We hope you are all extremely well and are enjoying the familiar return of our cold and wet weather, political infighting, the endless stream of football, bugs and, for UK investors at least, stock market weakness.

As readers may be all too aware, September is known as a seasonally weak month for stocks, however, global share prices accrued impressive gains this time around, delivering a positive, if emotional, 3rd quarter for investors. Referring to earlier comments, however, given the strength of sterling, returns were far more subdued for UK based investors, as global stock market performance was offset by relative currency losses.

Pound strength is a potentially confusing story given the current political narrative, yet despite burgeoning unease regarding our new government’s growth strategy, the economy continues to perform reasonably well, and far better than some very downbeat expectations. This resilience (derived from a jobs market in broadly decent shape), coupled with stubborn inflationary prints from within the service economy, is keeping the Bank of England on a relatively hawkish footing. Though the BoE is still set on a cutting path, the comparative ‘dovishness’ of its US and European counterparts has helped lift the pound to multi-year highs.

Indeed, the relative ‘dovishness’ of the US Federal Reserve was a key moment within the month… if not the year… if not this economic cycle! Deciding a 0.5% interest rate cut was the most appropriate course, rather than the usual 0.25%, the Fed moved at a pace typically reserved for emergency intervention. There was no sense of panic this time, however, citing a keenness simply not to fall ‘behind the curve’. The focus of the messaging centred on incremental weaknesses within the labour market, but the steps taken signal not just the Fed’s willingness to support the economy, but its comfort with the trajectory of inflationary trends too.

This policy course has been received well by markets, with investors interpreting a more accommodative path for policy as raising the prospect a soft landing can be achieved i.e. that a recession will be avoided. This conclusion aligns with our current thinking, though we’d be keen to stress the risks of recession remain prominent.

Despite the delivery of lower interest rates, most borrowers will likely suffer an increase in debt service costs at any imminent refinancing event; a dynamic which may yet squeeze the growth out of an already slowing US economy. We would also highlight the risk of resurgent inflation should the Federal Reserve push too hard on shielding/stimulating the economy. In such a setting, we suspect the Federal Reserve would be forced to reverse course (again), swiftly and dramatically raising interest rates to finally see-off the menace of inflation.

Neither outcome forms part of our base case but risks are non-negligible, with the outcome for equity investors likely to be pretty grim should either come to pass.

No doubt the most exciting event(s) over the month, however, came from Chinese policymakers, with a raft of policy initiatives designed to reignite demand within its flagging economy, as well as (remarkably) to support the stock market. The efficacy of these policy choices is far from certain, with demoralised consumers, rocked by house price depreciation, at risk of using any windfall to repay debt rather than spend. We also observe efforts to increase credit availability may also meet a swathe of disinterest from an economy low on confidence. Despite this nervousness, investors have taken comfort from a clear change in direction and tone, designed to more meaningfully address the challenges their economy presents. The scale (though not quite a ‘bazooka’) far exceeds previous efforts and has been delivered in an ‘open-ended’ fashion, suggesting a willingness to do more if circumstances require.

Though perhaps not a ‘Whatever It Takes Moment’, akin to that of former ECB President Mario Draghi amidst the European Sovereign Debt Crisis, markets have recognised the bold steps which have been taken, and the intent behind them. With such determination on display, an imminent reversal of Chinese policy initiatives seems highly unlikely, offering credible support for Chinese (and Emerging Market) equities for the time being.

Kind regards,

iPensions Wealth Team

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