The ‘inflation monster’ continues to bite
The kōura market wrap for September
September was the worst month in global stock markets since the Covid downturn of March 2020, with inflation still dominating the horizon.
It’s increasingly clear that higher-than-expected inflation means central banks will need to keep pushing rates higher and for longer – intensifying the risk of a meaningful recession to hit.
This is the scenario that markets are anticipating. In the month of September, markets were down over 8.3%, touching new lows for the year and shifting global stock markets back to pre-Covid levels.
The tech-heavy Nasdaq fell 10.5%, taking its year-to-date falls down to 32%, although it remains almost 8% above its pre-Covid levels - these companies were the biggest beneficiaries of the new Covid way of life and low-interest rates, both of which seem to be reverting back to normal.
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| Local market returns |
Kōura fund returns
| ||||
| 1 Month | 12 Month | 24 Month | 1 Month | 12 Month | 24 Month | |
| NZ Equities | (4.6%) | (16.6%) | (2.9%) | (4.6%) | (14.7%) | (1.2%) |
| US Equities | (9.2%) | (15.5%) | 4.8% | (5.3%) | (15.8%) | 3.5% |
| Emerging Markets | (9.3%) | (21.1%) | (3.8%) | (3.3%) | (9.9%) | 2.7% |
| Rest of World | (6.2%) | (10.7%) | 6.8% | (4.8%) | (16.0%) | 1.4% |
| Fixed Income | (1.5%) | (9.3%) | (7.7%) | (1.1%) | (6.6%) | (5.0%) |
| kōura Growth Fund Equivalent |
| (4.2%) | (13.6%) | 0.5% | ||
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.
In the meantime, the news flow was relatively limited, with the global conversation focusing on the increasingly tough talk on inflation and the chaotic ineptitude of UK politicians. Read on for our rundown of the key factors that we are currently thinking about.
1. The Central Bankers conundrum
There are no two ways about it: central bankers around the world find themselves in a tough spot right now. Despite aggressively pushing interest rates higher and clear signs of economic slowdown, we continue to see record-low unemployment rates and increasing cost pressures.
This is evident in the US, where the economy experienced two-quarters of negative GDP growth and, at the same time, record-low unemployment at 3.6%. Something similar, albeit even stranger, is happening in Europe: most of the continent is seeing negative GDP growth, with worse expected to come due to rolling energy cuts over the winter, yet unemployment rates are at all-time lows.
Unfortunately, until Central Banks start to see a material softening in the employment market (read higher unemployment) interest rates will continue to rise. We are starting to worry that shifting population dynamics might have more to do with this change than people are giving credit for.
2. The shifting population dynamics
The last 50 years of economic growth have been built on very low labour costs, driven by the surging global population, offshoring of production to low-cost countries, record immigration, and increasing workforce participation (largely due to women entering the workforce). But those days are well and truly over.
The global population is expected to start falling in the next 10-20 years, and aging populations in most developed countries mean there are fewer workers and more retirees. Over the past 2 years we have seen workforce participation rates (the percentage of the total population working) take meaningful drops, as the Covid-19 pandemic accelerated long-term trends, people that could retire or reduce working hours appeared to have done so. We now live in the age of the Great Resignation and ‘quiet quitting’, with many people choosing to permanently withdraw from the workforce.
Our concern is that this fundamental shift in the structure of the global economy will take a while to work through – fundamentally the only answer is a structural shift in the economy we will need productivity growth to grow rather than relying on population growth and cheap labour. It’s unclear whether central banks have recognised this as the new fight they need to be concentrating on.
3. The USD continues to steamroll everything in its way
The US Dollar keeps strengthening against all global currencies, with the ICE US Dollar index approaching all time highs.
This renewed strength is driven by three key factors:
- The relative strength of the US economy compared to other global economies;
- The aggression with which the US Fed is raising interest rates; and
- The position of the USD as a safe haven in times of global strife.
The strong USD can be good for commodity exporters (like Australia), as most commodities are priced in US dollars. But so are shipping and many other goods and services, which means that most economies will be importing a significant amount of inflation – paying higher prices for critical raw materials than their consumers will be spending Which can cause a huge amount of economic pain at home.
4. Have we finally seen the worst political performance of the past decade?
Over the past few years, we have seen political ineptitude that would have been unthinkable 20 years ago. And after the initial relief of Boris Johnson departing a few months ago, the UK public and markets have now come to the realisation that Liz Truss may be even more dangerous.
On 23 September, the UK Government announced a series of tax cuts worth GBP45bn (largely aimed at corporations and the wealthy) and confirmed subsidies for energy payments. Unfortunately, accompanying the announcement there was no detail on how these tax cuts would be paid for, particularly given the UK Government debt currently sits at almost 100% of GDP with a Government deficit of c.5.5% GDP as well. At first glance, the tax package would add another 2-3% to the budget deficit, though this was apparently missing the point according to the UK Chancellor who had promised that an explanation would be forthcoming in mid-November how
Markets did not react well, pushing up UK interest rates and pushing the Pound to all-time lows. Investors were nervous that it would lead to significant increases in debt issuance and were petrified about what it means for the long term health of the Government. How they thought they could delay explanations on the policy for 6 weeks is absolutely mind boggling!
Luckily, some form of reality has set in with the changes reversed earlier this week. Britons may now be wishing that Boris was still around…
5. Bitcoin may finally have bottomed out
Interestingly, Bitcoin was the best performing asset in Q3. Prices ended largely where they started the quarter, compared to a 5% loss for global stock markets and similar losses for Fixed Income portfolios. In the month, bitcoin price fell by 2%.
The market chaos seen in May and June appears to have calmed down, with Bitcoin continuing to trade in a relatively tight range of US$18 – 22k. According to chain analytics data, retail holders have not yet returned to Bitcoin, but the longer-term holders have stopped selling and the forced liquidations that we saw in May and June seem to have halted.
