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  • Belvedere Group

August 2023 Market Commentary

Updated: Oct 4, 2023

Developed Markets Update

Executive Summary:

● The United States witnessed a downgrade in August by Fitch Ratings anchored on the country’s troublesome debt level and high borrowing costs. The inflation and rate hikes continue to pose headwinds for the economy and though the job numbers seem progressive, the latest downgrade signals that downside risk remains heightened and this could spur investors to take positions in more secured defensive equities for the preservation of capital. This downgrade ensured that the US was stripped of its high-rated government debt by Fitch, tied to its expanding budget deficit that has led to a series of political clashes on Capitol Hill which nearly caused a default on its debt.

● The business activity in the Euro Areas experienced another contraction last month, missing the 50 threshold that signals expansion. The region’s latest purchasing managers index (PMI) declined from 48.6 in July 2023 to 47.0 last month. This comes as Europe continues to battle high prices that have led to the ECB raising rates for the ninth consecutive time at its last policy meeting. We believe that the recent data of business contraction would take a central focus on what the ECB’s next line of actions could be with President Christine Lagarde affirming that the central bank could either raise rates or take a pause on rate hikes, all dependent on the prevailing data.

Markets Summary:

The developed markets' performance for August 2023 was rather disappointing as a negative return was recorded across the board. The MSCI World Index, S&P 500, and FTSE 100 closed the month in red with net returns of -2.39%, -1.65%, and -3.98% respectively. Further review revealed that declines were recorded across all sectors notably Utilities, Materials, and Consumer Staples on a month-to-date (MTD) analysis. However, the energy sector was an exception to this MTD decline for all three indices in the developed market, driven by the impressive monthly total contribution to return of major oil companies in the region such as Texas Pacific Land Corporation, Suncor Energy Inc., Exxon Mobil Corporation, and Shell Plc.

Performance Analysis

The S&P 500 unsurprisingly continued to outperform in our $10k analysis, proffering a superior return of $31,529.76 for investors over a ten-year investment period with an initial investment amount of $10,000. In contrast, the MSCI World Index and FTSE 100 returned $24,278.73 and $13,882.75 respectively to investors over the same period and initial amount.

Blue-chip companies in the US continued their dominance with NVIDIA, Meta, and Amazon leading the YTD race for the top contributors on the MSCI World as of the last trading day in August 2023. NVIDIA Incorporation continued to smash the records with its stellar performance making it the largest contributor as its AI boom seems far from over, further backed by its latest second quarter numbers where top and bottom line outperformed forecasts. Hence, we believe these familiar faces would continue their progressive returns in the new month anchored on the solid P/CF and P/E fundamentals of these firms, and their ability to withstand market uncertainty that may truncate this growth trend.

United States Witness Credit Rating Downgrade

The US government was dealt a huge blow in August following the downgrade accorded to the world’s largest economy by Fitch, one of the three biggest credit rating agencies, from AAA to AA+. Credit scores are assigned to governments similar to private corporations and downgrades are slammed on the country when reputable rating agencies perceive a drop in its ability to repay loans. Uncle Sam has a long-dated history of living above its means while the country’s tax cuts, increased spending, and high interest rates signal that the difference between its revenues from tax and expenditures has unsurprisingly been heading north. Consequently, Fitch's downgrade was in alignment with the fears of a recession and fragile debt ceiling as the United States borrowing is on track to clinch 118% of the annual size of the economy by 2023.

The importance of these ratings cannot be overemphasized as investors utilize them to measure risk, hence a lower rating or downgrade exposes the country to higher costs of borrowing. However, the US seems to have some antidote in this regard as its government debt is termed to be a safe haven for investors, making Fitch’s downgrade unlikely to cause panic for investors to troop out of the US in the long run.

The equity market unsurprisingly reacted to this downgrade as it closed the week ended August 4th, 2023 in red upon the announcement by Fitch on the first day of the month. In our opinion, the full impact of the downgrade might take some time to manifest but the outcome of this downgrade seems distinct from the last time the US witnessed a downgrade in 2011 by S&P Global Ratings. For clarity, that downgrade over a decade ago came from the severe policies implemented in the aftermath of the Global Financial Crisis, where inflation and interest rates were low and government debt was of little concern. In contrast, the downgrade in August 2023 by Fitch came following the increased exposure of the country’s debt financing to high borrowing costs, while the US federal government debt has also climbed well above 100% of the GDP of its economy.

The equity market unsurprisingly reacted to this downgrade as it closed the week ended August 4th, 2023 in red upon the announcement by Fitch on the first day of the month. In our opinion, the full impact of the downgrade might take some time to manifest but the outcome of this downgrade seems distinct from the last time the US witnessed a downgrade in 2011 by S&P Global Ratings. For clarity, that downgrade over a decade ago came from the severe policies implemented in the aftermath of the Global Financial Crisis, where inflation and interest rates were low and government debt was of little concern. In contrast, the downgrade in August 2023 by Fitch came following the increased exposure of the country’s debt financing to high borrowing costs, while the US federal government debt has also climbed well above 100% of the GDP of its economy.

European Business Activity Contracts in August 2023

The business activity of the Euro Area declined in August, as the region’s economy continued to battle difficulties from multiple sides of the divide. The euro zone’s flash composite purchasing managers index (PMI) plummeted to 47.0 in August 2023, lower than the 48.6 recorded the preceding month. This new reading last month signalled the lowest level of the region’s business activity since November 2022, while also falling short of analysts’ forecast of an increase in business activity to 48.8.

Euro Area YoY Inflation Rate (November 2022 - August 2023):

The breakdown of the figures showed that services contracted to a 30-month low of 48.3, while the manufacturing PMI rose to 43.7 in August, albeit below the 50 threshold that signals expansion. The jittery growth in Europe are indication of the high energy prices, interest rate hikes by the ECB, and declining levels of consumer demand. Furthermore, the downward pressure on the economy was also largely tied to Germany, the region’s largest economy, which saw its service sector transcend from growth to contraction causing a severe blow to the country’s business activity.

Prices continue to overpower the 2% target rate in the Euro Area as the latest inflation data showed that consumer prices in the 20 nations that adopt the euro (€) rose 5.3% on a year-on-year basis, albeit unchanged from the annual inflation rate in July 2023. Inflation in the bloc, measured by the Harmonized Index of Consumer Prices (HICP), exceeded market forecasts of a 5.1% rise, while the HICP edged north of 0.6% monthly. Furthermore, the core HICP which excludes volatile food and energy prices rose 0.3% in August relative to the -0.1% recorded in the preceding month. Hence, we believe that the double whammy of high prices and business contraction poses a conundrum for the European Central Bank as prices continue to slip through the control of policymakers and businesses remain hard hit by the monetary tightening campaign. Hence, we recommend investors remain cautious amidst the mixed feelings on the next line of actions by the ECB on its base rate, presently at 3.75%, at its forthcoming monetary policy meeting in Frankfurt, Germany on September 14th, 2023.

Emerging Markets Update

Executive Summary

● China’s recovery from the economic downturn continued to be weaker despite the stimulus introduced to improve economic growth. Although the market responded to the soft stimulus introduced, the recovery session continued to be weaker as other emerging markets trounced China. Thus, we anticipate a dire need for the introduction of a 'bazooka' stimulus to ensure a strong recovery in the Chinese stock markets.

● India continues to lead with eye-watering returns in emerging markets as the significant shift in foreign direct investment and China’s economic woes strengthen India's position as the new attractive market. Major stock indices continue their healthy uptick and these unprecedented high returns are expected to be intact. Based on this, we believe that India will continue to solidify its position as an investment destination in emerging markets.

Market Summary

The performance in emerging markets faltered as negative returns were recorded on major indices. Both the MSCI EM and MSCI World Index recorded -6.16% and -2.39% respectively, a decline from the 6.23% and 3.36% recorded in July. The significant decline is against the backdrop of a decline in trade volume, diminished capital inflows, tighter monetary policy to cushion inflationary pressure, and stock market declines in emerging markets.

The sectors in the emerging markets recorded a decline across the board, with financials returning -1.25%, consumer discretionary contributing -1.13% to the decline, and communication services following suit with a -0.79% decline. In addition, real estate contributed least to the decline with -0.11%.

Performance Analysis

The emerging market continues to underperform its developed market counterpart in terms of return on cash investments. In our $10k analysis, the MSCI EM returned $13,426.38 in contrast to $24,278.73 in the MSCI DM. Despite investments of the same capital and period, there is a wide gap between both markets.

In summary, PDD Holdings led the top contributors to emerging market returns with 0.07% as the e-commerce company’s earnings-per-share in Q2 2023 were reported at $1.44 and revenue surged to $7.21 billion, a 66% increase due to higher sales on its Pinduoduo and Temu sites. PDD Holdings' return on equity stood at 28.4% compared to the MSCI EM ROE of 20.99%. In addition, Infosys, Saudi Arabian Oil, and Turkiye Petrol offered excellent entry points for investors, with increasing stock prices and impressive returns that continued to exceed expectations. PDD Holdings is expected to continue its northward trend after its recent earnings and revenue surge with Infosys and others following suit.

Scepticism Bound China’s Recovery as Stimulus for Economic Growth Falters

China continues to intensify efforts to revive its economy and bring investors back to its equity markets. In July, the Politburo’s policy implementation on consumption-related initiatives and the lessening of tightened outlooks for the property sector did not hold water; rather, the recovery lost further momentum.

Efforts to curtail the systematic meltdown in China included the central bank making the biggest interest rate cut in three years to 3.45% from 3.55% for the one-year loan prime rate, while the five-year loan prime rate remained unchanged at 4.2%. Other efforts included a reduction in the stamp duty on securities transactions to 0.05% from 0.1% to invigorate the capital market and boost investor confidence, the Chinese Ministry of Finance and Taxation announced.

China employed moderate measures to stimulate the economy, which the Politburo cannot continue to turn a blind eye to. Major macroeconomic problems in China included a downward trend in foreign direct investment at a 25-year low, which slowed to less than $4.9 billion for Q2 2023. In addition, households’ wealth is shrinking, and a bullish capital market is crucial.

The stock market gained from the soft stimulus introduced to the market. The scale, force, and speed of the measures beat expectations to further signal a positive response to the Chinese market. The CSI 300 Index of the Mainland rose by 5.5%, the Hang Seng China Enterprises Index grew by 4.1%, the yuan’s value also strengthened by at least 0.3%, and other brokerage stocks also rose above their limits. Consequently, these recent developments in the market’s condition in China underlined the deliberate government’s efforts to attract investment and support its indigenous companies.

However, a reality check on the stock market recovery showed that these measures were not significant enough to invigorate the capital market, as their impact would be short-lived if not followed by additional and more aggressive policy stimulus, Ting Lu, chief China economist at Nomura Holdings, added. "The stimulus initially spurred hopes as major indexes reversed losses before going sour and becoming one of the world’s worst-performing indexes", as reported by Bloomberg.

Scepticism further deepened at the back of whether China will indeed roll out more stimulus measures like it did in 2008 or financial stimulus measures employed by the US post-pandemic. Beijing continues to toil hard to improve its market’s condition despite the economic downturn; this, however, did not exactly win the investors’ hearts as they were fixated on the country’s macroeconomic problems.

We believe that for the stimulus measures to hit that mark, the Chinese Politburo is expected to follow these recently introduced stimulus measures with a massive stimulus, "bazooka-like" as described by Evercore ISI. China must introduce a massive stimulus to further brighten its fading decades of supercharged growth. In anticipation of this bazooka stimulus, JPMorgan has recently lowered its full-year GDP forecast to 4.8% as production weakens.

Indian stocks continue their remarkable rally as the index reaches an all-time high

Indian stock markets led with eye-watering returns and have been eye candy for foreign investors throughout 2023. Major stock indices such as the Nifty 50 and the BSE Sensex were at their all-time highs as there was a radical shift in emerging market investment havens from China to India. These unprecedented record highs of returns are expected to remain intact, as consensus analysts forecast.

The continuous healthy uptick in the Indian markets is hinged on robust corporate earnings and major recovery in sectors such as financials, fast-moving consumer goods, capital goods, and information technology. The Indian economy is experiencing the Goldilocks effect, where inflation is falling faster than expected while growth is picking up steam at a quicker pace, as stated by JM BlinkX Gangan Singla.

Nifty 50 Remarkable Rally Continues:

The good news in the Indian stock market continues as the performance trend improves. In addition, Bank of America upgraded the outlook for the Indian market and forecasts that the Nifty 50 may hit 20,500 points average by December 2023 from 19,000 points average reported in July 2023. The impressive forecast from Bank of America is against the backdrop of stronger domestic inflows and reduced fear of a recession in the US, which could affect direct and portfolio inflows to India.

India continued to hit the jackpot as it was poised to receive more foreign cash inflows. HSBC forecasted that foreign investors may continue to pour cash inflows into Indian stocks. The continuous foreign cash inflows may lead to an impressive bull run in the stock market. We believe that the Indian stock market may continue to celebrate the increasing net foreign inflows which currently stood at $15 Billion in 2023 and bullish stock markets as China’s recovery continues to dip. Reliance Industries reported Rs 74, 131 crores ($8.96 million) in its FY 2023 while State Bank of India posted its highest quarterly profit of 16,884 Indian Crore ($2.04 million) in August, a whopping 178.25% increase. The surge in profits reported by Indian companies was a result of increasing Cash flows and investment.

Disclaimer: The commentary you find on this page is for information only; it is not intended as research or a recommendation suitable to your individual circumstance. Please seek financial advice from a professional before acting on investment decisions. As is the very nature of investing, there are inherent risks, and the value of your investments will both rise and fall over time. Please do not assume that past performance will repeat itself and you must be comfortable in the knowledge that you may receive less than you originally invested.


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