‍

Investors received a double boost in September with the first US interest rate cut for four years and a raft of Government policies announced to help stimulate the Chinese economy. Although it wasn’t all good news with sluggish growth and ongoing fractious politics in Europe, and Israel launching a ground offensive in Lebanon at the end of the month heightening geopolitical tensions.

‍

The market had been anticipating that the Federal Reserve would reduce interest rates at the September meeting, but a decisive 0.5% rate cut came as a bit of a surprise, reducing the borrowing rate to the range of 4.75% to 5.00%. Especially given that the US economy still appears on a firm footing, the US consumer continues to spend, and retail sales increasing by 0.1% in August. However, the Fed appears to be confident that inflation has been beaten and keen to take a pre-emptive strike to stave off recession. Markets are now pricing in about 10 cuts to rates before the end of 2025 and the much awaited pivot has been a decisive move.

‍

European interest rates were also cut in September (by 0.25%), and the latest reading of Eurozone inflation saw it fall to 1.8% - below the European Central Bank’s target. Their focus will now surely turn to be the lacklustre growth environment. A survey of German business activity shows the fifth month in a row of falling activity and GDP there fell 0.1% in Q2.

‍

In contrast the Bank of England stood firm on rates in September, with inflation appearing under control (UK CPI was flat in August at 2.2%) and growth flat lining. Data released at the end of the month showed the UK economy grew 0.5% in the second quarter of 2024 falling short of the previous estimate of 0.6%. The feelgood factor of a change of Government hasn’t lasted long. Starmer’s catchphrase of “things will get worse before we get better” is unlikely to inspire a feel-good factor.

‍

Perhaps the most surprising event occurred during the last week in September as a barrage of stimulus was announced by Chinese authorities aimed at both the moribund economy and lacklustre stockmarket. The latter has seen an immediate boost; the former will take much longer to turn around. The announcements are close to the much awaited “bazooka” that investors had been hoping for. Stimulus has been mainly monetary with the key measures of cutting the base rate by 0.2% and existing mortgage rates by 0.5%, in addition to reducing reserve requirements of banks. There is also the possibility of some helicopter money at some point and the Peoples Bank of China will essentially lend to banks and brokers to invest in the stockmarket. The question is will this be enough to reverse the deflationary spiral threatening to engulf the Chinese economy?

‍

Market Watch

China will obviously occupy many column inches this month, but the Federal pivot was surely the catalyst for the boost in investor sentiment. The S&P 500 rallied by 2.1% over the month and hit the 43rd record high of 2024, whilst the Dow Jones index also hit new highs. However, a weakening dollar all but wiped-out market gains for sterling investors. If the Federal Reserve continues to make aggressive rate cuts, then a weakening dollar could prove a drag to UK investor’s US equity returns.

‍

The UK stockmarket had a lacklustre month, dragged down by weak data and no rate cuts with the FTSE All Share index falling back by 1.3%. This is despite a strong rally in the mining sector. Sharp rises in mining stocks at the end of the month illustrate how the fortunes of the sector remain intrinsically linked to the fortunes of the Chinese economy.

‍

And so, to the story of September – with the announcement of a stimulus package that took investors by surprise. Having been the most moribund of markets for a long time, the last week of the month saw Chinese equity performance graphs show almost vertical lines and all China related investments ignited. Hong Kong’s Hang Seng was the best of the major markets up over 18% with the Shanghai Composite trailing not far behind. China’s performance also dragged the MSCI Emerging Markets index up to a 5.5% return last month.

‍

Bond markets may not have been as exciting, but the US bond markets reacted positively to the first rate cut in four years with the 10-year treasury falling from 3.9% at the start of September to yield 3.78% at the end of the month. The 10-year Gilt didn’t do a great deal falling from 4.01% to 4% - with inflation near 2%, gilts are offering an attractive real yield. Having seen many false dawns, it feels like the pivot and a slowdown in economic growth is seeing bond markets in a position to generate an attractive level of income and provide diversification benefits in a portfolio.

‍

As interest rates fall, and geopolitical tensions remain elevated gold continues to hit new highs. Gold started September at $2527 and finished the month at $2654 an ounce, having been over $2700 at one point – another new record. The price of a barrel of Brent was $76.93 a month ago and closed September at $71.77 with the weakness attributed to a Saudi desire to regain market share and abandon $100 oil.

‍

On the currency front, the dollar was weak and sterling pretty strong. The pound rose 1.25% against the Euro, it was up 2.15% versus the US dollar and was flat against the Yen. Bitcoin was up 9.35% in euros as investors favoured risk assets.

‍

Fund Watch

Looking at funds now and the dominance of China was total. The top 44 funds last month were all China funds, with the 45th being an Emerging Markets funds, then back to China again. It will be interesting to see if this is the start of a bull market or a dead cat bounce – the answer may depend on whether more spending taps are turned on by Beijing.

‍

Redwheel China Equity topped the tables last month returning 30.2%, very closely followed by Matthews China which rose 30.09%. The top ten funds all rose at least 20% (and not a tracker amongst them.). For the record, the 45th best fund was the Polen Capital Emerging Markets Growth fund, then back to China again.

‍

The story from a sector perspective was no different. The China/Greater China sector was the runaway leader in September with the average fund gaining 16.3%. Asia Pacific ex Japan was a distant second gaining just over 5%.

‍

The foot of the table was a mixed affair with fewer discernible themes. Liontrust Russia propped the rest falling 8.57% - there didn’t seem any reason except the ongoing/never-ending war in Ukraine. The only real theme was UK micro-cap funds, especially those exposed to the Aim market. Rumours abound that the chancellor, Rachel Reeves, will remove the IHT break from Aim shares – this would be a devastating blow to the junior market and at complete odds with the Labour party promise to be pro-growth. Energy funds also featured near the foot with the oil price falling near the $70 mark. From a sector view Healthcare was the worst performer dropping over 4% followed by the three UK sectors.

‍

Looking at investment trusts now and the AIC China sector was the runaway leader here as well with the average trust leaping 22%. JP Morgan China Growth & Income took top spot gaining 24%. However, the rest of the top five sectors were all property – base rate cuts and a taming of inflation has led to investors rediscovering property as an asset class at the same time as one of the risk modelling companies that many financial advisers use has removed property as an asset class!

‍

Manager watch

China has been the most unloved market for some time and many commentators have been writing it off as an investment opportunity; calling China uninvestible or a “value trap”, whilst in the latest Merrill Lynch fund manager survey, the percentage of asset managers expecting a stronger Chinese economy is at the lowest level since that question was introduced three years ago.  The same survey earlier in the month saw commodities and China as the biggest contrarian trades.  Once again this highlights the pitfalls of market timing and short-term predictions. Last month we highlighted Fidelity China Special Sits manager Dale Nichols stating that with the China market trading at a 60% discount to the US this provides opportunities for long-term investors who can look through the current economic doom and gloom – that looks a sensible approach, given the events of the last week! 

‍

The numbers…

1 month returns - Performance figures 31/8/24 to 30/9/24, source FE Analytics.

‍

Important Information

This document is produced by Fairview Investing Ltd, an independent research consultancy. The content is for information purposes only and does not constitute financial advice. The commentary or research provided do not constitute a personal recommendation to deal. Any statements, opinions, forecasts, and figures are made by Fairview Investing (unless otherwise stated). They are considered to be reliable at the time of writing but may be subject to change.

Fairview Investing accepts no legal responsibility or liability for the content of this material. The contents of the document are not to be re-produced or circulated without the express permission of Fairview Investing Ltd.

Fairview are independent investment consultants sitting on the Investment Committee of EXE Capital Management.

‍