Welcome to the Quarterly Investment Review for Q3 2023.

Our Investment team have put together a range of resources to update you on what has happened in the markets across the third quarter of 2023. Here you will find: 

• High-level, global equity performance analysis
• Videos and interviews from our team covering Q3's hot topics
• A written summary of the quarter's main market events

Global Equity Performance Analysis:

The graph below shows global equity performance across the quarter and plots world events along the performance line.

Hear from our Team:‍

Trends, Themes and Investment Insights

Relationship and Business Development Manager, Donald Beggs and Head of Funds, James Fitzpatrick, discuss important topics from across the quarter, including interest rates and the clean energy sector.

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South African Perspectives: Offshore Investing

Business Development Consultant Tatenda Chikombero interviews Business Development Manager, Lerato Lebitsa on the current landscape for investors in South Africa and the role offshore investment plays.

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Is Now a Good Time to Invest in Emerging Markets?

Portfolio Manager Matthew Seaward explores the performance of Emerging Markets over Q3.

‍Summary & Outlook - Q3 2023:

Global equity markets posted losses during the third quarter; with the US, EU, and Japan falling -3.7%, -5% and -5.6% respectively in home currency terms. The Chinese market fell over 3% while Hong Kong was also weak, down over 7%. The UK equity market proved to be more resilient owing to its ‘value’ tilt and high exposure to oil and financial stocks achieving a positive return of 0.8%. This also reflected the relative cheapness of UK valuations which have not become as stretched as US valuations on a year-to-date basis.

Market sentiment was overall positive in July especially in the US where the AI rally continued to gain momentum, driving markets higher. Chip maker Nvidia was a notable beneficiary, reporting Q2 revenues of $13.51 billion, up 101% from a year ago and 88% from the previous quarter. However, as central banks began signalling to markets that rates would likely remain high and indeed ‘higher for longer’, and that a pivot in policy expectations towards cuts was not imminent, equity and bond markets both began to suffer. The reality of potentially higher peak interest rates also led to global government debt selling off as yields rose. This was reflected most markedly in the US bond market, where the US 10-year Treasury yield touched 16 year highs of 4.6% in late September as Fed officials guided that ongoing inflationary pressures could see interest rates remaining on an upwards trajectory.

The prospect of higher interest rates becoming the new normal has hurt equity valuations as higher discount rates are factored in for longer periods. This has also put strain on company growth prospects for those companies previously reliant on cheap debt for financing. Such a background has resulted in a poor August and a notably painful September for markets.

In terms of macroeconomic figures, August CPI readings for the US came in at 3.7% YOY while UK CPI remained high at 6.4% YOY. US Q2 GDP grew at a healthy annualised rate of 2.1% while UK Q2 GBP grew at 0.2%. UK wages also grew 7.3% in May ahead of expectations, an indication that the labour market remains tight.

Markets were indecisive about a rate rise in September, but in the event UK and US central banks chose to pause, with the US Federal Reserve staying put at 5.5% and UK Bank of England also holding at 5.25%. However, the European Central Bank increased the Deposit Rate from 3.75% to 4%. Rates are likely to be held at or close to current levels until well into next year, and yield curves are still inverted, with US Treasury 2-year yields at 5.1% and the UK Gilt 2 year at 4.7% alongside 10-year yields at 4.4%. in conclusion, we are unlikely to see any material cuts to interest rates until it is clear to central banks that inflationary pressures are well under control. It was noteworthy that Fitch downgraded the US long-term Issuer Default Rating (IDR) from ‘AAA’ to ‘AA+’ in early August on concerns about growth in government debt and on the ability of Congress to control spending, though this had little effect on markets.

Asian markets were shaken in September by the news that embattled Chinese property giant Evergrande was plagued by further issues. The stock itself was again suspended only a month after it had resumed trading following a 17 month suspension. Another Chinese property giant, Country Garden, also narrowly avoided default after reporting record losses and debts of more than $150bn. This weakness is a material concern as the Chinese property sector accounts for around 25% of China’s GDP and the bursting of the Chinese property bubble raises contagion concerns. China Q2 GBP grew 6.3% year on year, below expectation, and growth fell 0.6% quarter on quarter. Consumer spending, investment and trade all remain on the weak side, and the economy is only expected to grow 4% over the year as a whole.

Though gold typically acts as an inflation hedge, gold was down -3.7% in USD terms to $1848 against the higher interest rate background. During the quarter we exited our gold position and redeployed the proceeds into Treasuries and high yield fixed interest to take advantage of the high yields available. In contrast oil rallied by 27.3% in USD terms over the quarter to $95 a barrel. The US Dollar also appreciated against most currencies, up by 4.1% against Sterling over the quarter.

We find ourselves in an uncertain environment as the pressures of growth, inflation, and monetary and fiscal policy vie against one another, increasing the range of potential forward macroeconomic outcomes. Most global equity markets remain positive in the year to date, but for now we must cautiously assess developments as they take place, keeping an eye on valuations, the economic backdrop, and central bank responses. Inflation risks persist and central banks continue to monitor their progress in curbing inflation. There also remains the question of whether central banks will indeed pull off a soft landing or if the slowdown will be more severe. Central banks may be forced next year to adopt a more dovish stance if economic data suggests more damage is being done to the economy than necessary, but it remains too early at this stage to be sure. In this scenario, quality companies with strong balance sheets and good cash flows are key, and we will aim to add to such should valuations fall much further.

Disclaimer: The views, thoughts and opinions expressed within the articles, videos and soundbites are those of the authors/ speakers and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.

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