In the September quarter, global share markets experienced a downturn having produced strong performance in the first half of 2023. The weakness was primarily caused by ongoing concerns around inflationary pressures and recessionary risks stemming from tightening monetary policy. Of particular note, bond yields rose meaningfully during the quarter – for example the US 10-year Treasury yield rose from 3.8% to 4.6%. This is a reflection of resilience in the economy to date and serves as a sign that inflation, while declining, remains too high.
In July, both the US Federal Reserve and the European Central Bank (ECB) raised their cash rates by 0.25%. The ECB followed with another increase in September, and although September's inflation data showed a downward trend, major central banks have indicated that more rate hikes might be necessary to contain inflation.
In the US, equity markets were weaker, with the S&P500 declining by -3.3%. By contrast, the US economy has proven to be more resilient than anticipated. Chinese equities experienced a downturn largely attributable to troubles in the property sector, and the MSCI China Index fell -1.9% over the quarter. The Australian share market dropped -0.8% as concerns in China weighed. The Reserve Bank of Australia opted to maintain a pause on rate hikes during the quarter, and given the cautious environment, the Australian dollar fell -3% against the US dollar.
The recent sharp increases in global bond yields are partly due to confirmation from the US Federal Reserve that interest rates would need to remain “higher for longer”. Of course, there are other factors at play, for example: stubborn inflation, ballooning deficits and elevated bond issuance in the US, and rising bond yields in Japan.
But the strength of overall economic activity, at least in the US, is impressive. The labor market remains close to full employment which means consumers are still confident to spend. We know that interest rate rises take some time to work themselves through the economy, and so much of that negative impact has still not filtered through. Another reason for the evident strength in the economy may be that we’re still working through the fiscal handouts provided during the pandemic. So just how much longer this benign environment will last is a key question financial markets are beginning to ponder.
Some potential warning signs are already evident in the US. The labour market may have peaked, and manufacturing activity has been slowing. The environment in Europe is already weak, with Germany entering a technical recession. Structural problems in the Chinese property sector have been exposed. And problems within US regional banks were also evident earlier this year. These are not isolated incidents. They all share a common factor – the impact of rising interest rates.
On balance, we believe rising interest rates will, over time, lead to a better supply/demand dynamic in the economy and markets. Importantly, after a decade of falling interest rates and unconventional policies, traditional defensive investments, such as government bonds and cash, now provide the most attractive prospective returns we’ve seen in a very long time, alongside great diversification benefits and liquidity.
To that end we’ve maintained our strong focus on diversification, as this is one of the key foundation beliefs of our investment strategy in delivering positive, long-term, real returns to our members.
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If you’d like further information about how your investments have performed, or if you’ve got any queries about your Catholic Super account, you can contact us online at any time, or give our team a call on 1300 655 002, Monday to Friday 8:30am to 6:00pm AET.