Investment update for October 2022
October witnessed another turbulent month in global markets. With easing on global supply chain pressure, escalated tension between Russia and Ukraine, deepening energy crisis facing Europe, and continued weakness in China, there remains deep uncertainty as to what lies ahead.
In the US, the latest data shows a slowing resilient economy. Inflation remains at an elevated level, supported by services. Higher mortgage rates are weighing on the housing sector as data points to a slowdown in both housing starts and home sales. Weakness in some forward-looking indicators like Purchasing Manager Index (PMI) also signals softening in the economy. Labour markets remain strong as the unemployment rate fell to a record low, although high frequency data indicates moderated job growth.
In Europe, even though the gas price has come down, energy remains a key driver of inflation. To dampen the impact of the energy crisis, governments announced new measures including price caps, a common purchases system and new fiscal stimulus support. Within the Euro area, October PMI data indicates activity in most countries is declining at an accelerating pace.
Stock markets in developed economies registered a positive return while emerging market equities fell, with Chinese indices seeing significant drawdown. Global bond yields continued to rally, producing a negative return for the month. The Australian market has finished October with a respectable performance in both stock and bond markets. Consumer discretionary shares were among the biggest gainers, backed by strong consumer spending.
China’s zero-COVID policy keeps domestic demand weak, aggravated by a deteriorating property sector slump despite multiple rounds of policy stimulus since early this year. Real GDP growth rebounded to 3.9% in the third quarter, beating market expectations but set to miss the growth target of 5.5%. The value of Chinese investments fell significantly following the Communist Party’s National Congress where Xi Jinping secured his third term as President, producing large losses in Chinese and emerging market equities for the month.
Central banks in most developed markets continued to tread a tightening path as policy makers prioritise tackling inflation. US Federal Reserve officials continue to emphasize the need to steer policy toward cooling inflation, even if this means weaker growth in the future. The European Central Bank is also on an aggressive path of rate rises as it announced its third consecutive jumbo increase this year. Some central banks like the RBA and the Bank of Canada have taken a more dovish turn by delivering smaller rate hikes in recent announcements, recognising that accumulated rate hikes are yet to take full effect and cautious of speeding towards a hard landing.
A slowing global economy and deep uncertainty has pushed the US dollar higher. Dollar strength was particularly notable against Japanese yen and Chinese RMB, two currencies whose central banks continue to adopt a much more accommodative stance. The appointment of the new UK prime minister who announced a new set of economic policies has contributed to the rally of GBP.
The Australian dollar depreciated against most of the major currencies over the month except for Japanese yen, thanks to international central banks becoming more hawkish and recent turmoil in global financial markets.
Listed real assets, property and infrastructure produced a positive return in October, but rising bond yield and declining house price remain key risks for the property sector going forward.