September Market Update: market jitters
For financial professionals only
In a nutshell:
• Central banks more hawkish (slightly)
• Continuing inflationary pressures test the definition of transitory
• China’s ‘Lehman moment’?
What’s moving markets…
Positive headlines were few and far between in September. This is broadly reflected in asset class returns, with almost all indices down over the month.
Inflation continues to be hotly debated with heightened figures showing no signs of easing, testing the narrative that inflation will be “transitory”. However, for now central banks are unanimous in their view that inflation is a by-product of economies reopening and will fall back as supply chains settle down, with no need for quicker than expected monetary tightening. The latest inflation figures from the US fell slightly from 5.4% to 5.3%, while the UK figure was 3.2%, with the warning it will move above 4%. Large European countries expect similar. Gas shortages look set to continue – stoking the inflationary fire, but here in the UK petrol pump queues seem to be easing (fingers crossed).
After 16 months of extraordinary monetary stimulus to help economies firstly survive and then begin to recover from the pandemic, the question now is whether stimulus went too far. Fed chair Jerome Powell quickly defended the response and pointed to previous underestimates of economic damage. The spotlight is now firmly on tapering monthly bond buying and the possible timing of interest rate hikes. The Fed suggest tapering could start towards the end of 2021 to be completed by mid-2022, with the first interest rate rise also in 2022.
Interestingly Governor of the Bank of England Andrew Bailey indicated rates could increase before asset purchases are set to end in December. Achieving policy normalisation without exerting downward pressure on the global recovery is a fine balance and will be treated with great caution. As a reminder how difficult this will be, UK business confidence has fallen sharply in the latest Institute of Directors’ survey. Following a surge in confidence over the summer, it’s now at its lowest levels since February 2021.
A US government shutdown has been avoided for now with law makers agreeing to extend government spending until early December, but this will remain topical throughout October/November and likely lead to market volatility.
China Evergrande Group is the latest source of volatility in Chinese markets, after government intervention led to sector specific selloffs throughout 2021. Some commentators are likening this to a ‘Lehman moment’, while others feel that overstates the situation. The big dilemma is whether the Chinese government will step in, given the desire to crackdown on this sort of over-leveraging by companies. We’ll learn more through October and beyond.
In Japan, Prime Minister Yoshihide Suga announced his resignation plans despite taking over from his long-standing predecessor Shinzo Abe just 12 months ago. His handling of the pandemic has led to declining support, not helped by controversially allowing the Olympics to go ahead. Former Foreign Minister Fumio Kashida has won the race to be his replacement.
Asset class implications…
The data below shows that negative sentiment is reflected in asset class returns with the majority of these in the red during September. It’s pleasing to see that bricks and mortar property added an element of support to multi asset portfolios.
Within fixed interest, both conventional and index linked gilts delivered negative returns. Most notably this coincides with negative equity returns, so there’s clearly been a breakdown in what are perceived to be “normal” asset class correlations. 10-year gilt yields went from 0.59% to 0.90%, with the majority of the movement coming after 22nd September. Similarly, 10-year treasury yields moved higher over the month.
There are numerous drivers of the increased yields. The main ones are likely longer term inflationary fears (despite what central banks are saying), slowing growth (albeit from elevated levels), clearer direction from central banks on tapering, and the possibility of interest rate increases.
Following a reasonably positive start to the month, equities also came off quite sharply. The S&P 500 ended September at its lowest level since July, after its worst monthly return since early 2020. Market drivers continue to be mixed by region, with large caps leading the way in the UK, Europe, and Japan. Small and mid-caps outperformed in Emerging Markets and the US, helping our tactical overweight to US small cap stocks.
Japan was the standout performer, albeit tailing off towards the end of the month after the latest data showed manufacturing sector growth decelerated in September. Overall, Prime Minister Suga’s surprising announcement had no negative market impact.
Asset classes in numbers
|FTSE Actuaries UK Conventional Gilts All Stocks TR in GB||-3.70||-1.84||-7.40||-6.81||9.24|
|ICE BofA Global Broad Market Hedge GBP TR in GB||0.18||1.44||-3.15||-5.95||8.93|
|IA UK Direct Property TR in GB||0.68||2.29||4.36||4.22||1.01|
|FTSE All Share TR in GB||-0.96||2.23||13.56||27.89||9.53|
|FTSE USA TR in GB||-2.79||2.63||16.41||24.19||50.68|
|FTSE World Europe ex UK GTR in GB||-3.56||0.76||11.75||22.05||30.28|
|FTSE Japan TR in GB||4.70||6.83||7.41||16.54||19.06|
|FTSE Asia Pacific ex Japan TR in GB||-1.78||-5.42||0.44||13.62||27.56|
|FTSE Emerging TR in GB||-1.35||-4.47||2.18||13.63||26.50|
Source: FE Analytics, GBP total return (%) to last month end
“The above article is intended to be a topical commentary and should not be construed as financial advice from either the author or Parmenion Capital Partners LLP. If a client wishes to obtain financial advice as to whether an investment is suitable for their needs, they should consult an authorised Financial Adviser. Past performance is not an indicator of future returns.”
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