Q3 2023
Global equities and bonds, when looked at in dollar value, dipped during Q3, relinquishing some of the gains from the first half of 2023. Yet, in terms of the pound sterling, returns were slightly positive: 0.62% for global equities and 0.43% for bonds. China's ongoing economic deceleration, aggravated by its faltering real estate sector, persisted this quarter.
Significant defaults included those of Country Garden, China's premier private real estate developer, on its global bonds, and Zhongzhi, a Chinese wealth manager with a heavy real estate portfolio, on its products. These defaults, coupled with worries about their ripple effects on the Chinese financial system, overshadowed China's consistent annual decreases in both imports and exports, affecting global growth prospects.
The economic picture is mixed in the US, the UK, and Europe. The composite Purchasing Managers' Index (PMI) has been on the downturn in these areas. Specifically, the UK and Europe are hinting at economic contraction, while the US is barely showing expansion. The major contributor to this decline is the services sector, particularly in the UK and Europe. Manufacturing hasn't fared well in 2023, indicating contraction in all three areas.
Inflation remains a focal topic, with many areas observing drops since June. The UK's most recent inflation rate stands at 6.7%, a decrease from June's 6.9%. Europe witnessed a dip from 5.5% to 4.3%. The US's scenario differs slightly, with the recent 3.7% rate being an increase from June's 3.0%, yet it follows a general decreasing trend. Notably, core inflation rates have also reduced in these regions. Given this inflationary trajectory, central banks like the Federal Reserve and the Bank of England have paused their monetary tightening measures. However, they hint at prolonged higher interest rates, dimming hopes of imminent rate reductions.
Q3 witnessed global equities, as indicated by the MSCI ACWI Index, yield a 0.62% return in sterling, with Emerging Markets (EM) producing 1.11%, surpassing Developed Markets (DM).
UK equities grew by 1.88% in the quarter, significantly driven by the Energy, Basic Materials, and Tech sectors. Energy, in particular, benefited from a surge in oil prices. In contrast, sectors like Utilities and Consumer Staples underperformed.
In the US, the S&P 500 increased by 0.75% in Q3 (though dropped by 3.27% in dollars). Initial optimism around the Fed ceasing its monetary tightening faded as higher prolonged interest rates seemed inevitable. Energy, Communication Services, and Financials led in performance, whereas Utilities, Real Estate, and Consumer Staples lagged.
The MSCI Europe ex-UK index saw a 2.03% decline in Q3 amid concerns of interest rate hikes affecting economic growth. The IT and Consumer Discretionary sectors were particularly hit hard, while Energy, Financials, and Healthcare shone.
Emerging Markets reported a 1.11% return this quarter, surpassing global equities and DMs. However, worries persist about China's economy and the health of its real estate sector, and the robustness of the US economy which could maintain higher rates.
In EM, countries like Chile and Poland faced declines, whereas Turkey saw growth, largely due to its central bank's strategies.
In the fixed income domain, High Yield was the standout with global high yield climbing 4.25% in sterling terms during Q3. Corporate bonds outshone government bonds globally, except in the US.
In the UK, gilts and index-linked bonds took a hit as interest rates were hiked. However, the Bank of England paused further hikes due to slowing inflation.
Shifts were observed in bond yields both in the UK and the US. Lastly, the Reuters/CoreCommodity (TR CC/CRB) index experienced a significant jump, largely driven by oil price hikes as Saudi Arabia and Russia extended their oil production cuts.
