as they rebounded from weakness in the previous three-month period. They benefited from sterling weakness against a strong dollar and a sharp recovery in crude oil prices buoyed the energy groups in particular.
In China, renewed concerns about the state of the property sector weighed on sentiment, despite a number of new stimulus measures announced over the quarter that were aimed at stabilising housing activity. Evergrande, the world's most indebted property developer, has yet to achieve a substantial restructuring, despite more than two years passing since its initial liquidity troubles led to project halts
The South African Reserve Bank’s Monetary Policy Committee (MPC) made the decision to maintain the repo rate at 8.25% for the second time in September. This move followed a small increase in the Consumer Price Index to 4.8% in August from 4.7% in July, the first uptick in five months. The SA stock market mirrored the global equity market downturn, with the FTSE/JSE All Share Index falling by -3.43% m/m, erasing all YTD gains (-0.91% YTD).
Despite the overall strength of the U.S. dollar in September, the Rand remained relatively stable, with only a marginal 0.5% m/m depreciation to end the month at 18.92/USD.
Credits: Strategic IQ, XE.com, Shroders, Business Insider