United States

Many US equities kicked off the third quarter with positive earnings reports, which lifted US equities in the run up to August. Furthermore, the Federal Reserve (Fed) struck a dovish tone confirming their hesitance to tighten policy too fast.

In the September meeting, the Fed stated that it will start slowing down the pace of asset purchases (i.e. tapering) in November and will take up this action at a faster pace. This monetary stimulus tool had been accelerated since the pandemic hit the US back in 2020. This tapering action aims to remove the added pressure that quantitative easing is piling on rising inflation. The Fed now sees inflation running to 4.2% this year, 0.8% higher than its previous estimate.

The top performing sectors during Q3 were financials and utilities, while the industrials and materials sector lagged. This being said, the September’s sell-off impacted almost all sectors, except the energy sector, as supply constrains drove prices higher – particularly Brent Crude.

Eurozone

Similar to the US, in the Eurozone Q3 started positively, as many companies published positive earnings; indicating the ongoing economic recovery. Although, the Delta variant continued to be a threat, most of the large Eurozone countries have hit the 75% mark in terms of vaccinated citizens and hence increase enabled many restrictions to be lifted.

From a stock market perspective, Eurozone equities were flat in Q3. The energy sector, the information technology (IT) sector and semi-conductor related equities were the best performing sectors during the quarter. On the flip side, consumer discretionary stocks and luxury goods companies declined.

Although when compared to the US, the Eurozone is suffering to a lesser extent from inflationary pressures, supply chain bottlenecks and rising energy prices are a concern for the European Union. Annual inflation in the Eurozone was estimated at 3.4% in September, up from 3.0% in August and 2.2% in July. The European Central Bank said it would tolerate any moderate and transitory overshoot of its 2.0% inflation target.

During September, Germany held a general election to replace Chancellor Angela Merkel. The election saw the Social Democrats (SPD) take the largest share of the votes. Coalition talks are now under way over the formation of a new government.

United Kingdom

On the whole UK equities rose over Q3, as a result of several factors. Similar to the US and Eurozone, the energy sector performed positively, as crude oil recovered from its lows earlier in the year. Other sectors were mixed, as companies within the same sectors had different performances.

Small and mid-cap (SMID) equities suffered in line with higher growth areas of the market more generally in September, but performed very well over the quarter. SMID caps remained a sweet spot for M&A activity and made a useful contribution to overall market returns.

As inflation continued to rise faster than expected, the Bank of England struck a hawkish tone. Added inflationary pressure during Q3 was partly accelerated from supply bottlenecks and natural gas and fuel shortages.

Emerging Markets

Emerging Market equities dropped during the past three months, which saw a sell-off in Chinese stocks, concern over continued supply chain disruptions, and worries over the implications of higher food and energy prices for some markets. Regulatory actions in China were the initial trigger for market weakness. These were compounded by the re-imposition of some Covid-19 restrictions and supply chain disruption in August, worries about possible systemic financial system risks stemming from the potential collapse of Evergrande, and power shortages.

Brazil was the weakest market in the MSCI EM index as above-target inflation continued to rise and the central bank responded with further interest rate hikes. Meanwhile Q2 GDP growth disappointed while developments in China weighed on industrial metals’ prices. South Korea also suffered a double-digit drop amid falling prices of dynamic random access memory chips and concerns over the impact of power issues in China on production and supply chains. Weaker industrial metals’ prices also weighed on performance of net exporter markets Peru and Chile.

On the other hand, following the positive performance in the energy sector, energy exporters in general outperformed, most notably Colombia, Russia, Kuwait, Saudi Arabia, Qatar and the UAE. India delivered a strong gain, with sentiment boosted in part by the recent stream of initial public offerings. The economy continued to recover while vaccinations picked up – India is now on track to deliver at least one dose to 70% of its population by November.

Fixed Income

US and European government yields were unchanged for the quarter, as an initial decline in rates, was reversed in September as central banks had to adopt a hawkish tone as inflationary pressure continued to persist. The UK underperformed, with a significant rise in yields on increased expectations for monetary policy tightening.

The US 10-year Treasury yield finished at 1.49%, an increase of 0.01%. Yields fell initially, as the rapid economic recovery appeared to be moderating. However, as the market’s focus turned to rising inflation and the prospect of the withdrawal of monetary policy support, yields rose back to similar levels seen at the beginning of the quarter.

The UK 10-year yield increased from 0.72% to 1.02%, with the move occurring in September following the indication that the BoE might increase interest rates. Recent economic indicators came out worse than expected, while year-on-year consumer price inflation rose to 3.2% in August, the highest since 2012.

In Europe, the German 10-year yield was -0.19%, a decline of one basis point (bps). Italy’s 10-year yield finished 4 bps higher at 0.86% due to fast growth in Economic activity coming from pent-up demand, having come out of lockdowns relatively late. Eurozone inflation hit a decade high of 3.4% year-on-year in August.

Among corporate bonds, high yield (more speculative) made positive returns, while investment grade (highest quality bonds) credit was little changed. European investment grade outperformed government bonds, while the US market was in line with Treasuries.

Local Market

From a local market perspective, Q3 trading activity saw the MSE Equity index lose 0.3% to end at 8,033.911 points. The best performing equity during the quarter was Plaza Centres plc, as the share price of the shopping centre gained 88.7%. On the contrary, the worst performer during the same period was Santumas Shareholdings plc, losing 20.9%.

During Q3, the Malta Government Stock Index shed 1% and ended at 1,094.387 points, as MGS prices continue to drop. On the other hand, the local Corporate Bond Index advanced 2.8% to close at 1,151.774 points.

Article Sources: Schroders Insights and Malta Stock Exchange

This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]