2023-09-27 20:30:00 ET
- As the end of the third quarter approaches, stock markets around the globe are slumping as the US dollar reaches a six-month high after 10 straight weeks of increases.
- Over the last month through September 22, the global iShares MSCI ACWI ETF, ACWI, lost 2.7%, and its 90-day performance was a loss of 0.7%.
- Most international markets registered single-digit negative returns for the 90-day period, with the notable exceptions of gains in the markets of India and Japan.
By William H. Witherell, Ph.D.
As the end of the third quarter approaches, stock markets around the globe are slumping as the US dollar reaches a six-month high after 10 straight weeks of increases.
Over the last month through September 22, the global iShares MSCI ACWI ETF, ACWI , lost 2.7%, and its 90-day performance was a loss of 0.7%. Excluding the US market, the iShares MSCI ACWX ETF, ACWX , 90-day performance was worse, -1.3%.
Most international markets registered single-digit negative returns for the 90-day period, with the notable exceptions of gains in the markets of India and Japan.
Investor sentiment has deteriorated as a week of central bank meetings has underlined the prospect of higher-for-longer interest rates with lackluster economic growth.
September is a month when many institutions and economists issue revised economic forecasts. In its “OECD Economic Outlook, Interim Report September 2023: Confronting Inflation and Low Growth,” the OECD notes that the global economy was somewhat more resilient than expected in the first half of 2023, benefiting from lower energy prices and the reopening of China.
However, the effects of tighter monetary policies, a return of rising energy costs, and a sluggish economic recovery in China are leading to slower global growth in the second half and in the prospects for 2024. The OECD now expects “sub-par” global economic growth in both 2023 (3.0%) and 2024 (2.7%).
Central banks aggressively raised interest rates in 2022 and in the first half of this year, seeking to bring headline inflation back to target rates. Headline inflation is beginning to moderate, but progress may be slow.
The OECD projects headline inflation in the G20 advanced countries to be 6% for this year and 4.8% next year, still considerably above the 2% objective.
While slowing economic growth, particularly in Europe, will likely cause central banks to hesitate on raising interest rates significantly, they will probably still keep policy tight through 2024.
Looking at regions, signs of slowing growth are the most visible in Europe. While the Eurozone composite PMI (Purchasing Managers' Index) for September improved slightly over the August reading, at 47.1, this reading is still well below the 50 mark, which divides advancing from declining economic activity.
Thus, the Eurozone’s private sector was contracting as the quarter was ending. New orders declined for the fourth consecutive month. The forecast for the Eurozone’s economic growth this year now is only 0.6%, and for 2024 the growth may be just 1.1%.
It is notable that Eurozone stocks have shown a certain resilience in the face of the pessimistic economic outlook. This resilience may reflect the relatively attractive valuation situation. The 12-month forward P/E for the EuroStoxx 50 of 11.3 is well below the 18.3 measure for the S&P 500 as well as the 14.4 for Japan’s TOPIX.
Across the Channel, the United Kingdom’s economy is also experiencing a contraction in the third quarter. High interest rates and a tight fiscal policy are taking their toll on the economy. Inflation is proving to be sticky.
The OECD expects the UK economy will register a stagnant 0.3% growth rate for the year 2023 and just 0.8% next year. UK stocks also have attractive valuations, with a P/E of 10.7 for the FTSE 100.
Growth in Japan has been comparatively robust thus far this year, but momentum is expected to ease over the remainder of the year because of the sluggish external demand outlook.
The Bank of Japan is the only major central bank that continues to maintain an easy monetary policy with very low interest rates. It also benefits from being considered a haven for investors in periods when risk aversion is high.
Japan’s economy is projected to register a 1.6% growth rate this year, slowing to a 1.0% rate in 2024. International investors have favored Japan this year and are expected to continue to do so in 2024.
Major and long overdue reforms in corporate governance helped Japan’s stock market to outperform other advanced economies thus far this year. Note that while Japanese stocks are up some 24% year-to-date, Japan ETFs which are dollar-denominated and listed in the US are up approximately 14%. The 10% decline in the yen versus the US dollar accounts for the difference.
Turning to emerging-market economies, the sharper than expected economic slowdown in China following the initial boost from the reopening of the economy early in the year has been a headwind for global trade, commodity markets, and economic growth.
Weak consumer confidence, continued problems in the property market, and elevated public debt, especially for local government investment vehicles, are all challenges for economic and financial policy officials.
Growth momentum may have bottomed in July, as the latest economic indicators show improvement. Further government stimulus measures are expected to lead to a pickup in growth in the fourth quarter, with annual growth for the year at 5.1%.
The growth of the Chinese economy is forecast to be a bit lower in 2024, 4.6%. Chinese stocks have languished despite government efforts to boost the market, with investors not confident that a turning point is at hand. The benchmark CSI 300 Index is down some 14% since January. This drop follows a decline of some 20% in 2022.
Elsewhere in emerging markets, the Indian economy and its equity market have heavily outperformed in 2023. The Indian economy advanced at a 6.1% rate in the first quarter, followed by a surprising 7.8% advance in the second quarter.
The OECD is projecting a 6.3% growth rate for the year 2023 and 6.0% for 2024. These projections may prove to be conservative. With both headline and core inflation easing in August, the Reserve Bank of India looks likely to keep policy rates on hold at its October meeting.
Consumption growth is strong, and government spending will continue to be supportive. External demand, however, will likely continue to be subdued. Indian stocks, while highly volatile, have been trending strongly upward, with the iShares MSCI India ETF, INDA , managing a 4.5% gain over the past 90 days.
This gain contrasts sharply with the experience of the important Asian stock markets of South Korea and Taiwan, where the iShares MSCI South Korea ETF, EWY , declined 4.0% and the iShares MSCI Taiwan ETF, EWT , fell by 5.2% after registering strong advances in the first half.
These economies, while benefiting from their strong technology businesses, have suffered from the slowdown in China. In Latin America, while Mexican and Brazilian stocks are holding on to their outperformance status on a year-to-date basis, they also have declined in the third quarter.
Looking forward, the projected outlook for the global economy is for a widespread loss of momentum with risks tilted to the downside.
Among the notable risks are Russia’s war of aggression in Europe, an increase in China-Taiwan tensions, the political dysfunction and uncertain outlook in the United States, a sharper slowdown in China, tighter oil and natural gas markets, and the risk that inflation could be more persistent, leading to tighter financial conditions that threaten financial vulnerabilities.
Diversification of positions and careful tracking and analysis of developments are essential in this environment. The flexibility provided by using ETFs permits us to respond quickly should that become warranted.
The ETFs ACWX, INDA, EWY, and EWT mentioned above are currently in Cumberland Advisers investments. None of the securities mentioned above are in the author’s investments.
Sources: OECD.org, Oxford Economics, Barclays Research, CNBC.com, Financial Times, Brown Brothers Harriman, Goldman Sachs, pmi.spglobal.com
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:Third Quarter 2023 International Equity Markets