September 2024 MPS Market Review

• Global stock markets accrued impressive gains through September, rounding out a positive, if emotional, 3^rd quarter for investors.
• Given the strength of sterling, however, returns were more subdued for UK based investors, as increases in global share prices were offset by relative currency weakness.
• Despite burgeoning unease regarding our new government’s growth strategy, the economy continues to perform reasonably well, and far better than some very downbeat expectations.
• This resilience (derived from a jobs market in broadly decent shape), coupled with stubborn inflationary prints from within the service economy, is keeping the Bank of England on a relatively hawkish footing.
• Though the BoE is still set on a cutting path, the comparative ‘dovishness’ of its US and European counterparts as helped lift the pound to multi-year highs.
• Indeed, the relative ‘dovishness’ of the US Federal Reserve was a key moment within the month… if not the year… if not this economic cycle!
• Deciding a 0.5% interest rate cut was the most appropriate course, rather than the usual 0.25%, the Fed moved at a pace typically reserved for emergency intervention.
• There was no sense of panic this time, however, citing a keenness simply not to fall ‘behind the curve’.
• The focus of the messaging centred on incremental weaknesses within the labour market, but the steps taken signal not just the Fed’s willingness to support the economy, but its comfort with the trajectory of inflationary trends too.
• This policy course has been received well by markets, with investors interpreting a more accommodative path for policy as raising the prospect a soft landing can be achieved i.e. that a recession will be avoided.
• This conclusion aligns with our current thinking, though we’d be keen to stress the risks of recession remain prominent.
• Despite the delivery of lower interest rates, most borrowers will likely suffer an increase in debt service costs at any imminent refinancing event; a dynamic which may yet squeeze the growth out of an already slowing US economy.
• We would also highlight the risk of resurgent inflation should the Federal Reserve push too hard on shielding/stimulating the economy.
• In such a setting, we suspect the Federal Reserve would be forced to reverse course (again), swiftly and dramatically raising interest rates to finally see-off the menace of inflation.
• Neither outcome forms part of our base case but risks are non-negligible, with the outcome for equity investors likely to be pretty grim should either come to pass.
• No doubt the most exciting event(s) over the month, however, came from Chinese policymakers, with a raft of policy initiatives designed to reignite demand within its flagging economy, as well as (remarkably) to support the stock market.
• The efficacy of these policy choices are far from certain, with demoralised consumers, rocked by house price depreciation, at risk of using any windfall to repay debt rather than spend.
• We also observe efforts to increase credit availability may also meet a swathe of disinterest from an economy low on confidence.
• Despite this nervousness, investors have taken comfort from a clear change in direction and tone, designed to more meaningfully address the challenges their economy presents.
• The scale (though not quite a ‘bazooka’) far exceeds previous efforts and has been delivered in an ‘open-ended’ fashion, suggesting a willingness to do more if circumstances require.
• Though perhaps not a ‘Whatever It Takes Moment’, akin to that of former ECB President Mario Draghi amidst the European Sovereign Debt Crisis, markets have recognised the bold steps which have been taken, and the intent behind them.
• With such determination on display, an imminent reversal of Chinese policy initiatives seems highly unlikely, offering credible support for Chinese (and Emerging Market) equities for the time being.
• Recognising how uncertain the outlook remains for US Growth, however, as well as our philosophical belief in the need for humility when investing, MPS portfolios strive to seek appropriate levels of diversification to meet the investment challenges ahead.
• High quality bonds for example, offer an historically attractive level of yield, and may offer a useful portfolio diversifier in the event of continued disinflation, or perhaps even recession.
• Stay safe, stay well, and please get in touch if you wish to discuss any part of the Invesco MPS strategy further.

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