Global financial markets adhered to the traditional summer playbook, and then some. Prices of risk assets drifted lower amid lighter volumes, before accelerating to the downside in September, traditionally the weakest month for equities in the calendar year.
Asset class returns for the quarter in the table above evoke memories of 2022; most global equity markets and G7 government bonds were marked down, presenting positional challenges for investors with few places to seek shelter. All equity sectors were offside except for energy and communication services. Oil rallied almost 30% on both supply and demand factors, whilst the dollar is proving to be the cleanest shirt in a dirty pile of laundry.
US yields are rapidly repricing a higher-for-longer interest rate scenario, leading to a material sell-off in prices (prices move inversely to yields) across the government bond spectrum. By the end of September, the benchmark 10-year US Treasury yield rose to 4.5%, a seventeen year high, whilst the average nationwide 30-year US fixed-rate mortgage touched 7.31%1, the highest level since the year 2000. Little surprise that the housing market is beginning to freeze.
China Woes Continue
Emerging market equities modestly outperformed developed markets over the quarter, although the contrast in single country market performance was meaningful.
China’s equity market continues to struggle, with the much-hyped post pandemic economic reopening proving to be a damp squib, whilst the country’s beleaguered property sector moved back into the spotlight. Evergrande, a company with more than US$300 billion in liabilities, defaulted, whilst Country Garden, China’s largest developer, warned that it is facing the gravest challenges in its history, whilst acknowledging it had missed interest payments on two if its bonds. The property market is key in China, as it accounts for fully one quarter of economic activity.
Energy was standout sector, rising in a quarter where all other sectors were underwater. The market is waking up to the fact that China is slowing, not collapsing, and Saudi Arabia is backing rhetoric with action in restricting supply. We also witnessed a modest uptick in the US Strategic Petroleum Reserve (SPR) which remains at half capacity (approximately 350 million barrels of oil) following the enormous draw down initiated by the Biden Administration ahead of an election year.
TEAM Positioning & 4th Quarter Outlook
Our global approach to portfolio construction and flexibility to tactically allocate has buffered our core multi asset range through this difficult summer period, and we find an array of attractive investment opportunities across the four pillars of our menu currently.
Equities: modest overweight
We have a healthy split between US and non-US equity securities. In the US, selective large cap and technology shares continue to offer defensive characteristics exhibited by consumer staples and healthcare sectors in previous cycles.
*### Fixed interest: modest underweight
We are sharpening the pencils in the fixed interest space, particularly with regards to GILTS for sterling investors. Our preference at this juncture is for emerging market sovereign bonds based on peak policy rates, attractive real yields, and valuations, and investment grade corporate bonds.
Our energy commodities allocation served us well during what was a decent third quarter for commodities in general. Oil prices have rallied hard as speculative money has been forced to close out aggressive betting against prices going higher, fuelling the rise. We expect the US$100 on WTI crude to offer significant resistance in the short-term.
Shown below is the current asset allocation for the TEAM MPS range across our multi asset menu:
Please find enclosed a more detailed investment review and our outlook for the fourth quarter.
Craig Farley, Chief Investment Officer, October 2023