Stock market summer 2023: Warm start, but cooling due to high interest rates
The stock markets kept pace with the Dutch weather last summer: a warm start, but the stock market climate soon cooled down due to rising interest rates. What does this mean for the returns realised for the Employee Pension? And what are the outlooks? This investment update reviews the past quarter and looks ahead.
Summer at the stock market?
The summer started well for financial markets. Both European and US stocks rose by more than 2% in July. This was due to the buzz surrounding artificial intelligence and macroeconomic figures that were better than expected. Emerging market equities outperformed (5%) those of developed markets (2%). Stock markets suffered a significant downturn in August. European equities by -2.4%. Bonds achieved a modest positive return of about 0.3%. September saw a relatively sharp rise in capital market interest rates, both in the eurozone and in the United States (US). In the Netherlands and Germany, 10-year interest rates came in at around 3%, while in Italy, the UK and the US they were already above 4.5%. Rising capital market interest rates translate into negative government bond yields. In September, European government bonds recorded a monthly yield of -3.5%. Long-term government bonds in particular are sensitive to interest rate changes. And rising interest rates are also detrimental to corporate bonds. But compared with government bonds, the damage was still limited: European investment grade corporate bonds recorded a negative monthly return of -1.5%. Interestingly, the more risky high-yield corporate bonds were the only asset class to achieve a positive return in September, although this was limited to a paltry 0.1%.
Inflationary pressures decline markedly
Inflationary pressures fell in both the eurozone and the US. In Europe, inflation was 4.3% in September (year-on-year) compared with nearly 11% in October 2022. For the US, it was 3.7% in August (year-on-year), up from 3.3% in July. But still a lot lower than the peak of 9% in June 2022. Outside the eurozone and the US, the inflation picture is highly volatile. In the UK, strict central bank policy ‘finally’ seems to be having an effect. Inflation fell to 6.7% in August from 10.4% in February. In China, inflation was even briefly negative in July, before picking up slightly to 0.1% in August. In Japan, inflation has fluctuated between 3.0% and 3.5% over the past six months.