September 2023 Market Insights
Developed markets suffered a significant down month as investors turn pessimistic that interest rates would likely remain high for longer despite a likelihood of a softer landing.
Written by Kevin Hua Co-founder & Chief Investment Officer
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What happened to the markets in September?
Developed markets suffered a significant down month as investors turn pessimistic that interest rates would likely remain high for longer despite a likelihood of a softer landing.
The largest negative performances from the U.S. Russell 2000 Index, down -6.03% and the U.S. NASDAQ Index, down -5.81% (local prices). Only the U.K. FTSE 100 Index, up +2.27% (local price) experienced an up month. The weakness of the AUD by -0.77% against the USD, helped AUD dampen the negative returns for the Trends and indices.
Higher rates for longer
The U.S. Federal Reserve decided not to raise interest rates at its September meeting and left the Federal funds policy rate at 5.25% to 5.50%. It noted that the economy has proven to be stronger than expected due to the ongoing strength of the consumer. The Federal Open Market Committee’s economic projections now have an expectation for GDP growth this year at 2.1% (previously 1.1%) and next year at 1.5% (previously 1.0%). The unemployment rate is projected to be lower at the end of next year at 4.1% compared to a previous expectation of 4.5%.
Inflation is still expected to fall to 2.6% over this period and is then expected to fall back to its 2.0% target in 2025. As such, there is a growing likelihood that interest rates will remain elevated for longer, with potentially only small interest rate cuts in 2024.
Europe and U.K. are two different stories
Inflation in the European Union slowed to a two-year low of 4.3% in the year to September, down from 5.2% in August. However, the negative effects from interest rate rises on economic growth is weighing on the broader economy. The consumer discretionary and information technology sectors were all under pressure as consumer delay purchase decisions.
PMI data showed that the European Union private sector was in contraction, although the composite reading edged up to 47.1 in September from 46.7 in August.
In contrast, there are some signs if an improvement in U.K. consumer confidence with hopes that interest rates may have peaked. As a result, the consumer discretionary, housebuilders and leisure sectors have outperformed.
Chinese economy is vulnerable, Japanese economy is resilient
Concerns over the Chinese economy weighed on Chinese and Asian markets. Although China’s official PMI manufacturing index rose in August, it also marked the fifth consecutive month of contraction. China has sought to boost confidence in the country’s flagging stock market by cutting stamp duty levied on share transactions and slowing the pace of initial public offerings but ongoing concerns about the real estate sectors weighs on investors.
In Japan, markets were down but remain relatively resilient with corporate earnings providing a largely positive outlook. The Bank of Japan made policy adjustments during 3Q 2023 that endorsed a gradual increase in Japanese government bond (JGB) yields with suggestions that Bank of Japan Governor Ueda could announce an end to negative interest rates by the end 2023, or before the next spring wage negotiation.