October 2023 Market Insights
All developed markets continued their recent weak performance with investors growing increasingly worried about an extended rate cycle and the economic ramifications from the ongoing conflicts in Ukraine and Middle East.
Written by Kevin Hua Co-founder & Chief Investment Officer
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What happened to the markets in October?
All developed markets continued their recent weak performance with investors growing increasingly worried about an extended rate cycle and the economic ramifications from the ongoing conflicts in Ukraine and Middle East.
The largest negative performances were from the U.S. Russell 2000 Index, down -6.88% and the U.K. FTSE 250 Index, down -6.54% (local prices). The best relative performer was the U.S. Dow Jones Index, which was down -1.36% (local price) for the month.
Once again, the weakness of the AUD by -1.54% against the USD, helped AUD dampen the negative returns for the Trends and indices.
Higher rates for longer although economy remains strong
As inflation remained elevated (3.7%), the U.S. Federal Reserve’s tightening policy is likely to be extended causing investors some pause. Although the U.S. economy remained strong, the wars in Ukraine and the Middle East added to uncertainty.
The U.S. economy expanded at an annualised rate of 4.9% in 3Q 2023, exceeding the 2.1% growth in 2Q 2023. Growth was in large part driven by strong consumer spending as well as industrial activity, with the purchasing managers’ index reaching 51 in October, up from 50.2 in September.
Europe slowing but rate hikes may be ending; U.K. inflation remains elevated
The European Central Bank held interest rates steady in October after 10 consecutive increases, as annual inflation fell to 2.9% in October from 4.3% in September. Such news triggered some to believe that the rate-hiking cycle may be near and end as inflation is reaching closer to the European Central Bank 2% inflation target.
There is recognition that higher interest rates have weighed on economic growth. The European Union’s economy contracted in 3Q 2023 (-0.1%) compared to 2Q 2023. The purchasing managers’ index indicated that a slowdown had continued into October with a reading of 46.5, a 3-year low and down from 47.2 in September.
There was a continued slowdown in the U.K. economy, with consumer confidence weakening, a decline in key purchasing manager indices and news of further house price falls. CPI remained unchanged at 6.7% year-on-year in September, while core CPI inflation rate dropped to 6.1% year-on-year.
China remains weak while Japanese economy proves resilient
Investor sentiment towards China remains muted as the country’s economic slowdown continues. A lack of a meaningful policy response from the Chinese government especially in the real estate sector has left investors very cautious. The ongoing real estate debt crisis has also added to investor concerns.
In South Korea, chip makers weakened as investor feared a global economic slowdown would impact demand. In Japan, the Bank of Japan adjusted its yield curve control policy, letting the 10-year JGB yield rise above 1.0% as inflation remained under control. First half corporate results showed weakness in technology companies while domestic-oriented companies and auto-related companies had stronger results.