September, a positive month for emerging markets

In our latest monthly update video, our Chief Investment Officer Richard Flax looks back at a positive month for equity markets in September – especially for emerging markets – and explores the implications of the US government shutdown. You can also find a written version of his commentary below.

September was another broadly positive month for markets. Global bonds (measured in sterling) eked out a small gain, while global equities rose close to 4%. Broad commodities also performed well, up over 3% thanks to a strong rally in gold. Within equities, emerging markets outperformed, as investor sentiment towards China improved. 

Looking behind some pretty serene headlines, we can see some interesting themes. First on interest rates, we saw the US Federal Reserve cut its policy rates by 25 bps. This was very much in line with expectations and investors are expecting another cut in October. 

But the macro picture remains a bit mixed. The labour market continues to slow – in terms of the number of new jobs being created – but unemployment remains pretty low. Estimates for GDP growth for the second quarter were revised upwards again – suggesting that the economy is actually in better shape than we thought. And finally inflation remains above the Central Banks target and looks to be drifting slightly higher. That combination might prompt the Federal Reserve to cut rates again in October, but after that the case for further cuts doesn’t look very strong – barring a significant shift in the macro picture.

In the UK, the Bank of England left its policy rates unchanged. Policymakers are trying to balance relatively pedestrian growth, a weakening labour market and fairly high inflation. The hope is that inflation will decline in the coming months and that will allow the Bank to cut rates. But if annual inflation stays close to 4%, then lowering interest rates will be a challenge.

September saw a strong performance from Emerging Market equities, driven particularly by China. Chinese equities have staged a strong recovery over the past couple of months, helped by signs that the Chinese authorities have taken a more pro-business stance – notably in the tech sector. The government seems keen to encourage businesses to generate sustainable returns rather than just build as many factories as possible. That could mean we’ll see better profitability from Chinese businesses going forward – and that could prove positive for Chinese equities.

Data for the month

The datapoint that caught our attention was the growth in final sales to domestic purchasers in the US for the second quarter. It’s part of the GDP release. The latest figure showed a very healthy 2.9% year-on-year growth. The initial estimate was 1.2%. It’s a reminder of two things: first, it’s clear measuring economies is pretty tough these days – and the initial estimates can get revised a lot. Second, it highlights that demand in the US is still in pretty good shape and that should be positive for the global economy overall.

Question for the month

What are the consequences of the US government shutdown?

Politics in the US remains pretty complicated. Parties in Congress haven’t come to an agreement on a funding bill and the US government has been shut down. This isn’t the first time this has happened and financial investors have generally taken this sort of news in their stride. If the shutdown is short-lived, then we shouldn’t see much impact on the economy. If the shutdown lasts longer than a couple of weeks, that could have an impact on growth. At this point it’s tough to see how long it will take to resolve, even if we think both sides could see the benefits of a quick resolution. 

Importantly for investors, a government shutdown might also mean that key macro data doesn’t get released – like the upcoming non-farm payrolls data. That would complicate life at least in the short-term, not just for investors but for US central bankers as well.