Market update – Quarter ending 30 September 2023

Despite a great start in July, both equities and bonds ended the September quarter (Q3) on a low note, supporting the latter month’s reputation for delivering “seasonably weaker” returns.

US markets underperformed both developed and emerging markets, as value outperformed growth, with a retreat among the “Magnificent Seven” stocks (Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Tesla, Meta) that had provided most of the gains during the first half of the year. Negative market sentiment was driven by a “higher-for-longer” rates narrative in an environment of weak economic growth. This was more pronounced in interest rate sensitive sectors, driving negative returns for fixed income and gold. Advanced economies kept progressively readjusting the balance between supply and demand, leading to a gradual reduction in inflationary pressures. Although growth is slowing, it’s doing so at a more moderate pace compared to any declines in inflation.

US headline inflation (raw measure) moved higher mostly due to base effects, while core inflation (which removes key volatile commodities) continued to trend lower. Both inflation measures in the UK and Eurozone decreased as their respective central banks maintained their hawkish stances. This resulted in the status quo being maintained or rates being increased further, which put upwards pressure on yields.

Energy prices surged during the September quarter on the back of extended supply cuts by OPEC+ and Russia, resulting in large gains in West Texas Intermediate (‘WTI’) crude oil. This resulted in the energy sector being the only one to deliver strong positive returns overall. The listed property sector underperformed equities by a large margin due to rate sensitivity and concerns surrounding the Chinese property debt crisis.

Closer to home, Australasian equities posted similarly weak returns with the NZX and ASX returns dominated by the negative impact of higher long-term government bond yields on equity valuations.