Will October derail September’s market gains?

It was hard to find an example of negative market performance in September. A combination of the Federal Reserve’s first rate cut and Chinese stimulus floated most boats. Markets still judge risks to the global economy to be low. Inflation is falling and risk assets, especially in Asia, remain supported. Growth is holding up and labour markets show few signs of stress, with monetary policies seemingly steering developed economies to soft economic landings. China’s push allowed the authorities to regain some initiative, and markets reacted strongly. But the new measures do not solve China’s long-term challenges and we remain cautious. We removed strategic allocations to Chinese assets in late 2023 and our portfolio exposures through MSCI emerging market indices remain small, with no active tactical positions. After September’s unseasonal market gains, risks to the global economy have risen in October. But a year after Hamas’ attacks on Israel, what impact will the latest geopolitical escalations have? The VIX index, a measure of US stock market volatility, remains around historic averages, haven currencies are steady, and US breakeven rates, a measure of inflation expectations, have barely moved.

Much has changed since the oil shocks of past decades when the world was more dependent on the region’s output. Production has increased and diversified beyond the OPEC group, while the US is now a net exporter. Abundant oil supply is weighing down prices, and more should come online as production cuts are phased out from November. Saudi Arabia has even talked about boosting production to gain back market share. I expect oil price volatility to rise, however. End-users of crude, producers, processors and traders are trying to hedge risks – actions that helped drive prices up last week. Yet we believe a major disruption to supply, perhaps in the Strait of Hormuz, would be needed to trigger a significant oil price spike. We estimate that prices need to be between USD 90-95 per barrel to start being inflationary, and nearer USD 120 to deliver a major inflationary shock. Meanwhile, the impact of regional developments on the US elections has yet to be seen. I firmly believe that solid investment principles and a robust strategic framework are needed to manage a world of shifting geopolitical risks. Our Strategic Asset Allocations (SAAs) have this year delivered solid positive returns, while also providing protection in the face of market drawdowns. An active investment approach is also key. For some investors, it may therefore be time to start locking in year-to date gains via hedging strategies. Our Investment Committee next week will take stock of an evolving geopolitical and market landscape and attune our global portfolio positioning to the opportunities and risks it presents.