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Market Update: The Effects of War, Higher Interest Rates and China on Equities

Posted On: Saturday, November 4, 2023

Market Update: The Effects of War, Higher Interest Rates and China on Equities

South Africa’s benchmark stock market index, the JSE All Share Index, fell 2.7% in October, leaving it 4.2% lower for the year to date. That contrasts with developed market stock exchanges, which had a negative month but remained positive for the year to date. 

The US technology index, the Nasdaq, eased 0.6% during October, while the broad-based S&P 500 Index shed 0.9%. That leaves the year-to-date performance of these indices at an impressive 25.5% and 10.6%, respectively. In Europe, the Eurostoxx 50 Index fell more sharply on concerns about the region’s economy, losing 2.7% for the month but still 6.7% ahead for the year. 

The UK FTSE 100 Index also took a 2.8% knock and is in the red, down 0.8% year to date, reflecting the difficulties the UK has had in bringing its inflation rate below 10% and skirting with the recession. 

Jury’s out on China 

China had a particularly bad month, with the China Shanghai Index (CSI) 300 losing 5%. This reflects one of the most challenging years for the world’s second-largest economy. China is battling to surmount considerable challenges in its property industry stemming from years of overbuilding, resulting in extreme over indebtedness. Its recovery in the wake of the world’s most extreme shelter-in-place Covid-19 policies also proved short-lived, and investors aren’t happy with the onerous regulations China’s government has put on specific segments of the economy.

China’s economic fortunes typically affect global economic conditions because they are a significant driver of global growth, determining demand for resources like oil and iron ore. So, if China’s economy is contracting, the oil price comes under downward pressure in anticipation of lower demand for black gold. China also exports a significant proportion of the world’s computers, phones, office machines, and textiles.

Given its central, but increasingly contentious role in the world economy, professional investors have been weighing whether they should avoid investing in China entirely or whether it will always be too big an investment opportunity to ignore. There are early signs that China’s economy is turning the corner – bolstered by government stimulus measures. But the jury is still out because of the problems in the property sector. 

Geopolitics takes centre stage

October financial market conditions were also marked by the Hamas attack on Israel. Geopolitics has become a bigger consideration in investing over the past few years, given tense US-China relations, countries beginning to onshore production of what they deem to be strategic industries, like defence and computer chips, and Russia’s invasion of Ukraine. 

Though the stock market response to the Hamas attack has been relatively muted, there are concerns that hostilities may spread more widely through the Middle East. Russia’s invasion of Ukraine had an immediate and profound impact on global financial markets and the economy, triggering the most significant increase in inflation in decades and, consequently, the steepest rise in interest rates. MSCI research found that emerging market stock markets were still 12% lower a year after the invasion, and world stock markets were down 8%. 

The answer is: Diversify

As we head into the final two months of the year, the outlook for investors remains exceptionally uncertain and unpredictable. Will geopolitics remain a destabilising force in the year ahead? When can we expect interest rates to come down? What are the odds of a recession taking hold at home or globally? 

These questions are hard to answer with any certainty after three years of unprecedented challenges and change. However, investors have always been able to ride out the tough periods in history by ensuring their investments are diversified across asset classes, like equities, bonds, property and, increasingly, alternative assets, and across geographies. 

As always, our advice is to assemble a diversified portfolio and to never try to time the markets. If you have any questions at all, speak to your financial advisor.

    Note: All figures quoted in this article are correct at date of writing.

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