September 2023 Market Review

4 min read 25 Oct 23

This month, we’re looking at inflation, central bank decisions in the UK, US and Europe, and investment opportunities in emerging markets.

  • Global bonds rose by 0.79% and stocks fell by -0.34% in September.  India equities, UK equities and Emerging Market equities were the strongest asset classes last month.
  • The benchmark US 10-year bond yield has risen from 4.11% pa at the start of the month to 4.61% pa. Most of the volatility in bond yields over the last 12 months has been in shorter-term bonds, but longer-dated bonds have increased more recently.
  • This month, we’re looking at inflation and central banks in the UK, US and Europe.
  • And we’re looking at Emerging Markets in more detail. 

All figures are total return and quoted with GBP as the base currency.

UK, US – Central Banks pause rate hikes.

In August, UK inflation rose less than anticipated, with prices up 6.7% compared with one year ago. And the Bank of England (BoE) paused interest rate hikes for the first time since the start of the hiking cycle in December 2021. The key BoE indicators for the UK showed mixed signals; unemployment rose more than anticipated and services inflation slowed more than expected. However, wage growth exceeded expectations.

Oil prices have continued to rise, reaching c.$100 a barrel, driven primarily by Saudi Arabia led supply cuts. This in turn reintroduces uncertainty around inflation for investors. We don’t think the price will remain elevated long enough to impact inflation though.  Historically, the UK stock market, which has a large weight to energy and materials companies, benefited from rises in commodity prices. Even so, commodity prices are still anticipated to be lower than they were a year ago. As a result, we think there’s little further upside for commodity companies in the current market. In portfolios we have a neutral view on UK equities.

The US economy remains resilient. Second quarter GDP growth in the US was 2.1% pa and initial unemployment claims were lower than expected, confirming resilience, so investors are anticipating a “soft landing,” meaning the US economy will likely avoid a recession.

In August, core inflation which strips out the volatile inputs such as food and energy, rose 4.3% versus a year ago, as was as expected. The US Federal Reserve kept the policy rate in a range of 5.25% to 5.5% in September.

The US stock market has risen in 2023, largely driven by a concentrated number of mega-cap stocks. But we don’t think this performance is sustainable in the long term.  We believe US small and mid-cap stocks are being overlooked by investors. And we think that these types of stocks will benefit from a better than expected US economy.

Europe –  Interest rates pauses ahead?

In September, the European Central Bank (ECB) policy rate rose by 0.25%, marking the highest policy rate in ECB history. (The ECB was set up in 1998 to launch of the Euro, so it has a shorter history than the BoE or US Federal Reserve.) 

The economic outlook accompanying the decision, included downward revisions to economic growth and upward revisions to inflation. The drop in euro-zone inflation from 5.2% in August to 4.3% in September was below forecasts, and reinforces the view that the ECB will stop raising interest rates soon.

Germany’s economy continues to show weakness and is anticipated to contract -0.4% this year, so the government attempted to encourage investment in the country by offering subsidies to open factories. Germany’s car industry has also been faced with semiconductor shortages affecting the industry.

We do think Germany’s economic weakness could put pressure on company earnings, but European stocks are cheaper than other global developed market stocks and expectations for future growth are decent.

By M&G Investments

The value of the fund's assets will go down as well as up. This will cause the value of your Investment to fall as well as rise and you may get back less than you originally Invested. The views expressed in this document should not be taken as a recommendation, advice or forecast. Past performance is not a guide to future performance.

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