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  • Belvedere Group

September 2023 Market Commentary

Developed Markets

Executive Summary

● The revised economic release on the health of the world's largest economy revealed that the United States GDP for the second quarter of 2023 rose to 2.1% on an annualized basis, showing its resilience in defying the elevated level of prices and tightening labour market conditions. Further dive into the numbers by the Commerce Department showed that growth for Q1 2023 soared to 2.2%, higher than the previously reported 2%, signalling that the US continued to grow above the non-inflationary growth rate set by the Federal Reserve of around 1.8%.

● The European Central Bank (ECB) increased its interest rate for the tenth consecutive time by 25 basis points (0.25%) to 4%, as the region’s apex bank continued its battle against the rising inflation in the eurozone. The ECB’s decision reaffirmed its precedence of taming inflation over a weakening economy, as macroeconomic projections showed that prices averaged 5.6% this year from the previous forecast of 5.4%.

Markets Summary

The developed markets witnessed mixed performances in September as the S&P 500 experienced its worst-performing month since December 2022, witnessing a negative performance of -4.9%. The market continued its face-off with rising prices, historic rates, and the declining returns of blue-chip stocks on the index. Similarly, the MSCI World Index experienced a disappointing performance in September, declining by nearly -5%. In contrast, the FTSE 100 saw a rebound at the close of Q3 2023, with a 1% gain, which toppled the preceding quarter's negative return of -1.3%. In Europe, the broad STOXX Europe 600 Index wrapped up the final trading week of September in green, recording a 0.38% return as of September 29th, 2023, as prices in the Eurozone continue to show signs of deceleration.

September has traditionally been the worst month for stocks and this year was no exception. In the US, large-cap stocks were faced with the looming fears of a government shutdown, rising oil prices, and prospects of another rate hike before the end of the year. The S&P 500 was up by around 12% on a YTD basis as of the final trading week of September. However, this YTD positive return of the index was largely driven by the “Magnificent Seven” stocks of Apple, Nvidia, Microsoft, Meta, Amazon, Tesla, and Alphabet. Hence, an exclusion of these companies sees the S&P 500 rise by less than 1% year-to-date.

Performance Analysis

Nvidia, the top performer on the S&P 500 this year, continued its impressive run at the start of September following the company’s announcement of a partnership with Google Cloud that is expected to increase the distribution of its AI technology. Apple, the most capitalized stock in the US, was in keen focus last month following the unveiling of four new iPhone models. However, both bellwether stocks were on the loser’s chart in mid-September, with Apple being the latest pawn in the US-China rivalry after news broke that Chinese government workers could be barred from using iPhones at work. Hence, the stock plummeted by around -4% after the announcement as Greater China, which includes Taiwan and Hong Kong, represents Apple’s third-largest market and accounts for nearly 20% of the company’s total revenue.

In our opinion, we align with remaining fully invested in the developed markets, despite the uncertain macroeconomic conditions, as the pros certainly outweigh the risks of being on the side lines. However, possibilities abound of a hard economic landing as prices and rates remain elevated, but we recognize signs that inflation is slowly moderating and easing of benchmark rates in the region are on the horizon. Hence, we believe investors should continue seeking opportunities for income generation and portfolio growth. Furthermore, it is vital for you to seek investment counsel from your wealth advisor, to assist in identifying asset classes that aligns with your long-term goals after consideration of the benefits and risks of investing in DM stocks.

United States Economy Remains Resilient as GDP Expands

The US economic picture from 2017 to 2022 saw marginal changes by the government, with GDP increasing at an annual average rate of 2.2%, from the previously estimated 2.1% annual pace. However, household spending in Q2 2023 experienced declines on utilities, furnishings, clothing and footwear, driven by the elevated prices in Q2 2023. The final revision for the second quarter also revealed that business investment grew at a 7.4% annualized rate, surpassing its previous estimate of 6.1%. According to the Commerce Department, this increase was driven by the spending on “structures,” consisting of constructions that have long economic lives.

Consumer spending, which accounts for nearly 70% of America’s economic output, was revised from the 1.7% rate in the previous estimate to an annualized rate of 0.8%. The second quarter decline revealed that consumers reduced their spending as inflation continued to hit hard on income. Hence, concerns persist for the economy evidenced by a recent report from Moody’s Investors Service indicating that consumer spending is expected to decelerate in the coming months as Americans become more frugal in their purchases.

United States YoY Inflation Rate (September 2022 – August 2023):

The second quarter annualized expansion for the US was marginally lower than the 2.2% annual growth recorded in the first quarter of this year. However, consumer spending and business growth led to the Q2 growth, as the economy continued to shine forth despite the Fed’s aggressive stance in curbing inflation. The US Federal Reserve, in its policy meeting in September, voted unanimously to hold interest rate steady at the 22-year range between 5.25% - 5.5%. However, the apex bank signalled an additional rate hike might be implemented before the end of the year as the face-off with inflation lingers. We believe that the economic update for Q2 2023 indicates nothing has changed, aside from the resilient stance of the economy despite the elevated prices. Hence, our forecast anchors on expectations that interest rates in the US will remain higher for a longer period and rate cuts to commence in early 2024. These remain much aligned with the Fed’s rhetoric, including its increasing likelihood of an additional rate hike before the end of 2023.

European Central Bank Raises Interest Rate to 4%

The European Central Bank, in September, announced its latest increase in the benchmark interest rate of 25 basis points from 3.75% to 4%, citing concerns that prices remain well above the medium target of 2%. Christine Lagarde, the ECB President, reiterated that the bank would continue to monitor prices in the coming months to ascertain its next line of action in subsequent policy meetings. In Europe, households and businesses continue to face the double whammy of inflation and higher rates, which creates difficulty for households and businesses in assessing loans. However, the ECB statement affirmed that “based on its current assessment, the Governing Council considers that interest rate has reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”

The latest inflation numbers revealed that the consumer price index in the eurozone was 5.3% in August 2023, the same figure as the core inflation, which excludes volatile items such as food and energy costs. Europe’s biggest economy, Germany, has shown consistent deterioration, with declines in the service and manufacturing sectors, compounded by the crashing business sentiment. Thus, inflation continues to exacerbate the difficulties for the European economy.

Further commentaries from President Lagarde revealed that some central bank governors in the region would have preferred to pause rates and reserve future decisions once more certainty on the impact of previous decisions was ascertained. However, Lagarde offered little assurance that an end in sight for rate hikes in Europe has been ascertained, emphasizing that future policy decisions by the Governing Council remain data dependent. In our opinion, the monetary tightening campaign of the ECB might be reaching its end in the coming months as it continues to impact home prices and the economic growth of the eurozone which has already witnessed consecutive quarters of contraction. Data from Europe are also softening, with exports declining and business surveys contracting to their lowest levels since 2020. Hence, we opine that the global economy is looking less optimistic than any period post-Covid.

Emerging Markets

Executive Summary

● The latest India Development Update (IDU) from the World Bank underscores India's resilience in the face of a challenging global environment. In its flagship semi-annual report on the Indian economy, the IDU notes that India achieved remarkable growth in FY22/23, standing out as one of the fastest-growing major economies globally, with a growth rate of 7.2%. Notably, the country’s growth rate ranked second highest among G20 nations, nearly doubling the average growth rate for emerging market economies. The foundation of this resilience was strengthened by robust domestic demand, substantial public infrastructure investments, and a reinforced financial sector. During the first quarter of FY23/24, bank credit growth accelerated to 15.8%, surpassing the 13.3% growth observed in the first quarter of FY22/23.

● According to an official survey released, China's factory activity in September marked its first expansion in six months, signalling further progress for the world's second-largest economy as it emerges from the economic challenges posed by the pandemic. However, the economic rebound is still struggling to gain stability due to inadequate domestic demand, external uncertainties, and job market pressures.

Market Summary

Emerging market stocks continued their negative performance streak on the back of a challenging third quarter which was dominated by apprehensions about prolonged US interest rate increases and looming economic slowdown. The negative year-to-date return of -0.35% from the MSCI Emerging Market Index as of the end of September 2023 reflects this poor performance. However, despite a recent improvement in data, investors' sentiments remain gripped by concerns that US interest rates could stay elevated after US Treasury yields hit a 16-year high. Yields on the 10-year US Treasury considered a proxy for the country’s interest rates, reached 4.7% on Monday, the highest since 2007.

The MSCI Emerging Market Index closed the month of September in red losing -2.8% to settle at 952.78, as opposed to its previous performance of -6.4% in August 2023. The drop was on the back of the heavy declines that were recorded in the Asian markets. In China, worries about economic slowdown, property market slump, and frictions between Beijing and Washington that have caught tech companies in the crosshairs, have continued to subdue the performance of the stock market.

The Chinese Hang Seng index, which tracks the sixty largest companies on the Hong Kong exchange, in September 2023, mirrored the market's trajectory with a -3.11% loss, marking an improvement from the -8.45% loss in the previous month. However, its YTD performance remained negative, with a -13.07% loss. Similarly, the Shanghai Composite Index experienced a slight dip of -0.3% in September 2023, compared to the significant decline of -5.2% in the preceding month. Yet, on a YTD basis, it managed to achieve a positive growth of 0.69%, extending this growth to 2.28% year-over-year (YoY) when compared to its performance in September 2022.

Notable firms such as ACM Research Inc, Jiangsu Cai Win Technology Co. Ltd, and Piotech Inc posed as the top gainers with positive returns of 15.24%, 12.30%, and 10.97% respectively, at the close of the trading week in September 2023. However, on the downside, Shanghai Tianyong Engineering Co. Ltd, Zhejiang He Chuan Technology Corp. Ltd, and Jiangsu Provincial Agricultural Reclamation & Development Co. Ltd recorded declines of -10.01%, -9.30%, and -8.85% respectively. With the latest economic data revealing a slower expansion in China's factory activities during September and decreasing inflationary pressures that could lead to lower interest rates, we expect a potential upward movement in various emerging market indices, particularly those in Asian markets.

World Bank Forecasts 6.3% Growth for Indian Economy in FY24

The World Bank anticipates the GDP growth of India will reach 6.3% in FY23/24, with the expected slowdown primarily attributed to challenging global conditions and a reduction in pent-up demand. Nonetheless, the service sector is forecasted to maintain its strength with a growth rate of 7.4%, while investment growth is expected to remain robust at 8.9%. The India Development Update (IDU) foresees ongoing and increasing global challenges stemming from elevated global interest rates, geopolitical conflicts, and weakened global demand. Consequently, global economic growth is expected to decelerate in the medium term, influenced by these interconnected factors.

India's GDP grew by 7.8% in the April-June quarter, the most in a year and just a little above the 7.7% market forecast. The excellent performance of the service sector, along with strong consumer demand and increasing government capital spending, served as the primary engine for GDP growth. Retail price inflation in India moderated to 6.83% in August, down from July's 7.44%, which had been the highest since April 2022. The figure came in below market expectations of 7%.

The World Bank expects ongoing fiscal consolidation in FY23/24, with the central government fiscal deficit anticipated to decrease further from 6.4% to 5.9% of GDP, while public debt is expected to stabilize at 83% of GDP. In terms of the external outlook, the current account deficit is projected to narrow to 1.4% of GDP, sufficiently covered by foreign investment inflows and supported by substantial foreign reserves. In our opinion, the impact of tightening monetary policy on domestic demand, especially on investments, is expected to reach its highest point in the upcoming year. However, the consequences of declining global demand and increasing interest rates will be alleviated by India's low external debt and strong financial and corporate sector balance sheets.

China's economy rebounds as factory activity surges.

The National Bureau of Statistics recent report revealed that the Purchasing Managers' Index (PMI) of China, based on a survey of major manufacturers, rose to 50.2 in September from 49.7 in August 2023. The index exceeded the 50-point mark, indicating a shift from contraction to expansion, surpassing the anticipated reading of 50.0. The survey showed an increase in the percentage of manufacturing factories reporting intensified competition, high costs of raw materials and financial constraints. Factory activities witnessed growth, after experiencing declines in the previous five months, resulting from the recent measures of support from Beijing and a series of monetary interventions by the Chinese central bank.

The PMI, the first official figures for September, further corroborate the signs that the economy is finding its footing after an initial surge earlier in the year when China started to loosen its tight COVID-19 restrictions. The initial signs of stability emerged in August, as retail sales and industrial output picked up the pace. The decline in both exports and imports slowed down, and the deflationary pressures began to ease. Unexpectedly, there was a 17.2% increase in industrial company profits, reversing the 6.7% decline seen in July.

The National Bureau of Statistics and Chinese Federation of Logistics & Purchasing reported increases in measures of production, new orders, and employment compared to August 2023. However, Zhao Qinghe, a senior statistician at the Bureau, noted that the manufacturing industry is likely to still encounter challenges on its path to recovery and growth.

There were indications of China's economy stabilizing in August, and numerous economists are optimistic that the recovery trend may continue through the year's end. The positive sentiment is fuelled by a resurgence in consumer confidence, improving trade statistics, and government initiatives aimed at supporting the property sector during its extended slump. However, it's worth noting that the statistics agency has issued a recent warning, emphasizing the need for further consolidation in the foundation of the manufacturing industry's recovery and development. We believe that the recovery momentum of China's economy may extend heading into the end of the year on the back of renewed consumer confidence, improving trade figures, and efforts from the government to help the property sector from its prolonged downturn.

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