Expert investment views:
The circumstances around China’s looming property crisis are set out, along with the impacts on Western markets
Equities investors are urged to watch for economies and markets which may buckle under higher rates, and to take a long-term view
One wealth manager explains why his firm is adding to its holdings in US, UK and Asian equities and some value stocks
Featuring this month’s experts:
1. Did you know about the “September Effect” in the stock markets?
Historically, September has a reputation as a month of weak performance. And this September has been no different. Despite falling inflation, global markets have suffered from seasonal weakness on the back of higher-for-longer interest rates, rising oil prices and ripples from China. The AI hype has also finally met the challenge of a slowing global economy – the S&P500 returned -4.8% over the month.
Feeling the pain: Stock markets were under pressure as rising bond yields started to worry investors once more. The 10-year U.S. Treasury yields hit a 16-year high, driven by fears of higher-for-longer rates. A few factors have been at play to cause this worry: the unexpectedly resilient US economy defying recession expectations, increased government debt issuance, and the hawkish language emerging from the Federal Reserve.
The impact of high oil prices has also fuelled September’s reality check, with oil prices almost touching $100 a barrel. This was triggered by Saudi Arabia and Russia’s announcement that they will extend voluntary production cuts until the end of 2023. For central banks fighting inflation, this could become another problem they don’t need.
In the meantime, energy stocks are loving the price surge. The FTSE100 index posted steady gains over the quarter, up 2.1%, and was one of the better performing regional indices as a good chunk of the index is made up of the energy and utilities sector.
Doom and gloom in China? China has been in the headlines for a while now. Sluggish growth, high youth unemployment rate and a crumbling property sector have all made the headlines associated with the world’s second-largest economy. While major indices have climbed year-to-date (YTD), the CSI 300 index returned -8.9 % YTD.
What has grabbed the attention in September is Evergrande Group, one of China’s largest property developers. Since Evergrande’s declaration of default back in 2021, payments haven’t been met, home prices are falling, buyers are spooked – and we’re seeing yet another China property crisis being triggered
What has grabbed the attention in September is Evergrande Group, one of China’s largest property developers. Since Evergrande’s declaration of default back in 2021, payments haven’t been met, home prices are falling, buyers are spooked – and we’re seeing yet another China property crisis being triggered.
But the drama does not end here. Evergrande Founder and Chairman Xu Jia Yin has been placed under police scrutiny due to suspicion of “illegal crimes” and trading of Evergrande stock has since been suspended.
The ripples of this crisis have been weighing on emerging markets and investor sentiment as MSCI Emerging Markets Index returned -2.8% over the quarter.
On a more positive note, the Chinese government seems to be keen to signal support for the economy as Beijing cuts banks’ reserve requirement ratio, the second time this year after March.
Junior ESG Investment Analyst at 7IM
2. An Indian Summer, although not for markets
Is it really autumn already? The year seems to have passed at breakneck speed, helped by an environment that has proven far less perilous than feared in January. Recessions have thus far been avoided, inflation has come down (quicker in some regions than others) and jobs markets remain buoyant.
With rates having risen sharply after a decade when the cost of borrowing was close to zero, there are certain to be areas of the economy and markets which will find life at 5% rates harder, even if there are limited signs to date. Vigilance therefore remains our watchword.
With rates having risen sharply after a decade when the cost of borrowing was close to zero, there are certain to be areas of the economy and markets which will find life at 5% rates harder, even if there are limited signs to date
Events of the last few years have provided constant reminders of how difficult it is to predict the short-term; what seems certain today can seem stupid in six months. This is particularly true within equity markets where the preponderance of short-term narratives, fads and bubbles have regularly obscured underlying quality.
Share prices have consistently followed earnings over any reasonable time horizon and so when coupled with average valuations below those of the last decade, many areas of the market look attractive. So, whilst equity and bond markets are likely to remain challenging as investors continue to grapple with when and where inflation and interest rates will peak, there are opportunities for those with a long-term mindset.
Portfolio Manager at James Hambro & Partners
As this month’s experts emphasise, although the markets may be replete with risks, we should not let that obscure the attractive investment opportunities that do still exist. Many savvy investors will be adding to certain positions or taking advantage of attractive valuations to diversify more effectively. There is always value out there to be found.
Separating signal from noise is tougher than ever though. Why not explore what professional wealth management advice could help you achieve? We can arrange no-obligation discussions with a shortlist of leading providers fast and free.
3. Taking a multi-market view on equities
As we’re approaching the end of 2023, what are the headlines making investors sit up?
The economy is one. The US economy is ok. China is starting to show signs of improvement. Europe is looking less healthy and the UK is expected to be the poorest economic performer of the G7 in 2024 with the highest inflation. Next year we expect to see low global growth with a US slowdown being compensated with an uplift in China.
Inflation is another. Inflation is largely subsiding – it’s taken a while for rates to fall to central bank targets, but a lot of the heavy lifting has been done. Inflationary pressure is still intense in the UK, particularly in services.
The current status quo means we’re adding to US equities, although we’re still underweight. We like UK equities (so cheap!), Asian equities and some value stocks
Interest rates are a theme. The Fed and the Bank of England have stuck. The ECB has raised slightly. In 2024, the markets expect a cut in rates, but we don’t think it will happen until early summer.
Earnings are another factor. Analysts seem to think we’ll see a big uplift in corporate profitability – we think that’s optimistic, but we’ll keep a close eye. And in terms of value, we’ve just had a very poor month for equities, bonds, gold – every asset class, except for oil and the dollar.
The current status quo means we’re adding to US equities, although we’re still underweight. We like UK equities (so cheap!), Asian equities and some value stocks. We’ll start to take more bond risk in portfolios, although we’re underweight UK gilts and are overall ‘short’ duration in fixed interest.
At the start of 2023, we suggested being balanced, diversified and open minded – and ten months later, we still have the same motto!
Co-Chief Investment Officer at Canaccord Genuity Wealth Management
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.