Investment Commentary – September 2023

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Following generally positive equity market momentum since the beginning of the year, August saw a small reversal, although a rally towards the end of the month ultimately left major indices little changed. The main explanation provided for the weakness was perversely the continuing strength in the economy, particularly in pay growth. This led investors to expect higher interest rates for longer, suppressing valuations across assets. Concerns over the Chinese economic growth and property sector also weighed on sentiment.

Positive economic data came from the US, with the labour market remaining robust and retail sales growing unexpectedly strongly in the month. Although there is a slowdown in some areas of the economy, this has yet to turn into a broad based slump. Although the prospect of meaningful further rate hikes has not changed, the lack of immediate weakness has pushed back the market expectations of interest rate cuts over the coming year.

The UK had more mixed data in the month. Pay growth, retail sales and economic growth all posted surprise increases, spurring the Bank of England to increase rates by 0.25% to 5.25%. However, the unemployment rate spiked up to 4.2% from 4% the month prior, against expectations of no change. There continues to be more ambiguity in the progress of the UK economy and inflation, relative to other developed markets. The UK is still considered to have a greater inflation problem than other regions, although this has moderated in recent months. Falling inflation and a weakening economy will make it increasingly difficult to justify many more rate hikes.

Elsewhere, China actually fell into deflation, seeing headline CPI prices fall 0.3% year on year. Furthermore, there were concerns over the health of the property market. China has failed to experience the same reopening bounce that was seen in many developed market and longer term negative structural trends are weighing on the economy. Previous tailwinds have now turned into headwinds, making it more challenging for the Chinese economy to grow smoothly. In particular, demographics will increasingly be a problem, with the workforce and population overall now shrinking.

Nvidia, the US computer chip producer, once again managed to exceed elevated market expectations. In many areas the company has grown over 100% year on year, driven by a rapid rollout of next-generation data-centre hardware and software. The company remains some way ahead of the competition and is capitalising on the excitement surrounding generative AI and accelerated computing. It remains challenging to apply a valuation to such a rapidly growing company, however, investors appear willing to pay ever increasing prices for such rapid and cutting edge growth. Nevertheless, expectations are now so elevated, anything other than exceptional over coming quarters may lead to a sharp correction to a share price that has risen over 300% since October 2022.