All’s not quiet on the inflation front
The kōura market wrap for October
October saw global share markets rise by nearly 8% month-on-month, which helped offset some of the losses experienced in September. And there are signs that confidence is coming back to the markets.
Markets are still down 16% for the year, but data shows that investors were in buying mood in October, after the pullback in the previous two months. The S&P 500 reported an 8% gain for the month, its first positive month since July. Meanwhile, the Nasdaq increased 14% month-on-month. All predicated on the hope that the Federal Reserve is about to pivot and focus on growth rather than inflation.
Tech stocks were once again amongst ballasts on market performance, with Apple falling 1.5% and Google’s parent Alphabet dropping 1.8%.
kōura Growth Fund based on a typical 80:20 mix, NZ Equities 20%, US Equities 36.6%, Emerging Markets 7.8%, Rest of World Equities 15.6%, Fixed Income 20%. The kōura funds are impacted by currency (translation of local currency indices to NZD) and also differences in constituents between the underlying indices and the actual investments that the kōura funds invest in. kōura returns are net of tax. Past performance does not equal future performance.
Meanwhile, the inflation saga continues and all eyes remain on the central banks’ upcoming monetary policy decisions. Read on for some key things that we have been looking at this month.
1. All’s not quiet on the inflation front
Markets have been almost entirely driven by inflation this year, and the battle is still well and truly on. Central banks all over the world are adamant in their commitment to bringing down inflation, and unsurprisingly, the past month brought more interest rate hikes.
In October, the Reserve Bank of New Zealand (RBNZ) lifted the official cash rate to 3.5%(1). It was the fifth 0.5% hike in a row, the eighth hike overall in 12 months – and it’s likely that another increase will follow suit later this month.
Last week, the US Federal Reserve also increased their interest rate by another 0.75%(2), taking rates to their highest level since 2008. Interestingly, the central bank’s statement hinted that they might change approach in their fight to inflation, but in the subsequent press conference, Fed Chair Jerome Powell dismissed the idea that this will happen soon.
Central banks are walking a tightrope here. The risk is for rate hikes to slow the economy too much and push the globe into a recession, especially with extremely high levels of debt weighing on consumers, companies, and governments.
All this said, there are key factors driving hope from investors. Most economies – including ours – have so far been resilient beyond expectations, with unemployment remaining low at 3.3%(3), business sentiment still strong, and GDP growth continuing to defy forecasts(4). What’s more, across the world we’re now beginning to see signs of inflation falling, largely due to dropping commodity prices. How things will play out is anyone’s guess.
2. Is the UK turning the page?
Only a month ago, we talked about how the markets had reacted to the UK Government’s announced tax cuts, which quickly made Liz Truss’s tenure as UK’s Prime Minister untenable. What followed went down in history as the UK’s shortest-ever serving PM, with only 45 days in the job.
So, it’s now Rishi Sunak’s turn to get things back on track and restore credibility. Sunak was the markets’ preferred candidate due to his fiscal track record and financial background, and markets reacted well to his appointment. UK interest rates fell to 3.5% from a high of 4.5%, and the Pound recovered some of the losses. It remains to be seen, as most are hoping, whether a sense of normality will return to the market in the coming weeks.
3. Xi Jinping confirmed as China’s ‘leader for life’
This year’s National Congress of China’s Communist Party saw Xi Jinping being confirmed as President for an unprecedented third term. China’s constitution used to limit leaders to two consecutive terms, but that’s no longer the case as term limits were abolished in 2018. And this essentially means that Xi Jinping is poised to rule the country ‘for life’.
His reappointment per se was well-telegraphed. More surprising, though, was how traditional rules of hierarchy were upended to elevate Xi’s most staunch supporters to the highest ranks of the party.
The markets read this as a clear sign that China’s policies will continue in the same direction, with political risks making ‘the Red Dragon’ more and more uninvestable. As many analysts noted(5), investors are getting a general sense that China is closing itself to the world, thus no longer needing foreign capital.
4. European energy: the crisis that never was?
The European energy crisis may not be the disaster that many expected, after all. And ironically, that’s partially thanks to climate change.
After a blistering summer, the Old Continent has just had an unseasonably warm autumn, giving them enough time to build up high winter gas storage levels, and get their nuclear capacity back online. So, risks that seemed almost inevitable only a few weeks ago are starting to diminish, as the spectre of shutting industry and rolling electricity blackouts over winter is not as scary-looking as before. Don’t be mistaken: due to significantly higher energy prices, Europe is still headed towards a recession – but probably not as bad as expected.
5. Why subdued corporate earnings in Q3 is not all bad news
It appears that inflation is starting to be felt. Q3 corporate earnings disappointed as many companies are seeing reduced demand, no longer being able to pass on rising costs to consumers. This initiated a ripple effect that had Facebook and Google on the receiving end. As margins weakened, companies increasingly reduced advertising, ultimately leading to Facebook and Google’s poor results in the month.
So, where’s the good news? While 30% of companies missed their already reduced targets, by the end of October 56% of companies in the S&P reported earnings. And for Q3 2022, 68% of S&P 500 companies reported a positive revenue surprise(6), with the energy sector being the largest contributor. For many companies, demand seems to be holding up: the weaker earnings might be driven more by higher costs than a slowdown in sales.
6. The surprisingly resilient New Zealand economy
October was a relatively quiet month for New Zealand. As we mentioned earlier, the RBNZ raised the OCR by 0.5%. But despite headwinds and the aggressive monetary policy, the New Zealand economy keeps defying gravity. Things like business confidence and commodity price forecasts are all stronger than expected, and the low unemployment rate hasn’t moved an inch.
As great as this sounds, the flipside of such strong indicators is that the Consumer Price Index (or CPI, the measure of inflation in consumer goods) remained high at 7.2%(7) for the year to September 2022. We’ll have to wait until the end of January for the next CPI update. But in the meantime, economists are expecting that the RBNZ will increase interest rates up to 5%. And mortgage borrowers are set to feel the pinch.
7. Bitcoin was one of the best-performing asset classes
Finally, a quick update on crypto. A month ago, we highlighted that Bitcoin was the best-performing asset in Q3, with signs that the cryptocurrency might have bottomed out. We can now confirm that, since its meltdown in June, Bitcoin has been one of the best-performing asset classes, ending the month of October 20% higher than the June low. However, investors are keeping a wait-and-see approach, and trading volumes remain extremely low.
Disclaimer: The views and opinions expressed are those of the author Rupert Carlyon, the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.