After several months of successive gains, the markets took a breather in September. A combination of factors caused global equities to lose around 2.5% (in euros). At the same time, the month was also difficult for bonds, which suffered as a result of renewed inflation expectations.
While September was relatively stable, several disruptive factors emerged in its last few days, sparking market volatility.
First, the risks associated with the default of Chinese property developer Evergrande triggered a fall in capital markets.
The global press quickly recalled the “Lehman moment”, prompting readers to fear a systemic risk similar to the crisis of 2008. However, a more moderate interpretation of the issue suggests that the Chinese government’s action plan should be to provide more orderly support for the restructuring of this debt. A disorderly collapse would lead to a real financial and economic crisis in China, while an unconditional bailout would lead to considerable moral hazard. A course of action somewhere in-between therefore seems entirely justified.
Another big moment of the month was the US Federal Reserve’s Monetary Policy Committee meeting. While, as expected, it did not touch policy rates, it did announce a reduction in asset purchases in the near future, provided that the maximum employment and 2% average inflation targets are met. The outcome of the meeting was considered to be slightly more hawkish than expected, and this caused US long-term rates to rise from 1.30% to 1.50% in a few days.
Markets are not hiding their concerns about the shortage of natural gas ahead of winter. Indeed, an imbalance between supply and demand in Europe is driving energy prices higher. These have soared on the back of historically low stocks and high demand. The effects have already been felt in European industrial companies, where some fertilizer producers have been forced to halt production. Going forward, this could have an impact on agricultural production and food prices
Today, the environment is more threatening: difficulties in supply chains persist and are causing supply problems, while demand remains strong. This is why investors are probably questioning the duration of “transitory” inflation.
In short, we believe that the break seen in markets is healthy and does not call into question our long-term positive view on equities. Given the high valuations and the sharp rise in equities since the peak of the pandemic, such declines seem natural. Let’s keep in mind that companies’ growth and earnings outlook remain very positive, both this year and next year, and that central banks will maintain generally accommodative financial conditions despite the upcoming reduction in their asset purchase programmes.
We therefore continue to prefer equities over bonds, with a positive view on all developed markets. Our sector view remains balanced between growth and cyclicality.
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