I’m Neil Birrell, Premier Miton’s Chief Investment Officer. Thanks for reading ‘Market Watch’, our monthly summary of the key events in financial markets.
For information purposes only. Any views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
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September – in brief
- Interest rates remained unchanged in the US and UK, but were increased in the EU
- It was a mixed month for bonds and not so good for equities
- What next?
The central bankers came back from their summer holidays in a good mood
The central banks in the US, EU and UK had August off from meeting to discuss interest rates, but returned in September when the US and UK came to the same conclusion; rates stayed unchanged. But in the EU, interest rates were raised by 0.25%. They were all quite consistent in the messaging as well, which, given the circumstances was unsurprising. They informed us that if inflation showed signs of becoming a bigger problem again, they would act and put rates up, but as it stood, they are willing to wait and see how the economic data will follow through, however, we should not expect rates to start coming down soon.
All in all, quite predictable given the economic data we have seen over the summer in all major regions, has been positive, but not equivocally so. By that I mean the inflation data has been good, suggesting that the worst may be over and the trend is firmly down. The data on economic growth has also been encouraging, although there has been some evidence of weakening economies, which shouldn’t be a surprise given the sizable jump in interest rates we have seen.
Lets go for a cycle
The economic cycle is a well known phenomenon and although it varies in nature and scale each time, it is a cycle, which means it has peaks and troughs. All governments and central banks prefer a smoother cycle, with lower peaks and shallower troughs, which is not easy to engineer.
There has been much talk of a recession resulting from the battle to beat inflation through interest rate increases, which is called a “hard landing”, when the cycle ends with a bump before recovering. However, there is a growing view that a “soft landing”, when the economy slows and recession is avoided, may be on the cards. This is a relatively unusual occurrence, but the economic data could be read to suggest that will be the case.
The problem is that we do not yet know what the full effect of all the interest rate rises we have had will be. This is why the central banks have started to soft pedal on their policy measures but there is room for optimism.
We really care what the financial markets do, though
Bond markets usually react badly to expectations of rising interest rates and rising inflation and the converse is true as well. So, whilst the US Federal Reserve (Fed) did not increase rates and the news on inflation is positive, they did guide us to not expect a cut for some considerable time. As a result, the prices of US government bonds fell, meaning the yield (which is the price of the bond divided by the interest rate it pays) rose to levels not seen since before the 2008 global financial crisis.
It wasn’t all bad news though, the interest rate story in the UK was taken more positively, as a further increase had been much more likely, so bonds issued by the governments and companies rose in price by a small amount.
It was a similar picture in stock (equity) markets; most world markets were lower, whilst the UK was higher. In particular, the large US technology and communications companies, such as Apple, NVIDIA and Amazon, whose share prices have been doing so well, saw weakness in their share prices. Some of this was driven by the moves in bond markets, but also by concerns that the Fed’s language on future interest rate policy could lead to recession. Investors can be a fickle bunch.
What next?
Well, in the short term, that is a difficult call, but the longer term may be easier. The prospects for financial markets will be influenced by the economic outcome. However, the returns that are available from many areas of bond markets are getting to be compelling and the bifurcation that has taken place within equity markets has meant there are clear threats in some areas (US technology companies). Whilst providing huge opportunities in others, such as the UK equity market, which looks very cheap by international comparison.
On top of that, other asset classes such as property companies (who own and manage property on behalf of shareholders) and alternative investments (such as renewable energy and infrastructure) are ripe with opportunity.
It should go without saying that there is no guarantee that investment returns will be good, there is always a risk they will be disappointing; we cannot predict the future. However, there is plenty of room for optimism and maybe even the attractive returns available on cash deposits at the moment will start to look less attractive.
