Investment market update – Quarter ending 30 September 2023

Despite a great start in July, both equities and bonds ended the September quarter (Q3) on a low note, supporting the latter month’s reputation for delivering seasonally weaker returns. 

US markets underperformed both other developed markets and emerging markets, as value outperformed growth, with a retreat among the ‘Magnificent Seven’ stocks (Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Tesla and Meta) which had provided most of the gains during the first half of the year. Negative market sentiment was driven by a ‘higher for longer’ interest rates narrative in an environment of weak economic growth. This sentiment was more pronounced in interest rate-sensitive sectors, driving negative returns for fixed income and gold.

Advanced economies kept progressively readjusting the balance between supply and demand, leading to a gradual reduction in inflationary pressures. Although growth slowed, it did so at a more moderate pace than declines in inflation. While US headline inflation (the raw inflation rate) moved higher, mostly due to price increases for key commodities such as food and fuel, core inflation (which removes those volatile commodities) continued to trend lower. In the UK and the Eurozone, inflation decreased on both measures, as their respective central banks maintained their hawkish stances. This resulted in interest rates either being maintained or increasing further, which put upward pressure on yields. This had a negative impact on returns for each of the Fund’s investment options, as upward pressure on interest rates leads (generally) to falls in the value of bonds.

Energy prices surged during the September quarter on the back of extended supply cuts by OPEC+ and Russia, resulting in large gains in West Texas Intermediate (‘WTI’) crude oil prices. This resulted in the energy sector being the only one to deliver strong positive returns overall. The listed property sector underperformed equities by a large margin due to rate sensitivity and concerns surrounding the Chinese property debt crisis.

Closer to home, Australasian equities posted similarly weak returns, with the NZX and ASX returns dominated by the negative impact of higher long-term government bond yields on equity valuations.