September finished a tough quarter for investment returns, ironically a more resilient economic backdrop hasn’t been helpful as inflation
concerns remain elevated which in turn keeps pressure on interest rates.
On the inflation front, steeper supply curves particularly a resurgence in oil prices have also been unhelpful. Equity markets started the quarter on a positive note but suffered negative returns in both August and September as sentiment soured with a shift in focus to rising cost pressures challenging profitability, weakening demand, and higher borrowing costs which resulted in a broad market decline which proved difficult to avoid. Bond returns were negative as moves higher in interest rates resulted in capital losses negating the positive income accrual from fixed income.
The re-pricing of higher cash rates for longer and increased supply of government bond issuance weighed heavily on bond markets both here and offshore and yield curves are now a lot higher and flatter in slope. A positive is that cash and bonds look a lot more attractive as an investment, but this isn’t helpful for equities when comparing forward earnings versus the higher yield to maturity on cash and bond funds.
An improving inflation profile remains the key to lower rates but if economies and consumers remain more resilient it looks likely we will have to wait longer for validation. In general, risk appetite has taken a backward step with market liquidity much lower as investors reassess. The markets want to move forward but there is a surprising degree of uncertainty as to the evolution of economies and inflation especially considering we are arguably close to the terminal peak in cash rates. Even though assets prices have cheapened investors may be following the mantra of central banks which is to wait, watch and worry until they have more conviction regarding where to from here?